The Iran conflict isn’t hitting food manufacturers all at once, but in waves. Energy first, then freight, then agricultural inputs, then a consumer base that’s already stretched thin. The businesses handling the situation best are the ones that have already planned for this.
Bernardo Silva is a Senior Managing Director and food and beverage industry lead with Teneo‘s Management Consulting practice. He works with CPG and food manufacturing leaders on exactly the kind of high-stakes, high-uncertainty decisions that don’t wait for annual planning cycles.
In this conversation, he breaks down how sophisticated food companies are structuring their scenario planning right now, why energy cost increases are so hard to offset, and what the most important question in the industry is at this moment: how much cost do you absorb, and how much do you pass on?
Q. The Iran conflict is being described as a “layered” shock for food manufacturers, a sequence of pressures arriving at different points in time. How should food manufacturing leaders be thinking about the timeline of these impacts, and what should they be prioritizing right now?
Bernardo Silva: With the amount of uncertainty and volatility surrounding the conflict, it’s impossible to predict with any level of precision what cost impacts will materialize, when, and by how much. But we know what can happen, directionally, if the disruptions extend for longer or become more accentuated.
Scenario thinking continues to be the best tool in the management toolbox for those ambiguous but critical situations. Companies that think through scenarios and align on triggers for action can act swiftly and confidently once the conditions they had anticipated materialize, while competitors may still be trying to react impromptu. Those who build robust scenario plans across pricing, logistics, production and other pressures will be well positioned to act faster and with greater confidence.
Q. Energy-intensive manufacturing and cold-chain distribution appear to be among the first areas of exposure. What operational adjustments are you seeing leading food companies make to protect margins in the near term?
BS: Unfortunately, energy cost increases are hard to combat. Energy conservation tactics can help alleviate the impact but is unlikely to compensate for the energy cost swings. Changing manufacturing processes is rarely practical without impacting product quality or creating other unintended cost impacts. Shifting production to other facilities is unlikely to be economically viable. Lines and equipment may not be compatible, unfavorable standard cost variance may exist, increase in transportation and logistics cost may make it unjustifiable etc.
If the extra cost can’t be entirely mitigated, the question becomes: how much should we absorb, and how much should we pass along to customers? How to manage prices in the face of simultaneous cost volatility and consumer tightness is the most critical question food companies are struggling with right now.
Q. You’ve highlighted a consumer shift toward value and private label. How should branded food manufacturers be adjusting their price-pack architecture and value positioning to retain shoppers who are feeling economically squeezed?
BS: Price adjustment is one tactic manufacturers can take among many, including reprioritizing value-oriented channels (e.g., Club, Mass, Dollar), refining price-pack architecture (PPA), promoting value brands in the portfolio, and shifting to smaller pack sizes that provide same price per unit but more affordable out-of-pocket expenditure.
They can further adjust value positioning by creating promotional bundles, cross-promoting with adjacent category, and refining marketing messages around value and affordability. Those measures should be taken in a targeted manner, making sure they’re absolutely focused on the right consumer segments.
Q. With so many variables in motion (energy, freight, packaging, agricultural inputs, and consumer demand), how are the most sophisticated CPGs structuring their scenario planning right now?
BS: Most companies have a planning cadence that is out of sync with the pace of external change. Annual planning processes take months to complete and are “locked” for the next 12 months are not built with flexibility for future adjustments in mind and are based on their established operating framework.
The conflict in the Gulf is just the last example of how externalities can impact businesses in ways they hadn’t planned for. As a result, companies are increasingly embracing scenario planning as a way of building strategic and operational optionality in the face of uncertainty and volatility. It helps organizations pre-align on what actions to take, when, and why.
We are working closely with our clients on the scenario planning process, helping them to think through questions like:
What are the plausible ways in which the conflict can progress? What cost impacts we are exposed to?
How would we expect the cost impacts to materialize in each scenario and how would they impact our business?
What decisions need to be made under what circumstances? What signposts should we monitor to indicate how conditions are changing?
What are the thresholds above which action needs to be triggered?
What decisions do we need to make as a result?
What decision-making protocols will we follow, e.g., forum, authority, cadence?
This is a critical step for companies to take in our current reality, and to build into future annual plans and operations.
Bernardo Silva is a Senior Managing Director with Teneo’s Management Consulting business, and serves as the food & beverage industry lead. With over 25 years of experience as a senior advisor and operating executive, Bernardo works closely with management teams, boards of directors and private equity investors to unlock transformative growth and accelerate value creation.
