Silent Partners: Contract Manufacturing in the US

Contract manufacturing is a common practice in the food and beverage industry. Branded food companies have a growing need for increased scale and sophistication in manufacturing, which—together with the industry’s high level of fragmentation and strong growth prospects—can lead to consolidation in contract manufacturing.

picture of softdrink manufacturing

Report summary

A common practice

Food manufacturing is frequently outsourced to companies that are different from the brand names consumers will recognise. Contract manufacturers often operate behind the scenes and under confidentiality agreements, making it difficult to quantify the size of the market. Rabobank estimates that contract manufacturing in the US represents 10 percent to 20 percent of total food manufacturing.

…that benefits manufacturers

Using a co-manufacturer has several benefits, including cost savings, increased flexibility in operations, and access to specialised technologies. There are also downsides to outsourcing production, to do with a certain lack of control compared to in-house manufacturing.

Poised for growth

Contact manufacturing is growing more rapidly than food manufacturing in general, as a result of several trends in food & beverages:

  •  Companies need to offer greater product variety and innovation.
  • Newer and smaller brands that lack manufacturing facilities of their own are gaining volume and market share.
  • With declining volumes, margins and profits in many of the larger food companies are coming down, and investors are placing increased pressure on companies to rationalize costs and improve returns.

This rapid growth, combined with high fragmentation, leads Rabobank to believe contract manufacturing is poised for a rollup strategy.