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The Pandemic’s Impact on Food & Beverage Manufacturing

April 1, 2022
With us is a returning guest, Maggie Slowik, Global Industry Director for Manufacturing at IFS, here to talk about the pandemic’s ripple effect and lessons learned so far.

We’re continuing the conversation we started last November how the pandemic has changed the game for food and beverage manufacturers. We kick things off talking about the pandemic’s ripple effect and lessons learned so far. We peel back a few more layers about how supply chain issues are continuing to affect food and beverage processors, with Maggie explaining the ‘Supply Shock’ and ‘Demand Shock’ the industry has experienced the last couple of years.

We dig a little deeper into the new competitive landscape for food and beverage manufacturers and how information-hungry consumers are helping to shape new product innovation. We cap things off talking about supply chain disruption, labor issues, and the role of technology is playing in food and beverage companies’ digitally transformation journey, making sure to highlight how IFS's digital solutions are helping manufacturers across the globe each and every day.

Transcript

Erin: Maggie, welcome to the special bonus episode of the Food for Thought Podcast. Let's jump right in. We heard a lot about the food and beverage industry across the media in the last 24 months. It's an industry that was very much shaken up, but some would argue that the food and beverage industry came out as one of the winners in the pandemic. Would agree with that, and could you give us a view of what happened?

Maggie: Hi, Erin, and thank you so much for having me back on your podcast. Really pleased to be here. First of all, Erin, some of the folks listening in today might be wondering, why on earth are we still talking about the pandemic? Well, the reason being is that it's still very much present. We are still seeing the ripple effect. And there are some important lessons learned, but also it was a big force often for the better I would argue. I just wanted to say that because sometimes people say they are bored of talking about the pandemic, it's still very much present, and it's certainly been a big force of magnitude. But back to manufacturing, and what we're talking about today. Well, manufacturing as an industry at large was very much shaken up by the pandemic. I'd like to say that, unlike previous supply chain disruptions, such as, for example, the 2011 floods in Thailand, remember that? They were very much more localized, and they lasted a relatively short amount of time.

IFS develops and delivers cloud enterprise software for companies around the world who manufacture and distribute goods, build and maintain assets, and manage service-focused operations. Learn more about how IFS' enterprise software solutions at ifs.com.

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.

Erin: What is the role of technology in all of this? Are food and beverage manufacturers still digitally transforming?

Maggie: There are quite a few elements to this, but I will start by saying that food and beverage companies, and if I was to make a broader inference, even consumer packaged goods companies, let's say, they have been known for being more digitally mature than other sub-industries in manufacturing. And that is mostly because they are end-consumer facing companies now competing in incredibly competitive markets. The other thing to highlight is that digital transformation is not an end goal, but a continuous journey. And every company will need to make their own decisions as to which use cases make the most business sense when it comes to their technology investments. However, having digital capabilities in place means that food and beverage manufacturers can deal a lot better with the complex and quickly-changing market environments that they are facing, starting with new product development, all the way to operational efficiencies and as well, the complex supply chains that they're operating.

And this is key to driving customer loyalty and competitive differentiation in the market. Now, the other advantage of using digital technology is being able to engage more directly with your customers as well as end-consumers, improving forecasting and the ability to reach them at the right time and the right place, but also being able to better anticipate behavior and understand what these end consumers will demand next. And the last thing that I would like to highlight in this context is that the pandemic has really accelerated digital transformation journeys in manufacturing. Now, I go back to the example of companies investing in digital direct-to-consumer sales channels to reach end consumers. And an iconic example here is Nespresso. You know, the company that makes the little coffee capsules sold typically in beautiful stores or franchises. And while these stores were closed during big parts of 2020, Nespresso switched very quickly to an online presence to still be able to sell and reach these end consumers. I think it's just a really nice example of the agility that you can gain by investing in the right digital technology.

Erin: How does IFS support food and beverage manufacturers in light of all of these market changes?

Maggie: But we have a very industry-specific solution, which has ERP at its core, but it also extends to asset management and service capabilities, which is important because every manufacturing organization has assets that need to be maintained and serviced. And when I say industry-specific, we support all modes of manufacturing, whether it's make to stock, make to order, make to forecast, or a combination of these. And this is just, you know, with a focus on food and beverage organizations, obviously. One of our customers is Pukka Pies. They make these savory pies, for example, steak or chicken pies. And when they produce these pies. They can immediately sell them to their customers, but they can also decide to freeze them. Make them to stock if they really wanted to. We give our customers that flexibility and we offer a very comprehensive all-in-one solution that delivers key manufacturing modalities straight out of the box.

And that also includes recipe management, yield management, traceability, as I mentioned it earlier, quality control, and very important shelf life and exploration dates. And our solution also has a very strong demand planning capability to support our customers because we know how difficult that is. And in fact, we just released a new functionality called intraday or same-day planning where especially those fresh food manufacturers can fulfill an order the same day it comes in.

They're operating under very strict timelines. We help those customers in this very short amount of time. Usually, just today to make critical decisions and take the right action. We are also constantly embedding innovation into our technology. For instance, we have added a weather forecast to our planning capabilities, and that is embedded with artificial intelligence to help correlate patterns of weather with demand patterns, and that has improved forecasting accuracy for all customers in remarkable ways. We're investing in a lot of innovation for our sub-industries, food and beverage customers being an important market for us.

Erin: As we wrap up this special bonus episode, are there any final thoughts you'd like to share? For instance, what do you think will be the next big thing in the food and beverage industry?

Maggie: I think we will see an increased focus on justifying waste in the food and beverage industry, driven by regulations first and foremost, but also by other stakeholders, including retailers. In fact, I think that food and beverage companies will be pushed to account for the waste and find ways to bring it back into the production process. You could call it in a way upcycling, which is a concept that is part of the circular economy, right? In other words, food and beverage companies will experiment with repurposing food, which would otherwise be wasted. Sounds strange. Well, a good example of that is Unilever's use of the ice cream that remains in its manufacturing lines when there is a change over between products. What used to be waste that one of Unilever's brands is turned into, believe it or not, quite a popular flavor, and this upcycled ice cream repurposes 160 metric tons of waste annually, and it's favored by consumers for its sustainable nature.

I think that's incredible. And I mean, it's incredible, and also a huge opportunity for food and beverage manufacturers to rethink their traditional ways of operating. But equally, and I already talked about this earlier, Erin, it's an indicator of how consumers' preferences have evolved and continue to change quickly, and food and beverage companies have to be ahead of the game always. And this is sort of how I will wrap up, you know, you really have to focus on your end consumer, and be ahead of innovation or, you know, being able to measure innovation as it unfolds.

Erin: Maggie, thank you for being on this special bonus episode of the Food for Thought Podcast.

Maggie: Thanks for having me.

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