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Food and Beverage - The Impacts of COVID-19 and Business Considerations for the Food and Beverage Industry

One thing is certain, life today is much different than a few weeks ago before we all began grappling with the impacts of the COVID-19 pandemic. This continues to change daily as government and business leaders take actions to deal with health and safety concerns and volatility in our economic environment. While the impacts are far-reaching, government-mandated shutdowns and consumer reactions, and in some instances panic, have had varying impacts in the food and beverage industry.

Many consumers have experienced empty grocery store shelves, while for food manufacturers and distributors, it’s driving increased demand. The high-demand products may be “winners” in this pandemic, but there are significant challenges. Keeping up with demand, supply chain disruption, trucking availability - particularly in highly impacted areas - and quality and resource risks are real issues that these industries are facing.

A significant hit has been felt with the mandated closure of restaurants, bars, cafes, and the like. Many restaurants have been able to maintain a reduced level of operations by switching to a take-out and delivery model. However, the decline in revenues and ability to keep employees on payroll has had monumental impacts in the foodservice industry and as a result is significantly impacting the food and beverage manufacturers and distributors whose customer base is highly comprised of restaurants.

Companies across the U.S. have been operating in crisis mode for the past few weeks dealing with the realities of pending cash flow issues, potential employee layoffs, negotiating amendments, and temporary relief on debt and lease payments to mention a few. While the immediate actions are critical to a company’s survival, potential longer-term impacts need to be considered when assessing future financial and operational risks. With crisis comes valuable lessons particularly related to preparedness and ability to adapt to unexpected and rapidly changing times. While it is unknown at this time when normalcy will resume, below are some key areas for consideration in the weeks and months ahead.

  • Excess Inventory and Inventory Valuation – Companies in the food and beverage industry may be stuck with a considerable amount of inventory. While many may be looking to other channels to deplete inventory as much as possible or donating to non-profit organizations, the risk of excess inventory or inventory selling at lower than currently valued is much higher. Companies will need to take a hard look at inventory on hand and the demand within their customer base. Significant write-offs and write-downs may be necessary.
  • Collect-ability of Accounts Receivable – Even if food and beverage manufacturers and distributors can continue generating sales, they should be leery of the ability to collect outstanding accounts receivables from customers on terms consistent with past practice or at all. As time goes on, the financial struggles for many customers may worsen and many businesses may not survive this crisis, while others may seek extended payment terms. Companies should carefully and specifically analyze their customer’s financial stability, including when seeking new customers, and as a result may require significant increases in bad debt allowances.
  • Consumer Spending and Purchasing Behavior:
    • In-Home Consumption: Although many people initially stocked up on goods at the outset of the crisis, in the weeks following the unemployment rate has been on the rise as many companies have been forced to lay off their workforce due to mandated closures and work from home requirements. This could likely lead to changes in consumer spending and purchasing habits in the coming weeks and months as available household funds become tighter. With an economic recession looming, consumers may be less inclined to pay premium prices for organic, sustainable, or ethically sourced food and beverage products and may look to more local and lower-cost brands. Accordingly, price and cost structure considerations will need to be top of mind for manufacturers and retailers when performing outlooks and strategic plans.
    • Out of Home Consumption: While out of home consumption has essentially come to a halt, it will pick up as restrictions lift but highly unlikely to be enough to cover lost sales. Accordingly, food & beverage companies should assess their sourcing strategies, range of product offerings, and agility of supply chains and distribution channels, especially considering a potential economic recession and limited discretionary household income for some time.
    • E-commerce: With limited options on grocery store shelves and, for many, fear of in-person purchasing, consumers are often turning to e-commerce for their food and beverage needs. While the trend of online ordering with delivery and curbside pickup options had been increasing in recent years, this crisis may have propelled the e-commerce channel for the food & beverage industry. Accordingly, there may be growth opportunities to consider in the direct to consumer strategy with regards to packaging, brand awareness, streamlining and optimizing distribution networks, and digital presence. Time will tell if this is a trend to stay or just a matter of current circumstances.
  • Business Continuity and Disruption Plan – When crisis strikes it provides an opportunity to reflect on preparedness and where there may be room of improvement to be better equipped for future events. A few questions Business Owners, Management, and Board of Directors should consider:
    • Do we have a documented business continuity and disruption plan? Have we reviewed it recently to ensure financial and operational risks are adequately addressed?
    • How quickly were critical actions taken and were they effective?
    • How do we best manage working capital and ensure access to cash in a prolonged period of disruption?
    • How do we ensure the safety of our employees?
    • Do employee work arrangements allow for the flexibility and security of data if working remotely is necessary?
    • Can we rapidly move supply to alternative channels to minimize revenue impacts?
    • How do we support our key customers/suppliers to sustain our relations?
    • Do we have a concentration in suppliers and/or customers that puts us at risk?
    • Do our banking, lending and insurance arrangements provide for any relief in periods of significant disruption?

We appreciate being your trusted business partner and advisor. If you have any questions, do not hesitate to reach out to our Food & Beverage Industry experts at The Bonadio Group.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.