The Pandemic’s Impact on Food & Beverage Manufacturing

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And by the way, previous disruptions mostly impacted supply, not necessarily demand at the same time. Now, COVID-19, however, has been a truly global event impacting both demand as well as supply at the same time. I see a multitude of shocks here. Let's talk about the first one, which I would call the supply shock. What exactly do I mean by that? Well, especially in 2020, but also through our 2021, factories had to either be shut down or restrict access to the workplace to prevent the virus from spreading, right? Equally, there were restrictions on modes of transportation, including road, rail, and air. And the other shock that we saw was a demand shock, and due to the overall insecurity and buyers' finances getting worse as well as sales, whether on the B2C or B2B side, sales really plummeted worldwide. Last but not least, there was what I would call a workforce shock.

Now, that was particularly bad of a shock for manufacturing companies because you cannot just send your workers and factories home and have them work from there, right? These shocks really demonstrate the true ripple effect of the pandemic. And to add to that, the pandemic really exposed many manufacturing supply chains' weaknesses. However, I will also add that the food and beverage industry was a very special case. Now, think about your own behavior, Erin, as a consumer. Panic buying during the pandemic, and overnight consumers' homes turned into the new workplace, a gym, a restaurant, a cafe, the list goes on and on. In other words, consumers' homes became a central place for food consumption. Food and personal care sales went completely off the charts. Now, imagine what did they do to forecasting and planning within manufacturing organizations. Forecasting is already a huge challenge for food and beverage companies given seasonality, weather, and external events.

The demand spikes that these producers saw, especially at the beginning of the pandemic, that's what I would call a planner's worst nightmare. Now, what I just described are those food and beverage customers selling to essential retail, but those food and beverage companies that are most reliant on the channel, in other words, on restaurants, on hospitality, movie theaters, and the like, they got the short end of the stick, and they no longer could sell to these customers due to closures. Just to mention an example, a chocolate maker, not being able to sell to movie theaters any longer, they really took a huge revenue plunge. Who were the true winners in the pandemic? Well, I would argue those companies who were selling to retail, essential retail that is. But also those food and beverage producers who could sell directly to their end consumers via other sales channels like Amazon, for example. But that required a lot of agility and the investment in online commerce technologies.

Now, let's see who else managed to succeed. I'd say those companies who could quickly come up with new products, addressing the needs of the new home-bound consumer. And I will give you an example. One of our customers specializes in the manufacturing of dairy and whey nutrition, selling mostly to distributors and gyms, which of course, were also closed during the pandemic, especially at the beginning of 2020. But the pandemic made this particular company switch to protein stacks, which could be sold via online channels. Overall, the industry has really flourished during the pandemic. I will also add though, that sort of younger and smaller players in the space, they were very creative with their sales and marketing strategies, venturing into new channels, and a big reason for that is that these smaller players, they tend to be digital native companies. They have a lot more agility than their big counterparts.

Erin: Can you talk about the new competitive landscape? Food and beverage is a very competitive market. Has it become even more competitive?

Maggie: This is really fascinating because the pandemic has led to a lot of product innovation in the market. Take a note of that as you walk through the aisles of your local grocery store next time. Really, it's mesmerizing. And just to give an example, think of plant-based milk substitutes. Do you pick oat milk, soy milk, hemp milk, coconut, cashew? And another major trend here is the emergence of direct-to-consumer brands. What does direct-to-consumer mean? Well, essentially this is a vertically integrated brand. A manufacturing company that produces in its very own facility, as well as distributing products within its very own channels. And these channels may be an e-commerce platform, social media, and its own retail store. The point is they can reach consumers directly without a distributor, a retailer, or another middle man.

Now in food and beverage, we saw a lot of subscription-based meal kits or recipe box providers popping up, similar to the likes of Gousto, HelloFresh, and SimplyCook. I mean, again, the list goes on and on. And they were all catering to the convenience of the consumer without necessarily compromising the freshness and the quality of those ingredients. And in fact, Gousto, which is a UK-based company, they were founded way before the pandemic, by the way. But they were one of the fastest-growing food and beverage companies in 2020 with a two-year compound annual growth rate of 89%. I mean, just imagine this growth rate. To sum that up, a big trend is to cater towards convenience via dedicated, direct-to-consumer channels, but with an even greater focus on fresh ingredients and customized amounts, which makes it incredibly difficult from a planning perspective, as I already talked about before. Hence you need a technology-enabled approach.

Erin: As we all know, consumers have a lot of power in the food and beverage space. What are the demands of the consumer on the industry and has anything changed?

