Supply chains are the backbone of the economy, they’re designed to move goods efficiently, from raw material or finished product in a way that is both timely and ensures profitable unit economics along the way. External factors can play a large role in disrupting the supply chain and cause delays, ingredient shortages, waste and financial losses.
Examples of extraneous variables affecting supply chains are the pandemic, labor shortages, war, inflation and weather. In order for supply chains to operate efficiently, these extraneous variables need to be minimized or at a minimum, accounted for in order to maintain a functioning business.
Not all industries are subject to the same risks and impacts from these extraneous variables. When you’re in the food industry, extraneous variables are particularly impactful given the perishable nature of the products. For example, if a natural disaster were to create shipment delays for a fresh dairy or protein manufacturer, it could mean losing the entire batch. Ingredient shortages then impact manufacturers’ ability to produce finished goods inventory, worsened further by distribution bottlenecks impacting products’ delivery to retailers. Both situations create excess and waste.
Evolving consumer trends
These situations are exacerbated by retailers struggling with their own demand-planning efforts. Due to high inflation and other recessionary economic factors, consumers are cutting down on discretionary spending. Because of increased spending during COVID-19 and greater emphasis on speed and convenience, many manufacturers and retailers miscalculated demand, resulting in an abundance of inventory sitting in warehouses and distribution centers.
Retailers and manufacturers are also dealing with the rise of customer returns. In fact, customers returned 16.6% of their purchases in 2021 compared to 10.6% in 2020, a trend expected to continue as businesses strive to differentiate themselves around convenience and service. The ease of shopping online allows customers to over-purchase with the intent to return some items. While convenient for the consumer, it creates headaches for vendors.
According to Forbes, the cost and level of effort to process, package and resell customer returns are one of the biggest challenges facing retailers these days. And in the case of retailers of food products, many businesses aren’t even considered re-sale opportunities given food safety concerns. This ultimately leads to more waste being created.
The problem with excess inventory
So, extraneous variables in the supply chain along with inaccurate demand planning cause a lot of excess inventory. What happens with these goods? Well, the excess inventory sitting in warehouses contributes to carrying costs which are expenses associated with storing any unsold or excess inventory. It includes the costs of labor, taxes, storage, transportation, handling and more. This all contributes to an estimated 20-30% of a business’s operating expenses. Because of these carrying costs, many businesses want to get rid of the excess inventory that isn’t as profitable as newer or seasonal inventory. While some of this inventory gets liquidated or donated, much of it often gets recycled, landfilled or destroyed.
Waste in the spotlight
Fortunately, consumers are more aware of waste than ever before, making some businesses rethink their strategies around excess inventory. Consumers want corporations to take responsibility to reduce waste at every level in the supply chain. In fact, 60% of consumers said that they are “extremely” or “very” concerned about food waste.
Consumers are also more likely to make purchasing decisions based on a business’s sustainability or environmental, sustainable, governance (ESG) initiatives than ever before. Nearly 72% of shoppers said that they would support a grocery store that’s committed to reducing waste, and 38% of consumers have actually avoided brands because they don’t agree with the brands’ sustainability practices. It is no wonder that popular brands are starting to orient consumer awareness campaigns around this topic. This trend is likely to become more prevalent as younger generations continue to represent a bigger portion of the consumer demographic.
Additionally, the global green technology and sustainability market is predicted to increase to $74.64 billion by 2030 (compared to $10.32 billion in 2020), creating more and more opportunities for brands, retailers and service providers alike.
Discounts on the rise
Due to high inflation and volatile market dynamics, consumers are increasingly taking advantage of discounting strategies that manufacturers and retailers employ. According to recent studies, 64% of Americans live paycheck to paycheck, and 89% of consumers are now shopping at discount stores on a regular basis. That’s why more and more discount stores are adding grocery sections, including refrigerated and frozen which is a trend rooted in capturing more of consumers foot traffic and share of wallet.
How are these retailers meeting this growing demand for more affordable groceries? Increasingly from excess inventory. Consequently, the availability of excess inventory, coupled with millions of consumers relying on discount groceries illustrates a unique opportunity for both consumer packaged goods (CPG) manufacturers and discount retailers to take advantage of macro discrepancies between supply and demand.
Technology and collaboration to increase food access and reduce waste
The fact that 24% of food is wasted in the United States but 17% of Americans are food insecure reveals a harsh truth, there is still more work to be done to minimize inventory write-offs and ensure as much good food is getting to Americans in need.
It may also help to approach supply chain waste like any other problem with an inefficient solution, by optimizing and streamlining the process through technology and collaboration. A study conducted by Worldwide Business Research and commissioned by Spoiler Alert highlights that the majority of food and CPG companies still don’t have a cohesive digital strategy for navigating their excess inventory discounting processes. As a matter of fact, only 18% of businesses report their discounting processes as very mature or best-in-class.
And part of an effective waste minimization strategy is knowing who and where these retailers are that are catering towards these consumers that prioritize affordability above all else. Only 9% of CPG manufacturers have a customer base exceeding 10 retailers of opportunistic inventory, highlighting a significant opportunity to get affordable and nutritious products in front of more consumers.
While manufacturers should continue to invest in more accurate demand planning tools and keep open lines of communication with their primary retail customers, a more proactive and data-driven discounting strategy can go a long way in both navigating supply chain volatility and demonstrating to consumers that your brand is committed to both waste mitigation and affordability.
