Overview: In this issue of Food For Thought, we examine inflationary pressures and supply chain disruptions in the food and beverage industry and the extent to which these issues are squeezing manufacturers’ and retailers’ margins—or being passed on to consumers. To better understand the dynamics among brands, manufacturers, and retailers, we also interview two sales and marketing executives to learn how price challenges are playing out in the food and beverage industry today.
- Several factors have caused food-related commodity prices to surge in 2021, including increased demand from China, tighter inventories due to extreme weather events, and speculation that the Biden administration may prioritize investment in biofuels. Supply chains are having difficulty returning to their pre-pandemic levels of performance as retailers and food manufacturers are dealing with rising freight and transportation costs. Food companies are also struggling to fully staff their workforces in the wake of the enhanced unemployment benefits and stimulus programs enacted during the pandemic.
- Food manufacturers and retailers can use several strategies to protect their margins in this inflationary environment. In addition to increasing prices, steps companies are taking include offering fewer promotional discounts, manufacturing and managing fewer SKUs, cutting costs and automating key functions, changing package sizes, stockpiling inventory as a hedging strategy, and highlighting private label’s value proposition.
- While inflationary pressures present challenges to CPG companies and retailers, these headwinds have not slowed the robust pace of M&A activity in the food and beverage industry. Similar to what we saw at the height of COVID-19, sellers and their advisors should spend more time on the front end of processes preparing to answer buyers’ questions about pricing strategy across channels. Potential sellers also should highlight their ability to grow revenue and enhance profitability over time through investments in growth and efficiency.