By Mark R. Smith, Contributing Writer
Charlie Walker and many of his colleagues who cover the food processing industry know the issues. Inflation is everyone’s concern, and the lack of workforce is becoming coupled with the need for technology to help address that problem are among those that come to mind.
Still, Walker, site selection lead for Madison, Wisconsin-based Diligent Solutions, knows that it could be worse. And apparently, it isn’t. After all, how bad off can a $750 billion sector with about 21,000 companies, according to Pollock Orora, be? Worldwide, the number hits about $2 trillion. So, the U.S. accounts for 37.5 percent of all sales.
“So it’s not a bad time in the food processing industry,” he said. “It’s an interesting time. What we’re seeing from our clients is that workforce availability is the No. 1 critical issue, and its runner-up is managing rising input costs.”
While that issue is No. 1 now, it’s in addition to the main concern of the last several quarters, said Walker, “which was mitigating rising input costs and supply chain issues due to the pandemic and the war in Ukraine. Today, input costs are still higher, but when combining it with finding talent and workforce, companies are forced to take steps to mitigate risks.”
No. 1 Issue
Next in line is the worse inflation in decades. As consumers adjust their food budgets by leaning more towards generic labels and away from the expensive brands, companies must adjust.
“The recent announcement that meatpacking titan JBS USA is shutting down Planterra, its plant-based protein business, shows the plant-based market continues to struggle,” said Walker, “in part, due to concerns about rising prices that are leading customers to be return to traditional foods.”
Therefore, they’re “back to the ‘meat, potatoes and cheese’ by buying the generic brands,” he said, “so the trend for now is to go away from those trendy sustainability foods because saving money typically [prevails].”
As for possible solutions, raw material costs are being addressed as farmers closely monitor their commodity pricing and continue to invest in precision agriculture technology and automated/artificial intelligence technologies in farm equipment.
In addition, many farmers “are planting legumes to reduce fertilizer costs and are adjusting pest management techniques” to manage input expenditures, Walker said. “Food processers are working to strategically diversify their existing supply chains by looking for other suppliers that can handle and move their products.”
“The idea is for processors to work aggressively and try and increase their number of suppliers and to source more products locally. Better utilization of technology can reduce many supply chain bottlenecks,” he said, “and we advise them to also be more focused on their labor pipeline and investigate hiring more refugees, such as Ukrainians and Afghans.”
Forward movement, said Walker, would be spurred by improved management of the supply chain by companies, which “creates opportunities for communities that can aid in that endeavor. As companies look for new suppliers and offloading opportunities, they are doing so not with the eye of what is less expensive today, but with the idea of where it positions them for tomorrow and there will be a more diversified supply chain as a result.”
Take it Indoors
Another angle was offered by Leslie Wagner, senior principal with Indianapolis-based Ginovus, who discussed a newer trend.
“Overall, the industry is booming,” Wagner said. “It will continue to be very dynamic and innovative as a part of our daily lives. Businesses and consumers will continue to look for unique offerings, quality, convenience and budget-friendly solutions to their needs.”
One trend that qualified as unique is the increased popularity of indoor farming facilities. By 2026, vertical farming is expected to be a $10 billion industry worldwide, according to a recent CBS News report.
There are multiple reasons for its figurative and literal rise. “For one, it’s a year-‘round, full-time growing season and a more sustainable when compared to traditional agriculture,” said Wagner. “The farms can also operate in closer proximity to end consumers, so less truck miles are necessary to get from point A to point B. That’s better for the environment and helps ensure fresher food.”
Another positive aspect is that vertical indoor farms can be urban or rural, as opposed to the traditionally more rural endeavors requiring acres upon acres of land. But while flexibility with respect to location is helpful, such operations have particular requirements.
“Site selection fundamentals will remain the same in terms of finding available, infrastructure-ready land, especially for indoor grow facilities,” Wagner said. “There just are not many market-ready sites. Communities focused on proactive economic development will focus on identifying real estate and performing the due diligence necessary to support such projects as they come to the market.”
True, but there’s another caveat to understand. It’s about infrastructure. “They’ll focus not just on the land,” she said, “but also the supporting utilities along with renewable energy resources, especially with more companies focusing on sustainability goals.”
Wagner also noted that the frozen foods sector is growing, which is a trend that’s rooted in the COVID-19 pandemic and has held its momentum. “That market hit $66.4 billion in 2021,” according to the American Frozen Food Institute, she said, “which is due to people’s habits shifting during the pandemic. They’re likely to endure over time.”
The issue that reared its head even prior to the pandemic was the lack of labor, “particularly in manufacturing,” Wagner said. “Companies are working harder to attract millennials, especially in light of the anticipated 2.4 million workers that are set to retire within five years and the additional two million jobs that will be needed to keep up with demand,” according to Food Manufacturing magazine.
Those labor challenges continue to inspire the use of robotics and AI, “which is true across many industry sectors, including indoor farming facilities,” she said.
Speaking of the dearth of workers and technology, Wagner said, “It’s a good thing that autonomous vehicles continue to make significant strides because the American Trucking Association estimates that 80,000 more drivers would be needed to make up the shortfall in 2022. They expect that number to double by 2030.”
