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Conversation with the Experts: Food & Beverage Industry

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The Food & Beverage Industry panel is produced by the L.A. Times B2B Publishing team in conjunction with Ervin Cohen & Jessup LLP and GHJ.

With the many unprecedented operational changes that businesses in every sector have had to make over the last two years, a whole new landscape has emerged in the food and beverage sector in terms of financial, legal, employment and supply chain issues. Even the most seasoned industry pros have found themselves struggling to determine the right answers to crucial questions over the past year.

Are the changes, protocols and best practices that have emerged trend-driven or here to stay? What should restaurants, manufacturers and vendors be focusing on in terms of new standards?

To address these issues and concerns, as well as many other topics, the Los Angeles Times B2B Publishing team turned to two leading food and beverage industry experts for their thoughts and most important insights and to get their assessments regarding the current state of the industry and the various trends that they have been observing.

Q: From your perspective, how resilient has the food & beverage industry been after two years of the COVID-19 pandemic?

Maria Pearman_BAR_5-30

Maria Pearman, Beverage Practice Leader, GHJ: The industry has been incredibly resilient, especially manufacturers who also have a retail outlet. Many breweries depend on their taprooms for a substantial portion of their margin. The pandemic forced companies to think creatively about how to get their product into the hands of consumers when the neighborhood retail outlet was no longer an option. Many restaurants and processors showed an amazing degree of creativity to keep their workforce and used those employees in new and different ways in the face of local and state regulations that changed rapidly. Yet, the COVID story is not finished being written. Subsidy funds are drying up and now will truly be the test for small businesses. Many have buffered their coffers with onetime dollars that mask operational issues. Small business closures will most likely pepper the headlines in the months to come.

Q: What changes made during the last two years do you think will remain in place with the food & beverage industry going forward?

Pooja Nair_BAR_5-30

Pooja Nair, Partner & Chair; Food, Beverage and Hospitality, Ervin Cohen & Jessup LLP: Several changes are making an impact, including:

  • Easy Delivery: Consumers continue to expect the ease of fast and easy contactless ordering, payment, pickup, and delivery. Despite labor and transportation costs increasing, the industry will need to continue to provide this service at competitive rates.
  • Decreased Product/Menu Options: Due to supply chain shortages and dramatically increased food costs, we will continue to see streamlined options and decreased menu offerings at both restaurants and grocery stores.
  • Sophisticated At-Home Products: Even as consumers return to in-person dining at restaurants, there is a strong market for sophisticated food and beverage products to be embraced at home.
  • Outdoor Dining: Consumers have embraced outdoor dining throughout Southern California, and the state legislature and local city governments have taken steps to make initiatives like L.A. Al Fresco permanent.

Pearman: The pandemic forced business owners to figure out how to make QR codes, create e-commerce portals and partner with third-party delivery services. The trend I believe most likely to stick around is the home delivery of products and subscription plans. Meal delivery services have been around for a long time, but the pandemic pushed their popularity to a new level. Specific to beverage alcohol is the expansion of direct-to-consumer sales. Alcohol is subject to a three-tier system: a business can be only a producer, wholesaler or retailer. A brewery, winery or distillery cannot sell directly to a consumer; they must go through a wholesaler. State regulatory laws vary, and in the past two years, many states relaxed these rules, creating avenues for producers to sell directly to consumers. I believe this trend will continue to shake up the regulatory environment for beverage alcohol.

“Consumers continue to expect the ease of fast and easy contactless ordering, payment, pickup, and delivery. Despite labor and transportation costs increasing, the industry will need to continue to provide this service at competitive rates.”

— Pooja Nair

Q: What are some of the opportunities that the food & beverage industry has learned from or managed to embrace as a result of COVID safety protocols?

Pearman: Not related to safety protocols specifically, but a silver lining of COVID is that many businesses had to level up their management. Every decision had to be scrutinized for how it would impact the business. Many companies put in place equipment and software that allowed them to automate or upgrade their operations. The forced downtime of quarantine allowed many people to step off the treadmill and pause to consider what was truly critical for business operations. Deadweight was cut; hard choices were made. These improvements probably would have been delayed by many businesses, but instead, they were forced to address them head on.

