Get products into stores or restaurants, at the time and in the quantities they’re needed, at a price point that will induce consumers to buy.
The food & beverage industry’s mission sounds so simple when stated that way. But inflation, supply issues, labor shortages and other factors are making things as challenging as they’ve ever been.
The end of the pandemic was supposed to be a time of opportunity for the industry. And for many companies, that’s turning out to be the case. Many of the companies in the Food Processing Top 100© enjoyed significant performance improvement as the pandemic wound down, especially in the meat and beverage sectors, with PepsiCo and JBS USA posting the highest sales increases.
But as the economy revved up again, it didn’t do so smoothly. The supply chain had trouble handling increased demand, creating imbalances between supply and demand that fueled the highest inflation the world has seen in decades. The price of at-home groceries jumped 12% in October vs. last year, according to government statistics.
Food companies have been consistently raising prices to account for their own increased costs, for ingredients, packaging and many other necessities. The big question – one that will probably dominate 2023 – is how much they can do so without evoking consumer resistance, at the cash register or elsewhere.
Whether product price increases will “stick” with retailers and consumers has been a major topic in some food companies’ quarterly earnings reports. Many have been sounding optimistic notes, saying that food spending is dependable in general.
“Even in a recession, we tend to be somewhat resilient. Discretionary spending is kind of the first to go,” Kellogg CEO Steve Cahillane told the Wall Street Journal.
But companies including Campbell Soup, McCormick and Kraft Heinz have seen sales dollars go up while volume has declined, sometimes dragging down profitability. And in the industry in general, there are signs that price elasticity is slowing sales.
According to IRI’s September report on food inflation, prices were up and volume down for several major categories, including frozen dinners (prices up 21% in August year-over-year, volume down 11%) and coffee (prices up 18%, volume down 6%).
Now food companies have to guess how much consumers will resent rising prices, whom they will blame and what they will do about it.
“Perception is reality when it comes to consumers,” says Danny Edsall, grocery leader for consulting firm Deloitte. “Fair or not, more than half of consumers believe prices are going up more than needed in order to increase company profits. Our research also suggests that when consumers start to feel this way, they pull back on their spending intentions. It’s a matter of eroding trust and creates a tricky situation for food & beverage companies facing pressure of their own from much higher input costs.”
Grocery consumers are altering their shopping, according to Julie Oxner, senior vice president for business intelligence at consultancy Acosta. Changing habits include less overall spending on groceries, more switching to store brands, reduced impulse buying and even more fast-food visits among consumers who perceive them as a better value proposition than at-home meals.
One of the most noticeable effects of inflation has been the disappearance of grocery promotions – coupons, special discounts, package deals, etc. It’s been a point of contention between processors and retailers; Oxner would like to see more cooperation.
“We believe that there is absolutely a sweet spot for processors and retailers to work together to alleviate some of the cost pressures shoppers experience,” she says. “We’d recommend that the first step is to analyze current promotions to see which are a win-win for both the processor and the retailer.”
Part of the problem is that rising prices change the elasticity dynamics, so that a price point that once resonated with consumers no longer does when it has to be set higher.
One of the biggest potential problems with inflation is consumer resentment. Rising prices open the way for the food & beverage industry, especially the biggest companies, to be accused of price gouging or “greedflation” for setting prices higher than they need to.
“Corporations have used inflation, the pandemic, and supply chain challenges as an excuse to exaggerate their own costs and then nickel-and-dime consumers,” the head of Accountable.us, a consumer advocacy organization, said to the New York Times.
It will be difficult for food companies to avoid such accusations, especially since there’s a time lag between drops in producer and consumer prices, says Xinnan Li, a packaging and logistics analyst for Rabobank.
“Honestly, I don’t think there is a way for them to avoid those accusations,” Li says. “The producers are going through a really tough time with all kinds of costs coming at them, but we’re all consumers and we all see how much our grocery bills have gone up.”
Unkinking the supply chain
The biggest factor in inflation, by far, is supply chain problems that create shortages, which drive up demand and prices. Supply chain difficulties have afflicted the country and much of the world since the beginning of 2021. Shortages are also being caused by other factors, notably the war in Ukraine, which has shrunk supplies of edible oils and other commodities, and avian flu, which has caused a spike in poultry and egg prices.
In the food industry, shortages are especially acute in ingredients and packaging. Even the biggest, most influential players are having trouble finding what they need.
For a food company that finds itself short of a vital resource, only two basic strategies are possible: pay whatever it takes and hope you can pass along the extra cost, or figure out how to do without.
