The State of Food and Beverage Manufacturing and How Facility Management Can Help
The global food and beverage market is cautiously optimistic. And, in a fluctuating economy, this is good news!
The market grew from $6729.54B in 2022 to $7221.73B in 2023 at a compound annual growth rate (CAGR) of 7.3%. In addition, it’s expected to grow to $9,225.37B in 2027 at a CAGR of 6.3%.
Careful optimism and expansion plans will be a big part of 2023, according to a survey conducted by Food Processing Magazine. The knowledge leader conducted a recent survey and found that approximately 18% of their respondents said they are “very optimistic” heading into 2023, with another 42% calling themselves “somewhat optimistic.”
That 60% vote of confidence may not sound too terrible, but it’s quite lower than the 72% in those two positive categories when the media outlet reported this same survey last year.
But careful optimism is indeed reflected in plans for the near future.
77% of survey respondents anticipate their company’s plant production will increase this year, with 21% reporting it will increase by 20% or more over last year.
Another 27% said they expect output to increase by 10% to 19%. When asked about immediate plans for production capacity, 42% said their companies would more than likely expand production by opening new lines or plants.
The Bigger Threat Looming
Food and beverage manufacturing companies should be more concerned and cautious when building new plants and expanding their lines because in their industry, the state of facility management is broken. And adding new items onto an already unsteady foundation will not lead to success.
Facility management, in this sense, refers to state regulations like the Food Safety Modernization Act, state regulations, and third-party certifications like the Global Food Safety Initiative (GFSI). The boots on the ground and front-line workers who must know about these items are also a part of facility management.
Upgrading buildings remains a priority in capital spending, as always. But, maintaining them, as well as processes, is a facility manager’s job. That’s where a strong facility management partner comes in.
Recalls Reach a 10-Year High and show no sign of Softening
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The U.S. food and beverage industry experienced 23.1% more recalls in Q1 2023 than the previous quarter. Undeclared allergens, particularly nuts, and sesame – added as a major food allergen in January 2023 – were the leading cause of U.S. food recalls for the ninth consecutive quarter, with 56 recalls in Q1 2023.
Foreign material, bacterial contamination, viral contamination, misbranding, and packaging defects were the other leading reasons for recalls. FDA food recalls experienced a 700.6% increase in units impacted in 2022.
With 416.9 million units recalled, this represents a 10-year high, making recalls the #1 profitability killer for the food and beverage industry.
A joint study by the Food Marketing Institute and the Grocery Manufacturers’ Association estimates the average cost of a food recall to a food company is around $10 million in direct costs PLUS additional costs in brand damage and lost sales. Importantly, the final impact of a food recall often has more to do with the fallout of the recall rather than the recall itself. All (and more) of the issues below will have to be dealt with:
- Crisis communications will be activated to let the company and the public know the plans to resolve the situation.
- Legal costs will increase as the company must get counsel on proceeding through the recall process.
- Due to increased call volume from customers and media, the company may need additional tech support and help with its call center. A temporary call center is not uncommon and can cost thousands of dollars.
- The fallout will hurt the company’s reputation drastically. This is a difficult item to earn back from the public or customers overall. You can’t put a price on trust.
- Employees will be tied up dealing with the recall by assembling and shipping products that at a profit loss, further hurting the bottom line.
The Cost of a Major Food Recall
The cost of recalls varies depending upon the size of the company and the number of units affected. For example, the Jif peanut butter recall announced by the J.M. Smucker Company in May of 2022 cost the brand $125M between manufacturing downtime, consumer refunds, and the recovery of contaminated products.
After Abbott dealt with its Similac baby food recall, the major brand’s entire pediatric nutritional sales took a gigantic hit.
Earnings showed U.S. pediatric nutritional sales of $308 million, which is a $170 million drop from the same period of the previous year. Because it borrowed plant capacity from other products to meet demands for infant formula downtime, there were lower sales across different divisions for multiple quarters afterward, and analysts say that the recall cost the company at least $325M.
The Best Way to Handle the Regulation That Isn’t Stopping
Already heavily regulated food and beverage businesses must also account for increased regulatory pressure. Scrutiny and liability throughout the supply chain have become a virtual crisis for the food and beverage industry. According to the FDA, roughly 48 million Americans get sick yearly from some form of food-borne illness, and 3,000 people die from that annually.
