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Inflation and Supply Chain Challenges in The Food and Beverage Industry

By Tammy Gamble, on January 25th, 2023

With supply chain challenges and inflation still causing havoc as the new year begins and especially resulting in massive challenges in the food and beverage industry, consumers are continuing to encounter significant price increases at grocery stores including in many staple household items. Simply put, inflation makes everyday items more expensive, making it harder for consumers to budget and leading to an overall reduction in spending.

According to the U.S. Bureau of Labor Statistics in January 2023, the food at home index rose 11.8 percent over the last 12 months. The index for cereals and bakery products rose 16.1 percent over the year. The remaining major grocery store food groups posted increases ranging from 7.7 percent (meats, poultry, fish, and eggs) to 15.3 percent (dairy and related products).

People have to eat— food is a necessity. However, the prices we are all experiencing at the grocery stores are staggering. The year 2023 may prove to be a test of how willing consumers are to continue footing the bill.

As food & beverage manufacturers and processors face margin compression and pass cost increases on to their customers, consumers may be questioning whether the prices they are paying are going up more than necessary. Are companies price gouging and taking advantage of the current economic situation to rationalize their exuberant prices? This uncertainty may begin to erode consumer trust and brand loyalty resulting in significant shifts in shopping habits, possibly to more affordable private label products. The impacts of inflation on the economy most certainly impacts consumer behaviors. This is a tricky situation for companies to navigate as they attempt to retain customers, determine consumer tolerance for spending, analyze changes in buying habits and manage their inventory and staffing levels, availability of supplies, customer expectations, and continuously changing costs of inputs.

Shortages in the supply chain are a significant driver of inflation in the food and beverage industry. To combat these issues, companies may be faced with securing alternative suppliers, figuring out substitute ingredients and reformulating recipes or deciding to simply pay the higher prices for the products they can get. Unfortunately, factors causing shortages and challenges in the global supply chain are not easily overcome or quickly resolved and are often unexpected and unpredictable, such as the war in Ukraine, disease outbreaks around the globe, international trade disputes, geo-political issues, climate change and natural disasters, etc. For example, the price of eggs has skyrocketed year over year with many seeing prices quadruple (or more) which has been largely driven by the avian flu outbreak that has significantly impacted the chicken population.

With the costs of packaging, ingredients and transportation remaining at high levels, companies may need to look for ways to reduce costs through highly automated and efficient processes to be able to provide products at a better value to the consumer. Additionally, companies may need to consider if there are new ways to increase the attractiveness of its products to consumers, such as different package size options (bulk, snack size or multi-pack) to provide value or convenience as well as assess whether new marketing strategics are needed. Further, companies may want to explore whether they have adequately diversified their supplier portfolio and have solid relationships and contracts in place with supplier and logistics providers to be able to work collaboratively, efficiently, and effectively to stabilize the current situation.

There is no question that managing through the impacts of these challenges and determining the best path forward is difficult even for very experienced, seasoned management teams. Accordingly, as companies continue to navigate the waters, management should look to analyze data, assess systems and processes, assess the effectiveness of business relationships, develop budgets and manage cash flow to combat the inflation and supply chain challenges and implications of today. Management also needs to plan for beyond 2023 to ensure that changes implemented now are sensible investments and improvements to drive future growth in the business, consumer loyalty, and operational efficiencies. Well analyzed and purpose driven decisions and changes will allow the company to meet its strategic objectives and maintain compliance with regulations for the long term.

If you have any questions or are interested in learning more about this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts today.

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Written By

Tammy Gamble Mar23
Tammy Gamble
Partner & Chief Risk Officer

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