8 major challenges facing the food and beverage industry in 2016

2015 brought new challenges for food and beverage manufacturers, and 2016 will have its own set of issues that manufacturers will have to face to boost sales and increase customer loyalty. Here are eight major challenges manufacturers could face in the coming year.

1. Consumers avoiding center of store products

"Consumers have been shopping that perimeter of the store at the expense of the center of store categories, so that's obviously a challenge that's weighed on traditional packaged foods companies," said Erin Lash, equity analyst for Morningstar, Inc.

Consumers are looking for what they deem to be healthier products, and packaged foods companies have seen sales dip as consumers hug the outer rim of grocery stores rather than buying more of their products from center store shelves. Perimeter means fresh, natural, and whole foods while center of store foods are thought to be more processed. As a result, the top 25 U.S. food and beverage companies have lost $18 billion in market share over the past five years, Fortune reported.

Companies like Campbell with its Bolthouse Farms and Garden Fresh Gourmet acquisitions and the formulation of its Campbell Fresh segment have begun meeting consumers at this perimeter by developing fresh products themselves. But many other companies struggle with either luring consumers back to the center store or finding ways to develop enticing products for the grocery store perimeter.

2. Healthy and clean label vs. diet-friendly

Consumers aren't as focused on foods fit for dieting in terms of cutting fat and calories as they once were. Many are now more motivated to purchase products they deem to be more closely aligned with health and well-being, such as products devoid of artificial ingredients, GMOs, or pesticides, Lash said. This has given rise to cleaner labels and an increase of products in the non-GMO and organic segments, which has put more pressure on major food and beverage companies to adapt to these trends.

Kellogg has struggled with this shift already, particularly with its Special K cereal and snack brand, which was previously aligned as a diet aid type product, according to Lash.

"The company over the past year has been revamping that product line from a marketing product packaging perspective to shift the messaging toward more of a health and wellness offering overall," Lash said.

Last year, companies like General Mills, Kellogg, Nestle, Hershey, and Campbell all vowed to remove artificial ingredients from all or certain segments of their portfolios. That trend will catch on more as similar announcements follow in 2016, which will be critical if manufacturers want to stay on top of this growing trend.

3. Rise of natural and organic products

"If you can't beat 'em, acquire 'em" has been the motto for many major food and beverage companies this year as more manufacturers acquire smaller natural and organic companies that are slowly eating away at legacy brands’ market share.

General Mills and Annie's, Kellogg and Kashi, Hormel and Applegate, Campbell and Plum Organics/Bolthouse Farms, and Mondelez and Enjoy Life are just a few examples of how larger companies are expanding their portfolios with the smaller natural and organic companies they may otherwise view as threats in a particular sector.

"Those are areas that not only should enable these firms to position their products in a faster-growing segment of the packaged foods space, but also as a means by which to try to alleviate some of the pressures with the product innovation cycle," said Lash. "These niche companies tend to do a better job of coming to market in a more timely fashion with products that resonate with consumer trends. So the onus is on the larger, more established packaged foods companies to learn from these niche operators and integrate them into their consolidated business."

4. Adapting to shift toward e-commerce

Industries like consumer electronics, appliances, toys and games, and other household products are already firmly established in the e-commerce space, but food and beverage manufacturers have overall been slower on the uptake. Brick-and-mortar retailers and online retailers like Amazon have been investing in grocery e-commerce, but manufacturers themselves are also getting into the e-commerce game slowly but surely.

Mondelez announced earlier this year that e-commerce would factor into its growth strategy, setting a goal of $1 billion in direct e-commerce sales by 2020. A General Mills executive told Food Dive in November that e-commerce would be "mission critical" for the industry. PepsiCo selected a new leader for its own e-commerce expansion in September.

As more consumers shift to a preference for online shopping, manufacturers are finding ways to adopt e-commerce as part of their sales and marketing strategies. And there's good reason for that: U.S. e-commerce sales grew 15% in Q3 2015 alone, and eMarketer estimates that global e-commerce sales will surpass $3.5 trillion, or 12.4% of total retail sales, within the next five years.

SEE ALSO: Navigating the economics of direct-to-consumer food e-commerce

"There's just been a huge amount of activity in this space, so that's going to be a major challenge for how manufacturers and retailers within the food industry adapt to this new business model in which shelf space means something entirely different when it's online as opposed to walking down the aisle at the grocery store," said Jared Koerten, senior food analyst for U.S. packaged foods at Euromonitor.

"It presents big challenges for manufacturers to develop their processing, shipping capabilities — a whole other world for them that they may not have focused too much effort on until this point," Koerten continued. At the same time, manufacturers would have more control over their messaging to consumers as they cut out the middle man, the traditional retailer, in favor of direct contact with consumers.

5. The anti-sugar movement

With major organizations like the WHO and FDA coming out against high sugar intake, the latter recommending a cap of no more than 10% of daily calories, more consumers are turning away from foods that are high in sugar, particularly soda. The problem is that many manufacturers add sugar or other sweeteners to products ranging from condiments to pasta sauce, and with more consumers reading product labels these days, that could spell trouble for those manufacturers.

"It poses a big challenge for manufacturers in that consumers still want sweet products, but they don’t want to see sugar on the label, and they also don’t really want to see artificial sweeteners as we’ve seen with PepsiCo removing aspartame from diet products," said Eric Penicka, U.S. research analyst specializing in the beverage industry at Euromonitor.

Virginia Lee, senior global beverage analyst at Euromonitor, points to Coca-Cola and other soda companies’ push for mini-cans as a way to lure consumers back to soda, as smaller portion sizes generally contain less sugar per can.

6. Adding value to products

Value-added foods and beverages, such as products fortified with vitamins, minerals, or protein, are becoming more popular as consumers look for more than just flavor and price when making purchasing decisions. Manufacturers are looking for ways to add value to their products in ways that make sense without incurring exorbitant costs or adding ingredients that consumers may not recognize and therefore could reject.

Juice is one category that has seen value-added products, as the category has been hit by the same sugar content concerns as soda.

"To offset some of the value declines you’ve seen in juice, you have consumers moving toward these premium, value-added juices, where it’s not simply orange juice, but it’ll be carrot mixed with peach and lemongrass, where the consumer feels like they’re getting more out of what they’re consuming," said Penicka.

7. Slow product innovation cycles

Bringing to market new products that align with emerging consumer trends in a timely manner is difficult for many food and beverage companies as the process of creating new, relevant products and moving them through R&D, testing, and marketing to retail takes time — often more time than companies would like.

The issue is, by the time some of these products hit store shelves, trends might be abating. Or a flood of competition particularly from smaller, more agile companies could make it more difficult for that new product to stand out.

"Arduous product innovation cycles and getting that product from development to shelf are an issue that has plagued firms throughout the industry and one that companies will probably look to address or alleviate some of those pressures going forward," Lash said.

8. Making products more convenient

The growth of snacking among consumers has caused manufacturers to rethink the design and packaging of their products to make them more convenient and appropriate for eating on the go. Snacking innovations have entered categories ranging from cereal to meat, and as consumers move away from the traditional three meals per day, more manufacturers may have to adopt similar innovations in the future.

2016 won’t be without its challenges for food and beverage manufacturers. Consumers' tastes are fickle, and targeting them with the right messaging at the optimal place and time is increasingly more crucial. But when manufacturers look inward to find ways to be more nimble and adapt to these consumer trends, they may find ways to not only be more appealing to consumers but to be more profitable in the process.


 
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Food Processing