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Partnering with Others Offers Mutual Benefits

Nov. 4, 2008
Partnering with others to make your product -- or theirs -- offers benefits to both partners.

In addition to running their own products on their own production lines, food companies of all types and sizes routinely pack products for customers who want their own label on the product, or don’t want any label at all. Then there are food companies who call on outside plants for a new product launch, a test market or in some cases: everything.

“I don’t know how to run a manufacturing facility, and I never wanted to run one,” says Patty Stewart, a former Chicago stock broker whose celiac disease -- and accompanying gluten sensitivity -- led her to develop yummy-healthy cookie recipes that in the past two years have landed her retail chain accounts, a web business and a small plant that her business would quickly outgrow.

“The little bakery we were working out of grew so fast, I had to make a decision,” she says. And this past summer, her company, Whole Bakers (www.wholebakers.com/) , gave all of its production to PacMoore (www.pacmoore.com), a contract mixing, blending and packaging specialist based in nearby Hammond, Ind.

The Whole Bakers line of gluten-free products is low-volume and labor-intensive, but it enabled contract manufacturer PacMoore to add retail capability to its portfolio.

 “I just figured that I would focus on my strength and focus on media and distribution and getting our cookies in every grocery store all over the country,” she continues. “That’s where I’m strong. And where my weaknesses are, I can turn that over to the professionals.”

Working from her strengths, she’s made contacts with “so many different people on the customer side, and some very high profile media outlets, from TV shows and magazines to online outlets.” Freed of production chores, Stewart can now give full attention to sales and marketing, new cookie formulations and eventually line extensions, including muffins, bread crumbs, pizza crusts and, in the future, extruded snacks. She’ll have pretty much a full line of certified gluten-free baked goods.

But most of the dollars and products trading hands don’t involve start-ups. In fact, most of PacMoore’s business comes from Fortune 100 food companies, which generally call on the company for ingredient blends to be further processed. “That’s our bread and butter,” says Chris Bekermeier, vice president of sales and marketing, “but we’re moving to put more retail capability in our portfolio.” Whole Bakers is a step in that direction, as are other consumer brands now in talks with PacMoore. Beckermeier sees expanded retail capabilities as “an opportunity to offer more value.”

Contract manufacturers as well as food processors with their own brands and a little excess capacity will make products carrying other companies’ brands. Reasons include:

> To cover plant operating overhead for greater efficiency and 24/7 capital investment payback.

> To saturate category sales. “If you’re going to eat pasta, we’d prefer you eat ours,” regardless of the label, says Walt George, executive vice president of operations and supply chain at the nation's largest pasta-maker, American Italian Pasta Co. (www.aipc.com), Kansas City, Mo.

 > To gain insight into market trends. That’s often the case when a larger marketer with its own manufacturing chooses to use a smaller one for a new product.

> To reduce transportation costs. Some East Coast or Midwestern customers ship fruit and soft-drink mixes and concentrates to the docks of Tree Top Inc.’s West Coast processing plants rather than shipping the final product, which has a high (and heavy) water content. Or to better manage fleets (or negotiate freight contracts) by having empty trucks pick up materials once a customer delivery is made. That’s something “not at all uncommon” in the private label industry, where in-house fleet utilization and carrier contracts alike are a major source of costs, or savings, says consultant Jim Wisner, president of Wisner Marketing Group (www.wisnermarketing.com), Libertyville, Ill.

Likewise, companies large and small turn to others to handle various manufacturing chores for many reasons. These include:

> To gain manufacturing expertise while minimizing capital investments.

> To reduce the costs of long-distance distribution by choosing partners in one or more local markets.

> To handle temporary spikes when demand exceeds production capacity. For example, AIPC in the summer calls on other pasta-makers to supplement its production of bow-tie pasta, which sometimes exceeds its capacity as summertime pasta salads grace many a picnic tablecloth.

Playing both sides

East Coast product marketers can save by shipping concentrate to Tree Top for bottling and distribution in the Pacific Northwest, rather than shipping beverages that contain water and include packaging.

(www.treetop.com), Selah, Wash., is an apple-growing and -processing cooperative with its own well-known brand. But it also has a growing contract manufacturing business, especially with food marketers trying to supply Tree Top’s Pacific Northwest home area.Tree Top Inc.

“There’s a certain dollar-per-case value we need in order to cover the plant overhead,” says Terry Morgan, director of contract packaging. He notes the company makes a “concerted effort to sell some of our excess line time” as a hedge against the global volatility in apple supplies and prices.

It works both ways. In addition to packing drinks for others, Tree Top for more than five years has outsourced filling of its 10-oz. single-serve PET bottles rather than expand any of its half-dozen plants. “So far, it’s been more cost-effective than investing in a new high-speed line, which could cost anywhere from $4-6 million,” says Morgan.

Also playing on both sides is Sargento Foods, Plymouth, Wis. To supplement its branded cheese portfolio, Sargento contracts-out for some of its products. It also has an ingredients division (www.sargentofoodingredients.com) that does co-packing for products such as 3-oz. pouches of mozzarella for salad kits, cheese blends and toppings for bakers, and IQF sauce pellets for pizza processors.

“Whether it’s a finished, standalone product or a component, it’s still a contract, it’s still co-packing,” says Dick Williamson, vice president of food ingredient sales at Sargento. “We still have to meet our customers’ specifications, as these products are ultimately sold under our customers’ own brand name.”
Store brands and private labels are another source of income for many branded processors.

Even as it farms out some of its own processing to others during those summer spikes, AIPC is busy making products carrying customers’ store-brand labels. While some of the company’s 10 brands are regional leaders, AIPC’s own brands comprise only 28 percent of its business.

