Choosing the most important trends affecting the food and beverage industry is a daunting and, to be honest, utterly subjective task.
That said, Food Processing has drawn on our past coverage, consulted industry observers, and dusted off our crystal ball to identify five trends that we feel are likely to have a lasting effect on the industry in 2020 and beyond:
- Manufacturing Labor
- Trade climate
- Regulatory prospects for cannabis components
- Strategies for product innovation and specialization
- Increasing importance of transparency and traceability.
Read below for our predictions for 2020
Labor
One of the biggest ongoing challenges to the food and beverage industry is the availability of labor. It’s part of the larger picture of manufacturing in general dealing with a shortage of workers. According to an estimate from Deloitte and the Manufacturing Institute, as many of 4.6 million industrial jobs might go unfilled over the next decade or so, due to a combination of retirements and new jobs created by industrial growth.
Several factors come into play, including the decline in America’s working age population; the current hostile political climate towards immigration, which has traditionally provided much of the food industry’s workforce; and the difficulty, especially in times of low unemployment, in attracting young people to jobs in food plants, which often tend to be unpleasant work environments (noise, heat or cold, odors, etc.).
Another complicating factor that especially applies to the food and beverage industry is small margins and enormous pressure to keep down prices – and, therefore, production costs. This counters, and often overwhelms, upward pressure on wages.
But in the long term, the upward trend for wages needs to prevail, says Elizabeth Crofoot, senior economist with The Conference Board.
“There’s this perception that rising wages are a bad thing for business,” Crofoot says. This isn’t necessarily true, even in the short term, if productivity increases along with wages, through automation or other means, she says: “As long as there are increased efficiencies and productivity keeps moving along to offset increases in wages, then it can be a sustainable path.”
When it comes to the labor pool, quality is a challenge along with quantity. In terms of education, literacy and sometimes just plain attitude, many potential workers leave something to be desired. That leaves companies to pick up the slack, Crofoot says, through training, both internal and external.
“Hiring managers are having to decrease their hiring criteria in order to get more people through the door,” she says. “So it’s a combination of reducing the skill and hiring requirements, but making up for it through additional investments in training.”
Smithfield Foods is embarking on an ambitious program to close what it sees as an impending skills gap. It is partnering with Wayne Community College in Goldsboro, N.C., and next year with Metropolitan Community College in Omaha, Neb., to train workers for a variety of roles that include maintenance, welding, electronics and computer technology.
“In the next 10 years, more than 60% of our technical staff will likely retire, leaving a shortage of maintenance workers and other technicians,” says Lisa Swaney, Smithfield’s chief human resources officer.
“Additionally, as technology advances, we will need to equip our employees with new and refined skills.”
Trade
Perhaps no presidential administration in recent history has been as disruptive to foreign trade as the current one. This has had big implications for the food industry, since food, as a major American export, is a primary target for retaliation.
The striking thing about President Trump’s trade wars has been their inconsistency. Trump will plunge markets into turmoil with a tweet declaring a tariff on one thing or another, only to backtrack soon after. For instance, he enacted tariffs of 10% on imported aluminum and 25% on imported steel in early 2018, sparking retaliation against American food commodities, but removed it for imports from Canada and Mexico two months later.
In theory, tariffs on American food exports by overseas trading partners should increase the domestic supply and drive prices down. But the quick changes in the trade situation mean that processors, as well as retailers and consumers, can’t count on such a direct cause and effect. This constant whipsawing makes it hard for food companies to plan, says Derrell Peel, a professor and livestock marketing specialist at Oklahoma State University.
“The biggest theme that runs across everything I see is basically uncertainty,” Peel says. “Uncertainty takes a toll in markets. Markets don’t like uncertainty, and I believe that in a lot of cases there is a sort of risk premium that ends up hurting the markets when there is uncertainty.”
