Food Security Strategy for Food and Beverage Companies

Introduction: Why Food Security Matters to Food Companies

Food security is a critical issue for any food and beverage company. It is self-evident that food is the core business for such a company, so any macro-level issue regarding food is inherently important — but there are specific considerations that drive its particular relevance.

First, food security reflects on the long-run sustainability of the business. It may sound obvious, but food companies need food in order to survive. They need to grow it, process it, package it, and sell it. At the supply chain level, therefore, threats to food security must be taken seriously. The world today is beginning to look like a zero-sum game with respect to many resources, food being one. If the world needs to produce far more food than it has in the past, yet as much as a quarter of agricultural land is already compromised (AP, 2011), and much more is threatened by water constraints and climate change (Wheeler & von Braun, 2013), then food companies face a direct material risk. It is not difficult to imagine a future in which large food companies are targeted by governments, as food security needs ultimately outweigh the perceived right of these companies to control the food supply.

But there is also tremendous opportunity. Where food companies can provide genuine benefit, they gain in terms of status and market position. If there is growing demand for food, any company that can meet that demand will be able to increase its profits. While one can reasonably argue that the UN's 70% figure is overstated — it assumes that people have an inherent right to demand and receive a Western level of calorie consumption — there is little doubt that there will be a growing imbalance between what we produce and what we need to produce. The degree to which a food company can close that gap will go a long way toward determining whether such a company succeeds in a future where food security becomes a much bigger policy issue.

Corporate Response Strategies

Companies in the food business will need to take a number of different steps to address this issue, though it can be difficult to predict exactly what the future holds. The future could resemble science fiction scenarios in which food companies monopolize production and markets; alternatively, governments terrified of starving populations could dismantle large food companies and nationalize production and distribution in search of greater security and efficiency — and efficiency matters here, because the capitalistic food system is remarkably wasteful. An executive running a food company will necessarily need to consider strategies ranging from increased vertical integration, to positioning the company as a food security solutions provider, to dramatically reducing waste to avoid becoming an early regulatory target.

Before that strategic positioning can happen, however, the company must monitor conditions carefully. Threats and opportunities will not be evenly distributed around the world. Many international food companies operate with a geographic organizational structure, or a matrix structure for companies with several billion-dollar brands. These structures allow local divisions to gather information about food security — information that is not always collected even by local government officials, yet food companies are typically well-connected with local food production conditions. This data is usually combined with water availability and demographic data to assess a region's food security. In many cases where a region lacks food security, food companies are already involved in making up the gap. Thus, food companies have the means, should they dedicate the internal resources, to assess regional food security and understand the business and political implications.

One of the biggest challenges for food companies is balancing short- and long-term interests. In some areas, agriculture is relatively sustainable in the short run, but reliance on groundwater or the predicted effects of climate change will compromise food security over the long run. Food companies, typically public corporations, are oriented toward quarterly earnings releases and struggle to think more than a year or two ahead. This is a genuine concern where long-run sustainability is involved, because managers are not incentivized to think long-term. A manager could make a decision today that negatively affects long-run sustainability, yet never live to see the full effects of that decision — there is simply no incentive to think long-term, which is a core reason why addressing climate change has proven so difficult. In the past, managers could exploit new markets when old ones dried up, but the world's largest companies today have no more new markets to discover, and must therefore begin thinking more seriously about long-run sustainability, starting with gathering data and using available models to understand future conditions in different parts of the world.

Policies, Mechanisms, and Structures

The food and beverage industry is driven by short-run returns, since there are no genuine long-run consequences that executives face for their decisions. Incentivizing the long run is difficult. If people lived longer, long-term thinking would feel more urgent and personal, but an executive in their sixties today has no reason beyond altruism to care deeply about what the world will look like in the latter half of the 21st century — they pay lip service to this concern, but actions tend to speak otherwise.

Basic economic theory holds that where there is no market-based incentive to correct behavior that causes negative externalities — a classic case of market failure — such incentives need to be imposed by government. Government is the only entity with the formal authority to introduce and enforce such incentives, and it is also the only entity with an institutional lifespan comparable to that of a large corporation. The mechanisms best suited to this purpose are taxes or levies on behaviors that create long-run negative externalities. This is not an exact science — basing today's restrictions and taxes on potential future outcomes is inherently uncertain — but there are areas where government can guide policy confidently. Historically, government support of infant industries eventually allowed those industries to become viable, demonstrating that a government with foresight can make progressive policy decisions whose positive effects take many years to materialize. There are instances where the right policy is already clear — the amount of water used for agriculture in California, for example, is completely unsustainable — while in other cases, punitive policies to manage corporate behavior remain more speculative.

Companies can, however, act in a more responsible and sustainable manner on their own initiative. This requires vision, and perhaps some sacrifice, but a compelling vision can be sold effectively. If a company lacks vision — as the major automakers did — then a competitor like Tesla will emerge with a vision instead. For food companies, there may be no economic incentive today to think about long-run food security and sustainability, but that does not mean such thinking should be absent. A strategy should be developed, grounded in data and key trends, because companies that are best positioned and ready to capitalize when crisis arrives will be the ones that succeed through the 21st century. A company that does not think long-term risks becoming the food industry's version of Kodak — completely shut out of the market once it evolves.

On the consumer side, one factor that will become increasingly important is the trade-off between calories and nutrition. Calories are relatively easy to produce, while nutrition is harder to deliver and more dependent on individual choices. In a world with a growing population, focusing on calories at the expense of nutrition carries no immediate costs for food companies, because even if lifespans are shortened, people are replaced by new consumers.

References

AP (2011). UN: Farmers must produce 70% more food by 2050 to feed population. The Guardian. Retrieved December 11, 2014 from http://www.theguardian.com/environment/2011/nov/28/un-farmers-produce-food-population

Satran, J. (2013). Water scarcity must be addressed urgently to avoid food shortages, Nestlé CEO Paul Bulcke says. Huffington Post. Retrieved December 11, 2014 from http://www.huffingtonpost.com/2013/02/26/water-scarcity-nestle-ceo-paul-bulcke_n_2768390.html

Wheeler, T., & von Braun, J. (2013). Climate change impacts on global food security. Science, 341(6145), 508–513.