Outlook-CS-2021

2021 Food and Beverage Industry Outlook

Dec. 29, 2020
The food industry is struggling through the coronavirus pandemic, but the end is in sight. Which of its lessons will become permanent?

When you’re discussing the state of the food and beverage industry, the pandemic isn’t just the elephant in the room. It’s the elephant who’s sitting on your lap and sticking its trunk in your ear – impossible to even pretend to ignore.

As America and the world enter the second year of the pandemic, the food and beverage industry is struggling to come to terms with it. The crisis has reversed some trends, accelerated others, and created still others from scratch. As the industry works through the crisis, with the end hopefully in sight due to vaccines in development, it remains to be seen which of the lessons will carry over afterward.

Arguably the greatest disruption was the profound changes in demand among consumers forced to shelter at home. Demand shifted away from foodservice, as consumers found themselves having to prepare most or all of their meals at home. Nonperishable center-store items, long on the decline, saw a sudden surge in popularity, for several reasons: People who were suddenly faced with cooking at home needed staples; panic buying took hold in the pandemic’s early stages; people turned to comfort foods in uncertain times.

As a result, sales of pantry and other home staples soared. Canned soup sales were up 200% year over year in March, and frozen food sales were up 40%. Demand especially surged for comfort foods like snacks, with potato chips up 30% in March and popcorn up 48%. This helped the processors who made such items: General Mills, Tyson Foods, Campbell Soup and Kraft Heinz all saw sales gains between 10% and 20% in March.

Planners at those companies and throughout the industry have had to deal with two events that are inevitable but unknowable in timing and scope: the second wave of the pandemic and its eventual end.

As long as COVID is a threat, the food chain will have to put up with fluctuating demand, says David Gottlieb, a managing director for Trax, a retail intelligence service for consumer goods companies.

"We expect to see preferences for fresh and center-store items continue to whipsaw until fears caused by the pandemic subside,” Gottlieb says. “To manage these changes, many retailers are offering more center-store options to combat fears of out-of-stocks.”

One measure of the disruption is how demand has shifted among contract manufacturers. For Hearthside Foods, one of the biggest (and Food Processing's 2019 Processor of the Year), the pandemic meant handling a surge in demand for the cookies, bars and other pantry staples it co-packs for several major brand owners.

“There were a number of cases where their demand was more than they could do internally and they came to us and asked us if we could help out and take on some products for them,” says Hearthside CEO Chuck Metzger. This included packaging product that was delivered in bulk, along with manufacturing.

The end of JIT?

Out-of-stocks were a major problem at the beginning of the pandemic, which exposed the fragility of the food supply chain. For decades, food processors, in tandem with retailers, worked to take as much inventory out of the system as possible, getting as close as they could to a just-in-time (JIT) model. But when the pandemic required massive shifts among channels and big changes in production plans, the JIT approach proved problematic.

During the second wave and beyond, the industry will have a motive to evolve to more of a “just-in-case” model. In fact, that is already happening in some cases, says Roland Fumasi, head of the North America food and agribusiness sector for Rabobank’s RaboResearch unit.

“We are already seeing more blending between just-in-time and just-in-case,” Fumasi says. “Where possible, value-chain participants are holding more inventories. This tends to raise carrying costs but allows more responsiveness during unforeseen events that cause demand surges. The industry continues to evaluate what ‘correct’ inventories should look like, given recent COVID case surges and potential for more lockdowns.”

The JIT model is probably here to stay but will require tweaking, says Corey Chafin, a principal in the consumer practice of Kearney.

“As food companies continue adjustment to the ‘no normal,’ they will tweak their inventory strategies for high-risk items, but we do not expect a categorical abandonment of JIT inventory practices nor a step-change expansion of warehouse capacity to accommodate increased inventory levels,” Chafin says. “Instead, food companies are focusing on managing supply chain risks end-to-end.”

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Food Processing's Pan Demetrakakes and Dave Fusaro will look at the trends, twists and turns that will likely shape the food & beverage industry in 2021—such as changing consumer behavior, the prospects for an economic recovery, immunity-enhancing ingredients and plant-based products, how cultured meat has advanced and what our annual Manufacturing Outlook Survey reveals for manufacturing plants. And of course what food buying will be like after the pandemic. 

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Reliability over price

Maintaining the supply chain is, fundamentally, a matter of maintaining the relationship between food processors and their grocery trade customers. That relationship can be fraught at the best of times since, in the end, both sides want the best price. But the pandemic has taught some grocers a lesson: Reliability in supply is often more important than price, and the big players are in a better position to furnish that reliability.

“COVID-19 and related disruptions have absolutely affected the relationship between grocery and their suppliers,” says Tim Alexander, a managing director for Harris Williams, a global investment bank that specializes in mergers and acquisitions. “What we’ve seen is that the partnerships have grown stronger, particularly for larger grocers. The pandemic has illustrated the importance of reliable suppliers that allow grocers to keep product on the shelves.”

Even before the pandemic began, major retailers had begun to take a more rational approach to pricing and inch toward a more cooperative model with their vendors. The key was increased contributions from vendors toward trade costs like e-commerce marketing, promotions, discounts, special displays and slotting fees. These can account for up to 20% of a processor’s total sales dollars, says Robert Moskow, an analyst with Credit Suisse. When a processor cuts back on trade expenditures, retailers often react by seeking a better price.

The biggest motivation on the processor side, Moskow says, was that the retailers had gained negotiating leverage by investing more of their own money on data management and analytics – leverage that had belonged to the processors. This forced the processors to spend more on trade costs, or else they would lose shelf space and access to key retailer programs, he says.

