A Real Economy publication

Food and beverage industry outlook

Mar 29, 2024

Food and beverage industry outlook: Key takeaways

Food and beverage businesses face infrastructure investment challenges, but Fed rate cuts could provide relief. 

Driving up sales volume will be key to offsetting an environment of lower pricing that spills into 2024.

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Technology and process improvements will provide long-run benefits but pose financial challenges.

Food and beverage sector trend #1: Infrastructure investments are key for growth

Adapting to shifting consumer trends

The landscape for middle market food and beverage companies has dramatically shifted since the pre-pandemic era, with rising costs, inflation, and changing consumer preferences presenting significant challenges. Despite these obstacles, infrastructure investment remains crucial for driving sales growth and operational efficiency in 2024. While companies were able to pass some increased costs onto consumers during the pandemic, rising price elasticity now poses a challenge, necessitating a focus on volume growth through enhanced promotional activity and digital presence.

Consumer spending growth has moderated due to inflation, impacting both on-premises and off-premises food consumption. Discretionary spending, including dining out, is being scrutinized more closely by households, leading to reduced demand for food and beverage products. Additionally, supply chain disruptions caused by climate-related issues and geopolitical tensions further complicate forecasting and operational efficiency.

To counter these challenges, companies are investing in automation and data strategies to optimize supply chains, forecast demand accurately, and engage customers more effectively. 

Food and beverage sector trend #2: Costs pose challenges

From inflation challenges to consumer pricing pressures

In the stabilizing U.S. economic landscape, inflation is easing, and consumer spending remains strong, despite challenges like high interest rates. However, some food and beverage commodity prices remain elevated. As inflation decreases, manufacturers face pressure to cut prices, challenging profitability for middle market businesses. While producer prices are slowing, critical costs like transportation and labor remain high.

Consumers maintain a focus on value, with private label brands gaining traction. As pricing pressures persist, middle market companies must find strategies to compete and maintain profit margins. Recent activity in the food and beverage M&A market indicates potential despite high interest rates. Businesses can use M&A to enhance efficiency, implement automation, and navigate the challenging cost environment.

For middle market food and beverage companies, success hinges on driving sales volume amid consumer pricing pressures. 

Food and beverage sector trend #3: The rise of AI and data-driven technology

Using AI, first party data to identify inventory trends

The food and beverage industry is grappling with economic uncertainty and persistent inflation, which have led to cost-conscious consumers seeking affordable options. While the Federal Reserve's efforts to curb inflation are making progress, food prices remain elevated. Consumers are turning to private label products and cheaper retail options like dollar stores, even those with higher incomes, to manage costs. Although nominal spending on food has increased, real spending has been declining. Big-box retailers are considering price reductions, impacting suppliers' profitability. Labor and logistics costs have risen, and retailers are resorting to increased promotions to attract frugal consumers, though this strains profit margins.

Amid these challenges, the success of food companies hinges on adapting to shifting consumer preferences and establishing efficient operations. Artificial intelligence (AI) and data-driven strategies can optimize supply chains, forecast demand accurately, and identify trends promptly. AI can also personalize customer engagement, tailoring advertising and pricing. As Gen Z becomes a significant consumer demographic, companies must prepare to leverage AI-driven insights from shared personal data. Embracing innovation is crucial, even though it entails costs, to stay competitive and navigate the demands of price-conscious consumers.

RSM contributors

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