Healthy Optimism Across the Food Industry

Inflation: the worst might be behind us, but cost pressures are likely here to stay

• We heard that the degree of inflation that the food industry has faced over the last two years is “the worst in 40 years,” and was brought about by a confluence of factors: supply chains impacted by COVID, the war in Ukraine (which had been a significant global supplier of grain), high levels of inflation affecting fuel and fertilizer, a challenging labor market and adverse weather-related factors that impacted commodity yields.
• With regard to the U.S. economy, Austan Goolsbee, Head of the Chicago Federal Reserve, shared that – after ten consecutive increases to benchmark interest rates – the Fed’s decision to pause rates was a “close call.” Looking ahead, the Fed will evaluate certain markers with regard to employment, housing, services and goods before it makes a further decision about a longer-term rate pause.
• Kellogg’s CEO said that, while the public may perceive that food manufacturers have opportunistically raised prices excessively, the company is just tracking inflation. Indeed, Kellogg’s CEO stated that the company’s gross margin is the best indicator of the balance of higher input costs and the degree to which prices have been raised to offset those higher costs. He noted that Kellogg’s gross margin is still below historical levels and has not yet fully offset the cost pressure on the business.
• Companies are underlining the importance of tiered pricing. For example, in the pet sector, it was stated that there is a significant uptick this year in pets being sent to shelters as the cost to feed a pet rises and becomes less affordable. Companies like Mars are keenly focused on maintaining a broad range of price points for their pet food offerings, so that there is an option to “trade-down” for the pet rather than “trade-in” the pet.

Climate change and labor shortages are presenting massive challenges across the food chain

Climate change:

• Several attendees spoke of the historic drought that the U.S. is experiencing, and more generally, how weather-related factors are appearing to be more severe (e.g., more frequent and stronger storms, hotter and dryer summers, etc.).
• One speaker talked about the opportunities to “work with” Mother Nature and harness energy and water, but then also noted that these types of efforts are expensive and energy intensive to set up, and with the lack of funding for agricultural infrastructure at the federal or state level, many regions lack the funding to be able to mitigate or manage through these challenges.
• Another speaker addressed the issue of how climate change is impacting food safety. In some cases, more wet and humid weather promotes spoilage, while in other cases, more hot and dry weather necessitates refrigeration. We also heard how more industrialization and development in parts of the country has affected agriculture (e.g., heavy metals and chemicals found in soil), and as a result, there has been a call to action for tighter standards with regard to testing, certification and regulation.

Labor shortages, inefficiencies and related costs:

• Cabot Creamery noted that despite how much technology they have added into their milking of cows and the processing of their dairy products, labor is still the second largest expense item in their cost structure. We heard that given cows need to be milked three times each day, seven days a week, 365 days a year, it is critical to employ a robust work force on a commercial scale dairy farm year-long.
• Smithfield Foods shared that during COVID, when production was constrained, the company eliminated 35% of the SKUs that they had produced prior to the pandemic. Coming out of COVID, the company did not return to producing these SKUs, and in turn, the company’s profit margins have increased as the smaller assortment has led to greater productivity. The company also noted that they have performed rigorous analysis to “cost out” each job function, not with an aim to eliminating positions, but rather with a goal of increasing productivity (as demand for pork products continues to increase, and as Smithfield increases the proportion of their products that are exported). Similarly, Smithfield said that today, 25% of their capital spend is directed towards automation, again with a view towards increasing productivity and augmenting the existing labor force.
• A lingering impact of COVID is that when food service workers lost their jobs during a prolonged economic shutdown, many workers found other employment, and it has been hard to bring them back to their prior jobs. We heard from the CEOs of three different restaurant companies that while they have tried various approaches to streamlining their businesses (e.g., simplifying their menus), managing the high level of turnover in the food service industry is a persistent challenge.
• We heard from Chef Rick Bayless, owner of Frontera Grill and several prominent restaurant concepts, that his restaurants have adopted a policy of adding a flat 20% service charge to every check and offering the customer the option to pay additional gratuity. The advantage of this approach is to reduce tension in the restaurant (which waitstaff gets assigned to which tables) and even out how the tips are distributed (not only among waitstaff but in the kitchen as well). Bayless’ experience is that the majority of consumers actually like this approach to a service charge being included in their bill, as it eliminates tension from the end of the meal and streamlines their departure from the restaurant.
• The Under Secretary of the USDA talked about some challenges in investing in the U.S. agriculture economy, noting that, while there are some opportunities that can come from current immigration policies, there are still significant infrastructure issues across big parts of the country (e.g., the lack of housing to support more labor, insufficient irrigation and the fact that 25% of rural residents in the U.S. lack consistent internet coverage).

Food insecurity is an emerging “pandemic” in the U.S.

