Checking in: the food and beverage industry during COVID-19
Since March 2020, the food and beverage industry has found itself in the midst of unprecedented times. Yet even as we enter a global economic recession, the experts project the food and beverage industry to one of the only consumer product sectors to grow in 2020. This does not mean it is all smooth sailing.
Manufacturers and distributors are feeling the pressure of the global health pandemic, record unemployment, and other factors impacting how consumers spend their money. As companies continue to manage the crisis and plan for the future, success will hinge on their ability to demonstrate resiliency, utilize innovation, and promote transparency.
With this article, we take a closer look at some of the trends in the food and beverage industry stemming from the COVID-19 pandemic. While some trends may be temporary, others are likely here to stay.
General impact across the food and beverage landscape
Despite a number of industries taking a considerable hit as a response to COVID-19, the food and beverage industry has held up fairly well. Admittedly, away-from-home consumption (i.e., restaurant dining) has experienced a dramatic drop off, but the massive growth of at-home consumption has helped to offset the decline.
Overall, a number of trends have emerged regarding consumer preferences and shifts in behavior. Branded food and beverage products are performing very well, and consumers and retailers have chosen to favor established, trusted brands – at the expense of new entrants into the market. We have also seen significant growth of at-home consumption, coupled with booming e-commerce and delivery options.
Shifting food habits
With COVID-19 affecting supply chains, consumer purchasing, and more, a vast majority of Americans have shifted their food habits over the last few months. In fact, 85% of consumers have reported a change to their habits surrounding eating or food preparation, with the most common change being that people are cooking at home more often than before the pandemic. In addition, consumers are also snacking more, washing their fresh produce more, and thinking about food in general more than they did pre-COVID.
Considering that we are currently experiencing a health crisis, it’s of little surprise that about 50% of consumers are at least somewhat concerned about eating food prepared outside the home. Typically, food safety concerns are more pronounced for online grocery shoppers than those who purchase their groceries in person. However, 67% of consumers are at least somewhat confident in the safety of the U.S. food supply – reflecting no change compared to 2019.
As noted above, there has been a significant transition to at-home food consumption. And this trend appears likely to stick. Grocery sales skyrocketed at the beginning of the pandemic when restrictive orders were put in place by local governments, yet even as buying normalized in April, grocery sales were still relatively high.
So the question then becomes – will this last? It appears so. Over 70% of consumers indicated that they expect to cook more even after COVID-19 concerns pass. This is particularly convincing when we consider the fact that 53% of consumers are either unlikely or unsure if they will go back to restaurants as they reopen.
Consumer spending
As most of us recall, the announcement of government-ordered lockdowns and “shelter-in-place” orders caused a frenzy at grocery stores and other consumer goods retailers. Consumers initially “panic bought” core staple items including dry goods and frozen foods.
For example, compared to pre-COVID spending levels, dry goods sales grew by 20-25% and grocery perishables increased by 15-20%. A survey conducted by the American Frozen Food Institute revealed a 70% increase in frozen food sales. This is in sharp contrast to dining out, which fell by an incredible 90-95%.
E-commerce takes off
Online grocery shopping was already a burgeoning area prior to the current pandemic. However, due in part to the governmental orders over the last several months, an additional 10 million grocery shoppers have gone online with 30% of them repeating their online purchasing channel participation.
In fact, the growth in e-commerce, as related to food and beverage purchases, has been so astronomical, that experts estimate that the e-commerce sector may have been propelled ahead by three to four years just in the last four months.
Breaking it down, we see in a year-over-year dollar comparison, traditional grocery retail has grown by 17%. However, e-commerce grocery shopping has grown by 64%. Alcohol alone, mostly driven by the sale of wine and spirits, has seen an e-commerce spike of 141%.
As shoppers shift to online spending for their groceries, traditional retail has taken a bit of hit. The experts do expect that some of the shift to online channels will be permanent.
Health foods continue to thrive
Throughout the pandemic, we have seen the healthy food trend evolve. Consumers eat healthy to lose weight, increase energy and improve sleep. Now they are searching out ingredients that boost immunity and prevent illness. Shelter-in-place and reduced discretionary income caused more people to cook from home, finding it easier to eat healthy. As unemployment grows, more people find themselves without medical benefits, thus motivating consumers to stay healthy and avoid expensive trips to the doctor.
Consumers are prioritizing the health and wellness benefits of their food and beverage consumption. The data demonstrates that a willingness to pay for products that: contain healthy supplements are nutritious, maintain a strong immune system, contain high-quality ingredients, and offer a satisfying taste.
While consumers continue to consider plant-based products as healthy, it may be difficult for some manufacturers to pivot. Many smaller plant-based manufacturers focused primarily on restaurants and may not have a distribution channel to retail in place. On the other hand, many consumers may choose to eat plant-based proteins considering potential future meat shortages and higher prices. To achieve success, manufacturers will need to get control of their supply chains and distribution channels and use predictive analytics to prepare for potential future disruptions.
Alcohol sales shift to off-premise and seltzer takes off
The closure of restaurants, bars and other locations where alcohol consumption is common was initially devastating for the alcohol industry. In fact, there was an 80-90% overnight decline in alcohol sales following closures in March. However, online alcohol sales and “off-premise” consumption have begun to boom. In the pre-COVID weeks of 2020 (approximately 11 weeks) there was a total of $4.5 billion in total off-premise alcohol sales. Then, March hit. From the week ending March 7, 2020 through the week of May 16, 2020, off-premise alcohol sales ballooned to $19 billion.
