Food & Beverage Midyear Update: Preparing for the Next Act
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The food industry recorded a strong performance in the first half of 2021. That’s largely because consumer spending on food remained robust during the pandemic, and the momentum has continued as more and more of society reopens. Clearly, the food sector most impacted by the pandemic was food service. But even those companies serving this sector quickly pivoted, working with grocery retailers to repackage and relabel food service products to be sold to consumers.
As the vaccine rollout has progressed, the food service channel is on a roll. Pent-up consumer demand has been leading to greater capacity in restaurants, hotels and other hospitality environments, as food service distributors work to replenish the supply chain.
The challenge for the second half of 2021 will be balancing the supply-demand dynamics of food at home versus food away from home. For more than a year, most of the action was on the retail side as consumers did not dine in at restaurants. But as we're gradually shifting back to more familiar patterns, the question becomes how companies balance production into those channels.
Confronting Industry Challenges
While there’s strength across the food industry, companies are certainly facing their share of challenges; however, the industry is showing its resilience and creativity in confronting these headwinds.
Labor is definitely the principal issue facing the industry. We’ve seen companies across the board reevaluating production runs and the types of products they make based on labor availability. Many protein processors, for example, don't have enough workers to perform labor-intensive processes such as deboning, which means they may be limited in which products to market.
Distributors are doing what they can to attract and retain workers and, specifically, drivers. We've seen some companies offer sign-on and retention bonuses, as well as focus on employee satisfaction by implementing shorter production shifts and more flexible hours.
Labor is a challenge that will likely continue through 2021, but companies are looking for ways to offset the tight market. Companies are building new facilities, for example, and investing in equipment and lines that are much more automated.
The labor market is also changing the way companies think about where to open new facilities. They’re prioritizing areas with a large available labor supply, which is leading some manufacturers and distributors to consider more urban locations for their new facilities. Changing demographics is another key. There’s been a large population shift to the Southeast and Southwest, and more food companies are considering building facilities with close access to those markets.
Downstream supply chain challenges continue to plague the industry. Think about the chicken sandwich war. Just about every quick-service restaurant has a new chicken sandwich these days. One major chain had to delay the introduction of its sandwich because the company couldn't get pickles. The pickles themselves weren’t in short supply; the pickle manufacturer couldn't source the packaging it needed to get the product out to all the restaurant locations. That’s an example of why I think we're going to see companies focus on building stronger relationships with their suppliers—one that’s focused more on reliable access and, perhaps, less on price.
The supply chain has long been built for efficiency and cost. Now, more companies are reconsidering that approach, building flexibility and redundancy into the system and keeping more inventory on hand. This will require companies to invest in working capital and perhaps larger capital investments. A panel at our recent Farm to Market Conference discussed how some processors, wholesalers and distributors are addressing the issue.
Companies also discovered that they didn't have control over their supply chains, so we're seeing a lot of interest in building cold storage and warehousing capacity. Because there's so much liquidity in the market, it's fairly easy right now for companies to source the capital required to invest in the construction of new plants and warehouses.
That type of investment, as well as higher labor and commodity costs, may result in margins getting squeezed a bit in the short term. What remains to be seen over the longer term is whether that translates to higher prices for consumers or fewer promotions from CPG companies.
Another potential headwind is the proposed change in the tax laws, both on the corporate and personal level; especially for privately-owned companies. BMO has been having a lot of conversations with clients about how they can prepare for these changes before they take effect. The impact could be significant, so we encourage clients to learn about the changes and talk to their advisers about if they can make any changes to soften the blow.
Emerging Trends
Consumer demand surged during the pandemic and has continued with the gradual easing of restrictions. Now that more restaurants are reopening their dining rooms, consumers haven’t necessarily been spending more on food, they're just spending their money differently. That said, we do expect to see a surge in demand on the hospitality side as people return to traveling. A pick-up in business travel will help tremendously, but we don’t know if business travel will return to pre-Covid levels as tools like videoconferencing and virtual events have altered the landscape.
Reliability, sustainability and traceability are all important, and we’re seeing companies invest in those areas, offering more transparency regarding where they're sourcing product as a way to attract consumers and differentiate in the marketplace. The current drought in the West has demonstrated just how fragile the supply chain can be, and that has a direct impact on the availability of certain goods.
Consumers also want to know what’s in their food, where it comes from, and how it was grown and produced. Traceability and transparency are not only necessary to satisfy consumers, they also represent a marketing opportunity as younger shoppers are looking for “food with a story.” One processor went as far as identifying the chicken that laid the eggs you were eating.
With the boom in e-commerce during the pandemic, using data analytics to map consumer buying patterns has grown in importance. That was already starting to gain traction, but the pandemic accelerated the trend of using data intelligence to make marketing more personalized and targeted.
Companies are also paying more attention to cybersecurity. We all saw the recent headlines about a major meat processor paying $11 million to ransomware hackers to prevent further disruptions.1 But large publicly traded companies aren’t the only targets; smaller companies have been targeted by ransomware hackers as well, and they’re paying ransom to hackers to retain access to their systems and data. I think we’ll see more companies ramp up their cybersecurity efforts to maintain the integrity of their systems.
The key for continued success through the remainder of 2021 and beyond is to invest in your business. Successful companies will invest in tools and capabilities to allow for more control of their supply chains, automation both for efficiency and to solve for labor shortages, and technology, with data analytics and cybersecurity going hand-in-hand. The food industry as a whole has been robust this year. But focusing on the consumer by giving them what they want, when they want and how they want it, in a very targeted and tailored manner will be critical for long-term growth.
