Lab Technician Pat West conducts a frying study at Wayne Farms’ Innovation Central. Contract manufacturers are investing in added-value product development to elevate themselves above commodity suppliers. Source: Wayne Farms LLC.
Compared to the snake pit that is the contract manufacturing and copacking business, new products are kids’ stuff.
Consider the short, unhappy tale of Universal Food and Beverage Co. Founded three years ago, St. Charles, IL-based Universal assembled a team of seasoned food experts to take aim at the wellness beverage segment as both a contract filler and distributor of its own branded products. Initial orders of $10 million were announced in June 2005, encouraging expansion plans to boost capacity 10-fold. Later that month, a hot-fill line was commissioned in Independence, VA to help meet expected demand.
“With our foundation of proven senior management, a portfolio of trademarked products (and) a highly expandable state-of-the-art production facility,” confidently predicted CEO Duane Martin, former president of IGA North America, “there is no question that Universal is poised to become a dominant industry player” in the $7 billion bottled water business.
Innovative products, advanced packaging and processing systems and the hiring of Charles Sizer (ex-head of the National Center for Food Safety and Technology and an aseptic processing authority) as R&D director were not enough to maintain solvency, however. Instead of a 10-fold capacity increase, the firm was completing a private placement of $3.15 million in senior secured convertible notes 12 months later. In October, creditors were picking over the bones of Universal. A filing with the US Bankruptcy Court in Chicago listed zero assets and $11.1 million in debt.
George Lang doubts his copacking venture will meet a similar fate. He is business development director at American Pasteurization Co. (APC), a Milwaukee venture that began operations 100 miles north at about the same time as Universal Food. Both businesses were built around advanced processing technology; both were staffed by industry veterans. But APC carved a unique niche as the nation’s first provider of high-pressure processing (HPP) on a tolling basis. And it’s APC’s good fortune that HPP as a post-packaging treatment for ready-to-eat meats is taking off.
HPP has progressed in fits and starts. Anemic equipment sales prompted Flow International Corp. to sell off its Avure Technologies division two years ago. The divestiture coincided with HPP’s first home run: Hormel’s Natural Choice line of preservative-free deli meats. Other RTE meat suppliers took notice, touching off a stampede toward clean labels and extended shelf life (140 days validated for cold cuts) with HPP. The rush encouraged APC to install its third press from Avure this summer.
“Small and mid-sized food companies can’t afford this technology, so we stepped in to supply it,” Lang says. “It took us 12 months to get our first customer aboard; now, three or four companies approach us every week. For organic producers, this is a real boon because of the absence of preservatives” in organic meats.
Some copackers and contract manufacturers don’t buy new technology; it’s thrust upon them. Evansville, IN-based AmeriQual Group operates three presses from NC Hyperbaric, a Spanish fabricator that introduced a horizontal system to the US a few years ago. While APC shelled out millions for its systems, AmeriQual’s came gift-wrapped. Two are owned by Tyson Foods, the other by Kraft. Tyson had a regional hit with vacuum-packed, oven-roasted chickens that were preservative-free. A 14-day shelf life precluded national distribution, and there was no room in Tyson’s plant for HPP presses. The solution was to truck packaged product to Evansville for treatment that extends refrigerated shelf life to 45 days.
Three practical questions had to be answered when AmeriQual began applying HPP two years ago, according to Michael Billig, business development director: Would consumers accept HPP treatment? Would they pay a premium for the service? Could AmeriQual operate and maintain the systems effectively? “The answers were yes, yes and yes,” Billig says. As a result, the contract manufacturer will install a fourth and possibly a fifth press to serve other food companies.
A six-unit club pack solved a damage-return problem for Pacific Foods but didn’t result in a long-term relationship with the contract packaging supplier. Source: Think Plan Deliver Inc.
Have it your way
Major food companies always have been part of the private-label and foodservice production mix, making products for other companies to round out their production schedules. As a rule, they don’t customize other people’s products, and they don’t compete with their own new-product stars. Those limitations create an opportunity for contract manufacturers and copackers, and they are rushing to fill it with beefed-up product design support.“The technology in food production hasn’t changed,” observes Tony Rebello, president and CEO at copacker American Purpac Technologies (APT), Beloit, WI. “The applied research on various ingredients and how they will react is what has changed.”
Customers are moving away from me-too commodities to distinctive products. A branded manufacturer can’t or won’t deliver that type of product, creating an opportunity for contract manufacturers. Recalling his years at ConAgra, Rebello cites the Healthy Choice brand. The line was a hit, achieving sales of $3 billion in three years, and there was pressure to offer a private-label version. “You do that after the product has matured,” not when it’s a rising star, he points out. To be successful, a contract blending and liquid-processing specialist must help clients develop their own breakthrough products. Four-year-old APT addresses the need by providing formulation expertise. “For a company our size, we have a huge QA staff,” says Rebello.