To further complicate matters, China, the most prominent antagonist in Trump’s trade wars, is over a barrel, at least with respect to meat imports. African swine fever has wiped out an estimated 40% of China’s hog herd, its primary source of protein. Presumably for this reason, China announced in September that it would exempt pork, as well as other agricultural products, from retaliatory tariffs that it had imposed last year. China also reversed a four-year-old ban on American chicken in October.
In its turn, the Trump administration in mid-December deferred tariffs it had threatened on $160 billion worth of Chinese goods and cut in half established tariffs on another $100 billion worth.
“We’re kind of a last resort because of the tariff situation, but they don’t really have a choice,” Peel says of China.
Ultimately, at least with meat, demand from China might very well end up reversing any increase in the domestic supply – and therefore, any price advantage that processors might have enjoyed.
“I’ve been telling my audiences that we have this huge, record supply of pork coming in 2020, but despite that, bacon’s probably going to get more expensive,” Peel says.
Cannabis
One of the biggest changes in the American consumer goods sector over the past few years has been the advent of various forms and components of cannabis. The pace has accelerated, with Michigan and Illinois joining, in the last few months, the list of states where recreational cannabis is legal, bringing the total to 11 (plus the District of Columbia).
The cannabis market, of course, extends beyond recreational use. Its biggest potential lies in the use of cannabidiol (CBD), a component that doesn’t induce a high but is widely believed to have benefits including relaxation, alleviation of anxiety and pain relief. CBD has appeared in products ranging from beverages and candy to pet food, as well as many supplements and tinctures, and even personal care products like lotions and soaps.
But the legal situation for CBD, and cannabis in general, is as hazy as a cloud of marijuana smoke. And until it clears up, the market will be significantly handicapped.
The immediate problem with CBD as a food or beverage ingredient is that the FDA has consistently refused to designate it as such, instead treating it as medicine. It has sent warning letters telling manufacturers to stop using it in consumable products, with 15 such letters going out last November.
“They view CBD as drug ingredient, not a food ingredient,” says Jonathan Havens, a former regulatory counsel with the FDA. “So I’m wondering if what they’re saying is that unless and until FDA issues this as a regulation allowing this as a food ingredient, there’s really no viable path, on your own, to seeking declarations of being a permissible food ingredient.”
It’s more complicated than that. The FDA’s warning letters have been sent to marketers who made some of the more outré and unsubstantiated claims for CBD, such as that it can help with autism. The agency has seemed inclined up until now to leave marketers who make more modest claims, about things like “relaxation,” alone, says Havens, who is now co-chair of the Cannabis Law practice at Saul Ewing Arnstein & Lehr.
“There obviously is a very huge CBD industry that sells products as food and supplements and beverages, and the FDA has not policed the majority of the industry,” Havens says. One possible outcome, he says, is that established marketers of CBD products will be left alone as long as they don’t make excessive health claims, but new entrants may be reluctant to enter the market.
Owen Bennett, an analyst with Jeffries, told Bloomberg that he predicted retail sales of CBD products at just $3.5 billion in 2022, compared with previous estimates as high as $22 billion.
The legal uncertainty is, in a way, a reflection of the larger legal ambiguity regarding marijuana, which is still listed as a Schedule I controlled substance by the federal government.
“I do not think that cannabis will move out of Schedule I anytime soon,” Havens says. “And by that, I mean at least a couple of years.” This situation will have long-term inhibitory effects on the cannabis market, in areas like research, investment, taxation, banking, real estate and intellectual property.
Innovation/specialization
Like every industry, food and beverage is always looking for the Next Big Thing. But innovation is challenging in an industry that depends on high volume, produced on big, expensive equipment. It’s especially challenging for large companies, which often have bureaucratic chokepoints.
That’s why many recent successful innovations have been introduced to the market by small, entrepreneurial companies. According to IRI, more than $17 billion in consumer package goods sales have shifted from large companies to smaller ones since 2013. Such companies also are better at appealing to premium and other niche markets.
Larger companies have been coping in several ways with this form of competition, called “challenger brands” by Kent Stones, senior director of business and brand strategy for brand development firm Signal Theory.
