Food and Beverage Manufacturing Insights for 2023
December 20, 2022
As the food and beverage industry continues to command change and innovation to meet consumer wants and needs, it is paramount that leaders have the right tools to stay ahead of the curve. In this episode of ManuFacts and Perspectives, Travis Epp, Partner-in-Charge of EisnerAmper’s Manufacturing and Distribution Group, is joined by Richard Colloca, EisnerAmper Partner and National Food and Beverage Practice Leader, and Michael J. O’Donnell, President and CEO of The Belmullet Food and Beverage Group. The three cover the trends and developments will want to understand as well as insights on positioning themselves for success in 2023.
Michael O'Donnell: Thank you, Rich and thank you Travis. The Belmullet Food and Beverage group basically goes from business planning into logistics. We work with companies as startups. We were part of a sale of a 412 million company. We have been able to gain an understanding of exactly what goes on in the retail grocery business along working with great brands and manufacturers, distributors and brokers to make sure that that brand is totally represented. We've been very successful over the years that we make sure that we have partners such as our distributors and our retailers, so they understand that we understand their business to be successful.TE:Mike, thank you for joining us. Obviously, the food industry has definitely faced some significant disruption in the last number of years. Many, many challenges and probably more challenges to come in the future that we'll address today. Mike, the first question we'd like to start with is in regards to pricing strategies, is low cost always the best strategy?
MOD:In the beginning, it used to be okay back in the '80s and '90s, but because of many different brands now coming into the market, your pricing strategy really has to start with who your consumer is. Is your brand different in the category you're going to attack? And if that answer is yes, then what is the subcategory that you will own that will bring in a better paying customer into that retailer's store? So your pricing strategy should be one of value of quality. One of the biggest things that we took a survey through both our consumers, through IRI at one point, number one was quality, two was sustainability, three was where is the brand sourced, four was pricing. So sometimes people think it's just the price. It really isn't if you have that quality statement going into the consumer that you know will buy your brand off the retailer's shelf.
So your pricing strategy, yes, it's important. And another thing about pricing that we are big with, we review pricing with our brands once a month, nine times out of 10. Most people do it once a year and then they revisit it. Not in this environment going forward, you have to keep an eye on your cost of goods daily. Also with your trade promotional dollars to make sure that your pricing is covering all of your costs to make that profit. We look at certain categories where you should be at a gross of 52% margin. You could be as high as 55, so that's where you should be. Anything below 48, you're really going to struggle in this environment.
TE:Mike, you mentioned pricing and brands. Can you discuss the evolution of private label brands?
MOD:Private label brands in the beginning, we started as a cost reduction and type of sale with the retailer going to that particular consumer. Over the years, we've seen where the private label business has evolved, where you have a store control brand named such as Simple Truth. Simple Truth organic at Kroger and other people have done the same thing without just putting their banner name like Kroger on a particular package or ShopRite. They've been able to develop this.
They have been very successful in certain categories such as frozen, health and beauty aids and other what we call single ingredient products throughout the store. By and large though, brands are still driving the bus. The only time we've seen a private label explosion was during 2008 because at that time we didn't know where the economy was going to go. We didn't know where the money was going to be, and that's when private label jumped up into the mid 30% range. It is now at 29 to 31% depending on the retailer, but brands still by and large drive it, and you have to understand what the private label may be doing in your category to offset your loss of sales to that particular private label brand.
TE:Hey, Rich, do you have some observations on private label brands?
RC:Yeah, thank you, Mike. I would say on the private label, one of the interesting things that we did see, which occurred during the pandemic when there was scarcity of product and shortages on the shelves, consumers were looking for any alternatives that were available. So you certainly did see some level of pickup in the private label space because of that. And when you're in an inflationary environment such as what we're in and there's pricing pressures that all impacts consumers' decisions on whether or not to consider other products that they normally may not be as interested in consumption have now taken an interest in it because they've had a little bit of history here due to the pandemic and the availability of that product, let's say over some other products at the time.
TE:What suggestions might you have for food manufacturers that they take to reduce the risk of being replaced by a private label brand?
