What is the environment in which food manufacturers have been operating?
Since the COVID-19 pandemic, businesses and consumers across the globe have steadily been facing an increase in inflation. Over the past year, food manufacturers have, for the most part, been able to pass inflationary pressures on to retailers and their consumers.
Food inflation in the UK is up 18.3% year on year according to the latest figures. While this is down slightly from the previous month, the average family in the UK is still spending roughly £1,000 more on their annual grocery spend compared to last year. Food prices have been rising at a slower rate in the U.S., but costs are still on consumers’ minds, rising by 6.7% over the last year and are also much higher than they were pre-pandemic.[1] However, the inflation spike that has plagued pockets around the world has likely now peaked and will begin to come down.
This economic shift will go hand in hand with a shift in consumer behavior. As the tides change, food manufacturers are facing a “perfect storm” of headwinds that will play out over the next six months.
So, what are the challenges?
Challenge 1: A change in consumer habits
The first main challenge that food manufacturers will face in light of this economic shift is a noticeable change in consumer habits. The cost-of-living crisis has revolutionized the way the average British consumer goes about daily spending, and consumers in the UK are now budgeting better and buying less. This is mirrored in the U.S., as despite an uptick in consumer confidence, spending has declined across demographics for the first time in more than two years.[2] As inflation begins to come down and change in consumers’ pockets grows, frugal spending looks as though it is here to stay.
In addition to new spending habits, consumers are also becoming increasingly focused on sustainability and their waste outputs. To ensure that money spent on food is not wasted, consumers are purchasing more wisely, including only necessary items in weekly shops to avoid throwing away unused items, with some turning to frozen food over fresh to reduce waste.
These changes in consumer spending habits will result in less volume going through manufacturing plants, therefore leading to an increase in cost-per-unit.
Challenge 2: Increasing demand for sustainability
Sustainability is becoming increasingly prioritized for consumers and businesses alike around the world, and rising pressures in ESG markets are forcing food manufacturers to reassess their sustainability agendas and commitments. Recent research into consumer packaged goods in the U.S. has shown that products making ESG-related claims averaged 28% cumulative growth over the past five-year period versus 20% for products that have made no such claims.[3] Food manufacturers will have to consider aspects throughout their entire supply chain, from the packaging they are using to the transportation of their products, all of which bear additional costs.
Along with an audit of their sustainable practices throughout the supply chain, manufacturers in the EU and UK are also faced with the upcoming “Extended Producer Responsibility” regulation, which is due to be introduced in early 2024. This legislation aims to protect the environment by modifying existing Packaging Waste Regulations, shifting the full net cost of managing packaging to producers, and is poised to cost the industry in the UK between £10-15 billion of spend.
Challenge 3: Remaining competitive on cost
As food manufacturers continue to shift and adapt to less volume, grocers will start looking to manufacturers to activate more price investment to ensure products remain competitive. These new industry demands will begin to accrue new costs for manufacturers over the next several months, resulting in a significant increase to their existing cost lines.
To maintain profitability – as these new costs begin to take effect – the focus will need to shift towards saving their way to their P&L rather than growing to their P&L.
What can you do to mitigate these challenges?
To mitigate these challenges and remain successful as they begin to hit the industry, it’s imperative that organizations identify inefficiencies in their spend.
At Proxima, we start our projects with a comprehensive diagnostic phase that analyzes the inefficiencies of purchasing. Framing costs as ‘good costs’ and ‘bad costs’ allows organizations to be laser-focused on mitigating ‘bad costs’ throughout their systems. Solutions to these problems may include changing the location of your supply chain to reduce the costs involved with getting products in or changing packaging options to use fewer materials.
These new economic pressures and changing consumer behaviors are destined to impact all organizations, regardless of their size. If the summer months are used wisely, organizations may be able to proactively escape the brunt of these impacts. The alternative may see organizations taking a 2 – 3% hit in profitability.
If you’d like to speak to one of our consultants about what we are seeing in the market, please get in touch today.
[1] https://www.nytimes.com/2023/06/13/business/food-prices-inflation-may.html [2] https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/a-monthly-update-on-the-state-of-the-us-consumer [3] https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/consumers-care-about-sustainability-and-back-it-up-with-their-wallets
