Key facts
- Companies embracing contract manufacturing
- Nestlé, The Kraft Heinz Company, PepsiCo, Mars, Inc., Mondelēz International, Ferrero Group
- Drivers of shift
- Capital economics, workforce pressure, supply-chain architecture, speed imperative
- Capital investment for a facility
- Tens of millions of dollars
- General Mills external manufacturing expansion
- Up to 20%
- Time to market via co-manufacturer
- Three to six months
- Time to market via internal facility
- Twelve to thirty-six months
Background
Contract manufacturing has been used in food and beverage production for decades, enabling brands to scale efficiently, access specialised expertise and manufacturing capabilities, and bring products to market without significant capital investment in production facilities.
But it was never the primary route to market for major CPGs, who instead chose to retain direct control over production. Until now.
Some of the industry’s biggest names, including Nestlé, The Kraft Heinz Company, PepsiCo, Mars, Inc., Mondelēz International and Ferrero Group, are embracing contract manufacturing as a strategic business tool.
Current situation
The move away from in-house to contract manufacturing is being driven by “capital economics, workforce pressure, supply-chain architecture, and the imperative for speed,” says Ramendu Kumar, project lead at industry analysts Mordor Intelligence.
Building and commissioning a food-grade manufacturing facility requires significant capital investment, often running into tens of millions of dollars, says Kumar. For many brand owners, tying up capital in property and equipment is becoming increasingly difficult to justify, particularly when those resources could be invested in innovation, brand building and growth initiatives.
Outsourcing offers a clear alternative, allowing companies to access production capacity and expertise without the financial burden of owning and operating manufacturing assets. Operational pressures also play a role, as manufacturers contend with workforce challenges and increasingly complex supply chains.
| Aspect | Details |
|---|---|
| Capital investment | Tens of millions of dollars for a food-grade facility |
| Time to market (co-manufacturer) | Three to six months |
| Time to market (internal facility) | Twelve to thirty-six months |
| General Mills external manufacturing expansion | Up to 20% |
| Potential downsides | Lower margins, less direct control, IP concerns |
Impacts
The COVID-19 pandemic rewired thinking about supply chain concentration. When demand surged for staple packaged foods in 2020, several big CPGs announced plans to expand external manufacturing – some like General Mills by as much as 20% – recognising that single-site or wholly owned production models could not absorb demand volatility at speed.
Speed-to-market is another key impact. “Research estimates that brands can move from product concept to shelf in three to six months through an established co-manufacturer, compared with twelve to thirty-six months for an internally built facility,” says Kumar. “In categories where trend responsiveness and first-mover advantage define commercial outcomes, that differential is not marginal, it’s strategic.”
Contract manufacturing also allows brands to test concepts before committing significant capital, using co-manufacturers to validate demand, gather consumer feedback and refine products before scaling production. However, outsourced production can carry lower margins, and brands must relinquish a degree of direct control, creating potential challenges around quality assurance, food safety and consistency.
Future outlook
Scenario analysis: The possibilities below are not certain predictions.
If the past decade saw contract manufacturing gain popularity among the world’s largest food companies, the next is set to cement its position as a core pillar of Big Food’s manufacturing strategy, says Kumar. With the forces driving contract manufacturing showing no signs of slowing, many CPGs are moving beyond the question of whether to use it and are focusing instead on where it can create the greatest competitive advantage.
That doesn’t mean the shift will be universal. Categories built around proprietary processes, unique formulations or highly differentiated manufacturing techniques are likely to remain closely guarded.
But for much of the industry, contract manufacturing is becoming a cornerstone of modern manufacturing strategies, helping brands balance efficiency, agility and growth in an increasingly competitive and complex market.
Source: foodnavigator.com
