Food trustBuilding confidence in food

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Building trust in China’s food

China’s economic growth has created new food safety and quality challenges for corporations and policy makers. Supply and production chains are growing in size and complexity, rising incomes are driving consumer demand for more variety, and social media has increased public awareness of food safety issues.

The industry has made great progress with investment, new technologies and a proliferation of ISO certifications, but we continue to see food safety scandals that fuel public anxiety. Most incidents are caused by human factors like inadequate training, lack of knowledge around techniques and standards, or economically motivated fraud and non-compliance. The challenge for executives and regulators lies in the highly fragmented nature of the industry – small farms and businesses account for the vast majority of China’s producers, processors, distributors and traders.

Building trust in food is a difficult and complex problem, but it is also an opportunity. With so much information available via the internet, China’s consumers are increasingly concerned

about the health of their families. They are learning about the ingredients and origins of the food they purchase. More people than ever are willing to pay higher prices for better quality; and customers are loyal to brands that they trust.

The government recognises the importance of trust in the food sector, and has shifted the focus of its food policy from self-sufficiency to safety. China’s new national food safety law will impose significant new safety requirements on producers, distributors, retailers and even online marketplaces. The law will increase fines for violations and require the establishment of a food tracking system.

At the same time, China’s market is among the most fiercely competitive in the world. Margins are squeezed at every stage of production and distribution, and the environment is still dominated by companies and consumers who focus on price. Making investments to build trust while competing in China’s current market is one of the biggest challenges faced by food industry executives anywhere in the world.

Growing incomes and changes in middle class preferences will drive drastic changes in China’s food sector, and the names of today’s market leaders may be forgotten ten years from now. Who will capture market share by earning consumers’ trust? Who will lead the next wave of industry consolidation? Who will win the confidence of investors?

Companies that invest in building trust today will be the champions of tomorrow. To accomplish this, they must foster a food safety culture and ensure visibility and control in complex production and supply chains. Those who fail to do this will put the health of consumers at risk and destroy their brand. Those who succeed will improve both quality and efficiency, earn the trust of loyal customers, and grow their bottom line.

The PwC Purpose

“Build trust in society and solve important problems”

Our ambition“Inspire a movement of trust that creates lasting confidence in business and beyond.”

In the past it was enough to produce affordable food. In the future, only those companies that earn the trust of their customers will survive.

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Ten global trends driving change in the food industryThe companies that best anticipate change will be the leaders in tomorrow’s market.

1Globalisation of food supply chains

More food is being traded across borders than ever before. Businesses are hungry for growth and are looking to grow revenue in foreign markets. Faced with razor-thin margins, companies are sourcing from low-cost suppliers around the world. Globalisation is increasing food safety and quality risks, and is making traceability and control over supply chains more challenging.

2Integration of supply chains

As global food trade becomes subject to more regulations, food companies are spending millions on the integration of their supply chains to improve safety and traceability. At the same time, governments are issuing policy and strategic announcements to encourage the integration of supply chains to improve food safety and security.

3Scandals and increasing scrutiny

High-profile food safety and fraud scandals are triggering public health concerns and damaging trust in the industry and in governments around the world. With the ubiquity of social media and increasing public interest, a single lapse in quality control can quickly become a scandal that makes international headlines.

4Rising regulatory standards

Governments, most notably China and the US, are adopting stricter and more complicated regulations for quality standards, supervision and sanctions. This creates unprecedented compliance risk and additional costs for companies with operations, suppliers or customers in multiple jurisdictions.

5Shift in global economic power

The growth of Asia’s economies, especially China and India, is creating enormous new consumer markets. In 2015, the middle class population of Asia-Pacific will surpass that of the US and Europe combined. By 2030, we predict that the purchasing power of the E7 economies will overtake that of the G7.

6Technological and scientific breakthroughs

Scientific advances are increasing our ability to detect hazards and identify risks. New technologies, such as on-farm GPS mapping and DNA labelling are now commercially viable. Along with data analytics, these technologies can enable tighter controls along the entire length of the supply chain that will improve quality and efficiency. Advances in traceability will increase accountability and enable companies to execute fast, targeted recalls. Traceability combined with social media will give consumers unprecedented transparency into the origins and ingredients of their food.

