Why the food and beverage industry is building toward the future in 2021
As consumers across the country found themselves stuck at home last year, they drank a lot more Woodchuck Hard Cider and craft beer, said Green Mountain Beverage Chief Operating Officer Ben Calvi.
In June, the company announced it was expanding its canning capacity six-fold, from the ability to do 100 cans per minute to 600 cans per minute. The expansion will be added on to the company’s existing facility, which features state-of-the-art equipment, and is expected to be completed by January.
Green Mountain, which has gone through different expansions, divisions and name changes in the three decades since it started, had been eyeing this kind of expansion for years, Calvi said. In May, when parent company Vermont Hard Cider Company was acquired by holding company Northeast Drinks Group, they had the money for it. But, Calvi said, the pandemic-related acceleration in at-home consumption of alcohol — especially premium drinks — quickly showed the need to expand canning lines.
“If there wasn’t a strong business case before, it was the rubber stamp seal of approval that this is absolutely the right direction to go in,” Calvi said.
Green Mountain isn’t the only company that has chosen to expand its manufacturing footprint in 2021. According to an analysis by Food Dive, more than 70 manufacturing expansions have been announced or completed this year.
Richard Branch, chief economist at Dodge Data & Analytics, said in the first seven months of 2021, construction activity in the manufacturing sector was up 40% over 2020. Food and beverage is one of the three most active business areas in industrial construction right now, he said.
Data from CBRE shows that as of August, nearly 33.5 million square feet of industrial space had been completed for food and beverage this year — 8.7% of all of the commercial construction this year.
There is good reason that food and beverage manufacturing construction is so hot right now, said Geoff Freeman, president and CEO of the Consumer Brands Association. The pandemic drastically changed the direction the industry was going. Food and beverage companies went from flat growth, rampant internal cost-cutting and disappointing sales on once-reliable staples before the pandemic to a great business success story. And now, he said, it is time to invest in improving these businesses and what they can deliver to the consumer.
“You’re seeing a legacy industry in many respects go through a rebirth,” Freeman said.
From sales to investment
Freeman doesn’t like to use the phrase a “perfect storm” to describe something good, but that’s what happened to the CPG industry during the pandemic.
Sales dramatically increased across the board, with McKinsey & Company reporting 12% year-over-year growth in food and beverage in 2020.
As the pandemic started shutting down offices, leisure venues and restaurant dining rooms, consumers flocked to grocery stores and started buying. The shopping continued through 2020 and into 2021, even as supply chain issues are straining what stores can stock. Despite unprecedented sales gains in 2020, some big food companies are still posting sizeable quarterly increases this year.
Woodchuck Hard Cider cans at Green Mountain Beverage’s facility.
Permission granted by Green Mountain Beverage
“There is month-over-month, year-over-year demand that has proved to be sustainable. That has demonstrated that the changes we saw at the outset of COVID are, at the very least, semi permanent,” Freeman said.
Prior to the pandemic, companies had seen flat growth, leading to job cuts, factory closures and painful restructuring in the name of saving money. Freeman said at that point in time, Wall Street wanted food businesses to make those kinds of cuts to hold its bottom line.
Now he said, Wall Street wants the food business to be investing in the future.
“They’re looking to see we’re prepared for the long haul,” Freeman said.
Being prepared for the long haul is one of PepsiCo’s major business goals. Laura Maxwell, senior vice president of supply chain for PepsiCo Foods North America, said the company’s manufacturing strategy can be distilled in the phrase “always everywhere.” It wants products to perpetually be in every place consumers are looking.
The soda and snack giant’s Frito-Lay division has a long plan for where it wants to expand and when. And as the pandemic drove sales for the company’s snacks, it helped move forward several long-planned expansions across the country, including an extension of manufacturing lines at a facility in Rosenberg, Texas, a new fulfillment center in East Fishkill, New York, and a new fulfillment center in Kissimmee, Florida.
The Texas project is the largest, worth $200 million. It will add another Funyuns line in 2022, and could supply more snacks to the southeastern U.S., Maxwell said. A tortilla chip line is slated to be added in two to three years. It’s the second big expansion announced at this plant since 2019. The first, expanding lines and warehousing for Cheetos, is almost complete.
“You’re seeing a legacy industry in many respects go through a rebirth.”
