The Food and Beverage Industry
The Food and Beverage panel is produced by the L.A. Times B2B Publishing team in conjunction with Anchin, Block & Anchin LLP; Ervin Cohen & Jessup LLP; Intrepid Investment Bankers, a subsidiary of MUFG Union Bank and Wendel Rosen.
Like other unprecedented changes that businesses in every sector had to make last year, a whole new landscape has emerged in the food and beverage industry in terms of financial, legal, employment and supply chain. Even seasoned pros found themselves struggling to find answers to crucial questions.
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 and other topics, the B2B Publishing team turned to four uniquely knowledgeable food and beverage industry experts for their “need-to-know” insights and their assessments regarding the current state of the industry.
Q: From your perspective, how dramatically and in what ways has the COVID-19 pandemic changed the food and beverage industry going forward?
William C. Acevedo, Partner, Wendel Rosen: I believe that at the inception of the pandemic, consumers were alarmed by the prospect of not having enough staple food products stored in their pantry. Overbuying of staple products (ex. pastas, beans, soups, canned vegetables) with a long shelf life and sealed containers was the initial food wave of the pandemic, so to speak. Neglected aisles of the supermarket were suddenly rediscovered, often with the shocking realization that shelves were unusually light on goods. As the pandemic wore on, though, consumers turned to home delivery, cost-conscious buying, adapted to not being able to get everything that they wanted whenever they ordered food, and, of course, rediscovering their own cooking skills. Now, we are starting to return to a more normal buying experience from the consumer perspective, but until we see the vaccination levels rise and infection rates remain very low, food and beverage companies should plan for the consumer who wants healthy choices in what they consume (at home, mostly), all at a lower price point that reflects continuing economic uncertainty as we all work to shore up the financial impact of 2020. Higher price-point novelty items may be an occasional splurge, but I do not see it being the norm in shopping carts. Those food and beverage items will be reserved for those times when consumers eat out - whether it be in a restaurant or an outdoor gathering with family/friends.
Brian Levin, Director, Food, Beverage & Agriculture Practice, Intrepid Investment Bankers, a subsidiary of MUFG Union Bank: While the entire global economy was impacted by the COVID-19 pandemic, perhaps no single sector was as dramatically impacted as the food and beverage industry. The early stages of the pandemic largely shut down foodservice and put a huge crush on the supply chain to retail. Even as the initial “pantry loading” slowed down and areas of the economy began to open up, consumers continued to eat more at home as evidenced by resilient product velocities at grocery stores. We expect that even as the U.S. inches towards normalcy that the food and beverage industry will be returning to a “new normal.” This “new normal,” which we expect to last for several years, includes reduced in-person dining at restaurants, increased dependence on take-out and delivery services, and continued volume at retail. Lastly, consumers picked up new cooking skills during the pandemic that drove purchases in ingredient, flavoring, and other pantry categories -further supporting long-term at-home consumption.
Q: How have the businesses you work with responded to the situation and how have you counseled them regarding what they should do?
Stephen Plattman, CPA, Partner in Food and Beverage and Private Equity Groups, Anchin, Block & Anchin LLP: Very early in 2020, we told our clients to put away their yearly and quarterly plans and evaluate their financial projections and goals on a more frequent basis. This approach was crucial, both for our clients who had trouble keeping up with demand and needed to scale more quickly than anticipated and for clients who were hit hard and needed to make fast decisions to operate leaner. We worked with clients to constantly communicate with stakeholders, vendors and employees so that if there was news, it was not accompanied by the element of surprise. We spoke with each client about specific, immediate wins, such as considering their bank’s credit facility, negotiating with credit card companies, vendors and landlords, and considering product pivots and SKU prioritization if applicable. We cautioned clients at risk of over-producing to meet the short-term spikes in demand to avoid potentially significant inventory issues.
