When the dust settles, there will be few who have not been impacted in some way by COVID-19. In the short-term, the plant closures and the associated flow-on effects, and financial impact of the virus on the food processing and manufacturing industry will not be forgotten any time soon. Change at both an industry level and through new regulatory frameworks is seen as a likely consequence to avoid similar scenarios concerning industry shortcomings in the future. COVID-19 aside, the food processing and manufacturing industry will continue to face challenges associated with regulation and compliance, and the levels of sugar used in food products. Opportunities exist in the form of smart packaging and the recent legislative changes relating to CBD-food products, to the degree that those prepared to take risks in these areas are likely to reap the benefits while establishing themselves as market leaders. Trends can be fickle, but the recent trends toward functional foods and plant-based food products are slowly becoming established, and present ongoing opportunities for the food industry players.
COVID-19 RELATED INSIGHTS
Impact of COVID-19 on Meat Processing and Manufacturing Plants
- The impact of the recent meat processing shutdowns across America occur in the context of a recent trend toward consolidation of the processing and manufacturing in the industry, so although there are a large number of meat processing plants across the US, most of the processing of livestock occurs in a few large processing plants. The processed meat is distributed from these plants to a network of retail stores, restaurants, and other outlets across the country. For example, 60% of pork is processed in 15 large pork processing plants, despite there being over 60,000 pork processors in the US.
- The large plants are designed with efficiency in mind, and often have a large workforce that is required to work in very close vicinity to each other. There is a high potential for COVID-19 to spread through these plants because of the way the operations are set up, where social distancing cannot be maintained.
- This means that where one or more staff at these processing plants have been diagnosed with COVID-19, there is no choice but to close the plant as a precautionary measure, which is why several large meat processing facilities have been temporarily closed. As a result, pork processing is down nearly 50% and beef processing 25%.
Flow-on Effects of Meat Processing and Manufacturing Shutdown
- The flow-on effect from these closures is there is decreased processing capacity within the industry, and the plants cannot process the same numbers of livestock as previously. This has caused the price of livestock at the farm gate to plummet as farmers have nowhere to send their animals for processing.
- Unfortunately, at the retail end of the supply chain, the reduced processing capacity has created a decrease in the amount of meat available on store shelves. With competition between grocery stores to secure product, the price has been pushed upwards, meaning higher prices for consumers at the checkout.
- Farmers have been forced to euthanize a number of animals because the conditions are such that they cannot remain on the farm due to welfare issues, and there are no other feasible alternatives. Farmers have other animals that are continuing to grow and require the resources.
- The livestock that cannot be processed has created a situation of overcrowding and insufficient resources for farmers. This results in struggles to maintain hygiene, air quality, and temperature control due to increased numbers of animals. There are also fears of aggression among the livestock due to overcrowding. Against that background, some farmers have made the difficult decision to euthanize livestock.
- Many US retailers have instigated meat rationing to ensure that meat remains on the grocery store shelves. This background will no doubt raise questions regarding future consolidation of the industry, with the impact of COVID-19 perhaps minimized had the plants been smaller.
Impact of COVID-19 on Food Production
- Hyperconsolidation is not just an issue for the meat industry, the food industry at both a processing and manufacturing level and at a retail level has experienced similar trends. Even before COVID-19 it had caused sufficient concern for the OSA and more than 200 farm, food, and rural groups to throw their support behind an Agribusiness Merger Moratorium Bill.
- In the wake of COVID-19 there are an increasing number of reasons to weigh up the risks associated with the hyperconsolidation of the food processing plants, in light of the recent disruption to the supply chain COVID-19 has caused, against a less efficency-driven market with lower capacity. This is not a new concern, but one that has been raised consistently in the past as an ongoing threat to food security.
- Some consumer resistance can be expected, if this results increased costs of production associated with the financial impact of decreased capacity being passed on to consumers on the store shelf.
- The flip side of the coin is the risks to employees and their ongoing safety and the responsibilities of employers toward them, especially in light of recent warnings from attorneys regarding the expectation that legal action will ensue if this is not addressed properly.
- The prospect of regulatory changes in occupational health and safety practices seems to loom as an increasing likelihood in the wake of COVID-19, suggesting decreased capacity and its associated implications will be an issue for the food processing and manufacturing industry will need to address.
- Protocols around physical distancing, employee illness protocols, use of PPE equipment, and hygiene and sanitation practices are all areas where there is an increasing likelihood of regulatory intervention.
