Inflation: Why food companies need to invest in product development amid financial pressures

Inflation is driving up costs at food manufacturers while simultaneously making many consumers more careful about their spending. The twin forces are creating challenges for manufacturers, which risk losing customers if they raise their prices to offset climbing costs. Faced with the pressures, history shows that food companies need to innovate on two fronts to address both the near-term need for new products and the longer-term opportunities that will emerge as the crisis abates.

In October 2022, inflation, as defined by changes in consumer prices, in the 19 eurozone countries rose at a record annual rate of 10.7%. One year earlier, inflation was 4.1%. Inflation rose even more outside of the eurozone, resulting in a European Union-wide annual price increase of 11.5% in October.

There are signs the situation is easing — eurozone inflation slipped to 10% in November — but experts still expect prices to rise far faster in 2023 than they did before the surges seen this year. Inflation is forecast to fall to 6.1% in the eurozone and 7% in the EU by the end of next year.

Food costs are a key contributor to the trends. The war in Ukraine, lingering effects of COVID-19, climate change, rising feed and energy costs, avian influenza in Asia and Europe and other factors have combined to drive up the cost of getting food to consumers. In the eurozone, food, alcohol and tobacco were the second biggest driver of inflation in October, trailing only energy. Food was also a big factor in the UK.

As inflation pressures manufacturers to raise prices, it simultaneously erodes consumer spending power. Around half of Europeans are extremely concerned about the impact of inflation on household budgets, with the spread in the EU ranging from 39% in Poland to 60% in Ireland, according to Mintel surveys. Between 67% and 84% of consumers in European countries expect food and drink prices to increase.

How to meet changing consumer demands

Consumers are changing their buying habits in response to the financial pressures. Popular responses to the situation include buying more vegetables instead of expensive meat, shopping at discount retailers, switching to value packs and purchasing supermarket own-label foods rather than branded products.

Manufacturers need to respond to the changes in buying habits. Recognising that many consumers are unable to absorb price increases, companies can change their recipes for value optimisation, for example by switching to less expensive, alternative raw materials (REFORMULATION) yet offering the same quality in taste, functionality and nutrition, to keep their prices steady despite inflation. Improvements to shelf life are popular too because they avoid waste and result in better quality, fresher products.

Food manufacturers may also be tempted to reduce investment in new product development (NPD), but that can lead to missed opportunities in both the short and long term. In the short term, companies that cut back on NPD may fail to deliver new products that meet the needs of cost-conscious consumers, and fail to cater to the significant number of people who still want novel, premium foods.

The market for new foods will persist even as some consumers cut back. Some people are insulated from the impact of inflation by their wealth. Many other consumers will continue to treat themselves to foods even as they reduce spending in other areas.

For example, 56% of consumers in the EU plan to go to restaurants less often in the winter of 2022-23. Some of those people will want to recreate aspects of the restaurant experience at home, as happened when the COVID-19 pandemic caused a jump in purchases in premium foods.

The shift from restaurant to home consumption is creating opportunities for premium foods. Some consumers will try to replicate the cuisines they eat at restaurants at home, incorporating flavours such as yuzu and harissa into their cooking and buying ingredients with provenance; others will seek out products that provide restaurant-style attributes such as charring and smoking that are impractical to recreate in domestic kitchens.

Why NPD should continue in hard years

The longer-term case for continuing to invest in NPD through the current period of high inflation is built on experience of what happened when the world exited earlier crises. Notably, launches of new food products increased quickly after the 2007-2008 financial crisis, doubling from around 40,000 during the economic recession to more than 80,000 by 2015.

Manufacturers that continued to innovate through the crisis were rewarded with a favourable market as economic conditions improved. New products launched in the aftermath of the economic crisis had little competition, in terms of both innovation and advertising, and entered a market filled with consumers who were buying more premium foods after a few difficult years. Manufacturers that cut investment in NPD missed out on the post-crisis opportunities and were left playing catch up as conditions normalised.

This time around, companies that continue to invest in new products that are sustainable in every sense of the word. Consumers will want products that are: natural and contain fewer additives; nutritious and score well on Nutri-Score, for example because they are low in salt and fat and high in protein and fibre; and environmentally friendly owing to their use of ingredients that are local, promote biodiversity and cause low levels of greenhouse gas emissions.

Solina is helping manufacturers seize the near and long-term reformulation and NPD opportunities. With R&D teams at more than 30 centres across Europe and North America and as a global producer of savoury ingredient solutions, we have the local knowledge and culinary and technical expertise and infrastructure to help create foods adapted for the current inflationary period and the growth opportunities that will follow.

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