Pooja S. Nair, Partner & Chair; Food, Beverage and Hospitality Group, Ervin Cohen & Jessup LLP: My clients have had to think very creatively about how to adapt to a changing reality. Technology and brand engagement through social media played a huge role. Businesses also had to adapt to interacting with the government at the local, state, and federal levels in new ways: for example, navigating permits through the L.A. Al Fresco process; seeking Paycheck Protection Program loans; and now applying for Restaurant Revitalization Fund grants through the Small Business Administration. As a lawyer, I make sure that agreements such as contracts, operating agreements, and investment documents are in line with the new business reality, which requires a healthy dose of flexibility and negotiation. I also continue to counsel clients on making sure that claims for their food and beverage products are consistent with the reasonable consumer standards, false advertising issues as they relate to food and beverage, and compliance with employment laws and public health orders.
Levin: Intrepid’s Food, Beverage & Agriculture practice has been working closely with companies in packaged food, retail, and agriculture. As a result, the largest hurdle (and opportunity) our clients have faced is keeping up with increased demand that has strained their supply chain. Supply problems for our clients have come from increased demand for goods and issues created at distribution and manufacturing - primarily caused by absenteeism and safety precautions that have slowed down production. Our recommendation to clients during this period of disruption was to prioritize existing customers before focusing on new accounts. For branded food companies utilizing a co-manufacturer, we have suggested they establish at least a dual supply strategy to protect against further disruption. By delivering for customers during the COVID-19 pandemic, companies have generated goodwill with their existing customer base - benefitting them in both the short and long term. Once companies were able to stabilize their supply chain, they saw opportunities to drive growth by adding new accounts as customers were on the hunt for more reliable suppliers. Some of our clients were even able to reorient their business by adding completely new sales channels. One of the clients we worked with recently, a leading better-for-you protein brand selling packaged meats and snack products is a prime example of many of these trends. The company was acquired and it was able to capitalize on multiple key factors to drive a successful outcome. Specifically, the brand demonstrated a solid supply chain, gained new distribution wins during the pandemic, and also provided restaurant-quality food to consumers at home as they were seeking alternatives to dining out and carryout options.
Acevedo: Fortunately, most of the food and beverage businesses that Wendel Rosen works with reported really strong growth in 2020. People were home more, which meant that they prepared their own food and ate at home nearly all the time as eating out was largely not an option for most people for a while. As a result, the demand for food and beverage products soared. We’ve all read the reports of increased alcohol consumption (hey, we were stressed out!), but food consumption also increased - both eating for necessity and boredom purposes. In discussions with clients now, they still are forecasting strong sales in 2021, but perhaps not at the same year-over-year increase as they saw in 2020. Instead, they are budgeting for a more “normal” year of growth. This is a reasonable approach, and I have counseled clients to largely treat 2020 for what it was - an unusual year not typical of performance. Companies looking to raise capital in 2021 would do well, for example, to analyze the core elements of their businesses rather than the peaks of 2020 to find where value lies for investors. Companies should also continue to focus on innovation in their product offerings. In my opinion, there is a pent-up desire for new products; we’re all getting tired of seeing the same things in our pantries by this point. Healthy, flavorful and convenient-to-prepare/consume products will be the big winners. Trade spend, as in any year, needs to be carefully considered to achieve a winning mix of promotions, coupons and pricing discounts to drive sales. Lastly, companies need to be proactive about getting and/or maintaining adequate shelf space with retailers. Consumers can’t buy what they don’t see.
“California has consistently more stringent employment laws and higher labor costs than the rest of the country. The state embraced aggressive shutdown measures, often without advance notice, forcing businesses to pivot rapidly.”
— Pooja S. Nair
Q: What are some of the opportunities that the food and beverage industry has learned from or managed to embrace as a result of the lockdowns and challenges?
Levin: One of the key trends in consumer behavior during the COVID-19 pandemic is demand for restaurant-quality taste and a home-cooked feel while still being relatively easy to make. We call products that deliver on this combination of attributes “scratch convenience.” Companies that can deliver products on this premise really benefit across all retail and direct-to-consumer categories. This is especially evident with companies that have used the pandemic to launch in-store meal kit pick-ups and ghost kitchens to further increase prepared food offerings for customers. This is another trend we expect to survive in a post-COVID world as consumers remain focused on convenience and ease of meal preparation.