MOD:Well, you have to have what I call a four-legged stool approach to building a brand. One is your e-commerce. Using all of the touchpoints from a TikTok all the way to Instagram is one. Two, the brand itself, how you're communicating it through your e-commerce. Next, you should have a brick and mortar plan to ensure that the brand is being recognized by the retailer. And the last one is Amazon, which we'll talk about later, but that is also key because we're seeing more brands. We have some brands on there on two platforms. One is their vendor Central Post, and there are other one is the seller central post. But it's so key to have the e-commerce that you can work with the retailer through electronic couponing and other identifiable blasts to keep your brand in mind. When you work with these retailers, everyone seems to have apps for these retail outlets. It's quite important that you understand how they're being used by that retailer to stay in front of their private labels.
TE:Mike, obviously brand building is key to growth to food manufacturers and distributors. What suggestions or observations do you have on steps into building the successful brand?
MOD:When we build a business plan, the first thing is we look at the consumer and then when we know who that consumer is through demographic and lifestyle that they do every day, health and wellness, mother of two, whatever it is, then at that point when we build out the brand, we put a consumer decision tree. When they walk in, which category do they go to? Why do they go to that category and why would they pick up your brand? Now, if you can answer those three levels very concise to the retailer, then you have a very good chance of being successful with your brand. You also have to look at your point of sale. Are you going to have shippers, the cardboard boxes you see with your product in there if it can be done, are you going to have permanent wooden racks? That is also a cost factor.
These are the things that expose your brand to make sure you get it off the shelf and it can be resold and repurchased consistently. So the brand will have a chance to grow in the short and long term. And I feel that one of the things that brands overlook also in that is their trade spend. Are you spending the right money in a particular store such as a Kroger, but why are you spending less at a Walmart? So you have to balance out your trade promotional dollars as well when you're building your brand.
We took in a brand for $105 million. They wasted in a budget of $27 million, $17.1 million. So we had to reorganized exactly where the dollars went to particular retailers where the ACV was at 79% and they had the brand going now for seven years. But we said, "Whoa, whoa. Why are you spending £6 million when your ACV at the next retailer is growing? But it's still at only 21% ACV." ACV is all accumulated volume in these particular stores, and that's how you're judged when you're trying to sell your company. So that's what we look at is to drop those dollars in for that brand to grow in those specifically underdeveloped retail accounts.
RC:Mike, we've been hearing a lot about the supply chain being broken over the last couple years, and this has been evident by empty shelves at the grocery store. Shortages of products such as baby formula and other things. We're hearing rumblings of continued shortages to occur. With the global events of things such as the War in Ukraine and other events that are occurring, what should the consumers know about scarcity of product, where product comes from, how it would impact the supply chain?
MOD:Well, first we have two brands we're working with and China has had another lockdown, which means is now we had to go back out and resource those brand ingredients both in Mexico and South America to make sure that the brand was continuing to be manufactured and you get it back on the shelf of the retailer. So you have to look at China as that first blip in the screen, and we think it's going to take a little bit longer with China because of the covid experiences that they're still having over in China now Ukraine, that's a great one, Rich. The last of the grain came out just before the next escalation of the war with Russia. With that being said, wheat and barley is still going to be readily affected here in the United States. So you're going to see bread, cereal, beer, which uses these two fine ingredients to be affected both in higher price and also to see some of the brands actually falling off because it really comes down to who could buy the most of this scarce resources of wheat and barley.
Okay. And then the last thing, when we look at these really shortages that aluminum and tin were both at a very high level, 47% for aluminum, 71% for tin, they're coming down now. So we're starting to see a reset there in those particular cost in packaging. But the ingredients, like I said, with those two main and last, the drought in the United States in the Midwest and also the worst tomato harvest in California in 120 years is going to also put pressure again on tomato based products. And again, some of the wheat, soybean and corn products here in the United States, that should hopefully transition to a better year next year in harvest. But the winter wheat is now down 27% here in the United States. So we're still in that. Hey, we'll get out of the woods, and I feel very confident about that, but we ne really need to pay attention daily on all of these things that are going on in the global society we deal with.
TE:So based on those comments, Mike, you've alluded to the shortages and some inflation. Obviously we've seen significant inflation in food over the last year. What are your thoughts going forward for the rest of this year and into the beginning of 2023?