7Changing food demand

Economic development and population growth are driving increases in overall food consumption, while a growing middle class is demanding better quality and more variety. Greater purchasing power is has resulted in a significant increase in consumption of resource-intensive protein products, with significant implications for the environment and agriculture. Demand for certain standards, such as organic or halal, is also growing.

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8Empowered consumers

The internet gives consumers access to vast amounts of information about food and health issues. At the same time, social media enables every consumer to share and document their views on the quality and safety of food products. Using nothing but their phone, anyone can use text, pictures and videos to expose issues and trigger a food scandal. In response, food companies are investing more in communications, risk management, and crisis response planning.

9From compliance to competitive advantage

World-class food companies are setting internal standards that are far more stringent than those required by law. Instead of merely complying with regulatory safety requirements, they are aiming for exceptional quality that distinguishes them from their competition and builds consumer trust and brand loyalty.

10Population growth and resources scarcity

With growing populations and prosperity, agricultural production will need to increase by 70% to feed the world’s people by 2050, yet our current resource consumption is already unsustainable. Governments and companies are using new technologies, corporate acquisitions and even diplomatic relations to secure access to the water, energy and land resources required to ensure sufficient food supplies in the future.

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Industry best practices

World-class companies focus on achieving food safety and quality, and implement the necessary culture and control systems. They also prepare in advance to address any issues that could occur in spite of their best efforts.

In our experience, the following represent best practices in the global food industry.

A positive culture of safety and quality everywhere from the farm to the shop floor

Behaviour change and continuous improvement are employed to establish and maintain a strong culture of safety and quality at every level of the organisation, both internally and in suppliers. Risks are identified and managed with ongoing hazard analysis and monitoring of leading indicators.

A risk resilient business culture and best practice behaviours start at the top

Executives must assume more supervisory responsibilities and be fully engaged with food trust issues. Participation in industry bodies and thought leadership is essential to develop a culture that is relevant and responsive to current and emerging issues.

Continuous review of supply chain risks and benchmarking against best practice

The best companies have complete oversight over their suppliers and every stage of the supply chain, with risk management procedures tailored for multiple geographies. These companies regularly reassess supply chain risks and benchmark against current best practice.

Performance improvement and strategic alignment

Best in class companies ensure that their resources and efforts are focused on fighting their biggest threats. They conduct stringent risk analysis of areas where food trust issues could arise, and consider the potential impact to the organisation’s value and ability to achieve strategic objectives.

End-to-end integration of food supply chains within organisations

Vertical integration offers maximum control and visibility throughout the entire supply chain, and enables a more structured approach to risk management and crisis planning.

Investment in technology-enabled solutions

The best companies continuously invest in new technology to enhance controls, monitoring, hazard detection and data analysis.

Transparency and a focus on crisis management

Trusted companies approach food safety issues and crisis events with swift remedial action and open, honest communication. They prepare for events with scenario analysis, planning and rehearsal, and have robust product recall and crisis procedures.

Pre-acquisition analysis and diligence

Operational and food trust due diligence is fundamental to managing risk in food sector acquisitions. This includes the systems and processes at production sites, as well as culture, governance, supplier risk and support functions such as HR and IT.

Building and protecting trust is a never-ending initiative.

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Fighting food fraud

In China, the US and Europe, trust in the food industry has been damaged by unscrupulous suppliers.

According to the Global Food Safety Initiative, food fraud is deception of consumers using food products, ingredients and packaging for economic gain and includes substitution, unapproved enhancements, misbranding, counterfeiting, and stolen goods. Food fraud is very often motivated by economic gain1.

Why is food fraud a growing concern?

Food fraud in its worst form can cause illness or death among consumers. Even when fraudulent ingredients do not pose health risks, a single incident of adulteration or inaccurate labelling can destroy trust in your brand.

Today’s cross-border and multi-tiered supply chains present an unprecedented number of opportunities for food fraud and adulteration. Even as public awareness of food fraud scandals grows, it is more difficult than ever for companies to detect and reduce the risk of fraud. Challenges include:

• Lack of upstream supply chain visibility

While knowledge of tier 1 suppliers may be known, visibility to tier 2 vendors and beyond is often blurred. Sourcing practices of tier 1 suppliers are often not assessed or understood.

• Poor supply chain risk management practices

Financial risk assessments and operational audits may be common, but a broad approach to supply chain risk management is rare.

