4 key business issues driving food and beverage companies

What issues and opportunities are in store for middle market food and beverage businesses this year?

Anticipating consumer preferences

Consumer preferences and behaviors changed during the pandemic and will continue to evolve in 2022.

Consumers have shown interest in premium products, often seeking out natural and immunity-boosting ingredients; they will remain interested in this trend this year. Likewise, the plant-based movement continues to grow. Consumer demand has led to a proliferation of plant-based items in frozen and refrigerated sections. More competition in the plant space will help keep price increases in check and will be an important catalyst to achieving price parity with traditional meat.

Food and beverage companies are increasingly looking toward high-frequency consumer data to anticipate shifts in consumer preferences, drive innovation and understand the effectiveness of marketing and promotional strategies in real time. Tracking price elasticity will be an important theme as companies in this sector find themselves caught between rising costs on the supply side and consumers’ tightening wallets.

Understanding supply chain data analytics is also key for food and beverage companies in 2022. Analysis and supply chain management provide companies with the flexibility to pivot as consumer preferences shift. Companies have learned a great deal from the challenges brought on by the pandemic; in particular, they have recognized the importance of quick transitions to other channels and implementation of new systems to improve effectiveness and efficiency.

Finally, consumer price sensitivity will require continued assessment by food and beverage companies. Price increases may nudge consumers to search out private labels and value brands to take advantage of lower costs, an opportunity benefitting manufacturers serving private label brands. In turn, this interest could drive increased deal activity for these private label manufacturers.

Meeting safety and transparency needs

Ethical sourcing and the ecological effects of food production remain in focus as our environment is the responsibility of all. With today’s instant access to information, consumers are increasingly interested in ingredients and processes, and are more willing to pay a premium for authenticity and sustainability. Likewise, it will be more important than ever for food and beverage companies to pinpoint health and safety issues immediately. Technologies like blockchain will continue to gain traction, driven by both compliance demands and consumers’ focus on transparency.

Middle market food companies will need to be mindful of waste reduction as consumers demand sustainable, transparent production and packaging for the products they purchase. Regenerative farming practices, upcycling, biodiversity, and organic farming and food production will also continue to rise due to consumer demand. However, speed-to-market, quality control and safety must all be a part of this process; margins and profitability should be weighed, too, as these are essential to success.

Managing rising costs

In 2022, persistent challenges include a tightening labor force with associated cost demands, the rise in e-commerce and strains on trucking capacity, higher shipping costs, new cost pressures on the horizon from geo-political discord and impending La Niña weather events. To offset escalating costs, middle market food and beverage companies recognize passing increases to customers is only one part of the solution.  Many will need to take a phased approach to passing costs on, some now, perhaps some in six to 12 months. In addition, leveraging a tailored digital strategy to optimize operations and offset the impact of rising costs is a must for growing organizations.

With packaging, storage and transportation costs expected to continue to climb, middle market businesses should be looking toward labor-enabling technology that will allow them to get more productivity out of their employees. This could come in the form of warehouse and production automation on the floor and demand-planning tools in the back office to help navigate volatility in production and find efficiencies in distribution. Manufacturers should explore labor-enabling technology and distributors should evaluate the efficiency of their logistics footprint. Other creative solutions to retain labor could be nonmonetary, such as cross-training, upskilling and flexible work schedules.

Eyeing acquisitions

While on-trend food and beverage companies are still attractive to both private equity firms and large brands, in 2022 the mergers and acquisitions landscape will be smaller with a focus on add-on acquisitions that provide additional market share or entrance into new segments rather than multibillion-dollar, debt-heavy mergers. Companies may undertake acquisitions in segments that have better prospects, such as businesses offering health foods, snack bars and ready-to-eat meals, even if they’re outside their traditional business. The most attractive brands are those with strong consumer followings that can scale easily.

In addition, there will be opportunities for middle market companies to find under-served categories and branding opportunities to differentiate and fill in the gaps where bigger brands may be forced to scale back SKUs—stock keeping units. Also, some companies will look to spread their investments across smaller brand acquisitions to round out product and geographic portfolios versus investing in their own research and development to help save time and money, as well as reach new consumers.