What can we expect in the food and beverage industry this year? Food Processing’s own Dave Fusaro and Senior Editor Pan Demetrakakes offer their perspectives on the big issues facing the industry this year.
In our Season 3 opener, we talk about labor issues and the supply chain as well as the why and how inflation came into play. We also talk about what product development trends we can expect to see this year as well as where things stand with 2021’s star categories.
Note: This episode was recorded prior to December 21, the date Kellogg strike ended.
Transcript
Erin: Dave, Pan, welcome back to the podcast. It's always great to have you both on. I want to kick things off with this episode talking about something that took a huge turn in 2021, the supply chain. Pan, from your perspective, what do you think is behind the supply chain issues that the industry has been struggling with?
Pan: Well, they certainly are widespread and they reach pretty much every part of the supply chain from the ingredients and equipment that processors need to the chain that leads to getting the products out to the stores. But if I had to settle on one supply chain-related takeaway from what we've been seeing, it's that the pandemic exposed the vulnerability of the just-in-time model.
You see, just in time is great in terms of efficiency when demand is more or less predictable and there's a framework you can work within. But the pandemic has shown us that when demand swings very markedly between channels, then the just in time system is really not set up to accommodate that. And so, I think that going forward, we're going to see some adjustments in that model where we build a little more redundancy and a little more storage capacity into the supply chain.
Now, another supply chain issue in certain parts of the food industry has been centralization. We see this, especially in the meat sector. We all know by now that only three or four companies are responsible for processing huge proportions of America's favorite meat proteins. And this sets up a situation where if just one or two or three plants belonging to these mega players go down because of COVID or for whatever reason, then it creates a huge bottleneck in the supply chain.
There could be all the beef in the world on the hoof on one end, there could be hungry consumers on the other end, but because you've got it squeezed by concentration in the middle, there's just that problem getting the supply of meat through.
So now, the one thing that I think we have to keep in mind is that at bottom, I really think that all so-called supply chain issues are labor issues. You know, scratch the supply chain issue and you'll find difficulty in getting people to work. It's been seen, of course, all over the food industry in ingredient suppliers, equipment manufacturers, the processors themselves, and especially logistics, truck drivers are in huge demand. And so, I really think that the only way that the supply chain situation will ever straighten itself out, un-kink itself, so to speak, is if the labor situation gets resolved.
Erin: Well, that's a great segue, Pan, because now let's move on and talk about another really big topic that's impacting the food and beverage industry, especially lately, and that's labor issues. So Pan, from what you are seeing, how have labor relations in the industry changed and how are they likely to play out in the future?
Pan: Well, the biggest change that the food industry has seen is the same change that a lot of industries have seen with regard to labor, which is that workers and potential workers have a lot more leverage. They no longer are, they never feel like they are forced into certain situations, forced to keep certain jobs just because there were no alternatives available.
Now there are alternatives and workers are feeling their oats. They feel that they have that extra strength, that extra leverage, and they want use it. And the most immediate evidence we've seen of that this year has been in labor disruptions, strikes. Three of the biggest companies in the food industry PepsiCo, Mondelēz, and Kellogg have seen strikes, and the Kellogg strike is still ongoing.
You never used to see strikes in the food industry. I mean, you've seen more strikes this year against major companies than I have in the rest of my 30 years covering the food industry put together. And so, the Kellogg strike especially will be interesting to see how it shakes out because Kellogg is playing hardball. The main point of dispute is a two-tier wage system whereby newer employees get lower pay and worse benefits than established employees. Kellogg is bound and determined to preserve that, and they're going to the mat for it. They're really playing hardball, so it's going to be interesting to see how it shakes out.
Now, more broadly, what I think the industry is going to have to do to resolve its labor problems at least in the short term in the immediate future is raise wages. Manufacturing wages in the food industry, in the U.S. food industry, are something like 15% to 20% behind manufacturing wages in this country as a whole. The food industry has traditionally lagged behind for various reasons, and now with the intense labor shortage and the fact that let's face it, a lot of food factories just aren't very attractive places to work, there's a real squeeze on. And probably the only short-term solution that's going to be viable that we'll see is some kind of an increase in wages.
Erin: The supply chain and the labor issues of 2021 gave us another term we keep hearing from CPG companies this past year: Inflation. What should food companies keep in mind as they try to cope with inflation?
Pan: It's a juggling act because they have to keep ahead of the inflation that they're dealing with in their own expenses. The cost of ingredients keeps going up, so do the cost of transportation, labor most likely it will go up even more, and so they have a balancing act.
The advantage that they have is that for the first time in a long time, they have the ability to raise prices on their own products. That's something that we really haven't seen for a long time. All the time when inflation was at nearly non-existent levels, food companies sweated over literally every single cent in their price points, but now companies making their quarterly reports keep saying over and over we're going to have to raise prices for our products and the trade customers, the retailers, distributors, etc, are accepting it.
Now I think that what the food industry has to keep in mind is that, yes, they're able to raise prices, however, they shouldn't overdo it. You know, the temptation, especially after your prices have remained stagnant for a long time, is to really take advantage of the situation. However, I don't think that that would be a good look, especially for companies who are in highly concentrated markets and are big players in those markets.
Companies like Tyson that are doing very well, the smart ones, they won't give themselves excessive rewards like big C-suite bonuses or stock buybacks. Instead, they'll do what Tyson is doing, plowing money into capital expenditures such as new plants, into higher wages and especially into automation.