Q: What are some new safety precautions and protocols that came about during the pandemic that you feel are here to stay?
Nair: Here are three:
- Outdoor dining: Consumers have embraced it throughout Southern California. Streamlining what used to be a tedious, bureaucratic permitting process with initiatives like L.A. Al Fresco is extremely popular. SB-314 is poised to make these changes permanent on a statewide level, and Los Angeles is taking steps to make the program permanent.
- Contactless options: Consumers will expect the option of contactless ordering, payment, pickup and delivery. Now that most brands have developed those tools, they should plan to continue using them.
- Visibility of sanitation: The emphasis on thorough and visible sanitation measures for consumer comfort is not going to change. Customers walking into a restaurant or grocery store now expect to see hand sanitizer in visible locations and to watch staff thoroughly clean tables between diners.
Plattman: Before the pandemic, many of our clients relied heavily on business from the restaurant and hospitality industries and schools. One takeaway from COVID-19 is to diversify your customer base and not be too dependent upon sales to one particular channel. The closures in those industries left many of our clients with excess inventory, forcing them to look for new sales channels, such as meal kits and online retailers, and in some cases, pivot their product offerings. Some of these situations triggered generous food donations to avoid spoilage of inventory. Circumstances drove our clients to either implement or strengthen existing direct-to-consumer efforts. Additionally, we’ve seen a paradigm shift accelerated by the pandemic whereby companies prioritize having a self-sustaining business model. And with the cancelation of in-person events, companies had to find other ways of gaining exposure to their customer base. Many of our clients learned to operate more efficiently from a marketing perspective.
“In my opinion, there is a pent-up desire for new products; we’re all getting tired of seeing the same things in our pantries by this point.”
— William C. Acevedo
Q: What litigation trends should food and beverage companies be aware of?
Nair: Here are three:
- False advertising lawsuits: Food and beverage false advertising lawsuits continue to grow, with 220 class action suits filed in 2020 (up from 179 in 2019, and 53 in 2018). Litigation trends include lawsuits based on product origin, “all-natural,” “organic,” and “real” flavors. Based on these cases, which are primarily brought in California, companies should be aware of the “reasonable consumer” standard for evaluating claims on products and closely look at the claims in their product packaging, advertisements, and social media.
- Employment issues: Employers need to be aware of new guidelines on worker safety, supplemental sick leave, and other worker protections caused by the pandemic. Lawsuits are emerging about lack of compliance with new rules and safety standards.
- Insurance: Policyholders have been largely unsuccessful in fighting their insurance company’s denial of business interruption insurance claims due to closures during the pandemic. Almost all these cases have been dismissed.
Q: What are some legislative issues that food and beverage industry companies need to be aware of?
Levin: With the backdrop of the COVID-19 pandemic, food safety and transparency have been especially important issues. On a macroeconomic level, the food and beverage industry is impacted by a few issues including immigration, trade policy and social safety nets. As it relates to immigration, a significant portion of workers in the food and beverage industry are immigrants, and immigration reform has been a key topic under Biden’s administration. On his first day in office, President Joe Biden introduced an immigration bill that included a range of measures such as a pathway to citizenship for undocumented immigrants, boosting the number of visas and keeping migrant families together. As the bill was significant, the possibility of addressing the reform piece-by-piece was introduced early on. Another key bill that passed the House of Representatives in March is the 2021 Farm Workforce Modernization Act, which would provide legal status for the current workforce (assuming certain requirements are met), reform the H-2A program and ensure access to additional skilled, dedicated workforces - a key step in ensuring a reliable pool of labor for farms.
