A Real Economy publication

Food and beverage industry outlook: Fall 2022

Sep 07, 2022

Food and beverage industry outlook key takeaways

Despite consumers’ tightening budgets, their spending on food and beverage products continues to outpace pre-pandemic behaviors.

Private-label brands should experience continued growth due to perceived value.

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One of the largest contributors to food inflation has been the labor shortages that have plagued many sectors.

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Food & beverage Economics

Rising prices change how consumers and businesses make decisions

With food prices increasing at the highest rate in 30 years, consumers and businesses in the food and beverage ecosystem are grappling with difficult decisions. Consumers are changing their shopping patterns and diets, and companies serving the sector are looking for alternative ingredients, new processes and diversified product offerings to protect margins and adapt to consumer demand.

Inflation brings food and beverage consumption back in line

Despite tightening budgets, consumers are continuing to spend on food and beverage products at a clip that greatly outpaces pre-pandemic behaviors. But while the dollar amount on grocery receipts continues to rise, the number of items on receipts is shrinking. On a nominal basis, consumer spending increased 6% over the prior year through the second quarter of 2022, while real spending—which is adjusted for inflation—dipped 5%, falling back in line with pre-pandemic growth trends.

Real and nominal food and beverage consumption

Real and nominal food and beverage consumption off-premise vs. on-premise comparison chart | Food and beverage industry outlook and trends

Strong nominal spending indicates consumers are absorbing higher prices. It’s crucial for food and beverage businesses to understand how pricing is influencing buying decisions in grocery aisles. Higher prices have affected not only how much consumers are buying at the grocery store, but what they are buying. Perimeter categories such as meat and poultry, eggs, and dairy saw significant real spending declines in the first two quarters of 2022 as soaring prices had consumers seeking shelf-stable, center-store alternatives.

With inflation expected to continue to ramp up in the grocery aisles, food and beverage businesses should continue to see changes in consumers’ buying habits, including trading down as they stretch food budgets further. In addition, we’ll see top national brands that have experienced supply chain recovery faster than smaller competitors use their scale and pricing power to recapture market share they may have lost due to pandemic shortages.

Additionally, private-label brands should experience continued growth through the remainder of the year due to perceived value and retailers’ data-driven insights into how consumer preferences are changing in real time.

Is relief in sight?

Over the past year, cost pressures have mounted for food and beverage companies from every direction. But looking at the producer price index for final demand foods, softening may be on the horizon. The year-over-year increase in that category fell to 13% for May and June, from its peak of 15.6% in March. Continued declines would be a relief to the middle of the supply chain as the spread narrows between prices consumers pay for food products and prices borne by manufacturers and distributors. And while pressure has come from a wide array of sources, so will relief.

Price spread for food products

Price spread for food products chart | Food and beverage industry outlook and trends

Ingredient costs: While still above historical norms, agriculture prices for key inputs into many common food products have subsided after peaking in the second quarter. North American crops will likely benefit from more favorable weather conditions as the Americas move beyond a “double dip”—two consecutive years—of La Nina weather conditions. Consumer demand, feed costs for livestock and fertilizer costs may prevent meat and poultry prices from further receding. Relief of commodity prices come at a welcome time for businesses that entered into hedging contracts last summer and avoided the ramp-up in prices that began in the third quarter of 2021.

Packaging: Key components in food packaging costs have shown signs of softening through the combination of supply chain recovery and the commodity market factoring in a slowdown in demand. North American smelting plants have resumed normalized production capacity, bringing the price per ton down nearly 40% from the end of March. Plastics have also been subject to the retreat in petroleum prices, which are down from peaks in the first quarter. While the market is pricing in demand destruction from a weakening global economy, consumers’ interest in sustainable packaging and the proliferation of eco-friendly alternatives should not be ignored.

Logistics: Trucker shortages and supply chain challenges continue to beleaguer the food and beverage supply chain amid the pandemic. For middle market companies, which are more reliant on the spot market for domestic freight, cost challenges likely peaked at the end of 2021, when dry van and temperature control rates per mile peaked at $3.96 and $3.06, respectively. Those rates have since fallen 20% and 34% in response to independent operators flooding the market at the start of the year, when demand leveled off. Though those rates remain above historical averages, the declines should keep contract rates from accelerating further through the end of the year.

Labor continues to be a double-edged sword

Perhaps one of the largest contributors to food inflation has been the labor shortages that have plagued many sectors. Processors, distributors and manufacturers continue to struggle to staff warehouses and factories. Despite food manufacturers raising the wages for nonsupervisory workers as much as 13.5% relative to February 2020 levels, total employment has only marginally surpassed the level of that period—a level that posed a major challenge for the food and beverage industry even then.

Though the current staffing increase should ease some of the supply burden on the food system, staffing continues to fall short, particularly in light of the increased demand spurred by the pandemic. With compensation increases falling back in line for general nonsupervisory workers, wages may become less of a factor in driving up food prices, but food and beverage shortages and supply challenges could persist. Higher wages aren’t the only factor driving higher prices. Because many food processing and manufacturing plants are built to run on three shifts, the labor shortage is limiting productivity and exacerbating shortages in food supply. With more employees seeking creative benefits and flexible work arrangements in employment offers, businesses that control their manufacturing process and supply chain are better poised to navigate shortages.

Wage increases bring non-supervisory and production food and beverage workers back to plants

Hourly wages and employed persons line graph | Food and beverage industry outlook and trends

What's next for food and beverage companies?

Despite softening in consumer demand and the move off record prices for input costs, stakeholders in the food and beverage ecosystem are placing longer-term bets to mitigate the forces that are driving up costs. Food and beverage companies themselves are making investments in technology and automation to improve demand planning and efficiency as well as reduce dependency on labor and increase productivity.

The real estate investment community has bought in as well. Cold-storage warehouses, a crucial component of the food and beverage supply chain, historically have rarely been built on spec; real estate brokerage firm CBRE estimated the country would need 100 million square feet of additional cold-storage space to meet demand prior to the pandemic. Shifting consumer behavior and developments in energy efficiency have reduced that estimate, and a new report from the CBRE showed that as of the second quarter of 2022, 3.3 million square feet of speculative cold storage were under development compared to only 300,000 square feet in 2019, signaling progress in meeting current and future needs for this space.

Finally, even as mergers and acquisitions in the food and beverage space cool off, agtech remains a growing area of investment. Funding in the sector surpassed $5 billion in the first quarter of 2022, with areas of investment including vertical farming, which reduces reliance on complicated supply chains by bringing production closer to populated urban areas; and regenerative farming, which focuses on promoting biodiversity to amplify agricultural efficiencies.

Global capital invested in agtech

Global capital invested in agtech by year and quarter | Food and beverage industry outlook and trends

RSM contributors

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

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