Comanufacturers of virtually every kind of food and beverage are putting their money where their customers’ product-development interests lie. Wayne Farms, the nation’s sixth largest poultry processor, expanded its product-development capabilities two years ago when it opened Innovation Central, an R&D center at the company’s Oakwood, GA headquarters. Even American processed cheese is undergoing customer-centric reformulations: Advanced Food Products Inc., a joint venture of Land O’ Lakes and French dairy giant Bongrain SA that bills itself as “the leading North American copack manufacturer” of aseptic products, is tapping into Bongrain’s global R&D teams to develop reduced fat and cholesterol cheese for private label and industrial accounts. “We don’t want to be known as a packer; we want to be known as a valued-added partner,” emphasizes Bill Dillon, business development director.
Wayne Farms is a business-to-business company without any brands of its own, explains Stan Hayman, director-sales & marketing. Formulation of marinated chicken and other value-added products began a quarter-century ago, but Innovation Central ups the ante. A chef, additional food scientists and other personnel joined the staff, and the expanded R&D facility is rolling out new foodservice products and customized items for clients. “If we can’t help a customer drive its business and build its brands,” intones Hayman, “we’re not successful.”
Nitrates, nitrites and other chemicals work against packagers who want a clean label and a natural claim on their meat products. Organic Valley achieves a chemical-free claim for its ready-to-eat products with new processes and the help of a copacker. Source: Organic Valley.
America's breadbasket
Despite the loss of thousands of food jobs in the last decade, Chicago remains a major cog in American food production. It has less to do with the suits entering Kraft Foods’ suburban headquarters each day than the tens of thousands of workers in an expansive network of metro-area facilities. Contract firms are part of the mix, and a triumvirate of copackers-Power Packaging, Peacock Engineering Co. and Olmarc Packaging Co.-rank among the nation’s biggest.Chicago was a transportation hub and hog-butcher for the world when the processed food industry was born, and the commodities trading in grains and pork bellies at the Board of Trade enhanced its position as the industry grew. War-time demand gave birth to thousands of businesses, among them Peacock, which was created to pack replacement parts for military vehicles. The firm migrated to consumer packaged goods, and capabilities gradually expanded to include comanufacturing. Today, Itasca, IL-based Peacock operates four facilities totaling 1.2 million sq. ft. and is able to handle RTE products in USDA-inspected plants.
Olmarc and Power arrived on the scene in the 1960s and have followed a similar arc. “As major food companies began downsizing in the mid-’80s, they spoon-fed us technologies, and we picked up a bigger part of the project-management and engineering” of machine building and processing, says Ken Marchetti, president of Olmarc. The company operates facilities in Northlake and nearby Franklin Park, IL. Dry blending became a capability early in its evolution, with up to 2 million lbs. of spices, cake mixes and other ingredients blended each day. As brand owners continued to de-emphasize manufacturing, Olmarc added liquid processing to its core competencies. The same outsourcing imperative has reduced Olmarc’s in-house engineering and machine-building capabilities, however. “We used to do everything in house,” remembers Marchetti. “The brain power is still in house, but we partner more with other companies for the brawn.”
A huge pool of skilled workers is one of these firms’ strengths, an edge that rivals speed-to-market and reduced new-product failure risks in winning contracts from food companies. A study produced by Peacock surprised a major food company contemplating building a new facility in the Sunbelt by demonstrating labor costs in Chicago would be less than in a right-to-work state. True, unskilled laborers will work for less in Southern states, but modern factories rely on automation, not muscle. Workers who can program a date-coder or operate an automated slicer are in high demand and short supply in rural areas, and companies bid against each other for their services. The study’s conclusion that a Chicago facility would operate at a lower labor cost “was a big surprise,” confides a Peacock executive. “We opened a lot of eyes.”
Power Packaging, which acquired a shuttered Pillsbury plant in suburban Geneva, IL four years ago and promptly expanded it by 73,000 sq. ft., operates 11 food facilities. In recent years, Power has inched away from transaction contracts and toward long-term relationships. The same strategy is playing out at Peacock, which last year built a 440,000-sq.-ft. plant in Bolingbrook, IL that almost functions as a dedicated facility for Kellogg Co. But those types of relationships remain elusive: “Big companies are often gun-shy about making volume or dollar commitments,” Olmarc’s Marchetti observes. “The long-term viewpoint is overlooked many times.”
An abundance of available capacity incents brand owners to shop their business. Food plants never die; they just change names. When one emerges as a new contract manufacturer, it often has negligible capital costs that make life tough on other manufacturers. Take the case of Hardy Bottling in Memphis, TN.