Maggie: Consumers have always been a strong driving force in food and beverage, right? Literally, dictating the pace and the direction of change. And over the past years, consumers have become what I would call information-hungry and quite influential. If they don't like something, they're willing to go to all sorts of social media platforms to voice their opinion. Now, during the pandemic, consumer attitudes have continued to evolve. People have had a lot of time in their homes to think about their food choices and nutritional habits and become more willing than ever to try new products and even embrace the use of science in food production. I already talked about new product innovation, that is very much visible in today's grocery stores. But we are also seeing more and more proliferation and the emergence of alternatives often away from the traditional protein sources like meat, and fish, and dairy too, more towards planned or self-based alternatives.

There's a lot of focus on not only new product innovation but also customization. And this goes back to my early example of plant-based milk substitutes. There are so many to choose from. We also saw an increased focus on sustainability credentials and as such greater transparency across the entire journey of products, meaning from the sourcing of raw materials to production. And of course, all the way to the distribution of these products to its final destination. And this is actually something that I would like to highlight as being incredibly important in food and beverage, you know, that the need to be able to drive transparency and traceability, it's important to have these traceability capabilities and these traceability capabilities in place. And that is, in fact, something that I talked about in a previous podcast.

Another growing trend is sustainable packaging, driven by, as you can imagine, regulatory pressure, but equally by consumers and retailers nowadays. And big food conglomerates like Nestle and Kraft Heinz have already committed to using only recyclable, reusable, or compostable packaging by 2025.

Quite big bold statements by these food companies. And here's the interesting thing actually, these companies recognize sustainability as an issue that provides value to their customers, who are willing to pay a premium for products they believe support environmental sustainability. There's actually a lot of evidence for that. It depends, of course, on the food category, on the location of the consumer, etc. But, there is certainly arising willingness to pay a premium for sustainability credentials in food and beverage. And I think that's just a testament of how the consumer has evolved over time.

Erin: There's been a lot of talk about supply chain disruption lately. How much did the food and beverage industry get impacted by that?

Maggie: Well, as I've already highlighted, the food and beverage industry has been heavily impacted by the ripple effect of the pandemic. A big issue at the moment is certainly the volatility of commodity prices. Another big challenge is supply chain bottlenecks, especially around long-haul shipping. And at the heart of the problem is the shipping container itself. I mean, it might sound ridiculous, but, it has disrupted the delivery of everything from semiconductor chips, medical supplies, all the way to building materials, tires, etc. It's led to widespread manufacturing delays. And so, widespread manufacturing delays and bottlenecks mean there simply aren't enough shipping containers in the right place and at the right time. Plus there are too many containers at shipping terminals at the moment clogging up ports and blocking more cargo from arriving. And these bottlenecks have led to an explosive increase in freight increases, the pricing of freight rates. And for manufacturers, this means that they are really struggling to find those empty containers they would normally use to send their products to customers abroad.

And they're being forced into bidding wars to secure space on vessels, believe it or not. I recently had a conversation with a European potato chip manufacturer who told me that in order not to lose their shipping containers, they were, you're ready for this? They were at times shipping them empty around the world. I mean, just imagine shipping around empty containers. And of course, this is very UK-specific, but this was brought about by Brexit. And it has really cost a lot of headache around...and complex duty documentation for those UK and operating food and beverage manufacturers. It's just introduced another layer of complexity in doing business with a European counterpart.

Erin: We hear of skills shortages across manufacturing, did that become a big issue for food and beverage manufacturers?

Maggie: Labor shortage definitely remains a big challenge in manufacturing and in food and beverage, especially it continues to be a chronic problem. Some of our customers have told us that they're competing on talent with the likes of, again, this is amazing, with the likes of Amazon or big retailers who are offering signing bonuses. There's a big talent war going on as well. Again, in the UK, the labor shortage issue was further amplified by Brexit. I think that's sort of important to highlight and all of a sudden, not having a big enough talent pool to draw from. And all of this is, of course, on top of the fact that manufacturing has been suffering a reputation problem. It's from the industry, that sort of has its easy in terms of attracting the next generation of talent. They're just sort of looking for more attractive jobs in marketing, in finance, law, and so on and so forth.

I mean, think of manufacturing still being seen as a dirty type of industry. Saying that we will see...I mean, there has to be a solution to this labor skills crisis. Now to help mitigate this dilemma, we will see an increasing appetite for automation technologies. Although I will also say that food and beverage companies, having to strike a good balance there because there is also a cost implication associated with automation technology and the potential expansion of your sites, right? So that sort of has to be balanced going forward.