Food and beverage industry outlook: Winter 2022
Maintaining profitability while navigating economic recovery
INSIGHT ARTICLE |
Food and beverage companies are turning their attention to maintaining profitability as they navigate a volatile reopening and recovery.
Inside the winter 2022 food and beverage industry outlook:
- Food companies may get some relief in input prices heading into the end of the year; however, prices are still susceptible to the risk of extreme weather events.
- Wages are not the only factor in attracting and retaining talent; food and beverage employers need to set clear expectations in job descriptions, establish an effective onboarding process and, most importantly, be willing to train employees for an evolving marketplace.
- While most industries have exposure to the global shipping container disruption, systemic infrastructure and economic challenges mean logistics costs for food and beverage companies may be a permanent challenge for the sector.
- Middle market food and beverage companies should consider several factors before passing higher costs through to consumers, including the competitive landscape, product upselling potential and volume variance due to product promotion.
From farm to table, costs are rising across the supply chain, and despite demand continuing well above pre-pandemic levels, food and beverage businesses are reluctant to pass along costs. Through September, consumer prices for food at home and away from home outpaced producer prices for final demand foods by 8.6% and 8.4%, respectively. Those manufacturing, distribution and retail businesses caught in the middle are feeling the margin pinch the most.
Outlook for rising costs
While supply chain and operational disruptions stemming from the pandemic are expected to ease over the next 12 to 18 months, some cost drivers predated the pandemic and will create cost pressure into the future.
Relief in sight for commodity prices, but volatility risk remains
Food companies may get some relief in input prices heading into the end of the year.
After a pandemic-fueled surge in demand for agriculture products met disrupted supply lines, labor shortages and a La Nina weather cycle, prices for everything from grains to livestock soared to their highest levels since 2011. These increases found their way into household refrigerators and pantries, too. Growers have responded by increasing acreage dedicated to high-demand crops. The Department of Agriculture expects 93.3 million acres of planted corn in 2021, up from 90.8 million acres in 2020, with a yield expectation of 176.3, up 2.5% over the prior year. The result is a corn price of $4.99 per bushel, down from its peak of $6.74 in May. Other commodity prices have followed suit as price growth slowed in the third quarter.
While this still could be an area of relief for food and beverage companies, input prices are still susceptible to the risk of extreme weather events. According to the USDA’s summer weather review of Sept. 28, the droughts and wildfires of the West Coast and Pacific Northwest have severely damaged rangeland, pastures and other summer crops in those regions. It should also be noted that the United States experienced its hottest summer in 127 years, according to data from the National Centers for Environmental Information. Food and beverage companies may look for innovative solutions in agricultural technology and farm modernization to help reduce this volatility in the ecosystem in the long term.
Food manufacturing wages continue to lag
Most food and beverage companies hoped the labor shortage would be mitigated once government subsidies ended; however, entry-level workers still have challenges accessing affordable child care, and health concerns continue as COVID-19 rates stay elevated. From a wage perspective, the average hourly rate for food manufacturing trails national and nondurable goods manufacturing.
However, the seasonally adjusted quit rate has increased an entire percentage point for nondurable goods manufacturers as of July 2021 compared to July 2020, according to the U.S. Bureau of Labor Statistics. The competition for labor is exacerbated when large companies such as Amazon or UPS are hiring, because they provide higher compensation than the typical private manufacturer or distributor. Some food and beverage manufacturers and distributors are increasing wage rates for employees willing to work the third shift or providing incentive bonuses if they consistently show up for work five days a week. These types of incentives can be problematic and expensive, especially for companies with a mix of new and long-term employees. In addition, wages are not the only factor in attracting and retaining talent. Employers need to set clear expectations in job descriptions, establish an effective onboarding process and, most importantly, be willing to train employees for an evolving marketplace.
Logistics costs will continue to move upward
While most industries have exposure to the global shipping container disruption, systemic infrastructure and economic challenges mean logistics costs for food and beverage companies may be a permanent challenge for the sector. Consumer preferences, which prioritize fresh or frozen products and delivery services during lockdowns, further exacerbated the limited cold-storage warehouse and logistics availability in the United States.
Through August the producer price index for refrigerated warehouse was up 7% over prior-year levels compared to just 3% for general merchandise warehousing. The impact on ground transportation was even worse, with the average rate per mile for temperature-controlled trucking climbing 28% over the prior year and continuing to rise. Scarce speculative investment in cold storage and continued demand for grocery delivery in and around populated cities will keep rates high for the near term. The industry has begun to respond with a proliferation of investments in controlled environment agriculture, which allows produce to be grown closer to the end consumer, reducing the time and cost from production to table.
