2023 will be a challenging year for food retail and CPG, but what else is new? Nearly 3 years into a pandemic-induced hangover, the grocery industry continues to undergo enormous shake-ups, evolution and corrections.
Food price inflation (CPI) still sits above 10%, the highest in decades. In 2020, Covid-19 shut down vast swathes of the economy. Commerce then restarted with radically different consumption patterns, which continue to this day. Fragile, Just In Time supply chains were built for financier-friendly predictability and just couldn’t handle the new reality. Extreme weather events affecting harvests, avian flu causing poultry culls and Russia’s invasion of Ukraine have piled on. Rampant profiteering by railroad, ocean shipping, fertilizer, grain trading, meat processing, manufacturing and retail conglomerates, has contributed over 50% of price hikes while lining shareholders’ portfolios. The Federal Reserve has raised interest rates 7 times in 2022, and has promised additional hikes in 2023, based on outdated assumptions that working Americans have too much earning power and savings. Would you nuke a forest fire? Monetary policy is meant to stabilize prices and labor markets, and so far, there’s not much stability, just plenty of fallout.
Dollar Dollar Bill, Y’all
What does this mean for emerging food enterprises? Money will stay expensive and investors will be more hesitant to throw funding at food innovation. In the immortal words of Wu-Tang Clan– that would make Karl Marx blush with materialist envy- “cash rules everything around me”. Surviving 2023 means prioritizing cash flow and stopping the bleeding that, until recently, was encouraged by investors in the name of rapid growth. Growth capital won’t be impossible to come by. But it won’t be easier, particularly with more “vulture” capital seeking fresh carrion and “down rounds” becoming more common in financing. What a difference a year makes.
The challenges with this new reality are sundry. More trade spend surges will be implemented by larger manufacturers who took price hikes and have a glut of inventory leftover due to lower consumer demand. Customers are buying less after 18 months of pass-through cost increases and long-gone stimulus money. Retail sales dollar growth is exceeding unit growth, which has cycled negative in many companies. Retailers are reacting by pushing more private label and demanding higher slotting fees to milk more revenue from suppliers. Pay to play always benefits economies of scale. And despite over 80,000 food industry job openings, recent layoffs at Walmart, Pepsico, Misfits/Imperfect Foods, Motif Foodworks, Go Puff, DoorDash, General Mills, Coca-Cola, Beyond Meat and Impossible Foods signal that a “growth recession” has already hit the food industry.
But John Foraker, the CEO of Once Upon A Farm and former CEO of Annie’s, is optimistic about the coming year. “There is little evidence out there that consumer interest in cleaner, healthier food options abated in any material way over the past year. All the retailers I’ve spoken to over the past year are hungry for innovation and newness. In short, consumer demand for premium wellness positioned food and beverage remains very strong, both online and at retail, and retailers are hungry for it”.
Despite the USDA historically being a handmaiden to agribusiness, Covid-19 shortages, deaths and illnesses forced the agency to adopt a more diverse and pluralistic approach to food industry programs. Recent USDA funding to biotechnology, meat processing, organic farming transition and regional food centers will start impacting the broader marketplace. Stakeholders have started plugging these subsidies into market development, supply chains and R&D. And the USDA Farm Bill is up for approval in 2023. A coalition of food advocates, NGOs and companies is pushing for ambitious changes to farm and food policies. These include Good Food purchasing standards in federal food procurement, regenerative agriculture funding, and expanded nutrition and food relief programs. Food insecurity will continue to remain rampant unless effective anti-poverty measures such as the Child Tax Credit are renewed. The CTC cut poverty in half and reduced food insecurity by over 25%. 41 million SNAP recipients drive over 15% of total grocery channel sales, nearly 9 times the volume of all food distributed by food banks. But even the Government Accountability Office has recently analyzed USDA SNAP funding calculations as more stingy than “thrifty”.
The FDA will be under massive scrutiny after mishandling a nationwide infant formula crisis. A Politico expose detailed extensive organizational issues at the agency. And recent FDA decisions have mystified the food industry. The FDA took a tough approach to CBD consumables. Meanwhile, they were seemingly promoting GMOs despite a deeply flawed “bioengineered foods” labeling framework that exempts the majority of products containing GMOs. Various food industry stakeholders are calling for reforms, including merging FDA food supply responsibilities into the USDA.
