2017 Food and Beverage Industry Analysis: Trump Administration Food Policy Changes, the Impact of Online Grocery, and AgTech Investments

The following insights were compiled from the Moss Adams 2017 Food, Beverage, and Agribusiness Annual Conference held on October 19. Observations and statistics are sourced from the event’s presenters: Sean McBride, Founder and Principle, DSM Strategic Communications; Chris Innes, Vice President–Packaged Food and Food Retail, Wells Fargo; Erica Riel-Carden and Conor Riley, Principles, Global Capital Markets Inc.; and Bill Lapp, Owner, Advanced Economic Solutions.

The food and beverage industry is growing and changing rapidly. Start-ups saw significant profit increases in 2017, and new companies are seeing explosive growth across the industry in nearly every sector—many at double-digit rates. Meanwhile, consumer trust and market growth continue to be challenging for many legacy food-and-beverage companies. Only 41% of iconic brands grew in 2017, and most of them saw single-digit increases resulting mainly from cost-savings or M&A activity.

Online grocery shopping, meal kits, and food policies developed at the federal, state, and international levels will continue to cause uncertainty in the food, beverage, nutrition, and agriculture sector for the foreseeable future.

M&A Activity

As consolidation continues to be seen as a viable pathway to short-term growth, additional M&A activity is expected in 2018 and beyond. Private equity investors are looking for opportunities among legacy food companies similar to the synergies developed from the 2015 Kraft-Heinz merger. Separately, investors are investing in disruptive start-up food and beverage companies with innovative and healthier product choices that appeal to modern consumers.

Top Consumer Trends

Today’s consumers have redefined the global food supply chain through their willingness to pay more for products they perceive as healthier and more environmentally and socially responsible. This paradigm shift has led to several significant trends that are reshaping the food and beverage industry:

Start-Ups Gain Market Share

Large, iconic food-and-beverage companies are attempting to adjust their business models from a high-volume, low-profit margin model focused on affordability, convenience, and taste to fit the new consumer paradigm. Start-ups focused on catering to evolving consumer demands—such as healthy, fresh, local, and organic ingredients—will likely continue to grow exponentially and continue to challenge legacy brands for market share.

Legacy Brands Are Struggling

Campbell’s has seen negative growth for 11 consecutive quarters. General Mills and Nestle have also seen significant decreases in profits in the United States. Kraft–Heinz is profitable; however, the gains largely resulted from cost-cutting efforts.

Pepsico, meanwhile, has proven to be one of the nimblest legacy brands and is driving revenue growth with its healthier product lines—a practice other legacy brands will likely need to follow if they’re to remain competitive.

Health Foods

As more consumers seek healthier diets, they’re attracted to products with real and perceived health benefits. Clean label, non-GMO, and fresh, local, and organic products are priorities for many of today’s consumers. To capitalize on these trends, food companies have introduced more than 30,000 healthier product choices since 2003, incorporating smaller portions, fewer calories, and less sugar, fat, and sodium.

Trump Administration Food Policy

The Trump administration’s food policy has been centered around deregulation so far. In an effort to promote business growth and reduce the inflating cost of food production, the administration is beginning to unwind much of the Obama administration’s regulations.

During the Obama era, blame for the US obesity, diabetes, and heart disease epidemics was placed on food and beverage producers and manufacturers. Regulations were set in place in an attempt to help curb these issues, such as mandatory nutrition facts panel updates, sodium guidelines, school nutrition standards, and front-of-packaging nutrition labeling.

The Trump administration, on the other hand, is placing more responsibility on consumers and views increased regulation as a hindrance to economic development.

Policy Changes So Far

  • School lunch regulations have been frozen and are being evaluated
  • Delayed enforcement of restaurant calorie labelling law
  • New nutrition facts panel requirements delayed to 2020
  • Proposed cuts to food-safety spending
  • Proposed cuts to the Supplemental Nutrition Assistance Program (SNAP)

Food companies are taking different approaches to the Trump administration’s deregulation effort. Some believe more nutrition and labeling regulation is aligned with their effort to attract consumers with healthier products and more transparency. Others believe additional regulations are unwarranted, would increase operating costs, and won’t successfully impact public health outcomes.

