Under Inflation and Supply Chain Pressure, the Outlook for Food and Beverage Companies in 2022 Is Shrouded in Uncertainty

Editor's note:This article is part of the "2022 Food and Beverage Industry Trends" series.

When Hain Celestial planned to consolidate two U.S. snack factories into one last spring, CEO Mark Schiller faced a major problem that could hinder production of its largest food brands: a labor shortage that made it impossible to hire the 200 workers needed for the new plant.

The executive, who previously worked at Pinnacle Foods and PepsiCo, responded quickly by finding an overseas manufacturer to produce the goods, which were then air-freighted to the U.S., "at a high cost, just to keep inventory and prevent retailers from replacing us with other brands," Schiller said.

Today, that partner has not only become a permanent supplier but also represents the first step in Hain's push to diversify its supply sources—covering product and packaging production, ingredient supply, and distribution of tea, yogurt, and chips—to reduce the impact of future disruptions. Schiller said this runs counter to the past corporate priority of pursuing low-cost, high-efficiency supply chains.

"Surviving in this environment has almost become the new normal: you have to have a very flexible, agile business model," he said in an interview. "This is unprecedented."

"Never seen anything like this"

Food and beverage manufacturers like Hain are facing a series of challenges that test even the most seasoned CEOs. Supply chain disruptions, labor shortages, surging consumer demand, and soaring inflation are hitting consumer goods companies simultaneously, and it remains unclear whether and how conditions will improve in 2022. These disruptions have left many executives caught between maintaining competitiveness and responding to shifting trends.

General Mills, which makes Cheerios and Nature Valley granola bars, said its challenges are particularly acute in the supply chain, and the company is facingrecord levels of disruption, involving ingredient suppliers, its own factories, and even customer warehouses. The Minnesota-based company has in some cases been unable to fully meet customer orders.

"If you look at our pricing... we will offset inflation. The real issue is short-term supply chain costs, which is clearly our biggest challenge," Jon Nudi, who runs General Mills' North American retail business, said during thesecond-quarter earnings call in December. The company has recently raised prices on some products by about 20%,CNN reported。

Neil Saunders, managing director at GlobalData, said executives at several consumer goods companies have told him they are struggling to determine how long the many challenges they face will last and how best to position their businesses to respond.

"Even seasoned corporate and industry executives who have been through multiple boom-and-bust cycles are saying 'we've never seen anything like this,'" Saunders said. "No matter which way you look, there are unusual dynamics, which makes planning very challenging and difficult."

The problems plaguing consumer goods companies include unprecedented volatility in the supply chain, making it difficult for companies to secure packaging, raw materials, and trucks to keep up with surging demand. The highly contagious Omicron variant has sickened employees at many consumer goods companies, further straining the supply chain.

"We have good reason to expect that the supply chain may remain tight for the next month or so, until the Omicron wave passes," Conagra Brands President and CEO Sean Connolly said last week.

These disruptions have collectively led tofrequent shortages and temporary out-of-stocks。

"In fact, it's like whack-a-mole," Vivek Sankaran, CEO of grocery giant Albertsons, said on its second-quarter earnings call in October. He noted the unpredictability of whether a particular item will be on store shelves, "any given day, something in the store will be out of stock."

Supply chain disruptions have prompted many companies to reduce promotional activity. Analysts and consumer goods companies say that when demand is already high and there is uncertainty about whether manufacturers can produce enough, there is little need to stimulate consumption through promotions.

"You don't want consumers looking for a specific product in the store to feel frustrated and then not find it," said Erin Lash, director of consumer equity research at Morningstar, who herself sometimes struggles to find Lunchables and small bottles of Gatorade.

Inflation at its highest level in at least a decade is also hitting nearly all major food and beverage companies, prompting them to pass higher costs on to consumers across a wide range of categories.

Conagra, Campbell Soup, Coca-Cola, Nestlé, and Hain are just a few of the consumer goods companies that have announced price increases. Analysts expect more increases at least through the first half of the year. Many consumer goods companies have announced plans for or already implemented another round of price increases to further offset rising costs.

Any further increases would stack on top of the hikes manufacturers implemented in 2021. According to the U.S. Department of Labor's November Consumer Price Index report, food prices at home rose 6.4% over the past year, the largest 12-month increase since the period ending December 2008. All six major grocery categories tracked by the government rose over the past year, ranging from 1.6% for dairy and related products to 12.8% for meats, poultry, fish, and eggs.

Krishnakumar Davey, president of client engagement at IRI, predicts food prices will rise an average of 5% by the end of June.

So far, evidence suggests consumers are willing to accept price increases on some of their favorite products.