An operator prepares to blend a batch at Olmarc’s copack plant in suburban Chicago. Responding to food company needs, firms like Olmarc gradually have added processing capabilities over the years. Source: Olmarc Packaging Co.
Peggy Davies, vice president-store brands for McCain Foods in suburban Chicago, addressed the struggle between long-term relationships and lowest-price manufacturing at Food Engineering’s 2007 Food Automation & Manufacturing Conference. Private-label food and beverage is a $44 billion business at US retail and growing at 4.3%, double the rate for brands. Rock-bottom prices for some private-label products contribute to the growth, but the real excitement is at the high end, where attractive pricing, high quality and healthy eating help retailers compete with national brands. Periodic auctions where price alone dictates who gets the manufacturing contract still characterize the low end of the market, Davies said, but strong relationships are being forged at the premium end. “Retailers don’t have the culinary support to develop private-label products that are equal to or superior to the national-brand competitor,” she points out, and the smart ones are forging partnerships with contract manufacturers for that support.
A job well done is no guarantee of a lasting relationship. Think Plan Deliver Inc., a group of Portland, OR graphic-arts experts who segued into copacking and logistical services, learned that with Pacific Natural Foods, a Portland, WA, organic foods company. Costco wanted six-packs of Pacific chicken broths, but the manufacturer’s line was set up for eight-packs. Pacific tried shrink wrapping six cartons together. “The pallet was just not attractive, and the bundle weighed 16 lbs.,” explains Greg Stamm, Think Plan Deliver’s president. “Customers would grab the bundle, crush a carton, then pick up another bundle with two hands. Almost a third of the bundles were being sent back to Pacific by Costco.”
Think Plan Deliver developed a corrugated container that simplified palletizing and minimized returns. Stamm was prepared to arrange for copacking, but the client rebuffed it and hasn’t given the company another project.
Production-oriented copackers understand the fickle nature of client relations. Since the plant opened in 2004 (see “A new model for aseptic,” Food Engineering, November 2004), APT has expanded its production capabilities in hot fill and non-aseptic filling and received certification as an organic processor. The investments are designed to appeal to mid-sized and start-up food companies. “I love when the aseptic bag-in-box line is running cheese sauce for amusement parks; that’s the easy stuff,” says Rebello. “But any business is a blend of new customers and long-term relationships. You can’t just be in a transaction business if you’re a contract manufacturer.”
APC’s Lang seconds the sentiment. “I’m preparing myself for the day when we have competitors in HPP commercial tolling,” he says. “We’re treating our first clients like long-term customers from Day One.” APC’s ownership includes industry veterans who know well the pattern of companies outsourcing work until they have sufficient capacity to bring it in house. Lang and Justin Segel were executives at Emmpak Foods, a Milwaukee beef processor sold to Excel Corp. six years ago. Their partner in APC is Jason Eckert, president of private-label copacker Harvest Food Group based in-where else?-suburban Chicago.
“APC has been a good partner for us,” concurs Tedd Heilman, general manager of Organic Valley’s meat operations. The LaFarge, WI farmers’ cooperative was APC’s first client. Besides dairy products, the co-op produces deli meats and hot dogs under retailer brands and its own Organic Prairie label. Consumers of organic bacon, ham and pepperoni are skittish about nitrates and nitrites, so Organic Prairie uses a celery-juice treatment to give the color and flavor associated with cured meats but which requires labeling most items as uncured. “Even the organic consumer was unwilling to buy grey hot dogs,” confesses Heilman. By subjecting packaged meats to HPP, the company picked up 21 days shelf life and greatly expanded distribution, he adds.
Retaining clients like Organic Valley and the major meat brands who now are paying tolls to APC may not have been a realistic expectation in years past, but Lang believes today’s market is different. Operating and maintaining the equipment require a certain level of expertise; simply devising a HACCP plan for the process was a year-long project, he says. Those are barriers to in-house treatment. Besides, major food companies are shifting their focus away from manufacturing and toward brand marketing. The opportunity for long-term contract manufacturing and copacking increases in parallel.
Many factors were at work in Universal Food & Beverage’s demise. The market is no less brutal for new copackers than it is for new products. Trying to be both a manufacturer of branded products and a service provider to other food companies certainly didn’t improve Universal’s likelihood of survival. In an age of specialization, successful manufacturers are likely to be masters of fewer tasks but the best at the ones they do. That’s good news for best-in-class contract manufacturers and copackers. For more information:
Glenn Hewson, Avure Technologies Inc., 253-981-6239,
glenn.hewson@avure.com
Rick Marshall, NC Hyperbaric ,
905-643-0955,
rmarshall@gridpathinc.com
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