Acevedo: On July 29, 2016, President Obama signed into law the National Bioengineered Food Disclosure Standard. After several years of establishing the rules, now manufacturers, importers, and certain retailers are required to disclose the presence of bioengineered food or food that contains bioengineered ingredients, and the compliance deadline is fast approaching. While companies can voluntarily comply at this time, the deadline for all regulated entities is January 1, 2022. Companies need to make sure that they understand the Standard and its labeling requirements, and then review and analyze their supply chain to make sure that they know whether their ingredients are bioengineered or not. If they are, new labeling will be required, not just that which appears on packaging but also what appears on company websites. Regulated entities have several disclosure options including label copy, symbol, electronic/digital link, and text messaging. For small/very small packaging, as well as small food manufacturers (those with less than $2,500,000 in annual sales), there are additional options (phone number or web address) for disclosure. Even so, all companies need to understand if the Standard applies to them, and if so, Wendel Rosen is a strong resource to support development and implementation of their compliance plans without delay. Additionally, for egg, veal and pork producers, California’s Prevention of Cruelty to Farm Animals Act, otherwise known as Prop 12, continues to loom large. As of January 1, 2020, egg-laying hens had to be housed with a minimum of 144 square inches per hen and calves raised for veal had to have a minimum of forty-three square feet per calf. By January 1, 2022, egg-laying hens must be housed cage-free and breeding pigs must be raised with twenty-four square feet per pig. Industry groups have challenged Prop 12 in court, but to date, it stands and the California Department of Food and Agriculture is moving forward with its rulemaking process for this act.
“A resounding theme among our clients is the challenge of keeping up with rapid change. The expectations that shape consumers’ purchasing decisions are evolving.”
— Stephen Plattman
Q: What are the pros and cons of being based in Los Angeles in 2021?
Nair: California 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 has consistently more stringent employment laws and higher labor costs than the rest of the country. The state embraced aggressive shutdown measures, often without advance notice, forcing businesses to pivot rapidly. California consumers are particularly litigious, so food and beverage companies are more likely to face consumer lawsuits for a wide range of issues, including product advertising or labeling, website accessibility and consumer privacy protections.
Plattman: Many of our clients are based here. It’s a hotspot for emerging consumer products brands and start-up companies making waves in the business community. While our clients express a few obvious frustrations of being based in Southern California, such as the high tax climate and cost of living, most of them are choosing to stay. From a business perspective, companies in the area benefit from a large, qualified talent pool and access to capital, as many private equity firms have headquarters or branches in the area. In terms of lifestyle, our clients enjoy the temperate weather, outdoor recreation choices, a strong commitment to diversity, healthy living and environmental regulations, and being surrounded by like-minded people with similar interests in sustainability and transparency.
Levin: California has an especially strong agricultural community with farms and ranches that collected over $50 billion in receipts in 2019, according to the U.S. Department of Agriculture. Southern California businesses have benefitted from the logistical capabilities of its ports, rail lines, air freight providers, and warehouses. In addition, Southern California is favorable for “on-trend” food companies as the area consists of a large population of high-income households that are especially health-conscious. Organic food sales for instance continue to drive overall Food and Beverage industry growth, and strong adoption of organic products in California certainly supports long-term consumption trends. A couple of considerations for maintaining business in California, in general, include relatively higher corporate/income taxes, high cost of living, and traditionally a competitive labor market. California is also known for its complex regulations. One interesting topic we have observed is California’s Proposition 12. The measure requires that more space is provided for veal calves, breeding pigs, and egg-laying hens. By 2020 farmers were required to give egg-laying hens at least one foot of floor space and are to completely eliminate cages by 2022. Veal calves are to be given 43 square feet and sows 24 square feet of space. The most impactful feature is that anyone selling these animals in California is bound by these restrictions, therefore having huge cost and interstate commerce implications.
Q: How do you view the supply chain in California today for the food and beverage industry?
Acevedo: While there have been periodic worries about food shortages due to supply chain impacts throughout the pandemic, it is reported by the USDA that there are no nationwide shortages of food at the moment. Both the USDA and FDA, in conjunction with food and beverage industry stakeholders, continually monitor the food supply chain to ascertain whether there are any worrisome impacts. This industry analysis, though, is not often reflective of consumer perception, especially when inventory of certain foods at one’s local grocery store seem either low or slowly restocked. For California, additional worries for 2021 include historically low rainfall this past winter, the resulting drought, and the potential for another difficult fire season. All of these conditions can, and likely will, have an impact on California’s food production this year.
