Cresta Foods: Three cost shocks and one packaging decision
Cresta Foods makes chilled ready meals at two UK sites and sells them to supermarkets. Its three largest customers account for 62% of revenue, and supply contracts are re-tendered every two years, with the next round in nine months. Management has modelled three cost pressures: extended producer responsibility fees on packaging, calculated at 1.4 million pounds a year from next April; a 38% rise in energy costs at both sites at the last contract renewal; and the national living wage increase, adding 0.8 million pounds to a 22 million pound wage bill. Packaging is currently a mixed plastic and board tray that is not widely recycled. The commercial director proposes passing every cost increase to customers at the next tender. The operations director wants to invest 3.2 million pounds in a recyclable fibre tray line with a 14-month commissioning period. The finance director wants to hold prices and absorb the costs.
1. Using a PESTLE-style analysis, identify which external factors carry the greatest strategic weight here, distinguishing one-off from structural effects.
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Mapping the factors.
- Legal/political: the producer responsibility regime. This is structural, not one-off: fees are modulated by recyclability, so the rate applied to Cresta depends on a design choice management controls. Expect the regime to ratchet, not revert.
- Economic: energy (up 38%) and wages (0.8 million pounds on 22 million pounds, about 3.6%). Wages are certain, statutory and recurring. Energy is structural in direction but volatile in level, and partly manageable through hedging and efficiency.
- Social: retailer and consumer pressure on plastic, which shows up in tender specifications and not just in price.
- Technological: the fibre tray line, which is the response, not the driver.
- Environmental: the underlying reason the fee exists.
Weighting. The heaviest factors are the packaging regime and wage inflation, because both are recurring and both are certain. Energy is large but partly controllable. The decisive point is the interaction: 62% of revenue in three customers means the same customers who impose the fees also control the price. Only the packaging factors are both material and within management's power to change by design, so they carry the greatest strategic weight. Treating all three as one undifferentiated cost pool, as the commercial director does, misses that.
2. Evaluate the commercial director's proposal to pass all cost increases to customers at the next tender.
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The proposal rests on an unexamined assumption: that Cresta has pricing power. With 62% of revenue in three customers and two-yearly tenders, power sits with the buyer. Passing on roughly 2.2 million pounds plus energy on top of an existing cost base is a material percentage increase and invites the customer to test the market.
A second flaw is that uniform pass-through treats different costs as if they were alike. Wages and producer fees affect every competitor, so they can largely be recovered across the market. Energy does not: a competitor with a more efficient site absorbs the same headline rise with a smaller unit cost increase and can undercut at the tender.
A third flaw is that it treats a design problem as a price problem. A competitor that moves to a lower-fee packaging format can recover the fee and still be cheaper, and may also meet the tender's sustainability criteria, which could disqualify the current tray whatever the price.
Better framing. Differentiate. Recover the statutory, industry-wide costs where the market will bear them. Do not simply pass through the packaging fee before testing redesign, because redesign removes part of the cost rather than transferring it. Hold energy until the hedge and efficiency options are quantified. And test willingness to pay customer by customer rather than as a bloc.
3. Advise the board on the best course of action, and state what would need to be true for the fibre tray investment to be justified.
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Recommendation. Do not choose between the three positions; sequence them. Open redesign immediately, pass through only the costs that cannot be designed out, and hold the balance sheet until the investment case is underwritten.
Why the fibre line is attractive. It converts a recurring fee into a one-off capital cost, removes a tender disqualification risk, and reduces exposure to a ratcheting regime. A 14-month build, however, means the benefit lands after the next tender, so the first tender will be fought on the old cost base.
Conditions that must be true:
- The fee differential between the plastic tray and the fibre tray is confirmed and persists (or widens) after commissioning.
- At least one customer will commit volume or co-develop the format, so the 3.2 million pounds is not a bet on a tender that may be lost anyway.
- The fibre tray meets line speed, seal integrity and shelf-life requirements; a format that slows the line destroys the saving.
- Payback on avoided fees plus retained volume falls inside a sensible horizon, and the capital does not breach covenants during 14 months with no benefit.
- No cheaper route exists: a lighter tray, higher recycled content, or a reformulated pack might capture most of the fee reduction for a fraction of the capital.
Also act on the other two pressures. Hedge energy forward and address the wage bill through rostering and yield rather than assuming the customer pays.