Economic uncertainty and sticky inflation have left food and beverage companies dealing with more price-conscious consumers who are reluctant to spend top dollar at the supermarket before seeking out lower priced options. Securing strong profits while establishing growth has proved challenging for businesses up and down the supply chain as labor, logistics and other input costs remain high compared to pre-pandemic costs. 

While the Federal Reserve’s battle with inflation is yielding progress, food and beverage prices remain elevated. Inflation of prices for food at home and food away from home has slowed compared to previous 12-month highs but remained elevated in July at 3.6% and 7.1% year over year, respectively.

Consumers search for affordability 

Consumers’ sensitivity to these price levels remains evident in their buying habits. Their shift to private label products has continued as they seek less expensive alternatives to pricier national brands. They’re also paying closer attention to where they shop. Consumer purchases of food products at dollar store locations and mass merchandise stores, often seen as cost-effective alternatives to more expensive options, experienced healthy growth through the three weeks ending July 16 compared to the same three-week period a year ago, according to Circana market data. The increased traffic at more affordable retailers is not limited to lower-income households, either. In a study of retailer foot traffic, for the first half of 2023, InMarket found a 4% average increase in the number of visits to dollar stores by those making $100,000 or more compared to the second half of 2022. 

While consumers have remained largely resilient through the first half of 2023, constrictions of disposable income and price sensitivity have influenced consumer shopping trends. Despite strong year-over-year growth in nominal spending on food and beverage for both on-premises and off-premises consumption, real spending continues to dwindle in comparison. Retailers that benefited from price increases more readily acceptable by eager post-pandemic consumers will now face a more price-restrictive environment where costs are more difficult to pass on to customers. Inflation may be easing, but the high prices of the past two years appear to be having a lasting impact on consumers. The search for value has become a staple across income brackets—visible in the growing popularity of more affordable private label brands, selective behavior related to shopping locations, and the hunt for promotions. 

As consumers focus on their quest for lower prices, some big-box retailers have contemplated price reductions on household food products. While this is welcome news to consumers, it is very unwelcome news for suppliers attempting to recover and restore profitability. Some household names have already committed to forgoing price hikes through the end of the year, placing more pressure on food and beverage suppliers as they struggle to absorb decreased margins and wrestle to compete. 

High costs and promotional activity challenge profitability 

Unemployment rates have remained steady in recent months while labor costs remain strong, especially in the food manufacturing sector, where wages have increased roughly 5.3% year over year through July, outpacing the wage growth of 4.4% for all employees. Transportation and warehousing costs have also been normalizing but remain elevated compared to pre-pandemic levels.  

In addition to managing elevated costs, many retailers have been forced to increase promotional activity to encourage volume growth and remain competitive while catering to more frugal consumers. Food and beverage companies will need to balance higher costs and pricing pressure from retailers while simultaneously maintaining profitability and focusing on growth. According to Circana, both promotional depth and promotional intensity have increased for many food categories surveyed in the three weeks ended July 16, 2023. In an effort to reclaim market share, retailers are deploying more promotional programs that lead to more items purchased at a discount compared to the same period a year ago. While necessary to establish volume growth, promotions have been mentioned by several retailers during earnings calls as a challenge to profit margin.

Many middle market brands that emerged during the pandemic will struggle to find a place in a more frugal consumer’s pantry. The success of these brands will rely on establishing agile infrastructure and processes that can quickly adapt to changing consumer preferences while growing market share and maximizing profitability. Food and beverage companies will need to focus on establishing efficient operations through data-driven strategies, and the adoption of technology to streamline logistics operations and bring efficiency to the supply chain, thus limiting costs. 

 Establishing efficiency through innovation

Supply chain woes during the pandemic left suppliers reeling for months before they finally experienced relief and turned their attention to recovering lost profitability. As businesses cope with cost-conscious consumers and uncertain economic times, they should look to artificial intelligence and first-party data to better identify inventory trends and implement process automation to maximize efficiencies.