Challenges and Opportunities in the Food & Beverage Industry - Spring 2018

May 30, 2018

On March 27, 2018, BDO and Farm Credit Canada (FCC) hosted food & beverage industry executives for a discussion on challenges and opportunities. While there was some discussion about rising costs and keeping up with growth, the conversation focused on regulations, consumers behaviour, and industry trends.

Regulatory Challenges

Many acknowledged that new and changing regulations are major pain points. The consensus was that there is an ever-rising regulatory burden, both in the industry specific (i.e. SQF, BRC) and government regulations. Locally, regulations are changing and many in the industry are supportive in order to improve consistency, and reduce consumer confusion and incidences of food fraud. On the other hand, some wonder whether these additional measures are truly resulting in safer food practices or only increasing costs.

Labelling requirements are changing in both Canada and the U.S. to help consumers make informed purchasing decisions. This creates significant additional burden on food & beverage processors, as their customers make requests to update product specifications in preparation of the mandatory 2020 adoption date.

Some would like to see Canadian regulations more closely aligned with existing standards elsewhere, such as those of the FDA in the U.S. and Codex Alimentarius, international food standards. Selling product internationally creates a completely new complexity with different standards in each jurisdiction. Those selling into the U.S. market find additional paperwork required at customs to be particularly onerous and costly in both time and logistics costs. These additional costs make it more difficult to compete with U.S. products. Others are negatively impacted by changes in licensing requirements and imported product subsidized by foreign governments in our own local markets.

In recent years, the additional spending on meeting regulatory requirements has increased significantly, reducing available funds for capital spend and new product development. The result — companies are less competitive in the global marketplace and continue to see shrinking profit margins. Those looking to enter the market face significant barriers to entry because of the compliance cost, while those already in the market have a small competitive advantage over those start-ups. As a result, relatively new companies with great product ideas become targets for larger companies and the industry becomes more consolidated.

Shifting Consumer Habits

Consumers are becoming increasingly interested in their food — where it comes from, what is and is not in it, how it was sourced, how the animal was fed and how it was treated. Many want fuel for nutrition and some consumers have very specific preferences for ingredients based on what they hear and read.

The challenge for food & beverage companies lies in the reformulation of products. Preferences for clean label decks have companies investing heavily in product development since it is not as simple as swapping out one ingredient for another. Texture, taste, and functionality of ingredients, along with their interaction with other components in the recipe all play a very specific role in developing the product. Demands for arbitrary maximum number of ingredients are frustrating, as some consumers may not realize the complexities in deriving the taste they seek.

One response, which seems to be working for some of the executives in the group, is consumer education. Addressing consumer concerns through research and responses can reduce both the negative feedback and at times the need for product reformulation. This response can involve assistance from suppliers or their own internal teams. A positive aspect to these food & beverage preferences is that some consumers are willing to pay a premium for what they perceive to be a better product — due to humane treatment of the animals, organic ingredients, “free from” claims, etc.

Emerging Trends in the Industry

Custom Products

While national brands are on the decline, demand is growing for custom products. Retailers and food service customers want unique products. This helps distinguish them from others, aiding in customer loyalty. However, for the food & beverage processors, custom products mean smaller batches, higher product development costs, and increased inventory carrying costs for unique ingredients and packaging. There is also more downtime and cleaning for product changeovers and less efficiency due to lack of scale.

Those successful in maintaining profitability in the smaller order market have a number of strategies.

The first is flexible equipment lines and self-cleaning features on equipment to allow for quick changeovers.

Next is a robust order acceptance process. As part of this process, product pricing is reviewed closely considering not only the typical direct materials and labour costs, but also the following:

  • Special ingredients, which may not be fully used before expiry
  • Retooling of capital assets
  • Inventory carrying costs
  • Product loss
  • Machine and staff downtime costs
  • Opportunity for repeat business
  • Distribution costs
  • Rebates or customer support programs
  • Overhead costs — amortization of capital assets, rent, utilities, etc.
  • Length of time for the customer to pay

Customer contracts should consider provisions for changes in prices charged to help offset direct input costs and establish minimum order quantities or tiered pricing to account for customers with unreliable volume projections.

Meal Kits and Prepared Foods

Another growing trend is meal kits and prepared foods. With busy lifestyles, consumers want to reduce meal prep time, while still eating fresh and healthy food and they are willing to pay a premium for it. On trend, retailers are making more room in stores for meal kits, pre-cut fresh food options, and ready-made meals. This provides opportunities for food processors who can supply these offerings to the stores and for beverage processors looking to pair products with these food offerings.

Similar options are appearing in other formats — Uber Eats, commissaries, and daycare catering companies offering ready to heat meals at daycare centres for parents picking up their kids. These formats offer significantly reduced rent and staff costs, while providing quick and convenient options for the consumer. Some food processors are expanding their offerings to food courts where patrons can purchase quick and healthy meals, and choose specific ingredients.

The Foodie Movement

One final trend that companies are capitalizing on is the foodie movement. Companies are embracing social media to reach out to these consumers with pictures, videos, recipes, and the story behind their food. It is all about connecting with the consumers and helping them build the ultimate food experience.

Capitalizing on Opportunities

While there are many challenges in the industry, they are surmountable through careful and proactive planning, embracing change, providing feedback on proposed regulations, and seeking help from professionals. BDO's food & beverage team has the industry expertise to help navigate the challenges and capitalize on opportunities. Contact BDO today to learn more.

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