December 27, 2021

How Food and Beverage Companies Are Meeting Continued Challenges

By Jessica McCauley, Director, Managed Services & Consulting

How Food and Beverage Companies Are Meeting Continued Challenges Food & Beverage

The food and beverage industry has experienced rapid changes in recent years, and those changes were only accelerated by the COVID-19 pandemic. According to the Manufacturing ISM Report on Business, the food and beverage sector was one of 13 manufacturing industries reporting growth as of November 2021. However, that growth will continue to be challenged by labor shortages, supply chain disruptions, hiring difficulties, and turnover challenges as food and beverage companies continue to see high consumer demand.

Change in Consumer Behavior

The disruption facing the food and beverage industry pre-COVID began as a result of fundamental shifts in consumer preferences and behaviors toward food. Consumers were increasingly focused on eating healthier, and they were looking for food with fewer ingredients, transparent labels, and customizable options. Consumers were more frequently buying foods that were better for the environment, from meat alternatives to foods delivered in reusable/recyclable packaging. Meat alternatives have been growing in sales compared to conventional meat, as have non-genetically modified organisms (non-GMO) foods. According to SPINS retail sales data released in April 2021, demand for vegan meat increased 27% from 2019 to 2020. According to the Non-GMO Food Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026, non-GMO foods are forecast to grow nearly 16% from 2021-2026.

The onset of the COVID-19 pandemic caused further shifts, many of which are expected to remain long term. With the government-mandated closure of restaurants, and as a result of a general fear of contracting COVID-19, consumers flocked to grocery stores to purchase all their food and began eating at home more often.

The desire for convenience and stay-at-home requirements also fueled an increased demand for food delivery. There has been a huge increase in direct-to-consumer subscriptions like home preparation meal kits and grocery delivery services. According to research by Accenture, among new or low-frequency e-commerce shoppers, online purchases of food to cook at home rose by 333% during the pandemic. COVID-conscious consumers are also demanding better packaging, such as individual bags for snacks rather than large bags meant for sharing.

Consumers have historically had low trust in companies when it comes to food safety. As a result, food and beverage companies incur additional operating costs to ensure that food is fresh, high quality, safely delivered, and packaged in sustainable materials. The increased desire for home delivery also required companies to spend more money on packaging to accommodate ice packs and insulated bags. Carry-out and deliveries from restaurants also increased substantially during the pandemic.

These shifts in consumer behavior impacted the food and beverage industry in several ways. First, many food companies (particularly those in consumer packaged goods) that experienced flat growth for years, and that were focused on cutting costs and even closing factories, began to see increased sales and the need to expand their manufacturing footprint. According to the chief economist at Dodge Data & Analytics, in the first seven months of 2021 construction activity in the manufacturing sector was up 40% over 2020, and food and beverage was one of the three most active business areas in industrial construction. Companies also had to re-evaluate their supply chains to meet the new consumer preferences for customized products, home deliveries, and shipment tracking. Grocery stores needed to pivot to ensure their shelves were stocked sufficiently to meet the demands of consumers now choosing to cook at home.

Food and beverage companies have met significant challenges in adapting to these changes in consumer demands, including supply chain issues such as raw material supply shortages, worker shortages, and refrigerated truck shortages.

Shortage of Workers

Due to a combination of factors, including fear of contracting COVID-19, lack of childcare, and age of workers, the industries worldwide are struggling with a lack of workers. In the food and beverage industry, worker shortages in lower-wage positions are impacting the entire supply chain, from the farms and food processors to grocery stores, delivery drivers, and warehouse staff.

In the food and beverage industry, the shortage of truck drivers is especially significant. The sudden increased demand for home delivery and direct-to-consumer models resulted in a much higher demand for truck drivers. Making the shortage worse is the fact that close to a third of drivers on the road are over age 55, according to the American Trucking Association, which does not bode well for the future. The truck driver shortage isn’t expected to improve significantly in the near future. The shortage is causing major problems in the supply chain, from rising costs to inconsistent deliveries to spoiled products.

Worker shortages at shipping ports, warehouses, and fulfillment centers are also creating a need to redirect inventory.

Shortage of Commodities and Raw Materials

In addition to the shortage of workers, food and beverage companies are facing challenges stemming from a shortage of basic construction materials, such as lumber, metals, plastics, and resin. The shortage of raw manufacturing materials hinders construction projects that are necessary to expand factories and accommodate the growth that many food and beverage companies are experiencing.

There have also been shortages in other key supplies, including packaging materials, pallets, and glass bottles.

Finally, there have been shortages and inconsistent deliveries of fertilizer and pesticides, which could affect the supply of fruits and vegetables not only for this growing season, but also for next year. Fertilizer costs have increased 35% year to date, and pesticides have increased 25% according to the Southern Valley Fruit and Vegetable Executive Officers.

Plans to Face These Challenges

Food and beverage companies have discovered that successfully facing these challenges requires more significant efforts to retain employees, expand and diversify the supplier base, and embrace new technology.

Employee Retention

Many companies, including those in food and beverage, are realizing that to retain and recruit more employees, they have to start treating them better. Increasing wages, improving health and other benefits, and ensuring a safe work environment are all critical to remedying worker shortages. All of these factors should help ease the worker shortage over time.

Vertical Integration and Expansion/Diversification of Suppliers

The supply chain challenges are causing some food and beverage companies to think more about opportunities for vertical integration. An example of a vertically integrated company in the food and beverage industry is Shoreline Fruit, an organization that includes growers as well as dryers, pitters, packers, freezers, and storage facilities. Vertical integration creates trust and transparency with consumers.

Prior to the pandemic, the focus was often on keeping inventory levels as low as possible. Given the supply chain issues, companies are rethinking their investment in working capital and considering raising inventory levels. Companies are also thinking ahead to 2022 and ordering what they may need from suppliers well in advance. In addition, companies are spending more time considering “nearshoring” or keeping their inventory closer to where consumers are located. Finally, companies are also working with larger pools of potential suppliers and are considering decentralizing production locations.

Embracing Automation and New Technology

The pandemic made it apparent to many companies that their factories were long overdue for modernization. The labor shortages have pushed many food and beverage companies to seriously consider the need to automate processes and embrace technology upgrades. Automation can perform tasks in place of a human worker when a human cannot be found, or when it’s a task that a human would not want to do — and it can often do it in a more sanitary and efficient way. Automating low-wage employee tasks allows companies to meet customer expectations despite lower staffing.

As a result of supply chain issues and changing consumer demands, food and beverage companies are also improving systems for data analytics, as well as warehouse management systems, transportation management systems, and order management systems. Companies want to ensure demand forecasting is accurate and data and information systems are in sync, and that data is available to help leaders make decisions in real time. Shipment tracking systems in trucks are also getting a high-tech upgrade as consumers demand the ability to track food shipments real time.