• During the COVID-driven quarantine periods, one of the greatest concerns for some families in the U.S. was the fact that their children, who relied on free breakfast and lunch at school free, would not have access to meals. While this period of time did not last long, this issue highlighted the significance of food insecurity as a critical issue  Additionally, with shrinking budgets for many school districts, programs that support healthy nutrition such as home economics (which introduces the idea of a home-cooked meal to many) and higher-cost salad bars (which have been replaced by pre-packaged, lower cost, more ultra-processed foods) have been eliminated.
• In the U.S., food insecurity has increased since the pandemic ended, as SNAP benefits have dropped (due to the assumption that more people would be able to return to work post-pandemic). Today, it is estimated that there are 41 million Americans that qualify as being food insecure.
• While there are many questions that were posed (Why does soda pop qualify for SNAP benefits, but some healthier foods do not? Why can’t the government pass taxes on high sugar / high sodium food products?), there was a general acknowledgement of the complexity around solving many of these issues. There seemed to be a recognition that things could and should change, but the answers about how to effect that change are not easy to come by.

Good nutrition is a choice, and more effective education is needed to inform those choices

• We heard from Elevance Health, one of the largest insurance providers in the country, about the importance of good nutrition, not only for people’s current health, but also for their longer-term health and happiness. As one example, “you can prevent diabetes, but you cannot cure it”. To that end, insurance companies are increasingly looking at “food as preventative medicine”, with the goal of educating more consumers, starting at an earlier age, about what a healthy diet looks like and keeping those consumers informed as science evolves over time.
• We heard about the potential for changes in labeling requirements, which the FDA has said it is contemplating to improve transparency around what ingredients are used in certain food products. Of note, Kellogg offered that they believe that a big reason Rx bars are so popular (aside from their great taste) is the clear and simple ingredient profile, which is featured boldly on the front of the packaging.
• Kellogg also offered that good nutrition does not need to be expensive, and that a bowl of cornflakes with milk and fruit costs less than $1, which is far less expensive and far more nutritious than what a consumer might consume by purchasing breakfast on-the-go from a donut shop.

Ultra-processed foods are the new pariah, but there is a recognition that occasional indulgence is okay

• A distinction was made between processed foods (anything that is heated, pasteurized, canned or dried, for example) and ultra-processed foods (where the technical definition implies any “industrial formulation with five or more ingredients”). This distinction is important because for most people, as it is not practical to avoid processed foods altogether, but it is generally easier to avoid ultra-processed foods, which are formulated with emulsifiers, modified starches and other additives that are meant to improve the taste and texture of the product. We heard that, by some estimates, most Americans consume a diet of which 70% is ultra-processed foods.
• Kellogg’s CEO shared how they have reduced 20% of the sugar as well as a considerable amount of sodium from many of the products they sell in an effort to improve the nutritional profile of those items. And, while they conceded that some of their products (e.g., PopTarts) still contain significant amounts of added sugar, Kellogg’s CEO believes that in any balanced diet, there should be room for occasional indulgences.
• Jennifer Garner (Founder) and John Foraker (CEO) of Once Upon a Farm talked about their vision to make healthy food available to more babies and children, noting that in many cases, the food that babies consume is actually older than the baby itself. Their brand launched about 10 years ago and is now carried in 13,000 retail stores.  They believe there is massive opportunity to expand distribution further, build awareness of the importance of starting healthy eating habits at a young age, and expand their product line to serve older consumers (Garner noted that high-school athletes are popular consumers of their fruit and veggie pouches).
• Target talked about how they are launching approximately 30 new products this year in the snacking category, all sold under the Good & Gather store brand, and all of which will be “clean label” – produced using healthier and more sustainably sourced ingredients.

Companies – both big and small – can have real impact on the food industry

• Innovation remains critical to the lifeblood of the industry, as new products can leverage new technologies to improve nutrition, offer more choice and appeal to different palates and preferences. In terms of new products that seem to be winning in the marketplace, we repeatedly heard the term “functional” with regard to snacks and beverages that appeal to consumers because they offer multiple benefits (nutrition, caffeine, convenience, etc.) in a single product. We heard from Target that consumers are looking for “better-for-you” options and demonstrating high engagement in Health & Wellness categories, despite the fact that products in these categories generally tend to be more premium priced.
• One specific area of focus was plant-based meat, which as a category has experienced fits and starts over the last decade but now represents a $7.5 billion market globally. On the one hand, we heard from companies such as Impossible, Meati and Shiru, who are each using their own differentiated technologies and ingredients to formulate what they each consider to be either a more environmentally friendly or healthier option to animal-derived protein. On the other hand, we heard from Kellogg’s, who decided to discontinue their Incogmeato offering this year, opting to focus instead on their very successful Morningstar Farms line of mostly frozen vegetarian offerings.
• Aside from innovation of food products themselves, we heard about the importance of innovation in many facets of the industry, including farming, processing and packaging. There was discussion around the role that innovation can play in terms of lowering costs (by increasing a level of automation) and improving sustainability (regenerative agriculture and more environmentally friendly packaging).
• We also heard about the potential for innovation in the grocery channel, and that, if there is a benefit to come from consolidation among grocers, perhaps it could be a reinvestment in technologies benefiting consumers and suppliers. Specifically, we heard an interest in products that might make fruits and vegetables less perishable (so that there are fresher and higher quality products on shelf as well as less waste).