1 Reuters 
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Erica Kuhlmann
Market Executive & Managing Director, Food, Consumer and Agribusiness Group
Erica T. Kuhlmann is a Managing Director and Market Executive of BMO Commercial Bank's Food, Consumer and Agribusiness Group. The Food, Consumer and…(..)
View Full Profile >The food industry recorded a strong performance in the first half of 2021. That’s largely because consumer spending on food remained robust during the pandemic, and the momentum has continued as more and more of society reopens. Clearly, the food sector most impacted by the pandemic was food service. But even those companies serving this sector quickly pivoted, working with grocery retailers to repackage and relabel food service products to be sold to consumers.
As the vaccine rollout has progressed, the food service channel is on a roll. Pent-up consumer demand has been leading to greater capacity in restaurants, hotels and other hospitality environments, as food service distributors work to replenish the supply chain.
The challenge for the second half of 2021 will be balancing the supply-demand dynamics of food at home versus food away from home. For more than a year, most of the action was on the retail side as consumers did not dine in at restaurants. But as we're gradually shifting back to more familiar patterns, the question becomes how companies balance production into those channels.
Confronting Industry Challenges
While there’s strength across the food industry, companies are certainly facing their share of challenges; however, the industry is showing its resilience and creativity in confronting these headwinds.
Labor is definitely the principal issue facing the industry. We’ve seen companies across the board reevaluating production runs and the types of products they make based on labor availability. Many protein processors, for example, don't have enough workers to perform labor-intensive processes such as deboning, which means they may be limited in which products to market.
Distributors are doing what they can to attract and retain workers and, specifically, drivers. We've seen some companies offer sign-on and retention bonuses, as well as focus on employee satisfaction by implementing shorter production shifts and more flexible hours.
Labor is a challenge that will likely continue through 2021, but companies are looking for ways to offset the tight market. Companies are building new facilities, for example, and investing in equipment and lines that are much more automated.
The labor market is also changing the way companies think about where to open new facilities. They’re prioritizing areas with a large available labor supply, which is leading some manufacturers and distributors to consider more urban locations for their new facilities. Changing demographics is another key. There’s been a large population shift to the Southeast and Southwest, and more food companies are considering building facilities with close access to those markets.
Downstream supply chain challenges continue to plague the industry. Think about the chicken sandwich war. Just about every quick-service restaurant has a new chicken sandwich these days. One major chain had to delay the introduction of its sandwich because the company couldn't get pickles. The pickles themselves weren’t in short supply; the pickle manufacturer couldn't source the packaging it needed to get the product out to all the restaurant locations. That’s an example of why I think we're going to see companies focus on building stronger relationships with their suppliers—one that’s focused more on reliable access and, perhaps, less on price.
The supply chain has long been built for efficiency and cost. Now, more companies are reconsidering that approach, building flexibility and redundancy into the system and keeping more inventory on hand. This will require companies to invest in working capital and perhaps larger capital investments. A panel at our recent Farm to Market Conference discussed how some processors, wholesalers and distributors are addressing the issue.
Companies also discovered that they didn't have control over their supply chains, so we're seeing a lot of interest in building cold storage and warehousing capacity. Because there's so much liquidity in the market, it's fairly easy right now for companies to source the capital required to invest in the construction of new plants and warehouses.
That type of investment, as well as higher labor and commodity costs, may result in margins getting squeezed a bit in the short term. What remains to be seen over the longer term is whether that translates to higher prices for consumers or fewer promotions from CPG companies.
Another potential headwind is the proposed change in the tax laws, both on the corporate and personal level; especially for privately-owned companies. BMO has been having a lot of conversations with clients about how they can prepare for these changes before they take effect. The impact could be significant, so we encourage clients to learn about the changes and talk to their advisers about if they can make any changes to soften the blow.
Emerging Trends
Consumer demand surged during the pandemic and has continued with the gradual easing of restrictions. Now that more restaurants are reopening their dining rooms, consumers haven’t necessarily been spending more on food, they're just spending their money differently. That said, we do expect to see a surge in demand on the hospitality side as people return to traveling. A pick-up in business travel will help tremendously, but we don’t know if business travel will return to pre-Covid levels as tools like videoconferencing and virtual events have altered the landscape.
Reliability, sustainability and traceability are all important, and we’re seeing companies invest in those areas, offering more transparency regarding where they're sourcing product as a way to attract consumers and differentiate in the marketplace. The current drought in the West has demonstrated just how fragile the supply chain can be, and that has a direct impact on the availability of certain goods.
Consumers also want to know what’s in their food, where it comes from, and how it was grown and produced. Traceability and transparency are not only necessary to satisfy consumers, they also represent a marketing opportunity as younger shoppers are looking for “food with a story.” One processor went as far as identifying the chicken that laid the eggs you were eating.
With the boom in e-commerce during the pandemic, using data analytics to map consumer buying patterns has grown in importance. That was already starting to gain traction, but the pandemic accelerated the trend of using data intelligence to make marketing more personalized and targeted.
Companies are also paying more attention to cybersecurity. We all saw the recent headlines about a major meat processor paying $11 million to ransomware hackers to prevent further disruptions.1 But large publicly traded companies aren’t the only targets; smaller companies have been targeted by ransomware hackers as well, and they’re paying ransom to hackers to retain access to their systems and data. I think we’ll see more companies ramp up their cybersecurity efforts to maintain the integrity of their systems.
The key for continued success through the remainder of 2021 and beyond is to invest in your business. Successful companies will invest in tools and capabilities to allow for more control of their supply chains, automation both for efficiency and to solve for labor shortages, and technology, with data analytics and cybersecurity going hand-in-hand. The food industry as a whole has been robust this year. But focusing on the consumer by giving them what they want, when they want and how they want it, in a very targeted and tailored manner will be critical for long-term growth.
1 Reuters
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