Online Grocery Disruption

Market researchers anticipate online shopping will gain approximately 20% of overall grocery market share in the United States by 2025. More than $5 billion of meal kits have been purchased online in 2017 alone, which is a notable bellwether for the industry as a whole. Surveys indicate Amazon Prime has achieved an estimated 44% penetration into US households. Costco and Sam’s Club are at 34% and 31%, respectively.

As online grocery shopping continues to gain popularity among consumers in the United States, retailers should strategize accordingly by either developing ways to leverage the trend or manage the associated loss of market share.

What’s Changed?

The consumer decision-making process is now being influenced digitally throughout every stage of the sales cycle, from getting inspired to try a new recipe to comparing options and even leaving online reviews through social media or other customer-review digital platforms.

Consequently, the consumer purchasing process is also moving online. Where purchasing decisions are being made, the demand for price transparency and the disappearance of search costs are all digitally influenced.

Opportunities

While the convenience level of online grocery shopping is high, the consumer experience still has room for improvement. This is an opportunity for brick-and-mortar stores to create a better and more personal in-store shopping experience.  

What’s Next?

Corporate investments are being made to make online grocery shopping more accessible and convenient. Almost every major online grocery retailer is now offering free shipping or discounted delivery, for example.

Smaller, specialty stores like Trader Joes have also been growing the last 10 years. This trend is largely because most people still want to pick out their produce, meat, and deli products in person rather than online.

Product prices are also expected to continue to drop as competition among online retailers increases. When Amazon announced its merger with Whole Foods in June 2017, stock prices across grocery competitors dropped 6% overnight—and they’ve yet to recover.

AgTech Investments

Since Monsanto acquired the weather insurance company Climate Core in 2013, AgTech companies have seen their capital market mature at an exponential rate. There are now AgTech-specific venture capital companies—such as Fall Line Capital and AGR Partners—and more corporate venture groups are looking to invest earlier in company lifecycles than ever before. By the end of 2017, annual financings are expected to reach $8.8 billion.

This trend is likely to continue as demand for more cost-efficient automated processes in the food and beverage industry increases.

Main Drivers

  • Increasing regulation is creating a need for technology products that can help farmers and companies deal with maintaining compliance.
  • Labor shortages are driving up the cost of food production.
  • Population growth demands higher yields from existing farmland.
  • Protein consumption is increasing globally on account of population growth, rising incomes, and urbanization.

Challenges

While it’s not necessarily detrimental to a tech start-up’s lifecycle to retool their product, growers and producers place themselves in a high-risk scenario whenever they adopt a new technology. If the new product doesn’t work, growers and producers lose profit—often, a significant amount. Even established AgTech companies have a long sales cycle because of this disconnect.

To build trust between new AgTech companies and farmers, trial programs that devote only a small portion of an operation to testing out a new technology—often at a steep discount—are becoming more prevalent.

Looking Ahead

Water and labor shortages will continue to be the food and beverage industry’s greatest challenges moving into 2018 and beyond. Potential renegotiations of the North American Free Trade Agreement (NAFTA) could also have a significant impact on the industry.

Water Shortages

More than 17% of US cropland is currently irrigated. As demand for food increases along with population growth, the Western United States will feel the pressure on its water resources most. California, which accounts for the majority of US vegetable and fruit production, irrigates 98% of its cropland. Idaho irrigates 73% of its crops. Oregon and Washington aren’t far behind at 50% and 38% irrigated cropland, respectively.

Labor Shortages

The food and beverage industry’s labor force grew by 0.5% in 2017. That rate’s not high enough to meet increasing demand. Consequently, job openings are at record high numbers and monthly employee earnings continue to trend higher—peaking in September 2017 at 2.9% growth. This trend will likely put pressure on companies to reduce their reliance on labor and add fuel to new AgTech businesses than can help drive automation and cost reductions for producers.

NAFTA

The US is dependent on California for most of its fruits and vegetables, followed by imports from Mexico. If the Trump administration’s proposed NAFTA renegotiations evolve into a trade war with the United States’ southern neighbor, the cost of produce could rise dramatically.

We’re Here to Help

Regardless of where you are in the integrated vertical of food, you’ll likely be impacted on some level by competition, consolidation, and changes in regulations and policy.

To learn more about your company’s areas of opportunity or the potential impact of global events in your market, contact your Moss Adams advisor.