Retailers driving change in the co-packing market

10 April 2015




Retailers driving change in the co-packing market

Alastair Isbister, Consumer VP - Consumer, Tradeteam & Ireland

In the face of changing demands and increasing volumes Alastair Isbister Consumer, Tradeteam & Ireland at DHL Supply Chain, discusses the impact of increasingly complex supply chains, brand extensions, promotional diversity and the packaging requirements of retailers.

The services demanded of and offered by leading 3PL companies have broadened over the past few years. Contract packing, commonly known as co-packing, has increasingly become a key service requirement for FMCG companies as they look for integrated solutions when briefing new warehouse projects.

Driving these increased requirements have been Market Forces, which from a manufacturers perspective, pull in opposite directions. On the one hand manufacturers are required to be evermore cost competitive, driving increased standardisation of product and pack sizes and utilising larger, more automated single region manufacturing sites. At the same time, there is a need to incentivise consumers to purchase branded products via promotional offers, added value and novel packaging, the combination of which create a point of difference for products at point of purchase.

Efficiencies gained from mass production are undeniable. Consistently high quality products, packaged to minimise transport costs in automated production facilities, are the ultimate goal for most consumer product companies. However, centralised production will often ignore the needs of local markets, these being seen as secondary to the quest for production efficiency. This creates a significant challenge for local sales and marketing teams, as they attempt to respond to the increasing demands of their retail customers for exclusive promotions, special offers and displays which aim to create customer interest leading to purchase.

The solution to this challenge is late product differentiation and this can be achieved via co-packing services. The task may be as simple as packing individual bottles into a branded Shelf Ready tray, or the complexity may extend to the combination of two complimentary brands for a dual promotion. Another growth area is store display units, FSDU's, Shippers and Hods. These often create a greater demand for transport compared to delivery of palletised stock. An ability to segregate production across a number of co-packing centres will reduce onward distribution costs if a regional approach can be taken to the production activity.

Services have long since moved on from the simple re-packing tasks and now encompass food grade clean room facilities for bagging and flow wrapping of both naked primary and wrapped product. This provides maximum flexibility for marketers to create bespoke pack sizes using individual promotional artwork on packaging, whilst using a high quality standardised base product. In fact, the pace at which contract manufacturing is developing could see some of the traditional brand owners transferring responsibility for manufacture to third party producers in its entirety. This would mimic other industries where the value and development of the brand has become the business focus, moving emphasis away from the production origins. What may start with NPD (New Product Development) can rapidly move to responsibility for specific brands within a portfolio and on to a complete transfer of operation. If this is the case, brand owners need to work with respected and stable suppliers to ensure supply continuity and exacting quality standards, which protect the ultimate asset of brand value.

Packaging materials and the ability to create individual designs using appropriate corporate branding are as much part of the process as the co-packing activity itself. The ability for a Contract Packer to offer an End to End service where the design, sourcing and manufacture of such items is integral to the service is therefore gaining importance. The larger 3PL's now have in house capabilities in these areas and aggregation of demand from similar customers can often lead to reduced costs, even for small volume production.

As the market changes there is stability in the choice to partner with a 3PL. Providers have expertise in the industry, understanding the needs of retailers as well as manufactures, and can share this knowledge to enhance customers' operations to meet the packaging requirements of both manufacturers and retailers.



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