A Model of Success: One Company’s Approach to Navigating Labor and Supply Chain Disruptions
By Timothy W. Dufficy, Senior Associate, Managed Services & Consulting
The challenges facing the food and beverage industry vary depending on factors such as type of business, location, and other industry-specific influences. From labor shortages to price increases, a range of complex and interrelated issues confront F&B businesses.
One regional food manufacturer we will call “XYZ Food” provides a model of how F&B companies can successfully navigate these waters to protect and preserve their businesses.
Despite the challenges of COVID-19, and now facing subsequent industry-wide price increases from wholesale suppliers due to supply chain disruptions and resurgent inflation, XYZ Food managed to grow its footprint in the industry. How did they do it?
Several factors have contributed to labor shortages over the last few years. According to the U.S. Bureau of Labor Statistics, over 47 million Americans voluntarily quit their jobs in 2021 alone, largely due to COVID-19.1 Some of the highest quit rates were in the food and beverage industry, with the majority of the labor pool moving to other sectors or shifting to remote work opportunities.
To address this issue, which crippled many F&B companies, XYZ Food instituted salary and wage increases in order to retain workers. From 2020 through 2022, XYZ Food increased their employee salary and wage expense by approximately 19%. Fortunately, the company was able to maintain growth in revenues over this period, which proportionally offset its higher wage expense, mitigating any potential decreases in profit margin.
As industry-wide labor shortages continue to develop, businesses will need be creative in their procedures and processes to minimize the effects of increased labor costs.
XYZ Foods’ business model is heavily reliant on its wholesale dairy suppliers. From 2021 to 2022, XYZ Food experienced, on average, a 35% price increase in dairy costs.
Historically, XYZ Food has maintained a 45% gross margin on a go-forward basis. In the first half of 2022, the company saw its gross margin dip as low as 24% but maintained an average margin of approximately 33% during this period.
Management decided that in order to fully understand the market landscape, it would be wise to wait and evaluate how circumstances might change. By mid-year, the company decided to begin rolling out a series of margin-related price increases on its products, starting in June. Two additional price increases were executed in a staggered fashion between July and December in an attempt to normalize margins as dairy prices continued to fluctuate throughout the year.
As a result of its measured actions, XYZ Food was able to stabilize its margins at 41%, reaching as high as 43% in December.
Throughout this period of price increases, the company maintained its emphasis on strong customer relations, and as a result, its top line increased by 18% from 2021 to 2022.
Ultimately, the driving force behind XYZ Foods’ ability to compete in a very competitive industry has been its customer-centric approach and making sure the customer always comes first.
By the start of Q1 of 2023, dairy prices started to decrease. The company rode the storm in the first half of 2022 and is now reaping the benefits of its strong customer relationships and increased margins.
Should XYZ Foods ever entertain a potential sale of its business, the question for any buyer will be how much the company can declare as an addback to its bottom line in 2022 to restore margins to their historical value. Its decision to hold out on any reactionary price increases in the first half of 2022 could ultimately be a value-added factor if it ever entertains a potential buyout.
- Fuller, J., & Kerr, W. (2022, March 25). The great resignation didn’t start with the pandemic. Harvard Business Review. Retrieved April 5, 2023, from https://hbr.org/2022/03/the-great-resignation-didnt-start-with-the-pandemic