Some companies are figuring out ways to do the latter. When tapioca starch became hard for General Mills to procure, it had to reformulate Totino’s frozen pizza rolls to use cornstarch instead. But when a vital ingredient or other necessity has no viable substitute, there’s nothing to do but source it wherever you can get it, or do without.
The shortages have led to supply chain disruptions because many companies, especially in the early stages of the pandemic, got into the habit of ordering more supplies than they needed. It was an understandable reaction to scarcity, observers say.
“They're putting in huge orders and they're not getting 100% of their order. They're only getting 50% of their order. So naturally what they did was double their orders,” says Abe Eshkenazi, CEO of the Association for Supply Chain Management.
“If you multiply that by every retailer and then every distributor and every manufacturer, what you get is the small changes in demand amplified the further down the food chain or the supply chain that you go.”
As a result, inventories of all kinds of supplies have been building up, Li says. According to her, the ratio of sales to inventory in the U.S. has gone up 23% since the pandemic (although that’s for all goods, not just food & beverage).
“In the past three years there was a lot of discussion around supply-chain hiccups, but I think the tables have turned a little bit,” she says. With packaging in particular, customers such as food & beverage companies would order three months’ supply so that they would be sure of one month. But now that the supply chain issues are resolving themselves, demand is weakening because packaging users suddenly found themselves with a relatively high amount of inventory.
Will the supply chain situation ever straighten out?
“Eventually, yes,” says Deniz Besik, a professor of analytics and operations at the business school of the University of Richmond. “Global supply chain networks are adaptive and agile. Interest rates are also rising, so demand will ultimately stabilize.”
Besik recommends that food processors try to stabilize the situation through strategies including diversifying their supplier portfolios, establishing and maintaining good relationships with suppliers and logistics providers and strengthening their contracts in general.
One of the biggest questions is whether the just-in-time (JIT) model for logistics will endure. JIT has served the food and other consumer-goods sectors well for decades, but its vulnerabilities were exposed by the imbalances between supply and demand brought about by the pandemic.
There have been a lot of predictions about JIT’s demise, but some, like Eshkenazi, believe it will endure.
“Is just-in-time dead? I don’t think so,” he says. “I don’t think consumers’ expectations have changed. I think consumers’ expectations have increased in terms of products and delivery and affordability.” He believes that the JIT model will be altered to something he calls “just in case” – an approach with more flexibility, resiliency and responsiveness.
The details of how to do this, however, are elusive, because who knows what form the next major disruption of the supply chain will be?
“Oftentimes we prepare for the last disruption as opposed to what the next disruption is going to be,” Eshkenazi says. “So are we ever going to get caught short again? I think we need to ask the question who's responsible for just in case.” He suggests that a combined effort from public, private and industry associations will be needed.
One of the biggest questions the food & beverage industry will have to cope with involves how consumer behavior will change – or to put it another way, whether any of the changes brought about by the pandemic and its aftermath will be permanent.
Laurie Demeritt, CEO of the Hartman Group, sees potential for two such carryovers. One is that, with inflation continuing to rage, they will be more receptive to private label products. “Turning to private brands is the No. 1 strategy that shoppers have employed to manage rising prices,” Demeritt wrote in a recent article for FMI – the Food Industry Assn.
The other is a spike in online sales, which have been historically sluggish in the food sector. They surged as shoppers were forced to quarantine, and while usage went back down as lockdowns ended, a Hartman Group survey showed that in a 30-day period this fall, 63% of respondents said they had bought groceries online. To put it in perspective, 99% said they’d been to a brick-and-mortar grocery store.
“Shoppers are returning almost in totality to shop in person in food retailers, while at the same time embracing a permanent shift to use of online grocery services,” Demeritt wrote in the article.
As consumers struggle through inflation, they will develop coping strategies to try to sustain the shopping habits and food preferences that they’ve been developing over the years.
An example is trends in fresh foods. An FMI report notes that it’s a category where higher-income shoppers have traditionally gone for premium options, sometimes as a substitute for foodservice. But the report notes that lower-income consumers are substituting less costly options like frozen meals, leaving grocers – and the processors who supply them – with a balancing act.
“Serving these two groups of shoppers may seem challenging; however, in both cases, shoppers appear to want to ensure ‘high quality’ in whatever categories they do purchase,” the report says.
Inflation and tight supplies will be tough challenges for the food & beverage industry in 2023. But major rewards lie ahead for companies that figure out successful coping strategies.