KANSAS CITY —The past two years have whipsawed food and beverage manufacturers. The rapid COVID-19 global shutdown followed by the brisk pace of markets reopening around the world have led to increased consumer demand and unprecedented supply chain disruptions. Subsequent inflationary pressures brought on by the pandemic and the war between Russia and Ukraine have left many executives wondering what normal may look like a year from now.
The most salient characteristic of 2022 has been inflation. Food and beverage manufacturers have noted with regularity that their cost of goods has exceeded internal forecasts. Many see such inflationary pressures continuing through the rest of the year and hope for easing during 2023. “Hope” is used as a qualifier because a new COVID-19 variant or an escalation of the Russia/Ukraine war or something else completely may lead to further global economic disruption.
Despite the sharp rise in inflation, demand for consumer staples appears to be holding up. Branded manufacturers have noted with some frequency elasticities remain below historical norms, particularly when compared to the Great Recession. There are some indications consumers are becoming more cost conscious as some branded companies feel pressure from private label, but many food and beverage chief executive officers have expressed confidence in their company’s weathering current economic conditions.
Supporting consumer demand has been the health of the American consumers’ pocketbook. COVID-19 stimulus funds combined with higher wages due to a tight labor market have allowed many people to continue spending even as inflation has reached a 40-year high. But the strength of consumer spending has been a double-edge sword.
Attracting and retaining employees in the current labor market has been challenging, to say the least, for most employers. Staffing shortages combined with the supply chain difficulties have forced most companies to scale back innovation and focus on keeping customers stocked with the fastest-moving stock-keeping units.
Manufacturers have responded to the macroeconomic issues buffeting the industry by pulling familiar levers like raising prices and improving efficiencies, and by investing in new capabilities like artificial intelligence (AI). The digitization of marketing, operations, purchasing and supply chain is allowing manufacturers to develop a more granular view of their business and make small but impactful changes. Amid ongoing macroeconomic pressures, greater use of AI gives manufacturers more insight and control.
Another tool used by management teams has been the divestment of non-core assets. Mondelez International plans to divest its developed market gum and Halls business, and TreeHouse Foods has put its Meal Preparation business under review. General Mills has been very busy on this front, divesting its Helper and Suddenly Salad businesses to private equity firm Kelso & Company, and it has divested its European Union Yoplait as well as its European dough businesses.
Terms most often used to describe current food and beverage market conditions include unprecedented and uncertain. Heading into 2023, many forecasts call for supply chain disruptions and inflationary pressures to ease. The new normal may see the extraordinary aspects of the past few years fade and leave operators to continue managing through uncertainty.