According to IRI data, total food and beverage sales in the eight weeks ending December 26 (boosted by the holiday season and the rapid spread of Omicron potentially encouraging more at-home consumption) remained stable, growing at an annual rate of about 2% to 2.5%. But the question facing consumer goods giants is whether price increases will further impact U.S. consumers.

General Mills' Nudi noted that elasticity is currently lower than in the past, but he expects it to rise in the future. Elasticity is defined as the change in consumer demand after a price change; lower elasticity means more consumers will not change their buying habits when prices rise.

Chris Foley, president of Campbell Soup's meals and beverages division, told Food Dive that the company, which makes Swanson and V8, has been raising prices cautiously to ensure increases are commensurate with rising inflation.

Campbell has not seen a "dramatic change" in price-based consumption, Foley said last month. "We are not seeing elasticity more dramatic than we predicted."

PepsiCo CEO Ramon Laguarta expressed a similar view in October, noting that the snacks and beverages giant "is seeing much lower elasticity on pricing than historical levels."

Will buying habits change?

As the new year unfolds, people will become increasingly less tolerant of price increases and will change their buying habits as a result, IRI's Davey said.

Consumers will increasingly seek promotions and other value-shopping strategies. The premiumization trend that has penetrated many categories will become less attractive to middle- and low-income households. And private label—a category thatunderperformedduring the pandemic due to supply issues—will gain momentum, Davey said. Shoppers will also change what they buy, trading down from premium cuts of meat to ground beef, or stocking up on frozen chicken instead of fresh.

"When prices rise this much, people trade down and look for value," Davey said. "Some consumer goods companies are still talking about 'consumers being price-insensitive,' which no longer exists."

Post Holdings President and CEO Rob Vitale told analysts in late November that he has observed private label "ticking up" over the past eight weeks, but noted it is too early to tell whether this marks the start of a longer-term shift. Post's portfolio includes private label as well as brands like Pebbles cereal and Bob Evans frozen foods. "If these trends persist, this will be a turning point," he predicted.

The reason for uncertainty lies in potential shifts in consumer spending. Many consumers who spent most of 2020 and 2021 traveling less, dining out less, and commuting less have more disposable cash on hand. Meanwhile, government stimulus measures provided extra cash, offsetting the economic hardship caused by the pandemic.

But with savings dwindling and government support fading, many market observers are increasingly skeptical about whether consumers will remain willing to pay higher prices for meals and snacks in the new year. The risk for consumer goods companies: raising prices so much that consumers do not return once economic conditions stabilize.

Despite the ongoing pandemic, people are traveling more and returning to postponed daily activities such as dental appointments or dining with friends and family. IRI's Davey predicts that holiday spending generosity will give way to more conservative spending patterns in the new year. As more consumer goods companies pass higher costs on to customers, a wave of price increases affecting more products could pressure consumers.

One way to offset this is for food manufacturers to cut back or carefully limit promotions, change packaging, or reduce product content while keeping prices the same—strategies that are less visible to price-conscious consumers. Hain's Schiller said the company is implementing these practices, but they may take months to appear on store shelves.

Morningstar's Lash observed that consumer goods companies that prioritize investing in marketing and innovating across multiple product tiers are most likely to be winners when buying habits shift. "Keeping consumers within your brand family is far more economical and value-adding than trying to win them back or convince them," Lash said.

Some executives emphasized their ability to offer a full range of products in case some consumers decide to trade down.

"We ensure we are differentiated at every level of the price ladder—from entry to mainstream to premium—so that even if consumers' circumstances change, they can stay within our brand system," Kraft Heinz CEO Miguel Patricio said last fall.

Improving products through new flavors, items catering to trends like healthy eating, or eye-catching new packaging may also make consumers more willing to accept price increases. Schiller said Hain's price increases have averaged between 6% and 10%, but "volumes have barely declined" because the company attracts more affluent consumers and health-conscious demographics.

Despite ongoing uncertainty, most consumer goods companies remain fairly optimistic about the new year.

Kellogg CEO Steve Cahillane told Wall Street in November that the cereal giant's "majority of the business is growing and is very resilient, strong, and sustainable."

In a November report, analysts at investment bank Stifel predicted food manufacturers would see organic revenue growth of 3.6% in 2022, even as price increases keep volumes flat or declining and dining out continues to perform better.

"While it's easy to get caught up in the quarterly impact of inflation and pricing, it's important to keep an eye on the big picture," Conagra's Connolly said last week. "When you step back and assess the broader environment and how our portfolio meets the needs of modern consumers, we believe Conagra is uniquely positioned for the future."