I have been involved in food co-packing since the late 1980’s. During this time, I have seen food co-packing evolve from primarily low-cost producers of products developed by other companies, to full blown R&D and marketing companies, that have the capability for large volume co-packing.
This change has occurred in a number of phases. In the early 1990’s some co-packers moved away from the purely low-cost production models, to a more R&D focused strategy by customizing products for large end users. These included CPG companies, grocery private label and custom products that were created for mid and large size restaurant chains.
This strategy worked well for a number of firms in several product categories until the great recession in 2008. For several years after that, new product launches were severely curtailed and existing products were searching for the lowest cost producer.
As the economy improved, the food market began undergoing massive change. New, better-for-you products were emerging everywhere. These firms generally used co-packers and were looking for ones with great R&D capabilities. A number of co-packers jumped on this trend, but some bumps in the road quickly materialized. Many new products were launched, but very few were successful. This left the co-packer with little to show for their product development.
If the initial co-packer lacked the scale to meet increasing price pressure after the first contract period, the products that succeeded often moved to different low-cost producers. The more innovative co-packers began taking equity interests and/or success fees for new projects. This allowed them to beef up their production to quickly scale successful items.
As the food customer demanded more variety in better-for-you products and the share of the market grew, large food producers jumped in with a flurry of new product introductions. Along with this heightened new product activity, product life-cycles were dramatically shortened and competitive reaction to a successful product launch was almost instantaneous.
Based on these accelerating trends, what capabilities should the co-packer of the future have? I’ve listed a few of these capabilities below:
- R&D capabilities on par with the large food companies before they gutted them for cost savings
- The ability to rapidly roll out multiple new product launches on a small scale to see which ones stick and which ones fail
- The ability to rapidly scale the successful launches to full national roll outs at competitive pricing
- Create strategic partnerships with interesting startup companies. This offers both companies their R&D capabilities and access to subject matter experts in marketing, logistics and other critical activities.
So, the next generation of co-packers will need to think like a startup, R&D like a large company and scale up the successful items quickly. And all while carefully maintaining manufacturing flexibility and controlled Capex spending, to account for the shortened product life-cycles. This is certainly a tall order, but there are already some next generation co-packers out there, with more to come.
For an industry that only grows overall at 1 to 2 % annually, there is a lot of change transpiring. It surely does keep things interesting.