In response, some countries are addressing the driver shortages in creative ways. For example, Canada has what it calls the Express Entry Program, where Canadian citizenship is offered to new driving candidates.
“And while the bad news is that truck driver shortages are real and impactful to the supply chain,” she said, “the good news is that the ATA also revealed that wages for drivers have increased about 11 percent.”
Wagner and Walker were generally positive about where the industry is heading, as is Andy Drennan discussed the capital acquisition market.
Noting “numerous capital acquisitions last year” and that the industry “is still going strong,” said Drennan, senior vice president, membership/business development/special projects for the Food Processing Suppliers Association, McLean, Va., noting that “activity has slowed. So there might be some concern as we look forward to 2023, but we expect we’ll stay in positive numbers.”
Like Wagner, Drennan noted that during the thick of the pandemic there was considerable discussion about replacing legacy equipment with new technology, due in large part to worker shortages and the need to simply get product out the door.
“As we have largely exited the pandemic, we still have the same situation, however with economic volatility,” he said, “and we see food processors being more cautious with wholesale equipment replacement. Instead, they’re looking to make more targeted improvements, like replacing only parts of a line where an obvious significant improvement in productivity can be shown.”
It even has had an impact that few observers were predicting when workers feared that they would get pink-slipped in favor of robots.
“Today, [automation is] strengthening the jobs of those workers,” said Drennan. “Many of the more mundane tasks on a production line can now be handled by the equipment, leaving workers to focus on more important issues like facilitating production.”
He underscored that observation by saying the demographic issue with the workforce “won’t improve for a long time, so the pressure on food manufacturers to automate will increase.”
Food manufacturers will have to embrace automation because, no matter the economic circumstances, people have to eat. On that note, add Michelle Comerford, industrial and supply chain practice leader with New York-based Biggins Lacey Shapiro & Co., to the list of executives who feel the industry “has remained strong.”
What the market is seeing today, said Comerford, is “a combination of expansion and relocation. In some cases, companies that started in high-cost coastal markets grew to a point where they were shipping their products across the country. With their broader customer bases, there is an opportunity to save money and improve customer service by moving and/or expanding inland to improve access to more markets and operate more economically.”
Another reason for supporting more inland locations is the availability of truck drivers. “It’s the long-haul drivers that are harder to find as the older generation begins to retire,” said Comerford.
That trend has to do with the oft-heard millennial stance. “As the younger generation of workers enters the workforce, they’re emphasizing work-life balance. And it’s no different for truck drivers, although some are still willing to hit the road for weeks at a time. But companies now need to be more flexible and creative with scheduling to attract drivers, assuming a livable, competitive wage.”
Another point that is more particular to the food processing industry that makes Comerford nervous is inflation. “Margins are relatively low,” she said, “and as we’re seeing inflation impact construction costs, raw materials and labor, so there is a greater risk for companies considering new investments since the return may take longer than was anticipated.”
Like Drennan, she acknowledged that deals are still closing, “but with more of a pause. That’s partially because some new buildings are costing three times what they would have three years ago,” she said. “That’s catching attention in the board room and causing that more ‘wait and see’ attitude.”
Bots ’n Humans
But waiting is not something the public tolerates well and many observers successfully argue that the pandemic “expedited the market for on-demand food, at the grocery store and at home,” said Jason Giulietti, president of the Austin, Texas-based Greater San Marcos Partnership.
The Austin area “is growing faster than anywhere else in the U.S.,” said Giulietti, and that market has already seen the regional expansion in adjacent Hays and Comal counties Comerford noted.
“They’re the first and third fastest growing counties in the U.S.,” Giulietti said, “as food production companies want greater integration into their markets. But know that we’re not traditionally a hotspot for food processing,” though noting recent openings by such corporations as Hershey’s Creamery Co., Ziegenfelder, Jardine Matheson, Night Hawk Frozen Foods, U.S. Foods, Outer Aisle (which offers plant-based alternatives) and InFarm (vertical farms), as well as IronOx, a robot farming startup that opened a one-million-square-foot facility in 2021 is expanding by an additional one million square feet.
How can that happen in a tight labor market? “Robots,” he said, adding, “Good infrastructure attracts that kind of growth and we have that kind of connectivity, not only for central Texas (between Austin and San Antonio),” Giulietti said, “but throughout the southwest.”
As for those robots, they seem to have ample accompaniment from human beings, too.
“Unlike many other markets in the industry, ours has people moving in from all parts of the country, so that has helped our workforce,” he said. “They’ve brought skillsets of all different levels, so we get the producers, the packers, the assemblers, truck drivers,” etc, “Whatever the need, our workforce can accommodate it.”
That’s a big deal, since consumers have expectations “and if what they want isn’t delivered to their driveway before they get home, they’re upset,” Giulietti said. That’s why he, Comerford and many others think corporate expansion into growing markets will continue. “It’s almost an issue because we have to deal with the growth.”
And that, of course, means a boom in industrial space. “However,” he said, “there is a disconnect concerning availability because these structures have special needs, such as cold storage, which is expensive to build. And there are not many such buildings on the market.”
Plus, these corporations “operate in an expeditious manner,” Giulietti said, “because people don’t like to wait – especially when they’re hungry.”
“Therefore,” Giulietti said, “know that companies don’t want to wait a year to build anything.”