The Middle East serves as a critical crossroads for global trade, its waterways and resources fueling industries worldwide. However, recent years have witnessed a surge in instability within the region, significantly affecting the operations of global manufacturers, including CPG companies.
Beyond the devastating humanitarian impact, the Red Sea crisis (a military standoff, which escalated when the Iran-backed Houthis in Yemen launched attacks against Israel), coupled with the ongoing Israel-Hamas war, has sent shockwaves through global supply chains. These events have challenged the operations of CPG companies, making it harder to optimise trade routes, procure raw materials, and maintain vital supplier relationships. The consequences are significant, leading to delays, increased costs, and ethical dilemmas, ultimately impacting the flow of essential goods to consumers around the globe.
How are CPG companies being impacted?
The rising geopolitical tension in the wider Middle East and the Red Sea has impacted global CPG companies in several key areas:
Trade Routes: The Red Sea and Suez Canal connect Europe to Asia and East Africa and accounted for ~12% of global trade, including 30% of container traffic, in 2023. However, conflicts and political unrest have disrupted these routes, compelling shipping companies to seek alternatives. To avoid the Red Sea, global carriers such as Denmark-based Maersk, Japan-based NYK Line, and France-based CMA-CGM are now navigating longer paths, specifically around the Cape of Good Hope in South Africa, for their shipments from Asia and the Middle East to the EU and the UK. This detour results in lengthier delivery times, increased transportation costs, higher shipping surcharges, and a scarcity of containers.
Consequently, CPG manufacturers and suppliers are facing dwindling stock levels, shortages of raw materials, and interruptions in production. Major retailers in the UK, including Tesco, Next, and Marks & Spencer, have highlighted the potential risk of higher prices and inventory shortages for the consumer goods that are imported from APAC.
While interventions by major global economies are anticipated to bring some stability, trade disruptions through the Red Sea are likely to persist during 2024.
Commodity Procurement: The turmoil in the Middle East has significantly disrupted the procurement strategies of CPG companies. In 2023, the region was the world’s leading crude oil producer, contributing to over one-third of global production, and was also a crucial source of related commodities such as plastics, fertilisers, and petrochemicals. The interruption in the supply of these essential inputs has led to global fluctuations in their availability and price, affecting the cost structure and operational effectiveness of CPG firms. For instance, Egypt, Saudi Arabia, and the UAE were among the top plastic exporters, together making up over 20% of worldwide exports in 2023. The trade disturbances from the Middle East led to an approximate 2.5% M-o-M rise in Polypropylene (PP) prices in both European and Middle Eastern markets in January 2024. This scarcity of raw materials and the spike in prices have caused challenges for the packaging industry catering to the CPG sector. Consequently, CPG companies are compelled to re-evaluate their supply chain approaches and seek out alternative sources to maintain stability.
Supplier Relationships: The geopolitical concerns in the Middle East have led to increased scrutiny and re-evaluation of supplier relationships. CPG companies are now more vigilant in assessing the geopolitical risks associated with their suppliers across the globe. It has also strained existing supplier relationships due to disruptions in supply and increased operational costs resulting from delays in shipments, heightened security risks, and potential damage to goods during transit. CPG companies are actively developing contingency plans, including identifying alternative suppliers outside the conflict zones and alternative routes to ensure uninterrupted supply chains. Additionally, they are establishing policies and incorporating provisions into supplier agreements that are informed by thorough political assessments, evaluating how suppliers might respond to political unrests. This strategic shift has resulted in alteration of long-standing supplier relationships.
HR and IT: CPG companies with operations in the conflict zones face increased risks to employee safety and challenges in talent retention and cybersecurity. These conditions make it difficult to attract and retain skilled workers, while also increasing vulnerabilities in data protection. In response, these companies are establishing partnerships with specialised organisations to bolster their crisis management capabilities, focusing on comprehensive strategies to safeguard employees and operations.
What CPG companies should be assessing now:
Procurement and supply chain teams of CPG companies should be actively engaging with specialist consultants and solution providers to devise tailored strategies to avoid or mitigate any major disruptions. The Smart Cube can assist these teams to navigate the complexities and challenges posed by regional crises, such as the current situation in the Middle East, in the following ways:
- Supply chain diversification – Our specialists can analyse the supply chain vulnerabilities of a CPG company and recommend diversification strategies that can enhance stability and also help save up to 10% in procurement expenditure. This involves identifying alternative suppliers in more stable regions, suggesting changes to logistics and distribution networks, and advising on local sourcing options to reduce reliance on conflict-affected regions.
- Commodity price forecast and cost models – As a solution for the escalating operational cost, we can help identify areas of cost reduction and process optimisation. Our experts can build in-depth cost models for the procured raw materials along with their price forecast and available substitutes in the market.
- Market and regulatory insights – The Smart Cube’s specialists can provide up-to-date insights into market conditions and regulatory changes resulting from geopolitical conflicts and wars. These insights, including the demand-supply gap, changing trade regulations, price and supply forecast, can assist CPG companies to adapt their future strategy and make informed decisions about their operations.
- Product re-engineering and risk assessment – For CPG companies that rely on ingredients sourced from conflict-affected regions, we can assist in developing comprehensive risk management strategies, including diversifying their supplier base, investing in alternative ingredients, assessing varied formulations using alternative ingredients, and maintaining strategic reserves of critical inputs. We can also continuously monitor geopolitical developments and develop a risk scenario and forecast model. These models will assess the qualitative and quantitative impact on near-to-medium term procurement of various raw and pack materials, and services, which can help CPG companies in designing business contingency plans.
To discuss how your CPG company can mitigate risk and strengthen your procurement strategy in times of disruption, please get in touch.