Levin: California has enjoyed its place in the sun when it comes to the supply chain. The “Golden State” has been able to maintain supply chain hegemony due to a confluence of factors, including its large population and its climate and geography. However, these two longstanding pillars supporting the Californian supply chain are poised to face some challenges. As the most populous U.S. state, California gives local producers an edge given freight advantages compared to out-of-state competitors, but as costs rise, these advantages might not outweigh the cost of doing business. Additionally, California grows one-third of the country’s vegetables and two-thirds of the country’s fruit and nuts, yet new technological advances such as the rise of controlled-environment agriculture stand to gain market share, especially in vegetables and fruits. Still, while some natural competitive advantages are being chipped away by the cost of doing business and new technologies, the California food and beverage supply chain remains strong and a national leader with access to some of the largest American ports.
Q: What are some of the new challenges for restaurants?
Nair: Staffing is one. Labor is probably the biggest challenge my clients are experiencing now. Almost all of my clients have a labor shortage and are unable to get the help they need. It is a competitive market for hiring staff and a challenging time for people working in the industry who find themselves in the undesirable position of being public health gatekeepers to enforce safety guidelines. The second challenge that comes to mind is changing guidelines. Federal, state, county, and city public health guidelines are constantly changing and can be inconsistent. Adapting to these new guidelines is a challenge, particularly when those solutions require reorganizing a restaurant’s physical spacing, or investing in new technology. A third challenge is the state of partnerships and investors. Restauranteurs often rely on shaky legal documents pulled from the web to set up their business entities and investments. The pandemic put a strain on those relationships and increased investor and partner disputes, which presents an important challenge.
“While the entire global economy was impacted by the COVID-19 pandemic, perhaps no single sector was as dramatically impacted as the food and beverage industry.”
— Brian Levin
Q: What keeps food and beverage manufacturers and distributors up at night?
Plattman: A resounding theme among our clients is the challenge of keeping up with rapid change. The expectations that shape consumers’ purchasing decisions are evolving. The pandemic accelerated several years’ worth of trends seemingly overnight, and the changes keep coming. Some constants that have propelled our clients forward are staying true to their brand, being authentic as they adapt and communicating their story. In addition, items such as e-commerce, SKU rationalization, distribution, supply chain disruption, and promotions need to be continuously assessed as companies grow and changes occur. Our clients are trying to strategize their product offerings and allocate their budgets accordingly, factoring in new product development, expansion and promotions. They are also trying to make sure that their message is reaching consumers where they shop, which is a moving target today and in the future.
Q: What are some of the key consumer trends that food and beverage industry organizations can capitalize on today?
Levin: The COVID-19 pandemic has fundamentally changed the food and beverage industry. Specifically in packaged foods, elevated purchasing (expected to slip 1-2% in 2021 from 2020 but still up 7-9% from 2019 according to the Consumer Brands Association) has led to significant changes in the way consumers shop and interact with branded products. A key change of note is the rise of eCommerce. During the pandemic, adoption of online food purchases shot up - this trend is expected to linger even as life regains some normalcy. Consumers who have tried online food purchases are not looking back (77% of consumers who opted to shop online will continue the practice according to the Consumer Brands Association), and there is still room to grow as online food sales still lag behind other major categories (e.g., beauty and personal care, apparel). Some packaged food giants launched or revamped their direct-to-consumer platforms to tap into this behavioral change. Both nascent and established food and beverage organizations should consider investments in eCommerce platforms to capture the consumer who has gone online and to lift margins by cutting costs associated with the physical grocery channel.
Nair: Some key trends include:
- Transparent labeling: 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. Companies can not only set themselves apart from the market, but they can also prevent false advertising lawsuits.
- Plant-based products: Consumers continue to increasingly accept plant-based products and demand plant-based options.
- Consumer engagement: Consumers have come to expect a more involved at-home experience with food and beverage. Companies that have been able to develop and offer these experience-focused restaurant alternatives will thrive without needing to get customers physically into their space.
- Social justice: An increase in consumer consciousness about race and social justice is affecting all industries, including food and beverage. Reckoning with these issues in an authentic way is something that brands need to do.