These illnesses and death are why national, state, and local regulations are constantly changing. It is legally imperative that food and beverage manufacturing companies consistently keep up to date with policies and adjust facility management approaches to stay compliant.
Food and beverage plants, along with all their individualized locations, need to make sure that they are standardizing best practices but also tailoring their facility management approach to meet individual site needs and nuances.
Unfortunately, many in-house teams and national providers take a blanket approach to maintenance and commercial cleaning. This approach does not protect factories, warehouses, and distribution centers from risk. A more specialized approach is required as legislation is shifting the focus on foodborne illness from response to prevention.
Industry Employee Churn Continues to Cause Even More Issues
In addition to regulations and the increased possibility of a recall, the food and beverage industry is continually challenged with labor issues in their plants, warehouses, and distribution centers. For the present and foreseeable future, trending topics with food and beverage leaders will continue to be labor shortage, the quality of available labor, and increasing capacity with automation while navigating a worker shortage.
Therefore, production, maintenance, warehouse, and distribution center employees or providers typically categorized as “low wage” remain critical to food and beverage manufacturing.
But as we’ve seen after the Covid-19 pandemic, food and beverage manufacturers have had trouble bringing workers back into supply chain facilities. Can the lack of available staff be leading to increases in recalls as facilities are not getting the consistent, reliable service that’s needed to have a clean, safe, and efficient environment ensuring product quality and that products are shipped on time, in full?
In short, the answer is, “yes.”
Not only can the labor issues be linked directly to the increase in recalls, but it’s also hurting the margins of food and beverage manufacturers.
These manufacturers are continuing to raise wages faster than the overall average for hourly and nonsupervisory employees. While wage increases remain higher than historical averages, the slower pace of hiring results in fewer jobs filled in warehouses and factories as employees opt for jobs with better wages, benefits, and improved working conditions.
The U.S. Bureau of Labor Statistics cites 328,000 job vacancies in the nondurable goods manufacturing space. And more salary increases are likely required to draw employees into the industry.
Growing pressure to attract and retain talent, coupled with worker demand for higher wages, has resulted in a rise in total product costs across the food and beverage industry. Ultimately, these costs get passed to the consumer — further perpetuating the cycle.
The wage hikes that ultimately don’t get passed to the consumer still threaten to keep costs high and cut into already dwindling margins.
Interested in uncovering hidden costs and risks of insourcing? Check out this report.
Rising Operating Costs — Including Facility Team Wages — Are Passed onto Consumers and Hurting Sales
Consumers’ choices are showing that they are not happy. Despite record spending in the food and beverage category, consumers have resorted to reducing their purchases in response to inflation, resulting in an 8% year-over-year decline in real spending.
In addition, buyers are turning to store brands to save money, with sales of private-label products growing by 11.3% in 2022, outpacing national brands. To compete, manufacturers will need to cut costs and find ways to improve margins to reduce costs for consumers.
Food businesses that have invested in premium and natural products have initially seen success but are now feeling the pressure of rising costs. While these products were able to absorb more input cost inflation due to higher demand, they are now experiencing price increases deterring consumers from purchasing.
Premium product sales have declined for the first time since 2022, signaling additional challenges to growth moving forward. The resumption of student loan payments and continued cost of living increases could further restrain the premium food and beverage category’s upper- and middle-income target demographic.
Businesses must remain vigilant and adapt to changing consumer behaviors and preferences to remain competitive.
The Way to Protect Profitability is by Changing an Approach to Facility Management
Due to increased risk, greater probability of having a recall, and higher operational risks that are impacting margins, food, and beverage companies need to adopt a more mature facility management approach. The industry requires an approach that turns facility management from a cost center to a profit protection center.
At OpenWorks, we developed a facility management maturity model where we view facility management organizations in the following categories:
- Starting
- Progressing
- Excelling
- leading
We do this based on the approach they take with their customers.
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What we uncovered will change companies profoundly. We found that most food and beverage manufacturers are putting their operations at risk as their facility management maturity is either categorized as traditional or progressing.
By changing the facility management approach, food and beverage companies can limit supply chain disruptions, strengthen the P&L, reduce operational costs to improve price competitiveness and win back market share from private labels.
Most importantly, they can remove the risk of recalls – the #1 profitability killer for food and beverage manufacturers.
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