Some of you may not remember the days when pest control companies were few and far between and the majority of pest management programs were run by in-house experts. But in-house pest management programs used to be the rule, not the exception. Over time, most companies have adopted third-party pest management services as a way to manage costs. In-house programs are certainly more costly than third-party services, but they have significant advantages over today’s outsourced approach. Because of a shared accountability and responsibility for the outcome, well-managed in-house programs incorporate greater expertise and responsiveness.
While outsourcing pest control services will continue to be the standard, manufacturers do not enjoy the same level of transparency as they did in the past. Manufacturers trust that the job is being done well, but with limited in-house pest management expertise, it can be hard to know if gaps or “blind spots” exist in the program that can put them at risk.
With this in mind, it is important to remember that you rely on the expertise of your service provider. However, consider whether cost containment efforts have put your brand reputation in the hands of the lowest cost service provider, not necessarily the best provider. Your provider may be responsible for your pest management program, but they are not accountable for the consequences—you are. There are, however, ways to mirror the results of an in-house program by collaborating with service providers and aligning expectations. It may require building in-house knowledge and understanding of new technologies available today in order to partner with your service provider and get their very best service.
Last month Food Safety Tech and Bob Ferguson, managing director at Strategic Consulting, discussed changes that are affecting the contract lab industry, from processor concerns in keeping pathogens out of their facility to operational challenges. In part II of our interview, Ferguson reviews how these factors are increasing competition among food contract laboratories.
Robert Ferguson: It’s been interesting! I have received questions directly via email and many over various social media. People have been very interested in the overall impact that these changes will have on the market. As more and more companies outsource their food diagnostic testing, and as food contact labs companies capture a greater share of the testing market and also grow through consolidation of the market, testing labs will have greater market power. It is a common purchasing practice, of course, for buyers to commoditize services such as laboratory analysis to the extent that they can and then force the labs to sell on price. This has clearly been the case in the food lab market. But as more companies outsource, and the larger labs grow and consume greater share, the balance of bargaining power between the larger labs and processors will change.
FST: Is it just the relative size of the labs that is having the major impact?
Ferguson: Larger lab companies will certainly have economies of scale, operating efficiencies and bargaining power with their suppliers that the smaller labs will not that they will use to their advantage. But there is more to it than that. Close to 70% of the processors in our survey say that they outsource their pathogen samples to labs within 100 miles of their plant. Many of these processors are multi-site operations and will look to outsource their work with the fewest number of laboratory contracts. With growth and consolidation in the market, fewer and fewer lab companies will have laboratories in the right places to meet this 100-mile requirement. Fewer labs will qualify for the bidding process, and this will reduce competition.
FST: Will this change pricing?
Ferguson: Probably, especially over time. The other thing we heard from processors is that economics is not the main criteria in their decision to outsource. Traditionally, processors would “do the math” and those with fewer samples would outsource, as it would not be economical to maintain their own lab operation, while those with high sample volumes would run their own plant lab or a consolidated corporate lab. But what we hear from processors is a greater focus on food safety and a desire to get any work with pathogens out of their plant. We also hear more reluctance from processors to be “in the lab business.” Their core competence is food production, not maintaining lab accreditations, keeping up to date on more sophisticated analytical techniques, and everything else it takes to maintain an efficient lab operation. Neither of these goals is economic, and we are seeing more companies outsource their samples at a higher cost per sample than what it was costing at their in-plant lab. Less competition and more focus on qualitative goals and not just pricing will create longer-term increases in contract lab prices.
Ferguson: These changes will be a significant opportunity for some food contract lab companies and a significant risk for others. Those who can create the best lab network will qualify for the most outsourcing contracts and will likely be far more competitive. Single location labs, however, will find it harder to be competitive, and many will likely be acquired while others will fail. We will certainly see a continued high level of M&A activity in this market.