Tyson is getting into automation in a big way. They plan to spend half a billion dollars on it next year because they realize that automation is a long-term solution to labor problems, especially in an industry like meat where there are a lot of unpleasant tasks that have high turnover. The bottom line as I see it is that companies will be able to keep up with inflation, but they should try to resist the temptation to make a windfall out of it.
Erin: I want to shift gears and talk about product development for a bit. Dave, it seems like we couldn't go a month in 2021 without someone introducing a hard seltzer. Can you talk more about that red-hot hard seltzer category and how it's going?
Dave: I'm not sure it's that red hot anymore. Actually, the category probably is too hot, but it's becoming harder and harder to make a profit in that category because there are so many people that got...so many companies that got involved in it. Every, every Tom, Dick, and PepsiCo decided to launch a hard seltzer in the past year.
Speaking of PepsiCo, I mean, they came out with hard Mountain Dew. Coca-Cola has Topo Chico Hard Seltzer, Arizona has SunRise Hard Seltzer, some of the more boutique companies, Spindrift Spiked and Sparkling Ice Spiked. Grand new research has recently as December predicted the market will grow at a compound annual rate of 31% from now till 2028. I don't entirely believe that projection. Thirty-one percent every year is an awful lot, but the category I think is still growing.
It's just that when you have this many people getting into it, not everybody's gonna make a profit, not everyone's sales are gonna increase by 31% every year. And in fact, they're already starting a little bit of a shakeout. Pan reported in midyear Boston Beer company, which makes Truly, had to dump some of its hard seltzer because it was getting past the expiration date. They weren't moving it fast enough. And Coors dropped its Coors Light Hard Seltzer, although it's still making Vizzy. The category probably still doing fine, but there's gonna have to be a shakeout for anybody within that category to increase sales and to be profitable.
Erin: Almost as popular as hard seltzer, plant-based proteins seem to still be pretty popular. Have you noticed the same thing? Are plant-based proteins still on a roll?
Dave: It is I think very similar analogy to hard seltzers. They're still growing, probably not as fast as they used to. I mean, they've always been with us. The category got hot and they started making burgers out of plant-based proteins in the last couple of years, and that's why it became its own category. It's cooling off a bit too.
Some of the market research says it's the whole category is flattened, but definitely like hard seltzers, just too many people getting into it. Every Tom, Dick, and Tyson is making plant-based protein products now. And just as an example, Beyond Meat, which forecast 120 to 140 million in third-quarter sales a while back had to ratchet that down to 103 million.
And Maple Leaf Foods, a big maker of a processor of meats in Canada, their third-quarter report—their meat category—their whole quarter did very well, and their meat category really carried the day. But their plant-based protein group actually declined by 6.5%, and it's down 12% through nine months of the year. Maple Leaf’s president and CEO, Michael McCain, said they're going to seriously rethink whether they belong in that whole category.
[javascriptSnippet ]
Erin: What about cultured meats? Are those still growing?
Dave: Growing is exactly the word to use because there isn't a category, there isn't a market yet, at least not here in the U.S., although they're apparently serving cultured meat in a restaurant in Singapore. But definitely, the R&D work is growing, and they are growing cultures in different ways and that category really is on a nice growth trajectory. I mean, considering it's a category that hasn't, at least in the U.S., produced a consumable product yet, but a lot of things I think are gonna happen in 2022.
Mosa Meat believes they're gonna be able to come out with a product in 2022, Parlee Farms is gonna do likewise, and Eat Just has plans for cultured chicken, at least, in the year 2022. They're the ones that are already supplying a restaurant in Singapore with a cultured product. The technology is growing very nicely and the price is coming down from the first steak. I think it cost $250,000 for Mosa Meat to create one. It's getting close to parity with beef, especially with the price that beef has gone up but probably will never reach parity. But it's getting close enough to make a lot of people consider when it's available that they will take the plunge and eat some cultured beef.
Erin: As we wind down this episode, Dave, I'm curious to hear what product development trends you're noticing and think will continue into 2022.
Dave: One of them is both the word carbs and diets and some, in a lot of ways those two things are intertwined. When you start talking about the keto diet or the paleo diet that it's almost synonymous with a reduction in carbs. And carbs extends all the way up to things like sugars. Definitely, with the addition of the call-out on the nutrition facts panel last year of added sugars, people were looking to replace that.
They're doing it for the sake of sugars, but overall it's still part of the carbohydrate line on the nutrition facts panel. I don't understand the diets keto or paleo for that matter, but they certainly seem to have some rabid followers, and those are definitely trying to reduce carbs as much as possible.
The other thing we've talked about it for two years now during the pandemic, we've talked about people's interest in immunity boosting foods or ingredients. I don't think anyone is seeing the uptick that they expect, but it's definitely an interesting conversation topic.
And there also seems to be a general mindfulness. It might be the best way the umbrella term for it, mindfulness, people are looking where their food comes from the social causes, diversity and inclusion. And, you know, whether you want to save the planet or you're thinking in terms of your own health, I think people are being a lot more mindful of the purchasing decisions when it comes to food.
And cannabis, and CBD in particular, seem to be things that the FDA or USDA are planning to deal with in terms of rule-making in 2022. Remains to be seen, and a lot of work needs to be done in those, but they're getting an awful lot of pressure to come up with some type of set of rules where, at least CBD, can be marketed as a food ingredient, and then it won't be long before THC intoxicating cannabis can be used as a food ingredient as well.
