Food and beverage industry. 5 top business concerns and solutions

Food and beverage industry 5 top business concerns and solutions January 2019

Authors Charlie Gora Senior Vice President Food & Beverage Practice Leader 312.669.6934 cgora@lockton.com The food and beverage marketplace is quickly changing to meet consumer demands and comply with government regulations. The main objective for most food and beverage companies is to grow, but with that growth comes a complex framework of supply chain, product line, acquisition integration and global compliance issues to navigate. In a highly competitive space, how should food and beverage companies prioritize their efforts to reduce risk and capture market share? Katie Engle Assistant Vice President Account Executive 617.880.1524 kengle@lockton.com To provide insight, the Lockton National Food and Beverage Practice Group conducted a survey of our clients in the industry. The questions focused on ranking emerging risks, categorizing corporate goals and identifying obstacles that would adversely impact those goals, assessing contingency plans and identifying top business concerns. 70% of survey respondents noted that demand for healthier foods is the most impactful emerging risk to their businesses. 2

Emerging risks To meet consumer demand, food companies are addressing issues such as providing healthier products, transparency in labeling, secure verification of supply chain tracking from farm to table, and corporate, social, and environmental responsibility. Macro-economic factors such as trade policy and tariffs are influencing supply and demand equilibriums and impacting commodity pricing. Climate trends are leading to an increased number of severe weather events and unusual weather cycles which pose additional difficulties. Social media proves that reputation and brand image are intangible assets that can be destroyed overnight. Cyber incidents are daily occurrences ranging from the loss of protected information to ransomware and operational infrastructure hacks which impact operations. Regulatory issues abound for food companies at the global, federal and state levels. MOST IMPACTFUL EMERGING RISKS 80% 70% 60% 50% 30% 20% 10% 0% Demand for healthier foods Evolving consumer expectations (technology: retail and risk distribution) Food Safety Modernization Act (FSMA) Network security - cyber attack, business interruption Minimum wage increases Franchise relationships GMO awareness Autonomous vehicles (delivery) Sugar law and taxes (UK, California) Multiple jobholder employees/the gig economy Truth in advertising 3 Lockton Companies

Corporate initiatives Sixty percent of survey respondents noted growth as their top corporate initiative. The second most pressing corporate initiative was cost reduction. Resources and time were noted as the top two greatest obstacles to achieving corporate goals, followed by capital constraints, lack of crosscompany collaboration and specific expertise. TOP CORPORATE INITIATIVES 80% Growth (new products, new geographies, mergers and acquisitions, etc.) 60% Cost reduction 20% 0% Top initiative Initiative Second initiative Initiative Effective deployment of capital (CapEx, increase dividends, etc.) Protection of the balance sheet (increase liquidity, reduce leverage, etc.) Management of human capital (succession planning, improving recruitment/retention, etc.) GREATEST OBSTACLES TO ACHIEVING CORPORATE INITIATIVES 50% 30% 20% 10% 0% Greatest obstacle Obstacle Second Second Obstacle obstacle Capital constraints Lack of cross-company collaboration Resources Specific expertise Time 4

Business concerns OUR SURVEY REVEALED FIVE TOP BUSINESS CONCERNS: Commodity price risk Business continuity planning Disruption or supply chain failure Product contamination and/or recall Reputation and brand damage Depending on your business concerns, a variety of risk mitigation techniques exist. Here s how to begin addressing your risks: COMMODITY PRICE RISK: Not surprisingly, commodities represent the single largest income statement expense and source of risk and volatility for respondents. Various risk management strategies exist based on the operations of the company and the company s place in the food supply chain. For agricultural-input companies, forms of subsidized federal crop insurance is available to account for yield and revenue fluctuations. Other products such as shortfall coverage are open to intermediary producers with exposure to adverse yields by growers. The weather markets continue to expand, providing weather-derivative instruments based on parametric triggers such as excessive drought, rain, heat stress or frost. Most respondents use sophisticated hedging strategies, and these insurance products can seek to complement these tactics. 5 Lockton Companies

BUSINESS CONTINUITY PLANNING: Responses indicate a lack of preparedness in developing and rehearsing contingency planning. Brand damage represents a major obstacle to achieving corporate initiatives (80 percent identify as fairly or very disruptive), yet only 60 percent of respondents indicate planning and rehearsing of contingency protocols that serve to mitigate loss on a frequency of annually or greater. WHEN WAS THE LAST TIME YOUR ORGANIZATION REHEARSED A CONTINGENCY PLAN TO HELP PREPARE FOR A CRISIS? 100% 90% 2 2 80% 70% 60% 50% 10% 2 1 30% 20% 10% 0% Brand/reputational event (social media, news) 30% Network security (breach, hacking, data loss) 50% Property/catastrophe 10% 20% Product recall/ contamination event Quarterly Every 6 months Annually Every 5 years Never 6

