National study identifies best practices for food industry

March 6, 2006

PORTLAND, Ore. - The most profitable food industry businesses are not retail and restaurant outlets, but the companies that supply industrial customers with products, according to a new national study by Oregon State University researchers.

Businesses, such as those that sell ingredients for another business's packaged or prepared foods, report the highest growth and profitability of those examined in the new report, "A Snapshot of U.S. Food Business." The report, made into an Extension publication, is available online at: http://fic.oregonstate.edu/images/stories/documents/FoodBusRpt.pdf

The study, conducted by faculty at the OSU Food Innovation Center and the university's College of Business, is the first to document food industry business practices on a national scale and to identify best practices in each food business sector.

"Everybody thinks retail is the way to go, but our research shows there may be a better way to do things," said Aaron Johnson, food strategy business specialist with the OSU center and lead author of the report. He says businesses that focused on supplying industrial customers reported significantly higher growth and profitability compared to retailers and restaurateurs – in part due to their greater emphasis on competition, product differentiation and low-cost strategies.

Flexibility also plays an important role in both success and longevity. Yet, the report found that it was the established firms, those that have been around for 30 or more years, which successfully employed more flexible business strategies. Younger businesses tended to use strategies focused more on innovation and product differentiation.

While small businesses can no doubt be competitive, the researchers say, the report also demonstrates that those companies with fewer than 50 employees tend to be poorer performers than their larger counterparts. Johnson's work with entrepreneurs at the Food Innovation Center confirms his finding that younger companies tend to be either too inflexible to take advantage of business opportunities or so flexible they are blown by the wind.

Only about 10-15 percent of new businesses, Johnson said, will succeed.

"In a dynamic industry, where costs and consumer preferences are always shifting, there are no guarantees," Johnson pointed out. "Small, new companies really need to understand what benefit and value they bring to the world and stay to that."

In addition, the OSU study found that having an environmental policy adds value beyond income for people in the food business. "Even though it doesn't translate to profitability or growth, a focus on environmental policy doesn't lead to less profitability either," said Johnson.

Johnson collaborated on the study with Clay Dibrell and Justin Craig in OSU's College of Business.

The OSU researchers say they started the project "to better understand how food businesses function," Johnson explained. They compiled survey answers from 360 respondents, representing everything from frozen foods to dairy to snack and specialty foods. Dividing the companies into retail, restaurants or industrial suppliers as well as size and age, they assessed the challenges facing the food industry.

While managers of small or new businesses can use this information to put a company on the track to larger success, larger companies that may have become stagnant can also use the information to seek more innovative business approaches.

The Food Innovation Center provides practical education, business development and technical services to food producers, processors, marketers and entrepreneurs. Information about the center can be found online at http://fic.oregonstate.edu.

Author: Peg Herring
Source: Aaron Johnson