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Food and beverage (F&B) companies face significant challenges to their profitability and viability. Fast-evolving consumer tastes, heightened scrutiny of product inputs and supply chain partners, traditionally low margins, and intense competition characterize the daily landscape for F&B manufacturers and distributors.

Against this backdrop, the need to continuously measure your company’s performance is clear. But what to measure?

This post describes what to measure as you benchmark your company’s performance against those of F&B industry peers.

All Benchmarks Should Start at Operating Margin

Operating margin measures the profit a company earns on each dollar of revenue. To arrive at the operating margin, subtract variable costs (raw materials, wages, and other non-fixed items), before paying interest and taxes, from sales. Put another way, divide your operating profit by your net sales.

Operating margin is critical because it tells the story of your operational efficiency – the lifeblood of companies operating in tight-margin, highly competitive markets – and indicates how well you’re controlling costs in relation to revenues.

Take all benchmarking measures consistently over time and review them to track directional trends. Maybe your operating margin looks healthy, but, when viewed over several years, is declining. Here’s a good example of understanding one company’s health, PepsiCo, based on operating margin as measured over time by the professionals at GuruFocus.

As you can see, you get a quick view of the current condition compared to previous years and an understanding of how quickly the company has progressed. It’s also easy to measure your operating margin versus others in your industry, thanks to a wealth of online sites that describe each industry’s margins; the above link shows PepsiCo ranking higher than 82% of similar companies.

Don’t think you have many relevant industry peers? Benchmark your operating margin more broadly, as the analysts at CSIMarket did. They evaluated Sysco’s operating margins in relation to the narrow industry of food processing, then widened the benchmark against consumer non-cyclicals, and finally to an “overall” industry benchmark. They also wanted to know how the current quarter’s operating margin of 4.13% compared to the company’s recent historical performance. From their findings, it fell close to the average for the company of 4.36%.

The Important Benchmarks Beneath Operating Margin

The folks at FINLISTICS compiled a chart of 6 KPIs and their benchmarking values for F&B companies - take a look here. They measure how your company performs in numerous areas and how you should compare to industry peers. (You should evaluate these only after determining your operating margin.)

  1. Days sales outstanding: This is your average invoice collection period. It’s a financial ratio that illustrates how well you’re managing accounts receivable.
  2. Fill rate: This measures the percentage of customer orders filled by your on-hand stock and indicates how well your inventory matches demand.
  3. Distribution cost as a percent of revenue: This KPI reveals the quality of your sales. For example, if you’re making many small sales, your revenue will appear strong until you factor in higher distribution costs.
  4. Inventory turnover: This measures the number of times your inventory is sold or used in a time period (usually a year). The equation takes the cost of goods sold and divides it by your average inventory.
  5. Time to close the books: This metric tells how long it takes to zero out your income and expense accounts and record your company's net profit or loss onto the balance sheet at the end of a reporting period.
  6. IT spend as a percent of revenue: This measures how well you enable the business with IT systems. You want to modernize systems enough to do the things worth doing while not falling so in love with technology that you implement it for the sake of having the latest and greatest tools at the expense of profits.

Benchmarking Key Metrics in Relation to Operating Margin

When you view the KPIs alongside the operating margin, you get more significant insights into your business’s performance. Inventory turnover is an example of a metric that’s more useful when measured with operating margin – what good are extra inventory turns when they drag profits down? In 2006, for example, PepsiCo turned inventory eight times while Coca-Cola managed just five inventory turns, but Coca-Cola’s operating margin was 30% higher than PepsiCo’s. The value in the metric increases when tracked over time, as it can inform high-level strategy. Coca-Cola shifted strategy after 2006 and fell behind in both inventory turnover and operating margin categories, signaling the potential need for a dramatic strategy shift once again.[1]

Which brings us to our next point: track important metrics over time to measure your performance improvements/declines. How does this year’s “days sales outstanding” compare to previous years now that you’ve implemented a new collections process? After implementing a new financial system two years ago, have you steadily reduced your “time to close?” Want to see how your modern ERP system (CRM included) has paid off? You can measure your technology spend as a percent of revenue over time.

Traceability: The New Metric of Morality

Finally, there’s a new metric you’ll want to create, even if it doesn’t affect top-line growth or bottom-line profit each year – one to trace products and ingredients. Traceability is critical for F&B companies for multiple reasons. First, with hazardous products that can cause consumer illness, woe is the manufacturer or distributor that can’t quickly pinpoint the source of a problem. A benchmark of 48 hours to identify the origins of a faulty product is common; the below image shows what the Canadian Government dictates a food company should know within 48 hours of being notified of hazards related to animal meats.

food-recall-canadian-government

Traceability is also important because many consumers want not just locally sourced and organic foods, they want proof of the source of those foods. Third, you can use traceability as verification for things such as the “morality” of your supply chain. Take the recent benchmark report from KNOWTHECHAIN that names specific companies and evaluates their ability to track whether they use forced labor sources in their supply chains. Being portrayed negatively in such a report could cause long-term brand damage.

Modern ERP Can Help

Today’s modern ERP systems keep you up to date with all your key metrics because the operations that inform them flow through the ERP system. At Sapphire, we’re experts in helping you identify what to do, how to do it, and how to track it. Contact us today to discuss how you can better run your operations and report accurately and consistently on performance.

#Food & Beverage





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