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Beyond Direct Costs: The Hidden Profit Levers in Food Manufacturing

Over the past several years, food manufacturers have become more disciplined in managing direct costs, including ingredients, packaging, labor and freight. That discipline was not optional. It was a necessary response to extreme volatility across commodities, labor availability and supply chains. Organizations focused on negotiating inputs, reformulating products and protecting short-term margins.

But that success has created a new risk: cost myopia.

While direct costs have begun to stabilize in many areas, margin pressure hasn’t gone away — it has shifted. Indirect costs, overhead structures and embedded inefficiencies are now quietly eroding profitability. At the same time, volatility is re-emerging. Fluctuations in energy prices and other inputs could quickly put renewed pressure on freight, packaging and core materials.¹

In our previous work, we highlighted two forces reshaping the industry. First, persistent labor shortages and rising wages are structurally changing how work gets done and are accelerating the shift toward automation.² Second, value creation across the food system is increasingly defined by the need to balance four competing tensions: cost, performance, health and sustainability, rather than optimize any single dimension.³

What is becoming increasingly clear is that many organizations have not yet translated these pressures into how they operate financially. The result is a growing disconnect between where companies focus and where profit is actually won or lost.

From Variable Margin to Total Profit

Many manufacturers today are “winning” on variable margin while losing on total profit.

Fixed costs do not flex with volume, yet volume decisions are often made without a clear view of their impact on overhead absorption. Plants often run below optimal utilization, and per-unit economics can appear strong while the broader system underperforms.

This creates a persistent tension: chasing volume to cover fixed costs can dilute margins, while pulling back to protect margin can strand overhead. The answer is not simply more or less volume; it is the right volume aligned to the right cost structure.

This challenge is becoming more pronounced as companies respond to the labor constraints outlined in our earlier analysis. Automation is increasingly being deployed to offset workforce shortages and rising wages, improving consistency and reducing reliance on manual labor.⁴ However, these investments also increase fixed costs, raising the stakes on getting volume, mix and utilization decisions right.

In solving for labor, many organizations are unintentionally amplifying pressure elsewhere in the profit and loss (“P&L”).

A Walk Down the P&L: Where Profit Is Really Won

A full P&L view highlights where the next opportunities lie, and where many organizations remain under-focused.

Revenue and Mix
Pricing discipline has improved across much of the industry, but mix erosion often offsets those gains. Increasing stock keeping unit (“SKU”) proliferation and more segmented consumer demands, driven in part by evolving definitions of performance, health and convenience, add complexity without always improving profitability. Aligning revenue growth with capacity, complexity and cost structure is becoming increasingly critical.

Direct Costs
Ingredients, packaging and direct labor have been heavily optimized. Incremental gains remain possible, but they are increasingly marginal. For many organizations, this is no longer where the largest opportunities typically sit.

Manufacturing and Supply Chain Overhead
Overhead remains one of the most under-managed areas of the P&L. Maintenance, planning, quality and supervision are often treated as fixed and untouchable, reflecting legacy operating models rather than current throughput. As automation increases and network footprints evolve, overhead structures may need to be reset to match current realities rather than historical norms.

Selling, General and Administrative (“SG&A”) and Indirect Spend
Indirect procurement continues to lag direct by years and often lacks the same level of rigor applied to ingredients or packaging. The opportunity is not just price negotiation; it is controlling usage, specifications and demand.

Below the Line
Inventory write-offs, obsolescence and rework are often viewed as isolated events. In reality, they are frequently symptoms of disconnected decisions across commercial, planning and operations teams, many of which stem from unresolved trade-offs across the broader value chain.

Labor, Automation and the Shifting Cost Structure

Labor remains one of the most significant pressures across food manufacturing, but the nature of that pressure is evolving.

As we explored in our prior article on labor challenges, workforce shortages, wage inflation and an aging labor pool are not short-term disruptions; they represent more structural shifts.⁵ In response, companies are accelerating investments in automation, robotics and digital tools to maintain throughput and reduce reliance on manual labor.⁶

However, automation is not a simple cost-out lever. It reshapes the cost structure: fixed costs increase, capital intensity rises and the margin for error in volume and utilization decisions narrows.

At the same time, many organizations have optimized frontline labor without fully addressing organizational structure. Management layers, decision rights and support functions often reflect past growth rather than current needs. The result can be slower decision-making, costly handoffs and misalignment between accountability and outcomes.

Labor is no longer just an operating input; it is increasingly a driver of structural change across the P&L.

Rethinking What To Make, and What Not To

As cost structures evolve, so too must decisions about where and how value is created.

Increasingly, manufacturers are taking a more deliberate view of what they should produce internally versus externally. Rather than trying to optimize everything, leading companies are focusing on where they have a clear advantage, whether in quality, scale or capability, and partnering elsewhere.

Co-manufacturing is becoming a more strategic lever. It allows companies to:

Protect margins on products that are difficult to produce efficiently in-house
Reduce complexity within their own networks
Align capacity with higher-value production

These decisions are closely tied to the broader tensions shaping the industry. Companies with differentiated products or strong brand equity may be able to sustain more complex or higher-cost structures. Those without pricing power must be significantly more disciplined in aligning cost to value. In practice, this often reflects a “first mover” versus “second mover” dynamic. Companies with differentiated products or early market advantage can sustain a higher cost structure because they are able to command a premium. Those operating without that advantage must be far more disciplined, as margin is driven less by pricing power and more by structural efficiency.

Not all products, and not all volume, deserve the same cost structure.

From Cost Control To Profit Architecture

The next margin unlock in food manufacturing will not come from doing the same things better. It will come from doing things differently.

Our earlier work highlighted the structural pressures facing the industry and the competing demands shaping decision-making. This next phase is about translating those realities into how businesses are actually run.

Leading manufacturers are moving beyond cost control toward a more structural view of profitability. They are:

Linking volume, pricing and network decisions to fixed-cost realities
Managing indirect spend with the same rigor as direct materials
Redesigning organizations to improve throughput and accountability
Making deliberate choices about where they create value, and where they do not

In doing so, they are treating the P&L not simply as a reporting artifact, but as an operating tool.

Direct cost discipline helped the industry navigate a period of unprecedented volatility. But the companies that outperform going forward will be those that look beyond direct costs and intentionally redesign how profit is generated across the entire system.

The opportunity is no longer just to manage cost. It is to design how profit is created.

Footnotes:

1: Pyzyk, Katie, “The Iran war is hitting packaging supply chains. Are the impacts temporary?” Deep Dive (Mar. 19, 2026).

2: Cooper, Keith F., Joe DeSantis, Tim Peters, David E. Balkcom & Tegan Louw, ”U.S. Agriculture & Food Manufacturing: Navigating Labor Challenges and Finding Solutions,” FTI Consulting (June 25, 2025).

3: Chupp, Lauren, Nathan Ramsey, Polly Ruhland, Brandow Banner & Tegan Louw, “Navigating the Four Tensions Shaping the Food and Agribusiness Value Chain,” FTI Consulting (Aug. 18, 2025); Wrobel, Miriam, Lauren Chupp, Polly Ruhland, Brandon Banner & Tegan Louw, “Recalibrating Sustainability,” FTI Consulting (Dec. 3, 2025).

4: U.S. Bureau of Labor Statistics, Food Manufacturing (NAICS 311)—Industries at a Glance.

5: Cooper et al., U.S. Agriculture & Food Manufacturing, supra note 2.

6: Higginbothem, Gary, “How Automation Can Solve the Labor Shortage in Manufacturing,” Kardex Blog, (Apr. 7, 2025).