Some of the other questions people have asked are about the impact on lab companies’ strategies, outside of M&A. We have heard from processors that while the larger labs with the better networks are better outsourcing partners, they are also finding that these larger lab companies are more “industrialized” and have far less emphasis on customer service. This seems to introduce an opportunity for a laboratory company with a strong network that can also maintain a high level of customer service to gain a competitive advantage. We see some indication that this is already happening as more lab companies offer services such as auditing, onsite inspections and testing, and program development. In fact, our data shows that services, while still a small proportion of most food contact lab’s revenue, is nonetheless the fastest growing component, overall growing at nearly 15%. This seems to be a clear opportunity for food contract labs to differentiate themselves and stay competitive.
Companies are under more pressure to analyze food samples for pathogens, but not all of them have the expertise to handle the complexity involved in laboratory analysis. In addition, companies don’t want to risk contamination throughout their facility. As a result, many are outsourcing these services to contract labs.
Strategic Consulting, Inc. recently conducted a study of food processors and the trends in outsourcing their laboratory testing work to food contract laboratories. The firm spoke with 100 food processors nationwide in 15 food processing categories, including protein, dairy, vegetables and packaged foods, inquiring about the types of samples they collect, how many are collected on a daily and monthly basis, their target analytes, and where they have the analysis performed (an in-plant lab, central company lab or an outsourced food contract laboratory); the firm also spoke with folks at leading food companies and a number of large food contract labs.
Bob Ferguson, managing director at Strategic Consulting, shared his insights with Food Safety Tech about the survey, the details of which will be presented at the Food Safety Consortium in December.
Food Safety Tech: What were some of the major findings?
Bob Ferguson: Food processors continue to outsource more and more of their lab analysis. This is a trend that we outlined in our Food-8 market report in 2014, and it is clearly continuing and growing. The impact is particularly acute in microbiology testing, especially when analysis is for pathogens. Of the companies we surveyed, 87% did some amount of routine microbiology testing and 67% of those analyzed the samples at an in-house lab. But when asked about pathogens, 77% of the companies analyze samples for pathogens but only 34% analyze the samples at an in-house lab. Clearly there is a higher level of concern in handling pathogens at in-house labs.
Food Safety Tech: What are the processors’ concerns regarding pathogens?
Ferguson: I would say that their concerns fall into two major categories: Technical and operational. From a technical perspective, there is always a risk when working with pathogens in a food processing facility. Microbiologists understand how easily bacteria can travel through a facility—being carried on employees, their clothing, or equipment, through air currents, or even through penetration connections such as drains. And most diagnostic tests not only require handling pathogen samples but also enriching the samples prior to analysis. The presence of food samples with high concentrations of pathogens can present a risk for the spread of contamination into production areas.
From an operational standpoint, running a food analysis lab is becoming increasingly more complex. Analytical methods continue to get more sensitive and sophisticated, and this requires more expertise and a greater focus on instrument service and calibrations. Requirements for accreditation of food testing laboratories are also raising the bar for in-plant labs. Finally, running a food lab requires recruiting and hiring skilled analysts. More food processors are coming to the conclusion that none of these functions are part of their core competencies and are electing to outsource that work to a contract lab.
Food Safety Tech: What does this mean for food contract labs?
Ferguson: This could become a significant business growth opportunity for food contract laboratories. As we indicated in our Food Contract Laboratory market report, microbiology is one of the largest business areas for most food contract laboratories, comprising, on average, approximately 52% of lab revenues and growing on average at 12% annually. The average lab also reports pathogen testing growth at more than 13%. This is remarkable in that the overall growth in sample volume is only growing 6%, so labs are clearly gaining a greater share of samples.
Food Safety Tech: Is this good news for the food contract laboratory companies?
Ferguson: Well, I would say that this will dramatically change the nature of competition and will be good news for some lab companies, namely those who can best adapt to the changing market conditions, but certainly not all. Our analysis shows, for example, that about 70% of pathogen samples outsourced are sent to a lab within 100 miles of the food processing facility. This bodes well for labs with a robust national network of locations. Single-location or limited-location labs may have trouble competing and will be acquired or otherwise may not survive. Also, as more samples get outsourced, the most efficient laboratories will have a competitive advantage. Our data also shows that outsourcing does not occur uniformly across all types and sizes of food processing companies, and laboratories may be at more or less risk depending on their customer mix or concentration in a particular food processing segment. Food contract laboratories that understand these factors will be in a better position to compete and thrive as the market changes.
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