Food and beverage industry January 2019 DISRUPTION OR SUPPLY CHAIN FAILURE: While supply chain disruption represents a major threat to respondents, there is a lack of internal coordination among risk management, supply chain management (operations) and quality assurance teams. Respondents indicate an opportunity to manage the supply chain process better, with roughly 35 percent indicating they manage well to very well. HOW OFTEN DOES YOUR RISK MANAGEMENT ORGANIZATION COLLABORATE WITH SUPPLY CHAIN MANAGEMENT? 53+21+21+5D 21% Annually Never 53% Quarterly 21% Every 6 months HOW WELL DOES YOUR ORGANIZATION MANAGE THE FOLLOWING SUPPLY CHAIN PROCESSES? 100% 90% 80% 70% 60% 50% 30% 20% 10% 0% Contract management Establishing requirements for supplier insurance, indemnification and limits of liability Operational supplier assessment reviews Property protection Provider optimization and redundancy Supplier financial stability Poorly/not at all Needs improvement Average Well Very well 7 Lockton Companies

As supply chains become more complex and geographically dispersed, the process of risk assessment and identification is emerging as a corporate imperative. Lockton can assist in this process by offering visual tools to map global supply chains, process flows, indicating locations that are exposed to heightened natural disaster risks such as hurricanes, floods and earthquakes. Finally, the role of the distributed ledger is evolving, with numerous food companies rolling out blockchain traceability initiatives from farm to table. PRODUCT CONTAMINATION AND/OR RECALL: Evolving food safety regulations and compliance requirements are impacting food companies. The influence of social media is profound and has contributed to food quality and contamination incidents going viral. Technology and machine learning are proving to increase the effectiveness of linking foodborne illness and pathogens to the locations responsible for those outbreaks. Foreign supplier mandates and food transportation aspects of FSMA are being enforced. These issues are contributing to increases in the frequency of recalls, which is in turn driving changes in the product recall insurance marketplace. REPUTATION AND BRAND DAMAGE: Reputation is the cognitive expectation stakeholders have of organizations. Brand is an emotional construct, a connection to a firm s products. Reputation is an intangible asset and can comprise as much as 65 percent of the value of an average company. Improving reputation can add up to 6 percent to enterprise value, while a reputation crisis can shave 7 percent of a firm s market capitalization. 95 PERCENT OF RESPONDENTS have established processes and procedures for carrying out a product recall or brand/reputational event. 78 PERCENT OF THOSE RESPONDENTS have communicated those processes to all involved parties. ONLY 55 PERCENT OF RESPONDENTS COMPANIES purchase product recall or brand/reputation harm insurance. Reputation, Stock Price, and You, Dr. Nir Kossovsky, 2012. IF YOUR BRAND IS IMPACTED BY AN ADVERSE EVENT, HOW DISRUPTIVE WILL THAT BE TO ACHIEVING YOUR CORPORATE GOALS? 15+5+55+25D 2 Very disruptive 1 Slightly disruptive Disruptive 5 Fairly disruptive 8

There are a variety of products available to companies looking to protect their reputations. An assessment of enterprise risk management and corporate governance is the starting point for parametric risk insurance underwriting, which uses quantitative measures to establish and monitor corporate reputation risk/value. Other insurance products exist that can be tailored to specific perils/risks and protect business income. Regardless of the product, the process of assessing, treating and transferring (financing) reputation risk is highly customized. Lockton helps food and agribusiness clients address the risks they face. We service more than 450 food and beverage clients across the globe ranging from production agriculture to retail foodservice. To see the full survey results, click here. Please contact your local Lockton representative if you have questions about the survey or would like to improve your risk management program. 9 Lockton Companies

The Lockton Food and Beverage Practice is a team of Associates focused on providing clients with unique solutions to headwinds and pressures facing the vast global food supply chain. We support your business through our membership in national, regional and local trade organizations. We are well informed on industry dynamics and forge mutually beneficial client relationships. The breadth and depth of our practice allow us to deliver subject matter expertise on numerous topics and leverage the marketplace to drive meaningful outcomes. Matthew Klein, CPCU, ARM, ARe, AU, CIC, CRIS Senior Vice President Food and Beverage Team Leader Kansas City Series Kansas City mklein@lockton.com Charlie Gora Vice President Senior Vice President Food and Beverage Practice Leader Midwest Series Chicago cgora@lockton.com Katie Engle Assistant Vice President Account Executive Northeast Series Boston kengle@lockton.com Scott Halpin Vice President Account Executive shalpin@lockton.com James Irvin Vice President, Unit Manager Pacific Series Sacramento jirvin@lockton.com Nicole Holcomb Vice President, Strategic Leader Mountain West Series Denver nholcomb@lockton.com Caitlin McGrath Product Recall & Contamination Northeast Series New York cmcgrath@lockton.com Matthew Humphries Product Recall and Contamination London Partner matthew.humphries@uk.lockton.com Zac Sobba, ARM, CPCU Vice President Account Executive Kansas City Series Kansas City zsobba@lockton.com 10

Food and beverage industry January 2019 NOTES 11 Lockton Companies