MOD:I think we'll see a blip up for inflation. Again, it's not going to go up as dramatic as it did in the beginning of this year. Our numbers here is between 8.2 to 8.3. It will continue into probably July now of next year. That will start seeing the inflation coming down because at that point, let's go back to first the packaging. The aluminum and tin will continue to come down. Glass, which was a bit of a shortage, is coming down in pricing. Also, we're seeing the pricing of containers overseas coming down. So there's some good things coming at the back half of 2023, but we're still going to be muddling through this inflation rate till July of 2023.
TE:Rich, are there any comments you wanted to make in regards to inflation?
RC:An interesting observation is that although we're in an inflationary environment, we're not seeing significant dollar levels rise for the average order size at grocery stores. And if you think about, it seems a little counterintuitive because in inflation, if your consumption patterns are relatively the same by simple math, you'd be paying more. I think what that is an indicator of is I think you're seeing a little bit of rebalancing of what consumers are buying and how much they're buying and certain items I think they are cutting back to private label and some other things. They're reshifting to private label products in order to combat the effects of inflation.
The other consideration with inflation is the inflationary levels that we're seeing are not what I'll call isolated costs. An isolated cost would be increased labor costs, let's say due to a union dispute and that's isolated at the grocery store instead. This seems to be a compounding effect where first it starts at the individual level where you're seeing more in your heating bill, more in your fuel insurance costs. Everything is down to you at an individual level, then it's compounding because those same costs are at the next level, which is reflected in the product cost. The level of compounding that's occurring is exasperating the impact of inflation.
TE:We touched on the supply chain challenges a little bit earlier. One area that became evident during the pandemic was the issue of concentration with all the disruption,. What suggestions do you give to food manufacturers who may have concentration on either their customer base or with their suppliers?
MOD:Well, the first thing that we've done here is that we've drawn out what we call a value chain. Where are the ingredients coming from? How long does it take for those ingredients to be transported to our manufacturing partners? How long does it take to get the finished goods done? Then how long will it take for transportation to take it to either a distributor's warehouse or directly to a retailer's warehouse? How long will it take for the distributor to deliver it to the retailer? We already know the retailer that already takes direct shipments, so that takes normally three to four days out of our transportation line. So that's how you keep an eye on your cost of ingredients and definitely inventory.
When we do this on a daily basis, that's how we track everything here. So we know that we have enough inventory and we've looked at dates for trade promotion of price reductions and how many cases it will take to be either on the floor being displayed and also on the shelf and how many cases are being in transport either from the manufacturer or from the distributor to the retailer. So it's quite important that your supply chain is tightening up as we speak. You will lose more dollars not understanding how this all works in sync than ever before. And I believe that supply chain management will become a bigger key really in the coming years. It never was like that before, but now I'm seeing more and more of it where you're actually sending your supply chain personnel into the retailers and into the distributors to make sure that everybody's in line about shipments.
TE:Mike, you touched on retailers in your last response. They have definitely seen some significant changes in the last year or so with Amazon's purchase of Whole Foods. Aldi has entered the New Jersey marketplace and the most recent Kroger-Albertsons merger. What impact is this having on the traditional grocery store?
MOD:Well, let's take Amazon first. That's, that's a good one right there, Travis. When they bought Whole Foods, the industry panicked, but it needed to change because Amazon just delivers what you want. You don't even have to go, you look on your phone, whatever you need, it's there in two to three days, especially if you're a Prime customer. And what they did with Whole Foods in the beginning was they tried to put the 365 brand, which is the Whole Foods private label, more out front. Then they looked at it a year later and they lost consumers to this really radical change. So they went back to going into getting brands to come back in, high-end brands to get in that high-end consumer that Whole Foods was known for many years. Then Amazon turned around and said, "Okay, we're really out of the food and beverage business.", on the other end of their own private label brands.
And now they, they're the number one search engine for food and beverage over Google. So you need to be at Amazon, right, to understand what they've done. And what they're doing now at Whole Foods is they've become that boutique supermarket chain they were renowned for when John Mackey was running it. So there's been a big change on that. Now, Aldi has done an excellent job understanding a 22,000 square foot store. They have excellent produce and the perimeter of the store, which dominates how you bring consumers in from dairy, frozen, also their deli department and also the backend of their frozen dairy. They've done an excellent job. Their labor costs are incredible. They're smart. They usually bring in six people. I've been there at 5:30 in the morning. Everything's on wheels that can pack out a store very efficiently within an hour and a half, and by 10:00 they have three people there who are just filling in as they're going along, mainly in produce, also in dairy.
