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3 Ways Inflation is Impacting the Food and Beverage Industry The food and beverage industry is being hit particularly hard by inflation — especially as the cost of food, groceries and eating at restaurants have all shot up. So, what impact is it having in the market?

By Danilo Diazgranados Edited by Chelsea Brown

Opinions expressed by Entrepreneur contributors are their own.

Inflation is top of mind these days, and for good reason. Just this summer, inflation rose to its highest rate in 40 years. And under these conditions, it seems just about everyone (two-thirds of the country to be exact) is living paycheck to paycheck.

The food and beverage industry is being hit particularly hard — especially as the cost of food, groceries and eating at restaurants have all shot up. So, what impact is inflation having in the market? Let's get into it:

Related: Restaurants Are Adding 'Inflation Fees' to Customer Checks

1. Changing consumer habits

In one respect, 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 changing consumer habits.

Prices of staples like meat, eggs and bread are soaring at grocery stores across the country. Americans aren't getting a break at their favorite restaurants, either, as those choosing to dine in or take out are also experiencing increased prices for meals. Compared to 2021, the food-away-from-home index saw its largest 12-month increase in nearly four decades.

As a result, consumers are thinking strategically about the cost of what they're eating, both inside and outside of the home. Products and behaviors they might not have thought twice about in the past may now seem lavish. 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 during 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 delivery) to keep their loyal customers despite price increases.

Related: Wingstop And Hershey Are Two Food Stocks Overcoming Inflation

2. Higher operating costs

Higher prices don't just affect consumers — they also impact a business's bottom line. Add global supply chain issues and labor shortages to the mix, and it's a recipe for an operating nightmare and a higher cost of doing business.

Food and beverage businesses have experimented with several solutions to address higher operating and manufacturing costs. One answer, taken up by restaurants and large consumer brands like Chobani and Fritos, has been to simply offer less product for the same price, known colloquially as "shrinkflation." While this practice isn't new, it is often implemented without warning. And frustrated customers have called out companies on what they view as a deceptive business practice. To avoid similar backlash, some have been more upfront about their shrinking portions, like Domino's Pizza did when it reduced its 10-piece wings by two. (Granted, this change would have been pretty hard to conceal).

Another, perhaps obvious, solution to cope with an increase in operating costs is to pass the burden on to consumers via price hikes. While many have done this, in both grocery stores and restaurants, some argue it could harm consumer demand and/or brand loyalty in the long term.

The pros and cons of dealing with the current operating costs highlight inflation's impact 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 Shrinkflation? 3 Ways to Protect Your Wallet.

3. A pivot to beverages

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

As more of the country returns to bars due to post-pandemic restrictions, alcohol sales have been largely unaffected, even though prices increased (albeit not as sharply as some other products). This has led to innovation in the spirit industry, with companies creating new products like hard seltzers or even hard coffee.

However, alcohol isn't the only beverage riding high. Companies like Coca-Cola have experienced impressive revenue gains. Last year, for the first time, 46 of the top 100 products on IRI's New Product Pacesetters list were beverages. Additionally, eight beverage products landed in the top 10, including new offerings from Dr. Pepper and Minute Maid.

And while this new crop of beverages doesn't mean companies weren't impacted by inflation, it is an impressive showing of what it means to follow consumer demand in turbulent times. It also highlights that, although Americans are seeing more money leave their wallets, they're still willing to shell out for products they want and care about. For some entrepreneurs, pursuing this trend could prove to be worth the risk, even in today's economy.

While inflation has affected the ways we do business, it has also presented opportunities for those in the food and beverage industry to work in new ways. In a time when the economy is in flux and prices for goods and services are increasing, it's important for entrepreneurs to be adaptive and open-minded in an ever-changing market.

Danilo Diazgranados

Entrepreneur Leadership Network® Contributor

Investor

Since leaving his native Venezuela more than a decade ago, Danilo Diazgranados has been a successful independent investor with a focus on the consumer-goods, real-estate and financial sectors. Diazgranados also mentors young entrepreneurs and contributes to a variety of other philanthropic pursuits.

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