- While agencies like the CDC and Occupational Safety and Health Administration will be looked to for leadership in this area, even without regulatory intervention, things like social distancing will be difficult to remove from the workplace, with a number of attorneys already warning of legal action if the lessons from COVID-19 are not incorporated into day to day practice in its aftermath.
- In addition, the COVID-19 consumer pain point is creating a demand for greater transparency within the food processing and manufacturing industry, especially in relation to food, employee, and plant safety and hygiene practices.
- These issues are likely to add to the cost on processing and manufacturing within the food industry and the likely outcome is that these costs will be passed on to consumers, which will increase prices at the grocery store checkout. While the lower oil prices have to a degree mitigated the increased production costs to date, this will not be long-term, and food prices are predicted to rise to reflect the additional costs.
- The impact of COVID-19 is already far-reaching and has served to illustrate the vital role that agriculture and farming play in the supply chain. It has also served to illustrate the interdependency that all players from producers, processors, manufacturers, distributors, and retailers have on each other. COVID-19 has demonstrated this to such a degree that the challenge faced by the food industry in addressing the shortcomings that COVID-19 has highlighted is clear.
- The dichotomy of the growing scarcity of a range of products on the shelf of the grocery store, while at the same time farmers are forced to euthanize livestock and dump milk, vegetables, and fruit, serves to emphasize issues within the supply chain.
- Part of the issue has been directly related to the closure of restaurants, bars, and schools, which are all high consumers of food products. This has left producers without markets to send their products, leading to the drastic action mentioned above.
- It is estimated farm losses alone in the US will amount to over $1.32 billion in the coming months. Unfortunately, the processing costs associated with picking the produce and packing it to get it to markets where scarcities are being experienced has been cost-prohibitive, and dumping the produce is the only economically viable solution.
- Processors and manufacturers are also suffering the financial impact of COVID-19, with many being forced to shut down facilities or reduce production capacities due to COVID-19. The decreased processing capacity has only added to the financial woes of the farmers. Much has been written about the meat industry issues, but they are not facing this issue in isolation. The issues facing the dairy industry have seen dairy future prices plummet, and the produce industry is in a similar boat.
- Despite the high level of interdependence within the market, the incredible disconnect between the players that has been evident in recent months and their inability to re orientate the market in a timely manner to address these issues is the greatest cause for concern. In fairness, COVID-19 has presented a challenge that has not been seen on such a scale before, so perhaps some of the criticism is unfair. Still, now that the issues are evident, pressure will come to bear on the industry as a whole to resolve the issues to avoid similar future scenarios.
- The seriousness of the issue will be highlighted further in the coming months with the United Nations warning of a hunger pandemic of “biblical” proportions. Estimates suggest between 10 and 36 countries could be facing famine conditions. Although COVID-19 is only one of many contributors to this state of affairs, the wastage during COVID-19 will not be forgotten. The industry will face increased pressure to ensure this situation does not reoccur in the future.
TRENDS IN FOOD PROCESSING AND MANUFACTURING
Plant-Based Meat Products
- Over the course of 2019, the trend toward plant-based meat products started to gain some traction. This has picked up further momentum in 2020, with an increasing number of consumers looking to plant-based meat for their protein requirements.
- Products on sale currently have been designed to have the taste, look, and feel of meat, expanding the potential customer base beyond the vegetarians to include meat-eaters.
- The plant-based meat market is now worth $670 million. This equates to a 24% increase since 2017. The rising popularity of plant-based meat products is driven by a number of factors, including a perception they have greater health benefits, concerns over animal welfare, and the high environmental impact of meat production. The growing popularity of the product among the Millennial generation is also contributing to this trend.
- Impossible Foods is one company riding the crest of the plant-based meat wave with its plant-based burger patty. They have made it their mission to get more people eating this meat alternative because of it has less impact on the environment than meat. In the last year, the number of stores supplying this plant-based alternative has risen exponentially.
- Functional foods have a value that extends beyond nutrition, and encompasses potentially positive health benefits. In recent years, there has been a trend toward these products and demand has been increasing. Nutritional value, ability to promote growth and development, and protection against disease are just some of the reasons why these foods have been gaining in popularity.
- There has been a growing trend across the national market for functional foods, which looks set to continue to escalate for the foreseeable future. The emergence of a range of new markets within this category, such as the cytoplasmic rhodopsin-protein interface in blueberries, is adding to its buoyancy.