I've noticed that when I'm in those stores. And the last thing is they bring in the other consumers on the back end because they've rotated their product and they know it's still fresh, but their labor, they bring in only two other people. So there's five people at the end of the night and they're already packing out, getting ready for the next day. So they've been able to do an excellent job bringing in that consumer.
And I've also noticed being in the parking lots, I see BMWs now, I see Mercedes-Benz. So they're not a low end store as most people think, but they also have other different items such as when they had reading lamps just for the kids coming in back to school, and also comforters when the weather was changing to be cold. One other thing I think that should be also brought up, traditional grocers are also getting hit with specialty stores such as Uncle Giuseppe's here in New Jersey who are doing outstanding. Now they're not inexpensive either, but the quality of the brands that they have in the store with the quality deli department and their own private label, which is not as pronounced, but it's there. They've done an excellent job. So you're starting to see what I call these regional specialty chains doing an extremely well, and their traditional supermarket chain should know walking those stores that they've been able to grab some of their high-end consumers as well.
TE:Rich, did you have any comments on those developments or maybe the Kroger-Albertsons merger
RC:For the recent developments I think what's very interesting is to use a sports analogy, when I was growing up, I was much closer to dynasties. If you looked at some of the historical teams and over time, dynasties faded out mainly because competition expanded. Every sport has expansion, more teams, less dynasties. I think the one interesting thing is there is a level of fragmentation that goes on in the industry, and there are certainly many choices for consumers to get their product between brick and mortar stores, specialty, online. And I think that creates a very significant dynamic in the industry. I think also what's very interesting is this balance between your brick and mortar store, online store and the size of the brick and mortar store versus let's say a more specialized store compared to like a Supercenter for the longest time here, I'd say for the last 20 years it's been more of a supercenter mentality of expanding the store and now you're seeing competitors come in with smaller stores, less variety of product, but very specific product lines.
What's also interesting, if you go all the way back to 1917 chain out of the south called Piggly Wiggly was the first self-checkout store. So prior to that, you went to your local small little wood store that was on the corner somewhere. You would hand the grocer a list, the grocer would get everything that was on that list, bag it up, you'd pay for it and you'd go home. If you think about it, we've come full circle over 100 years later, and even a little bit before that with the evolution of online. So you're able to get products basically in the same fashion without leaving. And you also have consumers that have a hybrid. They're using online for certain things. They're using brick and mortar for certain things at the Supercenter level, they're using the specialty stores for certain products, and they're also using somewhat of a quasi where they'll go to the store, pick up the product that had been pre-ordered, and then they may add on.
So all of these factors are creating the landscape that we're currently in. As far as your other question goes, as it relates to the Kroger-Albertsons merger, there are certainly regulatory issues that need to be cleared. You are going to see contraction of stores just because of overlap. You are also going to see contraction of suppliers because of duplication and overlap. That will create opportunities elsewhere for new stores to come in on the vacated property. The products that were currently being distributed by multiple suppliers, if that gets consolidated, which presumably it will be, those product opportunities from those suppliers will be redistributed throughout the entire ecosystem. So it's going to be a very dynamic flow of what goes on here over the next couple years.
TE:So we talked about significant changes that have happened in the food industry in the last number of years. What are the predictions you see changing in the coming years?
MOD:Well, I think one of the things that Rich just had touched on is that the Kroger buying Albertsons, and he is right with suppliers. But what I'm also seeing, and it's a point that I just remembered, was a lot of these regional distributors are buying up a lot of other distributors. So we're seeing consolidation there in the distribution side. Where Lipari was a good regional player, well, right now they're in 30 states. 10 years ago they were in nine. So we're starting to see that type of growth on that side. And also I do believe we'll see consolidation of other supermarket chains to the certain point that they need that level of density as one. And probably two, economies of scale and scope. The other thing as we go down will be data. Data is quite important. We're big with it here. Being lucky that I have a brother who is the president of IRI, so I've been data driven for the last 35 years.