Geoff Freeman
President and CEO, Consumer Brands Association
The expansion comes after a very good year of snack sales for PepsiCo. In the company’s fiscal year ending Dec. 26, 2020, its Frito-Lay North America division saw a 7% sales increase. This reflects higher consumer prices, but the company also reported a 3% volume increase. These higher sales have continued for Frito-Lay, with a 6% increase in sales and a 1% uptick in volume in the most recent quarter, compared with a year ago.
While the Texas expansion has been on the calendar for a while, Maxwell said the needs during the pandemic helped move the development up on the calendar. The company asks a series of questions as it prepares to move forward with construction.
“Where’s product being sold? Where does it look like we see growth, and we might not have [facilities] aligned in that geography to feed that growth?” she asked. “…I think about Texas and all those [Southern] states. These are products that are growing in those markets, so it makes a lot of sense to put Funyuns in there, to put fried Cheetos in there, to put a [tortilla chip] line.”
Maxwell said pandemic-related consumption is influencing the type of equipment that will be going into the expanded plant. Consumers wanting to avoid sharing a package with others have purchased more individual-sized bags of snacks in the last year and a half, so Frito-Lay will be adding more equipment to produce that type of packaging, she said.
Other companies have translated sales — and the demand they saw in the pandemic — into expansions. In May, sous vide product manufacturer Cuisine Solutions opened a $200 million plant in San Antonio, Texas. Sous vide is a style of cooking where food is placed in vacuum-sealed pouches and precisely cooked in boiling water. Because Cuisine Solutions pre-cooks the food, it’s convenient and easy to prepare at home or a restaurant, especially in these times of short-staffing.
CFO Mark O’Donnell said the 315,000-square-foot plant will make products for both retail and foodservice.
“We see increasing demand for sous vide products throughout national restaurant chains to consumer products,” he said. “What we see in the market is a growing trend for food convenience and food safety.”
Cuisine Solutions broke ground on its new factory in February 2019. While the company calculated its capacity needs and finances before the pandemic, O’Donnell said the demand and consumer trends during the health crisis reaffirmed its decision to expand.
The business case for expanding
Food and beverage sales are mostly increasing, bringing positive growth and more optimism, but is now the right time for these businesses to take on more debt?
John Felix, managing director of investment advisor and private credit firm White Oak Global Advisors, said the answer is “unequivocally yes.”
“We are in what I would call [an] unprecedented time of liquidity,” Felix said. “The savings rate for the average consumer is way up. Banks are flushed with cash. Private credit funds have raised a ton of capital. The public markets, everybody is screaming for some type of return on their investment.”
And with still-growing sales for many companies, expanding facilities and capabilities is a good way to show promise of return on investment. Felix said that companies that are getting capital right now are also proving that they’re a good investment.
An aerial view of Frito-Lay’s plant in Rosenberg, Texas.
Permission granted by Frito-Lay
Pre-pandemic, he said, money was easily available. As companies bore the brunt of the pandemic’s unprecedented slam on the economic brakes, Felix said funders, including White Oak, started taking a harder look at those searching for money. Now when a business wants to borrow money, Felix asks whether it still deserves to exist. Is it providing value or products and services that consumers will pay for? The pandemic, he said, shone a bright and unflattering light on companies and exposed all of their vulnerabilities.
“Those companies that are coming out of the pandemic have made the necessary operating changes,” Felix said. “They’ve made more efficient their production facilities. They have reevaluated their supply chain, because we all know how the pandemic impacted supply chain globally. They have reevaluated their distribution channels, their sales channels.”
Many food and beverage companies showed their worth during the pandemic by keeping production lines running and accommodating new health and safety protocols. Freeman with the Consumer Brands Association said the pandemic showed how stretched manufacturing facilities were. It also demonstrated how much modernization the industry needed.
The pandemic has also disrupted supply chains, making it difficult for companies to get their raw materials in and finished products out, said Jay Biggins, executive managing director of site selection firm BLS & Co. He said risk diversification has always been something he supports for manufacturing businesses, but COVID brought the reasons it is vital into sharp focus.
“In addition to expanding production capacity, they are realigning, so they may be actually relocating a portion of their production capacity from what may have been a centralized location to one that’s somewhat more decentralized so that it gives them [a] more diverse and better risk-managed productions platform,” Biggins said.
Planning for new facilities screeched to a halt during the first six to eight months of COVID, Biggins said. The site selection process generally takes three to six months, depending on how much work a company has done in scouting out a location’s proximity to raw materials, packaging manufacturers, transportation and distribution networks — as well as other needs and incentives, he said.