- With two-thirds of grocery shoppers admitting their food choices are influenced by a desire to either reduce the risk or manage a specific health concern the ongoing strength of the market seems inevitable. The development of a number of sub-markets within the functional food market, such as the nut milk market, gives weight to this inevitability.
- COVID-19’s impact will be long-lasting, and already consumer trends are showing signs that the demand for functional foods is building upward momentum. Lingering health concerns post-COVID-19, will likely drive it even higher. This recent article in El Universal in Mexico, albeit at the more extreme end of the spectrum, illustrates the growing body of evidence that supports this scenario. It also illustrates that this trend is likely grow at a global level, with the prospect of increasing opportunities for food processors and manufacturers to develop new markets.
- Pepsico and Coca Cola are just two of a number of major brands that have sought to take advantage of this market. Pepsico’s acquisition of plant-based protein powder manufacturer, Health Warrior to strengthen their Gatorade electrolyte and Kevita probiotic ranges, and Coca Cola’s foray into the coconut sports water market, with its minority stake in Body Armor have served to illustrate the ongoing consumer momentum towards this product line, which will bring with it a range of opportunities.
CHALLENGES IN FOOD PROCESSING AND MANUFACTURING
Regulation and Compliance
- Even before COVID-19 unleashed itself, there was increasing concern in the food processing and manufacturing industry around the amount of regulation. There are several laws and regulations in the US that cover the production, processing, distribution, retail, packaging, and labeling of food products, and it is becoming increasingly more challenging for food processors and manufacturers to comply with them all.
- In recent years, changes to laws around privacy, data security, employment, and immigration have only added to this burden. The COVID-19 outbreak will add yet another layer of regulation going forward. This is coupled with an increase in enforcement action from US government departments.
- There is no doubt that several high profile “food scandals,” such as the outbreak of E.Coli from romaine lettuce in 2018, have contributed to the increased level of enforcement action, as consumers demand accountability and transparency in the supply chain. With regulators being given increasing powers, such as the ability to issue mandatory product recalls, there is an additional ongoing risk of reputational damage. While looming in the background, is the very real chance of criminal charges if the letter of the law is not fully adhered too.
- An unfortunate consequence of the current regime is, in many instances, it is the smaller players that are facing the greatest burden. A study of the compliance costs in the meat industry found the cost of compliance for the largest players to be around 0.3% of product sales. For large-sized operators, this grew to 4.2%, medium-sized operators 6.0%, and the smallest operators, a disproportionate 6.8%.
- Since the 2014 Supreme Court case of Pom Wonderful v. Coca-Cola, there is the added dimension that compliance with FDA regulation may not be enough to prevent civil actions. In that case, the Supreme Court removed the “safe harbor” defense for food processors, allowing false advertising and unfair competition claims under federal law, even in instances where labeling complies with FDA regulation.
- Machine vision technology is one way the food industry is attempting to improve compliance. This technology has applications in food sorting, safety control, and standardization. The inspection capabilities, for example, can detect contamination, undertake grading by quality, and check uniformity, among other things. Making these aspects of food production less labor intensive is seen as a way of decreasing the ongoing costs of compliance. The technology has also been shown to be more accurate than its human counterparts.
- While machine vision technology will address this challenge, at least in part, an ongoing concern lingers for the smallest of players in the industry who will not have the financial resources to employ such technology.
Sugar is the New Enemy
- High sugar levels in food products and the impact it has on health outcomes has been in the sight of public health officials for several years, not just within the US, but at a global level. This is driven partially by the high incidence of obesity and diabetes related illness throughout the world. There has been increasing pressure on food manufacturers to reduce the amount of sugar in food products.
- Among food manufacturers, sugar is the gold standard for sweetness. It is also used for its functional qualities, including bulking and food preservation, and its low cost in comparison to other alternatives. Given this, the food industry faces the challenge of finding alternatives to sugar that do not change the taste or quality of their products.
- Several European, Middle East, and African countries have already made legislative changes that include sugar taxes and restricting marketing of high sugar food items, especially to children. This will extend globally in the imminent future, and force food manufacturers to address the challenge. The challenge posed should not be underestimated with thousands of food products ranging from cured meats to preserves, and frozen fruits through to confectionery all looking to sugar in the quest to create the optimal food product.
- The functionality of sugar serves to complicate the issue, with suitable alternatives not readily available in some areas, or the alternatives change the nature, characteristics, or taste of the product in an unacceptable way. However, the ever-increasing burden being placed on health systems globally from these sugar-related conditions means that the pressure is unlikely to abate and food processors and manufacturers will need to reformulate products to meet health guidelines to ensure their ongoing viability.