• Difficulty of detection

Food fraud is incredibly difficult to detect. Strong food fraud prevention programs have reliable testing and analysis, integrate seamlessly with broader supply chain operations, and facilitate rapid incident reporting and response.

Most commonly reported food frauds

Sweeteners 7.4%

Protein-based ingredients 4.6%

Fruit juices, concentrates, jams, purees, preserves 3.7%

Wines, musts, spices, liquors, vinegars 3.1%

Natural flavouring complexes 2.9%

Dairy products, milk derivatives/Seafood 2.6%

Meats 2.3%

Cereals, grains, pulses 2.1%

Emulsifiers 1.9%

Functional food ingredients/Gums 1.6%

Animal feed 0.4%

Oils 26.5%

Spices 16.0%

Milk 11.5%Other 9.8%

Source: US Pharmacopeia scholarly records (1980-2012)

Hot Topic

1. GFSI Position on Mitigating the Public Health Risk of Food Fraud, July 2014

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The best practice response

Food fraud challenges are difficult and complex, but companies recognise that their brands — and revenues — can be impacted by supply chain partners over whom they have limited visibility. That’s why leading companies are taking control; seeking to understand their vulnerability to fraud; and acting to assess and improve their supply chain integrity.

Leading companies apply a range of advanced tactics to prevent fraud, including:

• Advanced supply chain management and logistics simulations that model the evolution of risk across the supply chain, using leading technologies to identify those areas most prone to incidents and disruption – resulting in a source-to-table understanding of food fraud risks.

• Rigorous supply chain risk and resilience processes that assess supplier financial and operational risks along with product risk, with the results used to inform investment and resourcing decisions. Some programs go further, incorporating procurement, logistics and manufacturing.

• Use of third-party data sources to understand emerging risks, meet regulatory and compliance obligations, and track actions. Such data provides information on food products, related regulations and surveillance methods.

• Leading scientific capabilities such as DNA testing and isotope analysis that can facilitate accurate labelling or authenticate ingredients based on biological or chemical signatures.

• Recall processes that go beyond mock recalls to look at capabilities across the entire supply chain (manufacturing, downstream and upstream) to confirm effective tracing, identification of nodes/sources and enable true recall execution and business continuity.

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Enhancing recall processes

After first becoming aware of a problem, many companies spend the first 48 hours scrambling to organise a recall team and gather necessary information.

Are you prepared to protect your customers, your company and your brand?

Rarely a week goes by without news that another food product has been recalled somewhere in the world. In 2013 alone, the US Food and Drug Administration recorded more than 400 recalls.2

In addition to the direct costs of a recall, regulatory sanctions and negative consumer reaction can result in lost revenues and substantial reputational damage. The power of consumers on social media, combined with regulators’ increased expectations, has made recall management a strategic priority.

But many companies spend the first 48 hours of a crisis scrambling to organise

a recall team and gather necessary information for a senior individual to make the decision to immediately prevent further distribution of an affected product. The result is that the recall issue continues to grow.

What’s stopping successful recalls?

Common reasons why companies fail to effectively execute recalls include:

• Failure to assign responsibility and accountability to a senior executive

• Inability to execute an integrated, cross-functional recall effort due to silo behaviours and competing objectives among different functions

• Lack of experienced, knowledgeable people who can immediately drive the recall with the required rigor and discipline

• Inability to quickly ramp-up call teams to respond to a surge in both customer and supplier inquiries

• Incomplete knowledge of recall triggers, and difficulty obtaining the data required by regulators

• Poor engagement with insurance carriers, leading to cash flow difficulties

• Inability to accurately track and manage the costs or scope of the recall due to system and data challenges

These factors make it difficult to quickly launch an effective recall operation. Definitive action within 48 hours of detecting the problem is critical.

2. US FDA 2013 Recalls, Market Withdrawals & Safety Alerts http://www.fda.gov/Safety/Recalls/

ArchiveRecalls/2013/ucm20035840.htm?Page=4

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Recall management should be a continuous process that is embedded across all functions and goes far beyond an annual mock recall and traceability test. It should not be a mere one-time exercise that is only carried out when a crisis occurs.

The best practice response

Companies can greatly improve their ability to manage recalls if they approach the process systemically and aggressively. The foundation for success is a pre-determined ‘pivot point’ team, reporting to a C-suite sponsor and empowered to oversee the recall process. The team is responsible for driving cross-functional coordination and execution, deploying and managing resources, and providing transparency into progress and costs and is accountable for performance.

