Food and Beverage manufacturers consistently face challenges, and analysts predict 2023 will be no different.
Wage pressures, supply chain challenges, rising energy costs, and cyberattacks threaten operations and overall profitability. Increases in one area ripple across the industry, causing price hikes in subsequent areas. As a result, businesses are seeking lower-cost alternatives. The grocery sector is a prime example as prominent players continue to push back on price increases from brand F&B manufacturers and look to shift their product mix to more private label products — which also garner lower margins.
Combatting this ripple effect takes a multi-pronged approach, and simply offsetting one area will not fix the breakdown when industry challenges arise across several facets of the operation.
Industry employee churn continues to cause issues throughout the F&B sector. While hospitality, food service, and grocery continue to lose workers, other sectors like manufacturing have remained stable since 2020, according to a report by McKinsey & Company.
However, throughout these sectors, wages continue to rise. Labor cost is known to be “sticky,” — meaning once wage rates go up, they don’t usually come back down. Since 2020, hourly wages have risen 7.8% for non-managers across all industries, according to The Washington Post.
Growing pressure to attract and retain talent, coupled with worker demand for higher wages, has resulted in a rise in total product costs across the F&B industry. Ultimately, these costs get passed to the consumer — further perpetuating the cycle. Where wage hikes aren’t passed to the consumer, rising F&B wages threaten to keep costs high and cut into already dwindling margins.
OUR ADVICE: Developing a positive workplace culture emphasizing positive work-life balance is another way companies can remain competitive and retain staff. Consider alternate incentives such as flexible work hours or wellness offerings (like sick pay and mental health days).
Furthermore, when recruiting, switch from a skill-based model (looking for the right combination of degrees and experience) to a foundational skill model. In attracting “near-skill” candidates, these employees may report higher job satisfaction as companies develop the employee’s experience. Utilizing these tactics could combat rising wages and costs across the board.
The availability of key ingredients, or packaging materials, continues to plague food and beverage manufacturers. These manufacturing delays create downstream ripple effects in the value chain, severely impacting profitability. When grocery store shelves sit empty, or food service cannot fill orders to their restaurant customers, menus adjust, prices increase, and the consumer bears the brunt.
In December, ERA’s manufacturing and supply chain specialists reported shortages of critical gasses for food production continue to impact large-scale F&B manufacturers, especially those in meat packing and beverage production. Carbon dioxide (CO2) is one such gas experiencing shortages and is used throughout operations to process meat and add carbonation to drinks.
Examining your risk and your supplier’s risk plan will be vital in ensuring supply chain delays and product shortages have a more negligible impact on operations.
OUR ADVICE: Have a backup plan ready now. Identify alternative suppliers you can turn to for key ingredients, necessary packaging, and any other crucial production item – like CO2. Consider local sourcing options whenever possible. If you use custom packaging, investigate
a more standardized solution you could temporarily implement if needed.
Another challenge food manufacturers, producers, and sellers continually face is the high cost of fuel and other energy resources powering their operations.
Giants like Hormel and Nestle have already diversified their energy portfolios — turning to solar energy to combat rising electricity costs and implement more sustainable practices, as stated on their respective websites. According to The West Virginia Daily News, poultry producer Oak Tree Farms installed the most extensive solar energy solution in the area to power their operations — producing over 940,000 kWh of energy per year, reducing their annual electricity spend by 10%.
Mid-size producers could benefit significantly by following these companies’ lead to diversify their energy portfolios and combat volatile utility costs by capturing long-term solar energy rates. Significant financial advantages from federal tax incentives or through negotiated power purchase agreements (PPA) from solar development companies exist to incentivize those on the fence. Often, PPAs dramatically reduce and cap long-term rates by as much as 20-30%. Not only do these measures save money, but they aid businesses in achieving their sustainability goals.
OUR ADVICE: As fuel costs continue to rise, leaders can shore up operations by diversifying their energy portfolio. Whether exploring alternative energy sources (like solar) for manufacturing plants or converting your fleet to electric, diversification helps ensure longevity, reduces disruption to operations, and improves energy cost predictability.
As food and beverage manufacturers aim to increase connectivity and productivity, many have moved towards smart factory automation. However, the adoption of this technology has come with risks.
The F&B sector ranks the third most compromised industry, accounting for 10% of all reported cyberattacks, according to Trustwave, a global cyber defense company. Most of these attacks have been on larger companies, with the perceived means to pay higher ransom demands.
However, smaller companies have also been the target of attacks, specifically when initiating digitized operational processes, and system vulnerabilities are not yet shored up, Food Engineering Magazine reported at the close of 2022. One such incident mentioned in the article was an attack on meat processor JBS’s operations, costing the company $11 million in ransom.
Other companies targeted by such attacks include Molson Coors, Ferrara’s, and Schreiber Foods. Many business leaders are instructing their security teams to think like their attackers to combat similar attacks. According to Fortress Security Risk Management, a leader in cyber intelligence, adopting this strategy may be business leaders’ best bet at winning the battle. In an article published on their site, Fortress SRM experts say simulating an attack and running drills can expose vulnerabilities in systems before those with malicious intent take advantage – allowing time to develop a solution.
Paring this mindset with a behavioral-based Endpoint Detection & Response (EDR) agent is helping many stay ahead of hackers with new AI-backed techniques, according to Fortress SRM. EDR is AI-powered next-generation anti-virus and is exponentially more effective than traditional signature-based anti-virus.
OUR ADVICE: Understand your risk exposure, both internally and externally. Get a cyber risk assessment and penetration test to check your perimeter. Then secure your attack surface – ensure firewalls and remote notification software are up to date and working correctly.
Securing all internal endpoints (laptops, desktops, and servers) with an EDR agent could keep you ahead of new malware attacks — like those created with AI engines such as ChatGPT. Traditional remote alarm notification agents, utilizing signature-based anti-virus, do not stand up to this new tech.
Lastly, review your cyber insurance policy to ensure your operations are covered in the event of an attack. If your company does not have cyber insurance coverage, now is the time to invest. Typically, cyber insurance policies that do not include multifactor authentication, good cyber hygiene (patching), and EDR won’t be written or are expensive.
The F&B industry will continue to face challenges throughout 2023. Remaining flexible, and diversifying your supplier base and energy sources, will be essential throughout 2023 to offset inflationary pressures and rising wages. Offering alternative incentives can help attract and retain staff while offsetting pressure to increase wages substantially. Furthermore, shoring up your firewalls, implementing best practices regarding cybersecurity, and ensuring you have a comprehensive cyber insurance policy are paramount moving forward.
Michael Plesha joined Expense Reduction Analysts in 2014, bringing over 20 years of global supply chain operations experience to our network of experts. His extensive background in manufacturing, distribution, logistics, and transportation across multiple industries allows him to deliver unique insights for meaningful, sustainable results to his clients in the agriculture and food and beverage sectors.