Food importers grappling with challenges surrounding container rates and lead times may see relief as container and port activity normalize over the next 12 to 18 months; however, global trade turmoil that existed prior to the pandemic will likely present added costs for imports in the near term as well.
Packaging becomes a bigger part of the conversation
While agricultural commodity pricing has driven up ingredient costs, energy and metal prices have fueled pricing for key inputs into widely used food packaging materials. Volatile energy prices and supply chain disruption have caused common packaging materials like high-density polyethylene and polypropylene prices to increase 97% and 160%, respectively, from a year ago on a per metric ton basis. Meanwhile surging demand for paperboard continues to drive up prices of more environmentally friendly packaging options. Prices for paper packaging products will remain elevated as food-at-home and e-commerce delivery demand is expected to last into 2022 and beyond. The number of mentions of packaging in quarterly earnings calls jumped from 48 in the second quarter to 73 in the third. Beverage makers may get temporary relief from the surge in aluminum prices as base prices cool; however, China’s limitations on smelters in the Xinjiang region may further disrupt aluminum supply, as the region provides nearly 20% of the world’s supply.
Consumer demand remains robust
In the last 12 months, the CPI rose 5.3%, its largest increase since 2008, according to the U.S. Bureau of Labor Statistics. The majority of food items experienced price gains for the 12 months ended in August, with center-of-the-plate proteins showing the largest increases. Of all food items, beef and veal presented the largest increase, at 12.2%. Food-at-home prices increased 3% year over year as of August, and food away from home continued a strong recovery with a 4.7% increase. Most notably, prices for limited-service meals—defined as pickup, takeout and delivery—increased 6.9% year over year in August.
Meanwhile demand for food products is still above pre-pandemic levels, and consumers’ habits continue to shift as they look for innovative offerings and are no longer buoyed by government stimulus. Consumers will spend on food, even with changing behaviors amid the pandemic recovery. According to Affinity credit card spending data, grocery spending remained 23% above pre-pandemic levels through September, and restaurant spending continued to tick upward despite challenges posed by the delta variant. However, even with the outsize demand, food and beverage businesses have been reluctant to pass along their proportional cost increases to the consumer.
Food and beverage companies will need to pass along price increases to stay profitable, but are concerned that they may lose customers if prices are too high. Before passing higher costs through to consumers, companies, including those in the middle market, should consider several factors—including the competitive landscape, product upselling potential and volume variance due to product promotion.
There is an assumption that if food prices are too high, consumers will trade down and purchase less expensive private label products. However, higher wage earners are more attracted to national brands than private label, so raising prices may not automatically translate into consumer substitution.
Consumer reaction to price increases also depends on product type. For instance, according to annual IRI data for the period ending Sept. 5, sales of national brands outpaced private label for beverages, meat and frozen foods. At the same time, traditionally organic and sustainably produced food and beverage products usually command a higher price. Mid-pandemic, consumers are increasingly responding to a personalized buying experience and are also willing to spend on products from companies that demonstrate a strong environmental, social and corporate governance commitment.
Managing these rising costs takes an innovative, data-driven approach. Being able to tap into your consumer data and insights regarding shopping patterns and household income will provide a more targeted and profitable pricing and promotion mix.
Rising costs set the table for meat alternatives to thrive
Surging costs plaguing supply chains across the traditional food and beverage sector have set the table to accelerate adoption of plant- and cell-based meat alternatives in U.S. households.
Consumers have moved past trial use to full adoption in light of surging meat prices and availability. Even as consumers return to more normalized shopping habits, meat-alternative prices increased only 3.6% through September compared to the rising CPI for most meat categories.
A proliferation of meat-alternative brands and product innovation has further increased adoption and kept prices low by increasing competition. According to a July survey conducted by IRI, approximately 17 plant-based alternatives are available in the fresh section of grocery stores nationwide compared to just nine options available a year ago. Continued innovation in the area is expected, as the category has tremendous opportunity. According to a Bloomberg analysis, the plant-based meat retail market could total $28 billion by 2025, capturing 2% of the overall meat market.
Consumer flexibility has led retailers and restaurants to focus their operations and delivery on agility to reopen and recover.
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