1. Comprehensive and up-to-date

A holistic view of the ‘recall system’ should identify all impacted employees and clearly define their tasks and responsibilities. Recall plans should be sufficiently detailed for immediate execution, but not excessively complex or inflexible. Plans should be updated frequently to account for changes in suppliers, manufacturing, distribution, customers and other factors.

2. Tracking and reporting

Companies should be able to assess the scope of a recall, track and document recall activity, respond quickly and accurately to regulator or other external stakeholder requests for data, and track all recall costs and KPIs. This requires a robust information management capability, and the right systems and processes.

3. Traceability

Upstream and downstream traceability is essential for quick and precise identification of both the source of the problem and the scope of products to be recalled. Better traceability can lead to a smaller and more targeted recall, limiting health risks to consumers as well as damage to your brand.

4. Communications

In the event of a recall, companies should communicate effectively with relevant government agencies and other key stakeholders, including employees, customers, suppliers, insurance carriers, investors, and the board. The recall team must determine which information to communicate, to whom, how, and when. The team must ensure that all internal and external communications are consistent, coordinated and timely.

5. Insurance recovery

The company should have a strategy in place for addressing insurance recovery. Immediately after a recall, the company should communicate with its insurance carriers about the recall process and identify all possible claim elements. This will help facilitate full and prompt insurance recoveries that safeguard cash flow.

Five pillars of effective recall management

Building on the foundation of the ‘pivot point’ team, these are the five pillars of effective recall management:

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Visibility in the food supply chain Upstream and downstream traceability enables fast and targeted crisis response, while illuminating opportunities for efficiency improvement.

Recent food scares in America, Europe and Asia have demonstrated the potential dire consequences of contamination. Every year in the United States alone, 48 million people suffer food-borne illnesses, more than 100,000 are hospitalized and thousands die.

The ability to implement a quick, selective crisis response is absolutely critical to protecting the health of your consumers in the event of an accidental contamination. It is also vital to the survival of your company and your brand. As production and supply chain networks become more complex, cover greater distances and involve more suppliers, exposure to risk grows exponentially.

Better upstream and downstream traceability enables companies to carry out smaller, more targeted recalls that limit public health risk and minimise the revenue and cost impacts of a crisis. The time required to identify the root cause of a contamination can be

reduced from weeks to hours.

Implementing an effective visibility regime builds on supply chain optimisation and supply chain risk frameworks, with particular emphasis on inventory and transportation management. Investment in supply chain visibility will do more than reduce risk; it will deliver working capital efficiencies and illuminate cost reduction opportunities. Visibility enables companies to know at any given time where a product is in the supply chain. This enhances decision making agility for production and distribution decisions.

Food supply chain visibility will soon be a standard expectation for middle class consumers. A small (and growing) number of Chinese companies currently use smartphone apps to give retail customers visibility into the origin and transport history of individual food purchases. In the near future, there will be more free flow of information directly from growers

and manufacturers to retailers and consumers.

The most recent draft version of China’s new national food safety law indicated implementation of a food tracking system will soon be a legal requirement.

Many companies, however, still have conspicuous visibility gaps in their food supply chains. The more agents that food passes through on its way to the consumer, the more information is lost. Vertical integration may reduce the number of entities involved in the process, but even among related parties, visibility requires robust controls and management systems.

The many links in the chain are unknown to the public. As recent scandals have demonstrated, the retail brand will bear the reputational and financial consequences for the transgressions of up-stream partners.

An example of the potential consequences of poor visibility is Peanut Corporation of America (PCA). In late 2008 and early 2009, nine people died and nearly 700 people fell ill from products containing peanuts (real numbers were likely much higher, the ratio of unreported to reported cases of salmonella being 38 to 1). The source of the outbreak was apparently the Blakely, Georgia processing plant of PCA, triggering the most extensive food recall ever in U.S. history (3,913 different products involving 361 companies). PCA, which the previous year had earned $25 million and was responsible for more than 2% of the nation’s processed peanuts, filed for bankruptcy within several months and permanently halted operations. Long after the damage had been done; it was found that the tainted peanut paste came not from the Georgia plant but rather another PCA site in Texas.

