Compliance catalyst for change and growth for food and beverage companies

In 2023, middle market food and beverage businesses faced significant profitability challenges. Elevated input costs persisted, consumers became increasingly sensitive to price increases, and the high cost of capital made financing operations and investments difficult. Although there was hope for relief in early 2024 through interest rate cuts, sticky inflation has forced the Federal Reserve to remain patient as the impact of its rate hikes gradually permeates the economy. Despite these obstacles, businesses must continue to focus on investing in infrastructure that will deliver long-term value through cost efficiency and top-line growth.

Until now, the primary justification for supporting investments in operations has been the innovation of key processes that drive growth and efficiency, such as enhanced customer engagement platforms, streamlined supply chain operations and automated business processes. However, another crucial driver has emerged for businesses in the food and beverage sector. The regulatory and reporting responsibilities of these businesses have grown substantially, further emphasizing the need for a robust data strategy, operational transparency and advanced functional analytics.

Strategic consumers and stubborn costs continue to squeeze

The relentless growth of input costs continues to pose a formidable challenge for middle market food and beverage businesses. At the forefront of this issue lies the struggle to manage escalating labor expenses while maintaining operational efficiency. A prime example of this can be seen in the food manufacturing sector, where workers' wages soared by 8.4% in October 2021, according to the U.S. Bureau of Labor Statistics. Although the pace of wage growth has moderated, it is still growing at 4.9%, substantially above the pre-pandemic average of 3.2%.

Compounding labor concerns are potential supply shortages and price increases for essential raw materials crucial to the production of many food products. Food producers find themselves navigating a cocoa shortage and the potential scarcity of milk and eggs, as avian flu spreads through U.S. dairy cow and chicken populations. This perfect storm of challenges exacerbates the risks faced by food manufacturers, who must contend with the dual threats of rising costs and supply disruptions.

To further complicate matters, this landscape is unfolding against the backdrop of a consumer base that is increasingly fixated on value. Shoppers are aggressively seeking out alternatives or trading down rather than accepting price hikes. Consequently, several large food manufacturers have cited lackluster volume growth and the unwillingness of consumers to bear the burden of higher prices.

Regulatory frameworks and compliance obligations are growing

The forthcoming surge in compliance requirements from the U.S. Food and Drug Administration and the U.S. Securities and Exchange Commission will most certainly add to the growing list of rising costs and stretch the resources of food and beverage companies. However, implementing a robust data strategy and fostering end-to-end operational transparency can streamline the adoption of these frameworks and simplify future reporting. By investing in a data-driven culture and infrastructure, businesses can transform compliance from a resource drain into an opportunity for growth. The short-term challenges of implementation will yield long-term benefits, including increased efficiency, better risk management and enhanced stakeholder confidence. By viewing compliance as a catalyst for positive change, these forward-thinking organizations will position themselves as industry leaders, ready to seize future opportunities.

The FDA enforces strict regulations that food and beverage companies must comply with to ensure the swift identification and removal of contaminated products from supply chains. The FDA's Food Safety Modernization Act takes this a step further by imposing additional documentation and reporting requirements on businesses that manufacture, process, pack or hold high-risk foods listed on the Food Traceability List within the Food Traceability Final Rule, which includes items such as cheese, shell eggs, and fish, among others. These enhanced rules apply to both domestic and foreign corporations, with the forthcoming enforcement date set for Jan. 20, 2026. While these regulations will promote greater transparency in operations, the ability of food and beverage businesses to respond quickly to recall events is paramount across the industry. Though total recalls were down slightly in 2023—466 compared to 479 in 2022—recall events so far for 2024 are on pace to exceed 2023 numbers.

Another rapidly expanding area of compliance pertains to environmental, social and governance (ESG) matters, particularly climate reporting. In March, the SEC adopted The Enhancement and Standardization of Climate-Related Disclosures for Investors, commonly referred to as the SEC's final rule. This framework mandates that all domestic and foreign registrants provide required climate-related disclosures based on registrant type, with the first compliance period beginning as early as 2025. These disclosures may include greenhouse gas emissions and expenses incurred as a result of weather events, should they exceed certain thresholds. To comply with these enhanced disclosure obligations, affected businesses will need to capture and analyze data that is not captured in their current solution design. The SEC's final rule aligns with similar legislation passed by the European Union and California, signaling a trend that is poised for continued growth.

The food and beverage industry faces a multitude of challenges, from rising costs and supply chain disruptions to shifting consumer preferences and increasing regulatory pressures. As the regulatory landscape continues to evolve, businesses must remain adaptable and committed to leveraging data and technology to drive long-term success.