How Companies Sell Less Food for More Money

October 10, 2012- 

In a year of severe drought and continued economic sluggishness, U.S. food and agriculture companies have struggled to keep pace with higher costs and very little growth in demand. Pricing is their last weapon in the fight to remain profitable.

As a result, more and more food producers are turning to technology to boost their bottom lines.

“With multiple types of products and multiple sects of customers in different markets, their [profit and loss statements] are incredibly complex,” said Matt Johnson, managing partner at consultancy firm Simon Kucher. “Automated tools to execute their pricing strategies … are pretty crucial.”

The tool is called price optimization software. It mixes a complicated soup of operations analysis, forecasting and statistics with a company’s own data and comes up with the highest possible value for the company’s products. It’s offered by a variety of vendors, such as Pros Pricing [PRO], Signal Demand, Vendavo, and Vistaar. (More: Outdated Business Model? Try Predictive Analytics)

Pricing optimization is a by-product of the big data movement, which gained momentum in the airline industry in the 1990s. Companies began to generate a tremendous amount of data, and by the mid-2000s, analytical software became sophisticated enough to pull it all together. The pricing focus developed because ‘big data’ systems lacked price management capabilities.

“When we started, most companies were taking an ad-hoc approach to price,” said Craig Zawada, senior vice president at Pros Holdings, the parent company of ProsPricing.

Price optimization software is still used as a complement to big data systems. Smaller vendors have also sprouted up to serve companies with much smaller data sets, but the main business remains in large-cap companies.

The bigger food companies, in particular, face a highly volatile pricing environment driven by fluctuations in raw material, energy and freight costs. Nearly half of companies in the sector actually say they’re in a “pricing war,” according to a recent Simon Kucher pricing survey. They consider the new software one way to get an edge over the competition.

Among the companies using this new technology are ConAgra Mills [CAG], Hormel [HRL], Cargill, National Frozen Foods, Ventura Foods, and Michaels Foods.

“In the commodity market, you’re trying to create value in separation. We produce over 800 different flour SKUs [stock-keeping units] in 23 different facilities,” said Bill Stoufer, President of ConAgra Mills, in an interview with Signal Demand. “To do that, we have to optimize and run them at the right time and the right price for our customers.”

ConAgra is the third-largest miller in North America, and it relies on Signal Demand software, which ConAgra says has led to increased profit margins. (More: 15 Surprising Global Technology Cities)

Whether or not they are attributable to software-related improvements, the operating margins of publicly traded food companies ConAgra and Hormel are 5.8 percent and 8.9 percent respectively, according to their latest annual filings. Both profit margins are significantly higher than the current food sector average of 1.6 percent.

At the very least, it’s fair to assume price optimization software helped. Simon Kucher research shows a 2 to 4 percent average increase in margins enabled from this type of software. The firm is a consultancy and does not sell the software.