Q: What are some of the biggest mistakes that food & beverage companies made during the last two years?

Nair: Some of the biggest mistakes companies have been making:

  • Employee Retention and Recruiting: Failing to proactively deal with the shortage of qualified labor by having employee retention measures in place and considering how to handle shifts with fewer employees was a major issue and forced businesses to reduce production or change operating hours. This issue is here to stay, and being able to retain qualified talent is essential.
  • Inadequate Contracts: Companies have relied on form agreements with suppliers and internally with business partners and investors that do not fit their actual business needs, which resulted in legal disputes.
  • Failing to Deal with Supply Chain Issues Proactively: On both sides, suppliers and food and beverage companies expected issues to resolve and companies failed to find alternatives on time. Particularly for midsize companies without sufficient control over production, this led to delays and a drop-off in customer loyalty.

“The COVID story is not finished being written. Subsidy funds are drying up and now will truly be the test for small businesses.”

— Maria Pearman

Q: What are some legislative issues that food & beverage industry companies need to be aware of?

Pearman: Most notably, the Food Safety Modernization Act continues to evolve. Adopted in 2011 and intended to prevent outbreaks of food-borne illness, it gives broad authority to the Food and Drug Administration (FDA) to implement safety measures in the food supply chain. The FDA continues to issue new and revised guidance on policy that governs growers, manufacturers, importers and third-party certification organizations. States are also introducing rules that affect the food industry. California and New York have both passed food waste bills that went into effect on January 1, 2022. The laws are designed to bridge the gap between the need of individuals affected by food insecurity and food waste by producers, wholesalers and retailers. California SB1383 and New York’s Food Donation and Food Scraps Recycling law are the first of their kind, but many other states may soon follow course.

Nair: Some key legislative issues include:

  • Animal Welfare: California has passed laws banning foie gras, regulating cage size for pigs, and requiring that breeding hens be cage-free. While these laws have been challenged by several lawsuits, so far, they have survived and will have a significant role in agribusiness going forward.
  • Food Allergens: Sesame will become the ninth major food allergen on January 1, 2023, joining milk, eggs, fish, crustacean shellfish, tree nuts, peanuts, wheat and soybeans. Those major allergens are subject to specific labeling requirements and must be clearly identified. FDA has announced draft guidance to potentially identify other allergens.
  • Dietary Supplements Listing Act: There is rising concern about the popularity of dietary supplements and the lack of regulation for them. A bipartisan group of lawmakers has proposed an act to create a mandatory product listing rule for all dietary supplements. Manufacturers would need to provide a comprehensive list of all ingredients, warnings, and allergen statements for each supplement, which would be published in a searchable database on the FDA website. Whether or not the law passes this year, the industry should anticipate some increased regulations in this space.

“Not related to safety protocols specifically, but a silver lining of COVID is that many businesses had to level up their management. Every decision had to be scrutinized for how it would impact the business.”

— Maria Pearman

Q: What are some key legal issues that food & beverage businesses need to be aware of?

Pearman: There are attorneys who specialize in scrutinizing food and beverage labels, looking for a reason to raise a legal issue. This is their entire business model. In most cases, these claims will settle out of court, but it can be costly and a needless distraction for food and beverage companies. In particular, “better for you"-type claims are a popular target. Before making any such claim, it is strongly recommended to have an attorney who is familiar with FDA regulations review the label. The same type of claim comes up often when a product may be named for or references a geography where it is not produced. For example, a tropical-themed beverage may be made in New England. Litigation has arisen, claiming false advertising because the label suggests the product is produced in the tropical locale. Be very careful how information is presented on labels.

