The US has gone through one of the most dramatic periods of change in its history. After coming out of the Great Financial Crisis (2007 and 2008), the US economy experienced, back to back, one of the longest bull markets (2010 to 2019) and worst pandemic shocks (2020 to 2022) in over a century. The food industry is now at a crossroads. Food manufacturers, foodservice operators and retailers alike face a new set of challenges: elevated inflation, financial instability, geopolitical risks, and economic recession. The consumer has also become more complex, making it more difficult than ever for companies to understand purchasing behavior.
What must food companies do to thrive in this “new normal”? This is a question I will address during a keynote presentation for SIAL America 2023 How companies act (or fail to act) will be the litmus test of long-term success or failure. Here are some of the key points that the entire food industry will need to consider over the next 12 months.
Optimized Framework for Understanding the Current Business Operating Environment
Most food industry leaders operate under a conventional set of assumptions: economy will “normalize,” inflation will go back to pre-COVID levels (i.e., +2% to +3%), and that geopolitical tensions will de-escalate over time. While this framework may have worked in the past, it lacks a holistic perspective on history, economics, financial theory, and human behavior. Consensus estimates from a majority of economists and financial pundits predict that the rate of inflation will return to “normal” over the next 12-24 months. What is often overlooked, however, is that the drivers of inflation are much more complex this time around. In fact, inflation has hit > 10% at multiple instances over the past 100 years as shown in the chart below.
Inflation over the Past 100 Years
How should food businesses operate in a sustained and elevated inflationary environment? What framework should management use to offset the impact of inflation, potential recession, and geopolitical shocks? What is needed is a new playbook—one that is hyper-focused on cost management and customer acquisition / innovation.
Building in Financial and Operational Flexibility
Given the potential risks mentioned above (i.e., economic recession, inflation, financial instability, etc.) food and beverage businesses need to build in financial flexibility to withstand potential shocks to their companies and the current economic environment. There are several tools available to companies:
- Raising equity and debt capital
- Lowering fixed and variable costs while maintaining (and growing) revenues
- Repositioning and retraining staff to support critical business units
- Leveraging data and technology (e.g., robotics, AI, etc.)
Being Hyper-Focused on Customer Acquisition & Innovation / New Product Development
For companies to succeed in the post-pandemic world, food industry leaders must have a solid understanding of megatrends impacting the food industry and the consumer. Having a sound framework will enable food industry leaders to develop a strategic path to innovation and growth. A short-term focus on “meeting budget” for quarterly meetings will ultimately lead to stagnation and eventually decline.
What are these megatrends? And how can food manufacturers, foodservice operators, and retailers develop strategies based on these megatrends? Here are 2 examples:
- Exponential Technological Change – Describes the disruptive nature that technology (e.g., AI, digitalization, robotics) has on the way consumers live and companies operate.
- Increasingly Dynamic Societies – Explores the patterns and behaviors of consumers from a demographic and psychographic perspective.
Companies that have a sound understanding of these megatrends will be better positioned to capitalize on growth and innovation.
A Call to Action
Food companies are facing a brave new world of challenges in this upcoming season. I liken the situation to a ship about to set sail in low-visibility weather, and in an ocean full of icebergs large and small. Businesses will need leaders and advisors with strategic mindsets to effectively navigate the complex waters. Furthermore, having the appropriate frameworks and insights will ensure that food companies will thrive in this new season.
About the Author
Brian Choi, CFA is Managing Partner and CEO of The Food Institute, a leading food and beverage media company focused on insights-driven content. The Food Institute also has an in-house Strategy & Insights Group that advises food and beverage companies on corporate strategy and insights.