And that's one of the things that you need to have to work with your distributor and retail partners. You have to understand the data, you have to rip it apart, you have to dive into it and show the retailer the value of your brand. What is it doing in a store? What's the missed opportunities? So data will be the biggest driver. It started three, four years ago. It is going to continue in certain categories. In Kroger, they've got three or four category managers in frozen. They've got six in dairy. So that tells you the scope of they're looking granularly into the information you're providing to make sure that they are trying to get to that high end consumer to make sure that they're getting every possible dollar out of that consumer's pocket. And the last thing that I think is going to happen, and Rich touched on it with Piggly Wiggly, full service has to come back.
The consumer today expects it. You go out, curbside delivery, you open up the trunk, you put the products in the trunk. Publix has done that since I've been dealing with them the last 45 years, and they haven't changed. They've actually set the pace for that. And I think other retailers have sort of missed on that and other things that they do within their stores to provide full service that the consumer feels like, I don't mind spending a little bit more when I'm getting help. And I think that will be the next big change there as well.
Last thing will be the supply chain. I think the tightening up of the supply chain after what we've went through is going to continue to develop. I think one of the things is the docs here in the United States, everyone else in the world is 24/7. We work Monday through Friday, but during the pandemic, the unions did allow them to work on the weekends. I think that has to become the same as the rest of the world. We cannot allow containers, ships to be out 60 of them in the Pacific Ocean for over 30 days. That to me doesn't make any sense, where the rest of the world can ship as efficiently as possible in seven days working constantly 24/7. And that's where we have to be. And I think that will be the next change as well.
TE:Rich, would you like to add on to what Mike said?
RC:Yeah, thank you, Travis. It's interesting because if you look back in history for quite the longest of time, there was not the significant rapidly changing movements that we're seeing that we've seen over the last probably seven to 10 years. Growing up if you walked into a neighbor's house, they had probably 90% of the same type of products that you had in your house. There were a handful of cereals, a handful of different foods that you had for lunch and dinner. Drinks were handful of brand names. Now you've seen such rapidly changing consumer preferences and expansion of so many different products that the consumer today is more willing to try alternative products like alternative meats, more healthy products, and that's creating a significant dynamic in competition. And we're seeing it at a much faster pace than what we've ever seen. And in addition to that, I agree with Mike's point on technology.
Technology is a significant component in the landscape and ecosystem of the food and beverage supply chain in terms of consumer data, product data, developing and sourcing product and transporting product. If you go back to pre pandemic times, there had not been a lot of consideration for the average consumer about how a supply chain works. Getting a product from point A to point B, everybody had a general sense, but nobody fully spent a lot of time thinking about all of the ramifications in supply chain management. And as a result of the pandemic, supply chain management became a significant component of a management strategy that has to be continually implemented. And we're going to see more investments into technology in terms of getting products sourced and transported, the management of products, how it moves, and data is going to be a very significant component of how the supply chain and how the food and beverage industry is going to continue to be managed.
TE:As we wrap up, Mike, Rich, any closing comments?
MOD:Well, I think one of the things is plant-based. That will continue to keep growing. They had a show in New York, the Jacob Javitz. There was 800 companies that were plant-based. Five years ago there was only 200. So now we're seeing plant-based and food tech, which is going to be huge, is going to be another opportunity when you're seeing all of these companies such as Aero Farms that does these vertical farming inside buildings with controlled environments, that's exciting. That's going to provide a lot more food. Healthy products without insects, pesticides attacking that type of product along with some of the plant-based products as well.
And the last thing, and I'll close is that I'm very honored to be on this podcast because EisnerAmper with their worldwide web understands what's going on. And I think both Travis Epp and Rich Colloca understand that. And they know that people have to eat and drink. That is one thing that will never change in our lifetime. And with that being said, it's really looking forward about where this industry's going because it is constantly changing and Rich was right, 10 years ago, we really just prodded along. And now all of a sudden when you're seeing independent stores going up, doing extremely well, offering different items, healthy alternatives in supplements and in food, that tells me that the industry is still going to grow in different directions than it was homogenized some 40 years ago. So that's where I believe everything will be.
RC:The evolution and expansion is very dynamic. It's moving at a rapid pace and it's creating a lot of different alternatives and it's going to be very interesting to see the next few years. I don't believe it's going to slow down. I think it's going to only intensify. And I think there's another generation of consumers that are coming up the pipeline that is going to further create the evolution and expansion.
TE:Mike, Rich, I really want to thank you for your time today and thank you all for listening to this episode of Manufacts & Perspectives in EisnerAmper's podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast.
Transcribed by Rev.com