Companies that make, move, and sell food and drink have navigated a challenging inflationary environment during the last three years. Operators are paying more for things like labor, commodity inputs, packaging, transportation, and energy, and, as a result, businesses across the value chain have increased pricing to protect margins. This strategy evolved largely due to inelastic demand that persisted for an extended period of time, as consumers were willing to pay more for a wide variety of goods and services following the pandemic.
But the operating environment is changing, as consumers are becoming weary of higher food and beverage prices in grocery store aisles and on restaurant menus. Various food and beverage products have experienced double-digit price increases since January 2020, led by eggs, orange juice, bread, cookies, coffee, potato chips, and soda.1 Meanwhile, wages and disposable income have not kept pace with the consumer’s diminished purchasing power.
As a result, cost-conscious consumers are exchanging pricier dining experiences for quick service and fast casual alternatives, as well as forgoing dining out in favor of shopping for groceries and eating at home. Even dollar store retailers are seeing their customers move towards food assistance programs, such as food stamps or food banks, versus paying higher prices for goods. Demand and volume degradation is widespread across the industry as manufacturers, wholesalers, and retailers balance pricing architecture and productivity initiatives to manage the inflation squeeze and demand elasticity.
“In this inflationary environment, the price has gone as far as it can go,” said Jim Kenwood, Group Head of Food & Beverage Advisory for PNC Bank. “Operators need to go beyond price increases and invest in productivity, efficiency, and automation to manage labor and operating productivity to protect their top and bottom-line.”
Interest Rates and Capital Availability
Ongoing elevated interest rates are another area of challenge, as finance teams look to fund maintenance, productivity, and expansion capital expenditures and working capital. Management teams that have up to now operated exclusively in a lower rate environment may find the higher rate environment particularly difficult to navigate.
However, according to Kenwood, there’s something important to remember – we’ve been here before. “When you think about economic cycles over a 30-to-40-year period, its clear current conditions are not abnormal or extraordinary. As interest rates have moved to more normalized, higher levels, companies are recalibrating capital allocation based on a deliberate return on invested capital approach.”
Labor and Operating Productivity
Labor continues to present challenges for businesses across the food and beverage landscape. While labor may be more available today than in recent months, wage levels have gone up, putting added pressure on businesses looking to grow. Within this context, high-performing businesses are turning to operating productivity, efficiency, and automation initiatives in the form of hardware and software investments. For many, the primary management objective is not to replace, but rather repurpose valuable human resources.
Relying on Banking Advisory
Kenwood noted that it is important for business leaders to remember that banking relationships can be an important resource for finding ways to meet the challenge. “At PNC, we know that businesses are looking to find innovative ways to maximize profit and loss (P&L) yield from their deployed net assets, and we have experience to advise on how they benchmark to sector peers from a P&L, balance sheet, capital structure, and return perspective, which is something that can offer real value in the current environment.”
Ready to Help
PNC’s Food & Beverage team combines industry and financial experience with local relationship management to offer tailored financial solutions to Food & Beverage companies across the value chain. For more information, reach out to your Relationship Manager or contact us.
Source:
1. U.S. Bureau of Labor Statistics
