For businesses in the food and beverage industry, inflation and interest rates were the two primary forces influencing performance in 2023. It’s a narrative that is likely to continue in 2024, as businesses try to find ways to adjust and adapt to ongoing economic uncertainty.

“The last few years have been really challenging for the food and beverage industry, due largely to factors that emerged out of the COVID-19 pandemic. But in some ways, 2024 is shaping up to be an even more dynamic environment, as consumers and businesses alike are trying to find ways to deal with persistent inflation,” said Jim Kenwood, head of Food & Beverage Advisory for PNC Bank. “Wage increases have not kept pace with cost inflation, which means that real disposable incomes are down. This is leading to shifting patterns in consumer demand, which makes demand planning difficult for businesses to manage.”

Part of the changes in consumer patterns include a shift away from purchasing more expensive national brands in favor of store brands and private label options, as well as moving from full-service dining experiences to less expensive, quick-service restaurant options.

Throughout 2023, businesses were able to manage inflationary pressures to a certain degree by passing on cost increases to consumers. However, many have now priced their products to the point that demand has become elastic and increasing them further is no longer a viable strategy given concerns around volume degradation. This puts the onus on businesses to find ways to temper costs to keep products affordable for the consumer.

The interest rate environment is adding complexity to the equation, as interest costs from a debt standpoint have become a major pain point for many businesses. As the cost of capital has become more expensive, it has affected how they approach their return on invested capital. “In this kind of environment, it’s important for businesses to examine their asset base in terms of inventory, payables, receivables, working capital, and figure out if they are optimized,” said Kenwood. “They need to determine if they have the right level of investment or if they should make adjustments.”

In this kind of environment, it’s important for businesses to examine their asset base in terms of inventory, payables, receivables, working capital, and figure out if they are optimized.
— Jim Kenwood, head of Food & Beverage Advisory - PNC Bank 

Benchmarking can be a helpful approach in making this assessment, and it’s one that Kenwood says his team relies on to help businesses in multiple sectors. “At PNC, we work with companies across the spectrum of the food and beverage industry, from manufacturing to wholesaling to retailing. With sector benchmarking, we can help determine where companies are relative to similar businesses in terms of investments in fixed assets or working capital and identify opportunity gaps where businesses can and should optimize.”

The effort toward optimization can also extend to finding ways to index productivity, and for many companies this is taking the form of technology-based solutions. These can include implementing digitized platforms to streamline treasury operations, investing in robotics to automate processes, leveraging data analytics to better communicate with customers and suppliers, and using the industrial internet of things (IIoT) to manage supply chains and customer portals.

As the uncertain economic backdrop continues to influence business decisions, banking relationships with advisors who know the industry well can play an important role, according to Kenwood. “Based on how things played out in the pandemic, we know food and beverage is a defensive industry, and businesses will continue to see consumer demand. But performance may vary, depending on how these macroeconomic factors affect a particular business or sector, so being able to turn to advisors for help in making business decisions can offer a lot of value.”

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.