As the food industry moves into 2023, Pentallect partners, like others, are examining how the year may unfold. While we lack the proverbial crystal ball, we have identified several anticipated dynamics that will have implications for food industry participants across the supply chain. In our view, the most important trends and dynamics to expect in 2023 include:
- Headwinds, But Sustained Momentum: We were a bit surprised at how well the food industry performed in 2022 despite unprecedented menu and grocery price increases, ongoing (but moderating) supply chain challenges and some softening of the economy. For most channel members volume is at or very close to pre-Covid levels and profitability has rebounded. We will certainly face some macro-economic headwinds in 2023 (mostly from higher interest rates and rising labor costs), but we believe the economy will grow and that we will avoid any significant recession due to a strong labor market and much lower inflation. This will provide a boost to foodservice in particular, especially to economically sensitive segments like travel/leisure and higher end full-service restaurants.
- Moderating Inflationary Pressures, Reduced Consumer Acceptance: The solid 2022 performance was due almost exclusively to price increases, as retail volume and restaurant traffic were down. To date, consumers have shown very little price resistance, which has enabled suppliers to optimize profitability as they have been able to reduce promotional spending and emphasize core brands/categories and customers. Pentallect does not expect this pattern to continue, as we believe consumers will resist future price increases, meaning that suppliers will not be able to rely on price increases for top-line growth. Based on actions taken by industry participants throughout 2022, we expect grocery prices to be +3 – 4% and menu prices +4 – 5% in 2023. Therefore, focus will have to shift to volume building initiatives, including, perhaps, more innovation (which has taken a “back seat” to supply chain initiatives the past few years) and increased A & P activity, while continuing to effectively manage expenses.
- New Supply Chain and Distribution Models: Supply chain conditions are gradually improving but will remain more volatile than in the past due to a variety of factors including ongoing commodity availability fluctuations, labor challenges, geo-political unrest and climate change among other causes. Industry participants need to revamp their sourcing and distribution practices to reflect this “new reality.” This includes an expanded, often closer supplier base, more raw materials and finished goods inventory investment, more efficient inbound and outbound logistics and a continued focus on core offerings via product and customer rationalization.
- Loss of Institutional Knowledge Impacting Operations: During the pandemic, many organizations lost experienced employees who elected to either retire or transition to new positions elsewhere. As a result, and despite recent improvements in overall hiring trends, many of Pentallect’s clients are struggling to achieve pre-Covid operating levels within their manufacturing, and other supply chain functions due to this “brain drain”; creating an ongoing challenge to fulfill demand. We anticipate that this dynamic will continue into at least mid-2023 until training efforts gain traction and highlight the importance of sustained training and succession planning processes within all areas of a company.
- Sluggish M&A Outlook: Despite significant fund reserves among both financial and select strategic investors, and the Kroger/Albertson deal notwithstanding, food industry M & A activity is likely to be down at least though the first half of 2023 due to high interest rates and valuation concerns. We believe that food industry companies will need to focus more on organic growth than rely on M & A and that valuations will likely remain down vs. previous periods.
- Expanding Mega-Customer Strength: For the most part, the leading companies, Top 5 – 10 supermarket and restaurant chains, foodservice management firms, distributors/wholesalers and even food and beverage manufacturers have solidified their market positions. Suppliers will become even more dependent upon these mega-customers and will need to organize and operate in an aligned manner with these organizations. To many, this may result in margin pressures associated with heightened expectations for trade investment, human resource deployment, customized supply chain initiatives, category management programs and private label brand development. Smaller companies need to be even more highly differentiated or specialized to operate in this consolidated environment (a “land of giants”).
- Disruptor Retrenchment: Many industry “disrupters”, most notably meal and grocery delivery services, will continue to find that their business models are fundamentally flawed with respect to ability to achieve consistent and acceptable profitability. We expect a fairly significant retrenchment, which could open the door to new and better business models.
- Virtual Engagement Is Here To Stay: The past several years have shown that virtual interface is, in many situations, a perfectly suitable and certainly more efficient means of doing business. We do not see this dynamic receding in the post-pandemic marketplace, in fact, technology advances will accelerate the trend. As a consequence, suppliers must adjust their system capabilities, organizational skill sets and resource deployment to reflect a reduction in personal selling and sharp increase in virtual information exchange.
- Likely Winners: In the 2023 operating environment, we anticipate that the strongest performers will include the following, all of which offer a unique experience to their customers:
- QSR chains
- Top Tier Foodservice Management Companies
- Leading National/Super Regional Broadline Distributors
- Regional supermarket chains
- Aldi, Trader Joe’s
- Dollar stores
- Costco
By: Rob Veidenheimer, Bob Goldin, Gary Karp and Barry Friends
We’d welcome the opportunity to discuss these issues and their implications for your organization, or to hear from you regarding your perspectives on the most relevant 2023 topics for your company.
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