George sees private labeling “viable and growing.” That’s an understatement in light of what Brian Sharoff, president of the Private Label Manufacturers Association (www.plma.com), notes are “new levels of quality and consumer acceptance.”

In the past five years, store brands grew 13.3 percent versus national brands' 7.1 percent growth. All told, store brands rose $5.4 billion in 2007 to reach a new high of $74.2 billion in sales, according to PLMA’s 2008 Private Label Yearbook, based on research by Nielsen Co., which details private-label sales in more than 700 categories.

In the pasta aisle, where store brands average 30 percent market share, chains with tight contract manufacturing partnerships command up to 60 percent of category sales, outpacing national brands, according to AIPC’s George.

With many processes and machines unique in chicken processing, Pilgrim’s Pride makes products for several major retailers’ brands, in addition to its own branded products.

(www.pilgrimspride.com) is another huge and branded processor that also has a growing private label business. The Pittsburg, Texas-based company is the largest U.S. poultry processor, possessing “a lot of very unique cooking processes, whether it’s a gyro cook or a spiral oven or air impingement – that’s the advantage we have,” says Dan Emery, vice president of marketing. Pilgrim’s Pride

In addition to retail branded, foodservice and industrial sales, the company serves several major retailers with two tiers of store brands: a standard and a premium line. “Everyone has their own, individual needs and we try to help be a good partner with them,” says Emery.

Like any relationship…

Depending on the complexity of the product and the companies approaching one another, the relationship involves varying degrees of contractual details and specifications. For Pilgrim’s Pride, the contract can “range anywhere from eight pages to a 20-page document,” Emery says, including product formulation, labeling, regulatory and process parameters.

At the outset of a contract, AIPC’s George says initial meetings focus on the characteristics of the product, initial volume projections and a timeline for launching. “We’ll take that through our commercialization process, lay it into a project timeline and work hand-in-hand with the customer to bring their product to market.” It can take months or more than a year, depending on the complexity of the product and packaging.

While Emery says it’s generally easy to accommodate customers because of Pilgrim’s Pride’s size, there have been occasional challenges -- like the retail chain that wanted something relatively unheard of: a complete line of 69 exact-weight fresh-chicken items. To accommodate the request, the co-packing team got serious, visiting equipment suppliers in Greece, the U.K. and Iceland and processing facilities “all over the world,” says Emery.

Despite what initially was projected to be a huge investment, Pilgrim’s Pride managed to do it for a fraction of the estimated cost. “We figured it out,” says Emery, “and today it’s a major piece of business.”

To enter into a contract of such magnitude takes two very determined partners -- and sometimes more. When AIPC opened a state-of-the-art facility outside Phoenix, George says the decision hinged on “a commitment from the business community that they would support that factory -- and they have.” From factory controls to robotic palletizing, it’s a model of efficiency, with just over 50 people working four shifts, 24/7. “At any given time, you’re not likely to run into 10 people in the whole factory,” he says.

Size matters, of course. Many companies turn away smaller or lower-volume customers -- like Whole Bakers, a PacMoore account that Bekermeier concedes is “fairly manual, fairly labor-intensive,” especially compared to the work he did at prior job ConAgra. “But now that we’re up and running, we can start looking at every aspect of the process to drive the cost down and help that company grow.”

Bekermeier says the company was willing to take on smaller accounts like this one because, as a dedicated contract house, PacMoore is itself “small, and privately held. We can be more patient.”

If the goal is to find the perfect match, Stewart seems to have baked-up a match made in heaven. She says the day she partnered with PacMoore was “the most overwhelming, joyous day of my life,” adding that she feels “completely blessed.”

“We’re happy we can be a part of helping Whole Bakers,” says Bill Moore, president of PacMoore, who puts his spirituality alongside trust and good business sense. “Yeah, we mix powders, we pack cookies ... yeah, we think profits are important. But at the end of the day, none of that’s eternal.”

Other partnerships strike a more mundane note; often starting with a figurative “knock on the door,” says Wisner, “and the question: ‘Hey, can you make this for me?’ And you say, ‘Well let's see, I think we can do that.’ ”

Note to Accounting

At the outset of a contract manufacturing relationship, the very structure of the deal can greatly affect profitability – for both sides -- and smooth partner relations.

For starters, does the contract encompass the full product life-cycle, starting with R&D and ending with store deliver? Or is it limited to production, filling and packaging?

Are you empowered to make changes that lead to cost savings? “Generally, when we bring in a cost savings, both the customer and our company benefit, so there’s an incentive,” says Dan Emery, vice president of marketing at Pilgrim’s Pride. “But you have to remember that changes in the product also require changes in the labeling.”

In all areas of the business, he says, “all costs are going up -- the price of oil, the corn we fed our chickens. Any number of pressures in our business right now are driving us to drive our costs down. Any savings measure is a welcome goal for both us and our customers.

“It’s all about eliminating waste and improving speed and efficiency,” he says, citing everything from replacing cardboard with reusable plastic totes to plant automation improvements. “In the end, [we] find ways to operate more efficiently while delivering a high-quality product at a fair price.”

“The trick is really getting into Activity Based Cost analysis,” says Jim Wisner, president of Wisner Marketing Group. Product and service costs for a contracted item are assigned specific values according to their consumption of plant assets, activities and resources. A predominant method for determining manufacturing costs, it’s also useful on the customer side of the contract, where it can help a marketer determine whether it’s more cost-effective to produce a product in-house or outsource it.

There are caveats, of course. For one, it’s difficult to ascribe costs to some overhead items, from executive salaries to wildly fluctuating transportation costs. The key, says Wisner, is to get as specific as possible and avoid too much generalization or averaging, to “really break down all the cost components every step of the way. Once you do that, it allows you to in effect run a P&L on every item, in a very specific way, with a very clear understanding of the impact is on your entire organization.”

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