Whether your company had difficulty weathering the pandemic or maintained healthy profits with ease, prepare for some significant industry shifts—starting with rising prices—in the recovering economy and position yourself to stay competitive.
Food prices are going to go up, not by a small percentage but dramatically. In 2020, the United States food retail sector spent about $24 billion on pandemic-related costs as global commodity prices and freight charges increased. Yet the real and long-term factor is that the cost of raw food has been increasing for two decades without prices being adjusted accordingly.
The food we buy as consumers is rooted in the commodity industries that have been volatile for the past 20 years. In the past, the big supermarket chains didn’t care about the price of corn or how much a farmer spent to feed livestock. They expected to pay the same price for chicken regardless and were able to make suppliers swallow many of the rising costs.
Those dynamics are changing. The pandemic forced manufacturers to pay more attention to costs while consumers had time to think about what they value in food.
Now consumers care more about what you’re selling. People have had time to think about what they eat, how they prepare meals, and where their food is sourced. The pandemic didn’t totally change the industry, but it certainly served as a catalyst for both trends and long-overdue changes.
For example, the same chicken consumer who once wanted the lowest price is now looking at other factors—including how the chicken was raised and what type of feed it was given—and may be willing to pay more for a better product. At the same time, raising prices to reflect costs won’t be seen as negatively as it would have been during the pandemic, when companies needed to be careful to avoid being seen as price gouging.
Differentiating your product
If prices are going to be higher—and when commodity prices are higher, everything else will follow—then companies must justify those prices. To create a premium model with a higher profit margin, you have to do it better than the others. You’ve got to change something, whether it be increasing efficiency, lowering costs, producing a higher-quality product, branding differently, changing your packaging to appeal to on-the-go lifestyles, or delivering faster.
Any combination of these things can help you achieve sustainable premium pricing. But what are you doing that deserves that? How can your product be the best of its class? Defining your competitive advantage may require you to think differently, from re-examining your branding and marketing strategies to prioritizing customers who yield the best profit margins.
When I talk to owners of food and agriculture businesses, they tell me how awesome their product is and how it’s different. Well, now it’s time to figure out how to get paid for it, and the way to do that is making sure you are indispensable in the supply chain. In other words, it’s time to put yourself in the driver’s seat with pricing.
You may have an opportunity you may never see again. For years, many manufacturers have been order takers, accepting whatever price is offered, as retailers controlled pricing through consolidation and buying power. Now you have a terrific and long-overdue opportunity to set your own prices.
On the heels of the pandemic, customers are more impressionable and understanding of the elevated costs being borne by businesses of all types. In past commodity cycles, the ability for businesses to pass along higher prices has been muted. With prices rising across the economy, food manufacturers will have the ability consider increasing their prices as well.
To do so, food and agricultural businesses will have to assess their products and customer needs to capture their worth to customers and create a competitive edge.
Look at your products and your customers from every angle and communicate that value to customers. Things you may have taken for granted—like an automated production process that you’ve invested in or extra care your company takes with packaging—may hold more value than you realize.
Five keys to assessing your product’s worth and competitive advantage
As you look to capture more value, look at both your numbers and non-tangible features:
- Cost accounting – Look for hidden costs. Have you properly incorporated overhead into the cost of your product? Does your cost accounting include all the time and expense you’ve invested in your product? Are there ways to make your operations more efficient and streamline costs without compromising your product’s value?
- Added value – What features—such as sustainable sourcing or identifying country of origin—add value to your product and can be captured in your pricing? Why is your product better than the competition’s? Can you promote decades or generations of quality delivery? What values has your company demonstrated? Whether your business’s legacy is tradition or innovation, it may offer value you can capture in your pricing.
- Customer evaluation – Who are your best customers? Which ones hold the key to higher profit margins? Are your customers willing to spend more for features like sourcing, preparation, and convenience? What new buying patterns or needs have emerged during the pandemic recovery?
- Adaptability – The pandemic accelerated trends across the economy. How can your company take advantage of customer demand for transparency—where and how their food is sourced—as well as frozen foods, plant-based products, global flavors, and premium features ranging from health benefits to cocktails conveniently available with restaurant take-out.
- Branding and marketing – How can you communicate your product’s full worth and differentiate your product from others? What elements of added value—even as simple as “since 1947”—can be included in your packaging and marketing? What other marketing channels—from social media to trade publications—can you use to reposition your business with your customers?
For food manufacturers, this is an ideal time to reevaluate your products, decide how you can be different, and communicate your brand’s advantages to the consumer. We’re at a pivotable point. Are you going to go back to where you were or are you going to figure out how you can be innovative?
New ways of thinking
I see the opportunities presented in the recovering economy as a black swan event—rare, important, unpredictable, and obvious in hindsight. As a result, conventional thinking won’t vault you to the top.
You probably aren’t used to looking at an event like COVID-19 and asking, “What’s in it for my business?” If you made good profits in the last year, it might be tempting to think you don’t need to change. But we’re going back to a world where competition matters.
What can your company do better than anybody else? If you can focus on that and communicate its full value, then you’ll have the competitive advantage to command the pricing you want.
Thinking differently also means looking beyond yourself and maintaining connections with other businesses in the supply chain to identify opportunities for partnerships where two or more companies might grow.
Truist works with companies all over the country, and many call us when they have a challenge. One of our clients was going to have a tough time sourcing green peanuts in the years ahead. The owner’s busy growing the business, but we were able to help find a supplier who could fill the gap.
If you have a similar challenge, we may be able to help connect the dots with others in the food business. A real partnership can solve problems for all parties, and everyone gains.