Nair: Key legal issues include:

  • False Advertising Lawsuits: Food and beverage false advertising lawsuits continue to grow, with 325 class-action suits filed in 2021 (up from 220 in 2020 and 179 in 2019). Litigation trends include lawsuits based on flavoring, product origin, “all-natural,” and “organic” claims. Recently, ESG claims about product sustainability, ethical sourcing, and environmental benefits have been the subject of lawsuits. Companies should be aware of the “reasonable consumer” standard for evaluating claims on products and closely look at their product packaging, advertisements, and social media.
  • Employment Issues: California’s minimum wage, already the highest in the nation, is steadily increasing at both the state and local levels. California employers must also follow new legislation and regulation on worker safety and supplemental sick leave.
  • Consumer Privacy: As the industry becomes more reliant on technology to connect with consumers, food and beverage companies must have measures in place to protect consumer privacy and comply with the California Consumer Privacy Act.

Q: How is the investment climate today for food & beverage companies wanting to raise capital or attract investors?

Pearman: The investment climate is strong! The hottest area of interest is functional food and beverage, where the product provides some type of health benefit in addition to basic nutrition. I am seeing larger banks and equity firms designate food and beverage as a targeted industry. Celebrity endorsements are on the rise, especially on social media. This can be a key strategy for marketing and fundraising. Crowdfunding allows individuals to take part in the success of a brand for a nominal investment. First, a company will build awareness via social media and then allow their engaged audience to fund their capital raise. Innovation and disruption have democratized the investment world. Food and beverage companies receive plenty of interest and activity from traditional outlets like private equity and family offices. Now a separate tier of individuals allows companies to raise required capital from many small-dollar donors.

Q: What are the pros and cons to being based in Los Angeles in 2022?

Nair: Los Angeles consumers are at the forefront of food and beverage trends, including plant-based, gluten-free, and CBD-infused products. Consumers have an appetite for new experiences in eating and drinking and view food as an experience, which makes for a fantastic testing ground for food and beverage companies. In terms of challenges, California in general has consistently more stringent employment laws and higher labor costs than the rest of the country, and Los Angeles County is at the forefront of that trend. West Hollywood recently passed the highest minimum wage in the country. California consumers and employees are particularly litigious, so food and beverage companies are more likely to face lawsuits for a wide range of issues, including product advertising or labeling, website accessibility, and consumer privacy protections.

Q: As a trusted advisor, what are some of the key pieces of advice you have provided to the businesses you work with in terms of managing the supply chain in the current climate?

Pearman: Some advice I share with clients includes:

  • Cultivate multiple vendor relationships for each part of your supply chain. One always needs options.
  • Do not take your eye off of cash. Companies may want to buy all they can of a supply item if it is unknown whether it will be available in the future. This is understandable, but trading inventory for liquidity is risky.
  • Get a banker who understands your industry and business and with whom you have a good relationship. Share financial results often. Have face-to-face meetings. Put in the time to develop a relationship before you need to ask for help. Access component of navigating supply chain turbulence.
  • Optimize production strategies. A detailed production plan allows a producer to fine-tune their materials needs. It also gives a longer runway for purchasing decisions.

“Consumers have an appetite for new experiences in eating and drinking and view food as an experience, which makes for a fantastic testing ground for food and beverage companies.”

— Pooja Nair

Q: What are some of the key consumer trends that food & beverage industry organizations can capitalize on today?

Nair: Consumer trends at top of mind today include:

  • Plant-Based Products: Consumers continue to increasingly demand plant-based options in all categories including fast food, snacks, creamers, and cheese.
  • Transparency: Consumers respond well to products that go beyond FDA requirements to inform customers about what is in a product and that advertise in a transparent manner. This can become a key part of a brand and build loyalty.
  • Openness to International Cuisine: Consumers are more open than ever to global cuisines, and we are seeing a rise in sales of Asian and Latin flavors, including in the condiment space. This provides opportunities for nontraditional products, including those that are sold as direct-to-consumer before major retail.
  • Functional Foods: Dietary supplements and functional foods have been on a major upward trend, but present marketing and compliance challenges. Consumers want products that promote health and reduce disease risks, but claims must be carefully scrutinized.