As things are rolling again now, Biggins said that may partly be why it seems like so many expansions are being announced: Companies are catching up on 18 months of delayed planning.
Problems with expanding during a pandemic
Although announcements of new projects are increasing, rising costs and shortages in construction materials — including lumber, metals and plastics — have contributed to slowdowns in those projects actually getting built, Branch said. The shortages are due to labor and transit issues and materials orders being backed up.
In an op-ed written for Supply Chain Dive, CBRE Managing Director of Supply Chain Advisory Joe Dunlap said that challenges in the supply chain for commercial real estate construction are causing backups that hurt businesses and consumers alike. There is currently a record high 410 million square feet of industrial space under construction in the U.S. Dunlap wrote, citing CBRE’s statistics. But completions have declined for the past two quarters, keeping them below the five-year average.
“Projects are breaking ground and stalling out due to lack of materials at a time when more product than ever is needed,” Dunlap wrote.
While there have been no high-profile examples of food plant construction being stopped, Green Mountain’s Calvi, Cuisine Solutions’ O’Donnell and PepsiCo’s Maxwell all said they have experienced delays and other challenges by building during the pandemic.
“Those companies that are coming out of the pandemic have made the necessary operating changes. They’ve made more efficient their production facilities. They have reevaluated their supply chain, because we all know how the pandemic impacted supply chain globally. They have reevaluated their distribution channels, their sales channels.”
John Felix
Managing director, White Oak Global Advisors
Calvi has encountered shortages of equipment and parts needed to create the new canning lines. In this environment, transparency is critical.
“We try to work together hand in hand as much as possible, and communicate as much as possible,” he said. “If something’s gonna be late, you got to let your customer know it’s gonna be late and why it’s gonna be late, And when’s the new ready date and when’s the new ship date. More than ever, we have to be very transparent, very communicative and very patient with our suppliers.”
There also isn’t much price negotiation happening now, as opposed to previous Green Mountain expansions, Calvi said. The company is paying list price for everything. Freight charges, especially for products coming from overseas, are also way up.
However, Calvi doesn’t think that suppliers are taking advantage of the situation and gouging. Even though there are some materials shortages, he said, there is still a fair amount of competition.
“They’re passing along cost increases for raw materials that have gone up, and so far I think most of that has been freight related,” Calvi said.
O’Donnell said COVID-related delays put Cuisine Solutions’ facility construction project roughly six months behind schedule. Because of international shipping and manufacturing challenges, it was difficult to get all of the needed equipment on time. There were also labor shortages and escalating costs on the construction side.
However, O’Donnell said that the timing worked out perfectly. Demand for sous vide products is climbing.
“We’re super happy that we went through that process to be able to have the capacity today to meet some of that market demand, versus fully pausing the project and then starting today,” he said.
At PepsiCo, Maxwell said that the company designs its expansion process for challenges. It builds in time to deal with supply chain issues, and puts together alternative plans to ensure it has the needed materials, equipment and labor. The current construction work, she said, remains on schedule.
If they build it, will workers come?
Branch said that even though the business economy is recovering quickly, the manufacturing construction recovery isn’t likely to be as steep. While funding, product demand, need for local sourcing and overall enthusiasm are rebounding, there’s still the issue of getting people to do the work. And, without adequate workers, a company will not see its return on investment for any manufacturing expansion.
According to the Bureau of Labor Statistics, about 45% of the open manufacturing jobs in August — a total of 393,000 — are in non-durable manufacturing, which is where the CPG industry is classified. The Consumer Brands Association found that despite an increase in CPG demand in the second quarter of the year, only 12,000 jobs were added. The group’s second-quarter economic pulse report, published in August, said the CPG industry is facing a “labor crisis,” especially because wages are up and workers aren’t coming. In food manufacturing, wages were up 4.6% in July over last year. For those in production and non-supervisory roles, the group found, the jump was even higher at 6%.
Cuisine Solutions’ San Antonio plant.
Courtesy of Cuisine Solutions
Calvi said Green Mountain has always faced challenges in hiring. The company is based in Vermont, which had low unemployment rates before the pandemic. Now with a nationwide labor shortage, it’s even more difficult.
While Green Mountain is a relatively small operation — the expansion will add about 20 more jobs, on top of about 60 existing ones — Calvi said the company is already working to find its new hires. These positions require training and skill, which the company would ideally provide before the new facility goes into operation.
