Strong data strategy can enhance value for food and beverage companies

Changing consumer preferences and price sensitivity emphasize need for infrastructure investment

The pre-pandemic era of low interest rates, ample labor supply and low inflation is behind us. Today, middle market food and beverage companies are challenged by the high cost of capital, high wages and rampant inflation that, while improving, has accelerated price increases of food and beverage products for over two years. Despite these headwinds, infrastructure investment should remain a primary focus of businesses in 2024 as they seek innovative ways to drive sales growth and operational efficiency. 

Food and beverage companies battling higher costs during the pandemic were able to recoup some expenses in the form of higher prices passed on to consumers. Consumers dealing with high inflation themselves, along with product delays amid supply issues, were more willing to accept those higher prices than they are today. Some segments of the food and beverage industry were able to maintain price increases through the end of 2023, but many are citing rising price elasticity as a challenge, emphasizing the importance of volume growth in 2024. The focus on volume will encourage enhanced promotional activity and a more significant digital presence to drive brand loyalty, especially as the popularity of private-label brands continues to grow, threatening the hard-earned market share of branded middle market businesses.

Rising price elasticity challenges sales volume growth

The long-term impact of inflation has left consumers dealing with exponentially higher daily living expenses than just a few short years ago. Shelter, food and insurance are just a few of the many categories challenging consumer budgets, and that impact is evident in consumer spending growth.

While consumer spending has been generally resilient throughout 2023, real food and beverage consumption growth has moderated and even declined in some months. On-premises restaurant consumption saw significant recovery in early 2021 as the world reopened from pandemic lockdowns, but growth has been far more modest recently, likely due in part to the inflation spike that began in mid-2021. Further, the last two years have seen annual declines in real spending on food for off premise consumption, illustrating the volume challenges cited by food and beverage businesses. 

Households attempting to manage their growing monthly bills are honing in on discretionary spending, including eating out. Year-over-year growth of on-premises consumption of food has been cooling, with indications that diners are venturing out to restaurants less often to preserve some of their monthly income. Some food manufacturers have reported significant write-offs as a result of falling demand from the restaurant industry and excess inventory.

The inability to accurately forecast demand amid shifting consumer preferences poses a risk to the overall efficiency and profitability of food and beverage makers’ operations. This risk is compounded by growing supply chain woes due to climate-related challenges and geopolitical tensions. Just as supply chains were returning to normal, unrest in the Red Sea and reduced capacity in the Panama Canal have businesses fearing higher costs and longer routes for global shipments.

Building the foundation: A strong data strategy

Food and beverage companies are countering these headwinds with innovative investments in their operations geared toward automation, with a focus on supply chains, demand forecasting and customer engagement. Successful automation of those areas requires a strong data strategy that includes the ability to implement additional analytical tools. A unified data strategy allows businesses to establish end-to-end transparency into their processes, which in turn leads to informed, data-driven decisions and an enhanced ability to forecast future demand, maximize capacity in their logistics and implement agile supply chains that can adapt to ever-changing global circumstances. 

Despite a difficult financing environment, food and beverage businesses have not shied away from capital spending. The capital expenditure-to-sales ratio of Bloomberg’s North America Packaged Food Valuation Peers shows that businesses maintained average capital expenditures of approximately 3.7% of sales from 2022 to Q3 2023, above the pre-pandemic average of 3.3%. This aligns with the results of the Q4 2023 RSM US Middle Market Business Index survey, in which 46% of respondents said they had increased current capital expenditures and 66% planned to do so in the first half of 2024.

Businesses will continue to look to innovative investment to drive productivity in the years to come. Brands seeking to achieve sales growth and operational efficiency will need to focus on the implementation of automated solutions and artificial intelligence to ease their reliance on manual processes and expensive labor.