THE U.S. food and beverage industry, in the aftermath of the recession, faces sluggish consumer demand at a time when food prices are soaring, especially for animal proteins.
Chris Nay, corporate finance senior managing director, food and beverage, for GE Capital, told Feedstuffs that food prices are definitely growing to the point that certain areas in the food sector will probably rise over income. For instance, animal protein prices have grown 10% year over year, which could drive changes in consumer purchasing habits, including substitution.
According to the GE Capital "Food & Beverage Industry Economic Outlook Survey," two in three of the 50 midsize companies — with revenue ranging from $10 million to $1 billion — that took part in the survey are concerned with the rise in commodity costs.
"The health of the food and beverage sector as compared to other companies in the middle market is less volatile," Nay said. "We see a real robust demand for improving food efficiency, improving food safety and investing in the companies."
As stated in the survey results, 73% of the food companies plan to improve operational efficiencies to lower costs. Additionally, 50% intend to expand automation, and 45% are planning to upgrade or replace equipment.
Furthermore, Nay explained that every mid-market company continues to struggle with meeting consumer price points, especially as large retailers — such as Wal-Mart, Costco and Target — pressure manufacturers to keep food and beverages at a low price point level.
Despite everything, commodity cost upsurges are likely to be offset by pricing strategy, improving operational efficiency and boosting sales by creating product opportunities that align with consumer trends.
Moreover, food and beverage companies are focusing on the consumer.
Specifically, consumers are more concerned with health and sustainability, with about one-third responding positively to marketing messaging such as "gluten free" or "natural."
As a result, "The middle-market food companies are innovating with new products," Nay added. "Manufacturers are reformulating products."
In addition, he said, for ingredient suppliers, being on the forefront of that reformulating process is crucial for long-term business growth.
Although Nay said a lion's share of consumers typically want to eat better and want to know where food comes from, a smaller population, approximately 30%, question what is in food products.
Yet, having information available in an instant for consumers has food and beverage companies on guard.
"With the internet, food brands are being very cautious about what is being said and (as a result) drives changes in a product," Nay added.
Marketing with integrity
At the Food Dialogues last week in Chicago, Ill., hosted by the U.S. Farmers & Ranchers Alliance, a panel comprised of farmers and ranchers, food industry executives, marketing ethics academia and consumer representatives discussed how integrity in food marketing needs to involve honesty and transparency.
Panelist Clarke Caywood, professor of the integrated marketing communication department at Northwestern University, explained separately that food and marketing are high-risk issues, so the marketing of food must be held to the highest standard, reaching beyond the law.
Nevertheless, Alan Moskowitz, director of Communispace, challenged the notion that consumers want complete transparency.
From a food marketing perspective, Moskowitz explained, "Integrity in food marketing is about providing truthful information about your brand and products that your target customer needs while maintaining your position in the marketplace."
Furthermore, Mike Donahue, chief brand and communication officer for LYFE Kitchen, said the consumer is always in front of the marketplace and often doubts the sales pitch. He added that marketing is about building trust in the brand.
Donahue said transparency and integrity are not meant to be defined but are emotional topics. Food claims generate an emotional relationship.
"The fact of the matter is consumers create relationships with brands," Donahue said. "Those who have pop signs, those that have buzz words that are not real, those that try to do environmental fraud will be voted against with the feat of the consumer."
Donahue said transparency is explaining the entire story because the rest of the story often surfaces.
However, Moskowitz is not certain that consumers want every single detail divulged as far as food is concerned. In fact, he added that, based on his experience, the majority do not want to see inside a sausage factory, for example.
"I think they (consumers) want transparency that meets their needs for trust for that emotion but are not sure they want full disclosure," Moskowitz said. On the other hand, "activists want full disclosure."
Ultimately, no matter the marketing approach, the consumer has to actually buy the product and serves as the gatekeeper of whether a food product will gain market share or disappear.