A better-funded and strengthened National Labor Relation Board means that food companies should make sure they are familiar with and in compliance with labor laws. While real wages continue to decline relative to inflation, the recent wave of union organizing has galvanized over 71% of the public supporting organized labor. And why not? Unions consistently mean better pay, safer working conditions and better benefits. While less than 8% of private sector employees are unionized, over 70% of recent union drives have been successful. Employees at Amazon, Trader Joe’s, Mom’s Organic Market and New Seasons have won unionization votes despite expensive union avoidance campaigns to convince them otherwise. Recent contract victories for UFCW, BCTGM and RWDSU locals have resulted in significant wage and benefits increases that are the envy of the industry. Or should food companies follow the example of Starbucks
The renewed focus on employee well being is also an opportunity to fulfill corporate ESG commitments. Companies can support employees by foregoing captive audience meetings, voluntarily recognize unions when employees choose that option, and bargain in good faith. Meanwhile employers will have to boost compensation, benefits and retention strategies for over 8 million workers as more states raised minimum wages on January 1.
And food workers may benefit from funding authorized by the bipartisan WORK Act. The legislation authorizes over $50 million to seed and support employee and worker ownership. Employee ownership typically means better compensation, benefits, training and retention. A number of high profile food companies are already employee or worker-owned, including Publix, Bob’s Red Mill, Equal Exchange and King Arthur Flour.
The Federal Trade Commission may be making some headway in regulating heavily concentrated industries. A stronger FTC could be helpful to emerging brands and independent retailers. It’s not easy to compete and negotiate with oligopolistic meat, snack and beverage companies who dominate supply chains, shelf space and customer wallet share. While the Kroger-Albertsons merger and $4 billion investor dividend drama has drawn the most grocery antitrust attention, enforcement of the Sherman and Robinson-Patman Acts could remake the food retail and CPG landscape.
Sweat The Technique?
The Regenerative Organic Certification (ROC) will continue to emerge from the fray of regenerative rubrics. ROC has a clear framework and strong backing from industry collaborators, including retailers and brands. ROC is also rooted in organic certification. It has more in common with “deep organic” frameworks like Demeter Biodynamic and Real Organic Project than many of the corporate regenerative farming promises. ROC has been building a network of producers who supply an enthusiastic slate of member brands with agroecological and perennial crops and ingredients. However, price will remain a concern for inflation-weary consumers, so market penetration will be limited by affordability. And lack of inclusion of food workers in governance and oversight may also limit the transformative potential.
Next generation GMO food technology, or synthetic biology, will also gain greater market visibility. This includes cultivated meat, which was recently greenlit by the FDA, as well as microbial dairy, oil and proteins (aka “precision fermentation”), which are produced by genetically engineered microorganisms. The Biden Administration has boosted the industry with an Executive Order that mandates federal funding for R&D and market entry. Environmental claims relative to factory farmed agriculture will appeal to younger, eco-conscious and tech-savvy consumers. However, the rush to market has overshadowed a “race to mission”and questions remain about ownership, patents, pricing, scalability, waste and biohazard risks, including such recent public disclosures:
The full effects of deployment or release of our genetically engineered organisms and materials into uncontrolled environments may be unknown… Such deployment or release… could impact the environment or community generally… We work with biological and chemical materials that could be hazardous to human, animal, or plant health and safety or the environment… Our operations produce hazardous and biological waste products.
And finally, whither plant-based processed foods? While the category will continue to decline in the short term as retailers rationalize oversku’d and underperforming assortments, they still have a bright future. Fungi (ok, technically not plants), oats, legumes and adjacent ingredients will help grow category popularity and market share. And a number of companies are developing fully transparent, regenerative value chains with family farms to secure ingredient supplies and create better products. This foresight may catapult these brands to category leadership and help foment a new “climatarian” or “climavore” focus for food companies.
2023 promises to be another turbulent year for the food industry. But everyone has to eat, and most people depend on the for-profit sector for the vast majority of their calories. And factoring in a Republican-controlled House of Representatives, 2023 definitely won’t be boring in the grocery store.