There’s another reason for grocers preferring existing larger customers, says Simon More, vice president of More Corp., a grocery broker. When social distancing is required, it’s just too hard to build up new relationships.

“Because of COVID, retailers aren’t wanting to have meetings and be face to face with new guys,” More says. “So they’re just sourcing more products from the people they know and already have relationships with.”

Variety takes a back seat

The variety of those products has taken a hit during the pandemic. As demand increased for center-store items, processors found themselves having to trim marginal SKUs to increase production of more mainstream ones. Mondelēz International announced in July that it planned to eliminate a quarter of its products during the pandemic; Coca-Cola, PepsiCo, J.M. Smucker, General Mills and other major processors announced similar plans.

The question is whether that production pattern will outlast the pandemic. SKU proliferation came in part as a strategy for companies to bump up sales of established brands and stake out more precious retail shelf space. Companies will have to evaluate whether that’s still worth the production and distribution expense.

Some already are ramping up production of some of the SKUs they sidelined. But others, like Kellogg, are open to the possibility of making the SKU trims permanent: “Grocery stores [and] retail outlets will probably have less [items] than they had going into the pandemic,” CEO Steve Cahillane said in June.

In some cases, the pandemic simply accelerated plans that were already in place at some of the largest companies to trim underperforming brands and SKUs. Coca-Cola announced plans in October to cut more than 200 brands, out of about 500 total, as part of a restructuring that began in 2017.

CFO John Murphy told the Wall Street Journal the pandemic accelerated plans to streamline Coca-Cola’s product portfolio: “My role…has been to sort of steward and shepherd that process, marrying the strategic rationale for doing it with the economics.”

What’s going to last?

Of course, SKU trimming won’t do any good unless you’re left with products that people want. And figuring out what they want is going to be one of the toughest post-pandemic challenges. The most fundamental question is whether which, if any, of the food trends inspired by the pandemic will outlast it.

The most significant pandemic-inspired trend is arguably the surge in center-store sales. Moskow of Credit Suisse doesn’t think that will last: “I think it will be close to impossible for manufacturers of those kinds of products to match the consumption they enjoyed in 2020. When a vaccine becomes available, at-home meal consumption will decline.”

But others disagree. “Our latest consumer findings show us that being stocked up on the essentials, like those center-store items, is a habit that’s here to stay, according to nearly 70% of Americans,” said Dave Fisch, general manager of Shopkick, a shopping rewards app.

He expects consumers to make fewer grocery trips than before, with larger purchase totals, and shelf-stable (as well as frozen) items will be important because of their durability. “While fresh items will always have their appeal, it’s center-store that has simply become more practical, a trend that looks like it’s here for the long-term.”

Fumasi of Rabobank also believes that the sales bulge for center-store items will have some stickiness, if only because a significant number of consumers will keep working from home, at least to a greater extent than they did before the pandemic. But he adds: “A sustained increase is very different than sustained growth. Growth will require continued innovation.”

A significant part of that innovation probably will follow a trend that’s been going on for years before the pandemic: larger companies acquiring smaller ones that have developed innovative products, in a form of R&D outsourcing.

“Over the years, we’ve already seen large food companies acquire smaller, more nimble, on-trend brands. However, the COVID situation has brought many traditional foods and brands back into vogue, as eating-at-home has increased,” Fumasi says. “Still, large brands cannot get complacent. The eventuality of a vaccine and life returning to a new normal will continue to make innovation critical.”

Alexander of Harris Williams says the pandemic will help identify which new products from small companies have true staying power. “A larger company is more likely to pay a premium for an excellent company with an interesting product or brand that has shown resilience during the pandemic.”

Pandemic winners

Some kinds of food are selling very well during the pandemic – in some cases, better than they’ve ever done. One of the most prominent such products, and a relatively new one, is plant-based analogue meats.

Consumption of real meat is down by about a third since its peak in the 1970s, and plant-based analogues have seen a 31% increase in grocery stores in the past two years. Mainstream companies like Tyson Foods, Nestlé, Kellogg and General Mills are rolling out meat-analogue products at a rapid pace. The latest is Unilever, which recently announced that it is seeking to increase its sales of meat- and dairy-alternative products to $1.2 billion by 2027 ¬– which would be about five times current levels.

Meat analogues are projected to have sales of $23.8 billion by 2023 despite most of them only being in existence for about 10 years, says Phil Kafarakis, a consultant and former head of the Specialty Food Association. He sees this boost partly as a result of the pandemic.

“It is my view that the current ‘trial’ consumption moves toward these products will turn into repeat sales, and depending on consumers’ dietary restrictions, they will become a part of their daily diet,” Kafarakis says. “COVID had become an accelerator for trying new and at times ignored products that would normally not even have been considered.”

Gourmet or luxury food items are also in greater demand, for those who can afford them, Kafarakis says. “There is increased retail spending on the part of those who have the financial wherewithal. Because of restrictions on travel and entertainment, these people are shifting their discretionary income to more indulgent experiences by upping their at-home dining game.” He mentions liquor, coffee and fancy ice cream and confections as products doing especially well.

However the pandemic has disrupted the food industry, and whatever changes it may bring long-term, observers say there’s one thing no one should lose sight of: the fine job the industry has done in keeping the nation fed.

“Overall, the food and beverage industry has performed well throughout the pandemic,” Alexander says. “While there have been COVID-19-related disruptions, many companies in the industry have strong fundamentals and good long-term prospects.”

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