With the shift to at-home consumption, we have seen the largest growth come from spirits (driven by hard seltzers, tequila, gin and bourbon), followed by wine (with large brands growing faster than smaller ones), and finally beer (driven by growth in the premium segments).
Of particular interest during this time is the drastic growth of hard seltzer. Hard seltzer, a drink popular among millennials, has proven to be one of the most resilient segments of the entire alcoholic beverage industry during the COVID-19 pandemic. Even with the sting of sudden bar, restaurant and on-premise tasting room closures, retail sales haven’t missed a beat. According to Nielson, since the week ending March 21, 2020, each week’s dollar sales of hard seltzer within the U.S. off-premise market has exceeded the week of July 4, 2019 (previously the highest individual week of sales).
Moreover, the week ending June 13, 2020 represented the fourth consecutive week during which hard seltzer drove more than $100 million in retail off-premise dollar sales, and the 10th consecutive week during which annual retail hard seltzer dollar sales increased by at least $50 million.
With the meteoric rise of hard seltzer comes new opportunity for manufacturers and retailers. While 20% of the market is comprised of seltzers aligned with parent beer companies, the leading seltzer brands – White Claw and Truly – are not. Hard seltzer gained traction because of its correlation to health and wellness, convenience and an intriguing variety of flavors (notice how these trends resonate throughout the food and beverage industry as a whole right now).
The growth has opened the doors to an even broader array of new and bolder flavor options, and its allowing manufacturers to expand the limits of what ‘hard seltzer’ means. Hard seltzer was already growing before the pandemic struck, and it has exceeded expectations since. No matter how you look at it, hard seltzer has the most sustainable trajectory across the U.S. alcohol landscape and it is proving to be far stronger than just a summer ‘fad.’
Animal meat takes a hit
As consumers stockpiled groceries in March, food manufacturers of all types ran multiple shifts to keep up with demand. Despite the strict guidelines to keep food safe, the pandemic shone an unfavorable light on the meat and poultry processing industry. In early April 2020, the U.S. Center for Disease Control (CDC) became aware of several cases of plant workers testing positive for COVID-19. After a month-long investigation, the CDC discovered 4,913 cases and 20 deaths reported from 115 plants in 19 states.
Several factors contributed to the quick spread of the virus, both from structural and operational constraints to social and economic challenges. The CDC recommended changes such as increased sanitation in high touch areas, physical distance barriers, face coverings, and more to improve working conditions. While many plants temporarily closed their doors to address the problem, the President issued an executive order to keep the plants open. This encouraged another round of panic buying, which resulted in higher retail prices and limited selection.
In a survey of 1,000 consumers performed by Datassential in early May, 69% of U.S. consumers identified themselves as meat-eaters. The survey also asked these meat-eaters if the spread of the virus among meat processing facilities would prevent them from future meat purchases. Only 39% expressed concern but would still buy meat; another 37% showed no concern at all. While these are positive signs for the meat and poultry industry, the processors should be wary of price. As a result of the rising unemployment rates and concurrent economic downturn, consumers are more resourceful and flexible. While they may not stop eating meat, they will most likely limit consumption to save money.
Supply chains tested
Skyrocketing grocery demand and shuttered restaurants created major production and distribution challenges for those involved in the food and beverage industry. From the farms and factories to the distributors and retailers, supply chains were put to the test.
Farms have seen prices for corn, cattle, hogs and milk drop as demand from restaurants, colleges, schools and other institutions has evaporated. At the same time, production was already very high and farms had existing stockpiles. This led to the now-famous stories of farmers having to dump out their milk because they had no one to process or consume it. Now drops in future prices has made harvesting certain vegetables unprofitable for farmers.
Factories, like meatpacking plants, have been under intense scrutiny for their working conditions and employee safety. The forced closure of these plants resulted in a decline of meat production and a corresponding increase in retail prices. In addition, some consumer packaged goods businesses have struggled to meet the sudden spike in demand from supermarkets.
Distributors have their own set of unique problems. For instance, the prices to transport food are on track to hit a five-year low because the rapid increase in grocery orders has not offset lost orders from restaurants, schools, and sports events. In addition, wholesale prices for some supermarket staples have jumped amid product shortages. Also, because food intended for restaurants cannot be easily rerouted to grocery stores, there has been consistently mismatched supply and demand.
Finally, the retailers have their fair share of obstacles as well. For example, grocery stores have seen a tremendous increase in consumer traffic, however, with the increase comes higher costs to maintain elevated safety standards. Simultaneously, supermarkets have struggled to keep some popular items on their shelves, particularly as sales of canned and packaged food jumped. On the digital side of things, e-commerce has seen a significant uptick as consumers sheltered in place.
The challenges at each level of the supply chain now present endless questions for the future. What is the trade-off between labor safety and cost? What is more cost-effective, permanent or temporary labor? What are the optimal pricing and promotional strategies? How will consumer behavior change after restrictions are lifted?
As we navigate these unchartered territory, Baker Tilly is here to work with you to optimize your business strategies and tax planning. Our manufacturing and distribution team has advanced knowledge and experience working with companies in the food and beverage sector. We make it a point to stay abreast of industry news trends, and challenges.