And, Green Mountain wants to hire people who will not only be good at the job, but also fit into the company culture. Some current employees have worked with Green Mountain and its related entities for decades, Calvi said.
“If we can get potential new hires to come and spend time with us, they see it’s the kind of place they want to work at,” Calvi said. Competitive salaries and benefits are also key, he said.
At Frito-Lay’s plant in Texas, Maxwell said that the company is also thinking about hiring. While the plant already has about 750 workers, the expansion adds about 160. The plant has significantly grown in its years of operation, and Maxwell said the Rosenberg community has always been supportive.
“We’re in a place where we’ve had good fortune in terms of being able to keep the site staffed and running,” she said.
But the worker shortage definitely has PepsiCo looking at its timeline of finding workers, Maxwell said. Recruitment is likely to begin early next year, even though the plant won’t be ready for several more months.
The potential workforce is playing a big role in where companies are trying to locate now, Dodge Data & Analytics’ Branch said. The areas of the country seeing the most new construction are what his firm classifies as the West North Central — Iowa, Kansas, Minnesota, Missouri, Nebraska and the Dakotas — and the South Atlantic — the coastal area from Washington, D.C. to Florida. These regions have both been aggressively trying to attract manufacturing facilities of all kinds for years through their natural amenities, proximity to transportation and population and incentives. The South Atlantic also has robust age and education demographics for potential employees, which makes companies want to be nearby.
“Projects are breaking ground and stalling out due to lack of materials at a time when more product than ever is needed.”
Joe Dunlap
Managing director of supply chain advisory, CBRE
BLS & Co.’s Biggins said site selection can help companies find workers. Knowing the demographics of an area — ages, educational levels and options, skill sets and unemployment levels — can help companies find communities where the jobs they offer will be a better match.
State, county and local economic development entities have long offered big companies incentives to build their facilities nearby. These can include lower property taxes, inexpensive utility service, and infrastructure upgrades near the property. Sometimes, these incentives have been based on the number of jobs that are created.
The pandemic doesn’t seem to have changed incentives by state and local economic development organizations, Biggins said. These groups are still working to do their best to attract businesses, but don’t seem to be offering more generous benefits than prior to the pandemic. But the nature of those benefits may be changing, relying less on job creation, he said.
Biggins said there are many factors which have resulted in the current worker shortage. The resurgence of COVID-19 infections though the delta variant has made people more cautious, plus some people needed to stay closer to home to care for children.
“You’ve got all these factors in play,” he said. “It’s not just the unemployment, which is a popular hobbyhorse for some, but you really have to unpack it. …All those things play a role but no one of them is singularly responsible for it.”
Changes in policy and on the calendar, however, could spur more people to return to work, Biggins said. The recent end to the eviction moratorium and most unemployment benefits may be sending people back to work. And with most children across the country returning to in-person school, there is less need for someone to be at home with them during the day.
Future outlook
Calvi said the economic situation that has come out of the COVID-19 pandemic has made it an especially exciting time for Green Mountain to be expanding its business.
While the company makes and cans its own craft products, the facility also functions as a co-manufacturer and packer. For people who have been moved during the pandemic to follow their dreams, Calvi said Green Mountain is ready to work with them.
“That makes it an exciting time to be expanding and increasing our offerings to not only our end customers of the brands that we own and make, but also to our contract partners who don’t have a facility like ours, but have a brand or a product that they want to bring to market and we can be a part of that solution,” Calvi said. “It’s a really fun time to be in beverage alcohol.”
Green Mountain Beverage’s facility in Middlebury, Vermont.
Permission granted by Green Mountain Beverage
These kinds of expansions also help bolster the industry. A survey of food and beverage leaders done by Mattson in spring 2020, soon after the pandemic shut down much of what was once ordinary life, found that half felt their businesses would emerge from the pandemic stronger. New facilities, increased capacities and a good outlook for return on investment all contribute to that outlook.
Consumer Brands Association’s Freeman said the CPG industry will not continue to grow at the same clip that it did in 2020, but Freeman said he believes in the industry’s ability to adapt.
“If you were trying to shift the American public in one way or another to help the CPG industry become stronger, you couldn’t have written a better roadmap than the environment that we’re in and the environment we expect to continue to be in for the foreseeable future,” Freeman said. “Again, more home consumption and other aspects that have come with COVID are in the are in the wheelhouse of this industry and that’s why I think there’s great confidence in the investments that you see being made.”
Source: fooddive.com