A contrasting incident, however, illustrates how damage can be controlled when supply chain visibility is in place. When mad cow disease appeared in Alberta, Canada in 2005, a traceability system was available and used to determine which farms the sick cattle were coming from and which members of the herd had come into contact with infected animals. The outbreak was soon contained, saving thousands of cattle.3

3. Connecting Discipline: Supply Chain Visibility Increases Food Safety, Duke, The Fuqua School of

Business,http://www.fuqua.duke.edu/news_events/feature_stories/foodsafety/

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Traceability framework

Visibility

• Information on demand

• Integrated systems

• Integrated suppliers

• Effective risk management

Control

• Production

• Management

• Track & trace

• Metrics & data accuracy

Collaboration

• Suppliers

• Voice in the industry

• Regulators

• Information sharing

• Visibility The ability to obtain relevant information in a timely manner to enable decisions with a high degree of confidence based on the analysis of current data.

• Control The ability to manage and make decisions over the extended supply chain to mitigate risk, improve operations, and reduce cost in the supply chain

• Collaboration Sharing information with other parties in the supply chain to provide a more responsive value chain and proactively work together to reduce risk in the food supply chain

Inventory management provides increased visibility through activities such as on-hand inventory analysis, current order analysis, categorisation of inventory, review of receipt and put-away processes, detailed inventory data and ordering process analyses, and SKU rationalization.

Transportation management enables increased control through access to metrics and data that creates visibility into transit times, modes, and locations of origin and destination.

A well-managed sourcing process includes both qualitative and quantitative evaluation of the supplier base. After a supplier is selected, a company should actively monitor its suppliers with audits or third-party certification to ensure compliance with existing contracts and food safety requirements. A collaborative relationship should be developed over time.

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1. Building trustA focus on food safety culture, ethics and compliance to give people greater confidence in your food.

2. Growth strategy A suite of strategic growth planning, deal consulting and due diligence services to assist companies position and execute their growth plans.

3. Food fraudWe’ll help you understand your susceptibility to fraud and act to identify, assess and improve your supply chain resilience.

4. Food safety systems and traceabilityWe’ll assist you to develop and implement traceability tools and frameworks to increase your resilience and customer confidence across your supply chain with our traceability and process improvement solutions.

5. Regulatory We’ll assist your understanding of the relevant regulatory requirements and industry guidance to design and implement good practice systems and processes.

6. Supply chain integrityWe’ll help you take control by evaluating your vulnerabilities to disruptive events and support you in taking steps to enhance the resilience of your supply chain.

7. Crisis managementWe’ll assist your company to manage and build its reputation by preparing for and managing crisis event situations relating to food security, safety and quality (including relevant processes and controls testing, identifying remedial actions and product recall).

Agricultural inputs ‘Before the farm’

Processing ‘After the farm’

Agriculture, livestock

‘On the farm’

Our core services across the food trust value chain

Warehousing Rail, trucking, shipping

Wholesale Retail, food services, restaurants

Consumer and government

Agribusiness and processors Storage and transportation Retail and consumer

Core services

Building trust

Growth strategy

Crisismanagement

Supply chain integrity

Regulatory Food fraud

Food safety systems and traceability

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Our alliance with AsureQuality We’re a credible and trusted global network of advisors, with the best people who work with the best partners from strategy through to execution, committed to solving your important problems. That is why through the PwC network we’ve formed a strategic alliance with New Zealand Government owned food safety and biosecurity provider AsureQuality. With AsureQuality’s extensive international accreditations, state of the art laboratory facilities, and practical understanding of global standards – including FDA regulations, FSMA and pre-approvals – we can provide quality assurance and advisory services from the farm to the supermarket shelf.

www.pwccn.com© 2016 PwC. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

Contact us

Amy CaiPwC China and Hong Kong Priority Services Leader+ 86 (21) 2323 3698 amy.cai@cn.pwc.com

Samie Wan PwC China and Hong Kong Food Supply & Integrity Services Partner+ 852 2289 2019 samie.sm.wan@hk.pwc.com

Fiona Zhang PwC China Food Supply & Integrity Services Director+86 (10) 6533 3669fiona.x.zhang@cn.pwc.com

Wenjing Cao PwC China Food Supply & Integrity Services Director+86 (10) 6533 7026wenjing.cao@cn.pwc.com