Q: Any new tax-related considerations that food and beverage companies should be aware of?
Plattman: While not new, we are still seeing a lot of traction with economic relief programs such as the Paycheck Protection Program (PPP) loans and tax credits such as the employee retention credit. There are also other incentives, such as tax credits offered for employees who are getting vaccinated during company time, awaiting a diagnosis or recovering from COVID. A newer economic relief package is the SBA’s Restaurant Revitalization grant, which began accepting applications this month. Additionally, we are having more conversations about entity choice and corporate structure (i.e. LLC vs. C-Corp). The best choice is not always obvious and requires a comprehensive look at the specific facts and circumstances.
Q: What are some of the hottest issues concerning food and beverage in 2021?
Acevedo: I think that the pandemic really underscored both how vulnerable and how resilient our food system is. I have seen reports that companies who were working on addressing some of the critical points in our food system were getting funded. Examples of this include the increased use of technology and plant-based food. With regard to technology, traceability will move beyond a food safety focus to a greater application to production methods. Cell-based meats immediately come to mind, as does the use of robotics in food manufacturing to deal with either worker shortages or the need to increase social distance in food facilities without sacrificing output that could be occasioned by another pandemic in the future. Plant-based foods were experiencing strong growth before the pandemic, but even more so during 2020 and beyond as consumers view food through the lenses of health/wellness and sustainability/climate change. I don’t believe that these trends are going away, and prudent companies would examine how they might benefit from incorporating technology and/or plant-based products into their overall businesses.
Plattman: Our clients are faced with the difficult task of upholding safety standards to not only protect their employees and business efficiencies but also to maintain the high level of trust that consumers have in how the food is manufactured. Also, as methods of purchasing evolve, so do the challenges associated with distributing food. Consumers want high-quality, better-for-you products that are accessible, affordable and delivered quickly, and it is challenging to keep up and maintain good profit margins. Each company should do an assessment to determine what risks are most likely to threaten their operations. Companies should evaluate and develop plans for how they will need to respond to challenges such as packaging issues, logistical concerns, cyberattacks or natural disasters. Companies should evaluate business interruptions or events that could impact their customers.
Nair: One hot issue is advertising and labeling. Food and beverage companies are a huge target of consumer class actions about their advertising and labeling, and this trend is on the rise. Additionally, the FTC, which regulates food and beverage advertising, has shown an increasing appetite for enforcement. During the pandemic, it issued over 400 warning letters for deceptive ads related to COVID-19 immunity. In July 2020, the agency issued a “Made in USA” labeling rule, strengthening civil enforcement penalties for products inaccurately labeled or advertised as “Made in USA.” Another emerging challenge is GMO labeling. January 1, 2022 is the compliance date for the national mandatory bioengineered food disclosure standard. Companies need to understand the guidance and what it means for their product. The FDA has invested significantly in a food traceability infrastructure, which would increase record-keeping requirements for certain food products. Website compliance is yet another challenge. The California Consumer Privacy Act went into effect in 2020 and creates strict obligations for how companies collect and manage customer information online. Additionally, restaurants and retail stores have increasingly been targeted in ADA cases based on website compatibility.
Q: What advice would you offer to an early‐stage restaurant or food services company seeking growth capital in 2021?
Plattman: I have the privilege of also working with many private equity funds, so I often counsel brands on how to showcase themselves effectively to that audience. Whether looking to bring on a strategic partner or conduct a friends-and-family round of fundraising, there are things that companies can do to be more attractive to investors. One example is to think about the business’ needs in the future. When growing, if a company puts processes in place that are expected of larger companies, such as more robust reporting and record-keeping, that tells an investor that they will not need to implement a huge process overhaul in the future. Also, making the pitch to investors can be difficult and time-consuming. Think about your goals and have contingency plans in place. Make sure you are authentic in your communications and be prepared to explain your financial information, product differentiators and story to potential investors. Consider other intangibles, like whether you are in alignment with potential partners, as part of the overall package for an investor looking to work with you.