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October 14, 2022

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Inflation is top of mind these days, and for good reason. This summer alone, inflation rose to its highest rate in 40 years. And under these conditions, it seems that almost everyone (two-thirds of the country to be exact) lives paycheck to paycheck.

The food and beverage industry is being hit particularly hard, especially as the cost of food, groceries and restaurant dining has skyrocketed. So what impact is inflation having on the market? Let’s get into it:

Related: Restaurants are adding ‘inflation fees’ to customers’ checks

1. Changing consumer habits

In a sense, the food and beverage industry is lucky: Many of the items and services they sell are considered necessities, but that doesn’t mean it’s safe from changes in consumer habits.

Prices for staples like meat, eggs and bread are skyrocketing in grocery stores across the country. Americans also don’t get a break from their favorite restaurants, as those who choose to dine in or take out are also experiencing rising meal prices. Compared to 2021, the Food Away from Home index saw its biggest 12-month increase in nearly four decades.

As a result, consumers are thinking strategically about the cost of what they eat, both inside and outside the home. Products and behaviors that you may not have thought twice about in the past can now seem luxurious. They might also be switching to different brands, stores, and restaurants where they can find lower prices. In fact, recently, more consumers have been substituting their favorite brand name products with comparable store brand items.

To combat this, some companies are offering more for less. Take Taco Bell’s five-item Big Bell Box combo, for example, which has been a fan favorite throughout inflation. But not all brands can afford this strategy. So instead, they can focus their efforts on customer retention with innovative marketing and advertising, loyalty programs, and low-cost perks (like offering home delivery) to keep customers loyal despite price increases.

Related: Wingstop and Hershey Are Two Food Stocks Outperforming Inflation

2. Higher operating costs

Higher prices not only affect consumers, they also affect a company’s bottom line. Add global supply chain issues and labor shortages to the mix, and it’s a recipe for an operational nightmare and higher cost of doing business.

Food and beverage companies have experimented with various solutions to address increased manufacturing and operating costs. One response, adopted by restaurants and big consumer brands like Chobani and Fritos, has been to simply offer less product for the same price, colloquially known as “shrinkflation.” While this practice is not new, it is often implemented without warning. And frustrated customers have criticized the companies for what they see as deceptive business practice. To avoid a similar backlash, some have been more forthright about their shrinking portions, as Domino’s Pizza did when it cut its 10-piece wings in two. (Of course, this change would have been quite difficult to hide.)

Another, perhaps obvious, solution to coping with rising operating costs is to shift the burden onto consumers through price increases. While many have done this, both in supermarkets and restaurants, some argue that it could hurt consumer demand and/or long-term brand loyalty.

The pros and cons of dealing with current operating costs highlight the impact of inflation on the industry, and individual businesses must walk a tightrope to find solutions that work for them and their unique customer base.

Related: What is shrinkage inflation? 3 ways to protect your wallet.

3. A pivot to beverages

While there is no argument that inflation has negatively affected both consumers and businesses, it has also opened up opportunities for entrepreneurs and creative thinkers. And while the overall industry and consumer habits are changing, Americans’ demand for beverages hasn’t stifled, particularly alcohol.

As more of the country returns to bars due to post-pandemic restrictions, alcohol sales have been largely unaffected, despite prices rising (though not as sharply as some other products). ). This has led to innovation in the spirits industry, with companies creating new products such as carbonated soft drinks or even hard coffee.

However, alcohol is not the only drink that is getting you high. Companies like Coca-Cola have seen impressive revenue gains. Last year, for the first time, 46 of the top 100 products on IRI’s New Product Markers list were beverages. Additionally, eight beverage products made it to the top 10, including new offerings from Dr. Pepper and Minute Maid.

And while this new crop of beverages doesn’t mean companies were unaffected by inflation, it is an impressive display of what it means to follow consumer demand in turbulent times. It also highlights that although Americans are seeing more money flowing out of their wallets, they are still willing to pay for the products they want and care about. For some entrepreneurs, following this trend could be worth the risk, even in today’s economy.

While inflation has affected the way we do business, it has also presented opportunities for those in the food and beverage industry to work in new ways. At a time when the economy is constantly changing and the prices of goods and services are rising, it is important for entrepreneurs to adapt and keep an open mind in an ever-changing market.