Contract manufacturing is on the rise in the food and beverage sector. While the practice holds attraction for both parties involved, it can also have its pitfalls and should be approached with caution. Matt McDonald writes.
Contract manufacturing – the production of goods by one business on behalf of another business – has long played a role in the food and beverage industry.
However, according to Tony Pititto National Head of Food and Beverage at Grant Thornton Australia, over the last five or ten years the practice has not only become more prevalent but also spread to a broader range of products.
“It really started off in the areas where consumers didn’t really care – staple items such as sugar and flour,” Pititto told Food & Beverage Industry News.
“These days you can have contract manufacturing in a whole range of different areas – cereals, snack foods, pet foods, canned products, anything that’s ready to eat…it really has become prevalent in all areas.”
He explained that the popularity of private labels and supermarkets’ own brands is behind much of this growth. The demand is there so retailers are all too happy to grow their own brands. And by growing their own brands they provide more work for contract manufacturers.
Who does it?
According to Pititto, contract manufacturers tend to fall into two categories. First, there are mid-sized businesses which don’t have their own labels. All their manufacturing work is undertaken on behalf of somebody else and carries that second party’s brand.
The second category includes larger manufacturers which produce their own branded products.
“Those manufacturers that have brands will do it because a supermarket comes to them and says, ‘we want you to do this product in our label’,” said Pititto.
They are generally happy to accept the extra work, often because it allows them to work to capacity and means plant and machinery isn’t left idle.
Also, by accepting the contract work, these manufacturers ensure the job doesn’t go to someone else. “It’s really protecting their own products,” said Pititto.
On top of that, businesses which are approached by retailers to produce a product but who are already operating at capacity and can’t handle the extra work, will often accept the contract and contract it out to a third party.
Again, the motivation is to protect their own brand. If they don’t accept the contract somebody else will and, as a result, their own brand could suffer.
The attractions for clients
Melbourne-based Maltra Foods describes itself as an expert in dry powders and blending. Its brands include GreenSpoon, Arkadia Beverages and Teisseire Syrups.
The company is also a contract manufacturer and is currently looking to expand this part of its business.
“We do a plethora of products focussed on food and beverage dry powder products,” Maltra’s Sales Manager Jack Eydlish told Food & Beverage Industry News.
The long list of products the company can produce includes hot and cold beverage powders, soft serve or ice cream powder mixes, sports nutrition and dietary supplements, baking mixes and health foods, milk powders and fortified milk powders, sugars (including specialty sugars) and natural sweeteners.
“We are basically an end to end solution business,” said Eydlish. And this is a key attraction for potential clients.
Maltra’s clients receive more than just contract blending and packing services. They also receive the benefit of the company’s innovation and R&D capabilities. The company handles all procurement and sourcing, and all finished products are quality certified.
“And we do all project management and also have an in-house marketing department to help other people launch their products,” said Eydlish.
In addition, Maltra has its own state-of-the-art blending and packing facility which Eydlish describes as “one of the best manufacturing plants in Australia.”
“When people use Maltra Foods they don’t have to invest massive dollars into their own manufacturing plant because we fulfil that requirement. We’ve done all the investing for them,” he said.
Flexibility is another key benefit of working with Maltra. The company can handle runs ranging from as little as 400kg right up to container loads of product. And packing options range from small 20g sachets up to 500kg bulk bags.
From July 1 more transparent country of origin labelling laws will come into force in Australia.
“This has created more demand for Australian made,” Maltra’s Brand & Project Manager Nathan Alfrey told Food & Beverage Industry News. “…so we’re expecting that to drive a lot more customers to our door that are currently manufacturing overseas.”
However, whatever happens, the company does not foresee a time when it will dedicate all its energies to contract manufacturing.
“We’ll definitely be retaining our own brands. It’s something the business has focussed on in the last decade and we will continue to do that,” Eydlish said.
Costs and margins
There is much to be said for producing your own brands and, despite its recent growth, there are negatives associated with contract manufacturing. Pititto offered some words of warning for businesses considering taking on such work.
“The biggest negative is that the margins are very low,” he said.
“These businesses really need to understand what the costs of the manufacturing is and [work out if] they are actually extracting a decent margin.”
“Our experience is that a number of mid-sized businesses in Australia really don’t know their costs that well. So they say, ‘yes they’ll do it’, but they don’t actually realise they’re losing money.”
“The other risk is that there’s very little loyalty involved. Because there’s no intellectual property associated with the manufacturing anyone can go out and do it. It can be quite cut-throat.”
He advised trying to secure longer term contracts. “The length of the relationship is important because if you get a longer term agreement you don’t run the risk of being dumped,” he said.
And from the point of view of those considering using a contract manufacture, he advised taking time to find the right partner. “Making sure their quality systems are strong is important,” he said.
Although contract manufacturers have no rights in the area of branding, Pititto pointed out that “there can be instances where the contract manufacturer actually develops some IP in the manufacturing or the processing of the product.”
“So it’s important that they protect that IP as part of the process so, if they do get dumped, it doesn’t go with the product,” he concluded.