“Many large food companies are responding to challenger brand success by purchasing those challenger brands or by introducing their own brands that look and feel like an up-and-comer,” Stones says.
Perdue Farms, for example, has a Perdue Premium Meat Company business unit comprising high-end acquisitions; its latest was Panorama Meats, the nation’s top producer of grass-fed beef, in May. Other examples in 2019 include PepsiCo’s recent acquisition of BFY Brands snack foods, Boston Beer’s purchase in May of Dogfish Head Brewery, and Constellation Brands’ acquisition in April of a minority stake in Mezcal El Silencio.
Stones cautions that a bigger company that buys a smaller one doesn’t automatically inherit its goodwill and loyalty.
“Consumer support of a challenger brand can easily shift when the consumer discovers their preferred brand has a new, larger owner,” he says. “Within our study, consumers indicated they might continue to purchase small brands after they are acquired, but they might also think less of the brand than they previously did.”
Many of the big players have gone beyond just looking for innovative or specialized companies; they’ve established investment units to try to start their own. Processing companies with such investment arms include General Mills, Kraft Heinz, Campbell Soup, Tyson Foods and Barilla Group.
Arthur D. Little has developed a strategic model that it says takes the investment-arm concept one step further. Called the Breakthrough Innovator (BI) model, it basically separates the process of developing a new product, or even a new business, from the main business structure, in some cases by actually relying on an external partner. The development team, whether internal or external, has contact with the mainstream business only at certain well-defined points, and otherwise has total ownership of the development process, from conception to testing and scaleup.
“The BI model is based on a systematic approach to deliver major new growth, not just a number of ‘bets’ which may or may not come to anything,” says Rick Eagar, managing partner at Arthur D. Little.
Transparency/traceability
One ongoing imperative for food companies is transparency – the knowledge of where food comes from. Closely related is traceability, the means of knowing where food comes from.
The appeal of transparency and traceability is rooted in trust, or lack of it, by consumers. This has long been a special problem for larger processors.
“Lack of consumer trust is not a new problem for Big Food,” says Stones of Signal Theory. “What has been remarkable is the precipitous decline in trust over the last five years. Consumers have become increasingly disconnected from food production, and as a result have less knowledge of food and how it is produced.”
Broadly speaking, transparency and traceability have two basic appeals. They reinforce authenticity, for quality claims such as regional origin, aging and other production methods, animal feeding and treatment, and many others. And they add to safety by allowing contamination and other problems to be traced back and pinpointed. (The two intersect when it comes to weeding out and tracing counterfeit products.)
Arguably the most prominent up-and-coming traceability technology is blockchain, a distributed system that uses encrypted data to create an unalterable record of transactions and other information, accessible only to a designated network. One of its biggest uses in food is to pinpoint, with unquestionable accuracy, the origin and movement of products through the supply chain.
“Blockchain is the primary technology being used to drive transparency and traceability across the supply chain, be it food or any other CPG product,” says Barb Renner, U.S. consumer products leader for Deloitte. Renner identifies potential advantages of blockchain that include what Deloitte calls “business-centric use cases,” such as product authenticity and origin, delivery, and recalls, and “consumer-centric use cases,” which include accessing product information, payments and loyalty programs.
More generally, transparency can come through technology that allows consumers to access information about their food’s origin and other aspects through codes on their packaging, usually via smartphones. For example, Fishpeople Seafood, a processor of frozen and ambient seafood products based in Portland, Ore., includes codes on many of its products that, when entered into the company website, give a “backstory” of the product’s origin. Other such information includes recipes, discounts and coupons, and even discussion boards where real consumers can ask questions and receive answers directly from the company.
“Smartphones are a critical conduit to that information,” Stones says. “Food company leaders should consider the smartphone as a real-time window into their practices. If companies don’t provide access to that information someone else will, and it stands a really high chance of being incomplete at best and misleading at worst.”