- Nestle is one company showing industry leadership in its efforts to reduce sugar, taking a less traditional approach. Nestle has been working on a sugar reduction project since 2016. It has researched extensively ways to reduce the size of sugar crystals (which reduces overall sugar content), which increases the sweetness taste due to the crystals dissolving quicker in the mouth. This means that less sugar can be used in products.
- Illustrating their progress in this area, Nestle has already filed several patents around their research and is slowly starting to incorporate these innovations into their confectionery range. The challenge for the remainder of the food processing and manufacturing industry is coming up with more innovative solutions like this, to this ongoing issue.
OPPORTUNITIES IN FOOD PROCESSING AND MANUFACTURING
Food Incorporating CBD
- The recently signed Farm Bill allows the cultivation of hemp and its derivatives, including the cannabinoid CBD. Currently, in the US, CBD food products cannot cross state lines. With public hearings already underway, it seems likely these regulations will be loosened on a federal level in the not so distant future. However, in states that already allow the sale of CBD food products, demand has been high, with consumers citing their benefit in pain management, anxiety, and stress relief.
- Currently, an opportunity already exists at a state level to be among the first to develop and manufacture these products. Alabama, Kentucky, Colorado, and Alaska have already allowed CBD foods in adult-use and retail stores, while Floridia, Indiana, Illinois, Kansas, Maine, Maryland, Minnesota, Nevada, Oregon, Texas, Vermont, and Washington allow sales from licensed cannabis retail stores and dispensaries. California is in the process of passing legislation to allow retail sales of CBD food.
- The international market has shown the opportunities that exist for food manufacturers in this area to the extent larger CPG brands are showing an interest in CBD-infused food and drinks. Pepsico and Starbucks have held discussions over a CBD infused drink. Kelloggs is looking for ways to incorporate CBD into it Rxbar protein bars. While recent comments from the FDA regarding safety have slowed some of the larger companies, with smaller start-ups already seeing the benefits,
- Domestically, Cinncinati-based Queen City Hemp has made inroads into the market at a state level with its CBD-infused Seltzer at hundreds of convenience and grocery stores in seven states, while LifeAid, who sell their CBD-infused drink online, sold out of 200,000 in its first 36 hours online.
- Smart packaging looms on the radar, not only as a potential disruptor to the food processing and manufacturing industry, but as a very real opportunity. Adoption of this technology is still in its infancy, but the potential is evident. There are various types of smart packaging with a diverse range of applications, some of which show real potential for the food processing and manufacturing industry.
- Active smart packaging uses chemistry or advanced technologies to assist in improving the functionality or appearance of the product. Examples include, moisture retention, temperature control, and thermochromatics. Connected packaging on the other hand creates supply chain certainty and transparency, with the packaging containing sensors, codes, or tags that enable not only tracing, but generate a range of additional information that can be captured, analyzed, and used to inform consumer behavior in respect of particular items.
- RFIDs are already used in parts of the food industry to create a traceable supply chain, but smart packaging represents the next generation of packaging. Smart packaging has two distinct areas where the technology can be of benefit to the food industry. Intelligent packaging helps monitor food products through its ability to monitor the food product and detect changes in the product at both an internal and external level. Active packaging, on the other hand, looks to assist in extending the shelf life of products. Both have the potential to be game changers for the food industry.
- The savings that could be generated from this technology are not insignificant. Food spoilage alone costs the industry over $146 billion annually, with 31% of all food products discarded due to spoilage.
- Meat and seafood quality and safety will be one sector that will benefit from smart packaging. With the global meat trade growing by 2.5% in 2018, fueled by a growing Chinese market, that US processors and manufacturers have been quick to take advantage of, this technology is becoming increasingly relevant, especially in creating a competitive advantantage for those that adopt it.
- General Mills, Pepsico, and Heinz Ketchup are already looking to smart packaging to gain a competitive edge, with product packaging that provides information regarding manufacturers quality certificates, locations, nutritional information, and photos from the farm the ingredients were sourced, to provide the end consumer with greater product certainty.
To identify the required information, we have reviewed a range of industry publications, government reports, media publications, and expert commentary. In respect of the trends, challenges, and opportunities those identified have been included because they have been discussed in multiple industry publications, have been mentioned on numerous occasions by experts in the field, and have caused sufficient disruption that the industry has shown signs of change as a result.