A Real Economy publication

Food and beverage industry outlook: Summer 2022

May 31, 2022

Food and beverage industry outlook key takeaways

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Food and beverage companies should expect shifts in how and what consumers are eating and drinking.

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The change in consumer preferences has put middle market food and beverage businesses at greater risk than their larger counterparts.

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Finding and paying for labor continues to be a challenge for food and beverage businesses and is contributing to higher food prices.

Food & beverage Economics

Rising costs change consumer preferences

The price increases consumers were accustomed to seeing in the meat and produce sections around the perimeter of the store have begun to infiltrate the center store categories as grocers and retailers finally allow surging prices incurred by producers to be passed through to their customers. The result is monthly increases in the consumer price index for food-at-home purchases have accelerated faster than core items (purchases excluding energy and food) 1.5% to 0.3% as of March 2022.  With grocery costs expected to continue to increase and wallet share pressure coming from other everyday purchases such as rent and gasoline prices, food and beverage companies should expect continued shifts in how and what consumers are eating and drinking.  

Food and beverage spending growth relative to pre-pandemic levels chart | Food and beverage

The shift in consumer spending is multipronged. While food and beverage spending remains elevated relative to pre-pandemic, some consumers are beginning to trade down to value brands to offset the impact of inflation. According to monthly point-of-sale data compiled by SPINS, sales growth for specialty and gourmet food and beverage products slowed to 7% in the first quarter while conventional items saw sales growth accelerate. Likewise, private label and national brands have reclaimed some market share in a number of center store categories such as soup, cereal and spices.

In addition to raising prices, many consumer packaged goods companies are also reducing package size or product volume, a measure often referred to as shrinkflation. Consumers may begin seeing increased promotions as food retailers work to maintain market share.

Ironically, higher food-at-home costs could be an added boost for consumer spending at restaurants. As consumers see grocery bills increase faster than prices on restaurant menus, they may choose to dine out for an affordable luxury or simple convenience, particularly as their mobility continues to increase. 

The change in preferences has put middle market food and beverage businesses at greater risk than their larger counterparts, due to less ability to diversify brands at varying price points as well as less exposure to value and club stores. Businesses in the middle market should focus on delivering on the values that are important to consumers as preferences change. Consumers continue to seek out and pay premiums for healthy and natural food offerings, with growth in this category outpacing conventional and specialty items.

Brands that can successfully deliver and market products will be well positioned to capitalize on changing preferences. This is especially relevant for brands that offer an affordable luxury even as wallets tighten, or a convenient substitute for a conventional product as consumer mobility increases. Middle market businesses must look to consumer data, and the tools to leverage it, to maintain profitability as these preferences change.

Labor challenges

Finding and paying for labor continues to be a challenge in the food and beverage space and is contributing to higher food prices. In fact, more than half of all U.S. states raised their minimum wage during 2021 and 2022. 

For many food and beverage processors and distributors these minimum wage increases are costly and often not enough to stay competitive in their marketplace and attract good talent. With the U.S. unemployment rate at 3.6% and 18 states having rates lower than the national figure, according to Bloomberg, employees continue to have leverage over employers. 

To remain competitive in the labor market, middle market food and beverage companies need to also consider the less quantifiable benefits of employment such as company culture, opportunities to advance or retrain, and flexible hours. However, as prices remain high, the bargaining power of lower-income earners may start to diminish in the latter half of the year. For middle management and high-wage earners, increased wages, large savings accounts and increases in home prices and stock values will continue to support their bargaining power and lift overall consumer spending.

Cost of goods sold

Expect to see most food and beverage manufacturers carry increased raw materials and packaging inventory in the first half of 2022 as commodity prices increase and supply chain disruptions linger.  Many middle market food processors are still having difficulty finding key ingredients. But many have used this to further innovate their products. For example, demand for corn oil has spiked, in some cases rendering it unavailable. Producers are evaluating comparable oils such as soy and working on formulations to ensure there is no change to taste and quality. This process can take time but may provide cost savings, depending on the substitute. Similarly, as costs rise and plastics and paperboard continue to be scarce, it is a good time for producers to evaluate alternatives so they can get their products to market on a timely and cost-efficient basis. These formulation updates and process changes lend themselves to research and development credits as well.

Finally, it is important to address transportation costs, which have plateaued from 2021. Automating logistics and having good visibility into supply chains are key to keeping these costs in line.    

RSM contributors

  • Peter Cadigan
    Peter Cadigan
    Consumer Products Senior Analyst
  • Karen Galivan
    Consumer Products Senior Analyst

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