Procurement Trends July 2022 by 4xi Global

PROCUREMENT TRENDS July 2022

TRENDS Eight trends in procurement for the decade.

PG. 8

The future of procurement in the foodservice sector

WHAT WILL 2030 HOLD? PG. 15

Contents 06

Surveying the Current Landscape The early part of the 2020s will be remembered for more than COVID.

Trends

We see eight trends in procurement for the rest of this decade that contract foodservice operators should consider.

Big protein companies are investing in new foods. Why?

Global factors and their impact to major food categories by 2030.

Foodtech and Agtech

Single-Use Disposables and Plastics

The war on plastics was waged without alternative solutions.

What Will 2030 Bring?

About the Contributors

Helene York,

Sustainability, Supply Chain, Menu & Product Innovation

Introduction Global uncertainty, rapid change, and growing pressures seem to characterize our situation today, but a tremendous uptick in ‘new’ foods and delivery methods is fueling expectations and causing disruptions. What is to become of our familiar foods and services? Of our procurement income? What will we menu? Where will food come from and how much will it cost? These factors keep many of us up at night. But, as with every crisis, the real question is how to turn these uncertainties into opportunities for us to do things differently, better, and more efficiently than ever before. Helene York, Sustainability, Procurement, Product & Menu Innovation Lead, and Simon Elliot, Managing Partner, at boutique advisory firm 4xi Global Consulting & Solutions, look into some of the factors associated with the future of food for foodservice operators.

Executive Summary For many in the foodservices industry, our focus is on the ‘here and now’ and day-to-day operations. Lofty sustainability goals seem like a distraction and an added cost. We have depended on procurement income in the past, and contracting with lowest-cost products, but COVID has made us recognize that this approach needs to become more flexible and aligned with growth goals to be successful over time. Sustainability isn’t about buying particular products. It isn’t more expensive. It’s fundamentally about rationalizing what we buy, how we use what we buy, and having an underlying strategy about both. A strategy that is authentic, embraces innovation, and doesn’t lose sight of both consumer and client needs. Over the next decade, our consumer base is going to change (as it always does), but demands from upcoming generations will require a different response than in the past. The generation now in college - the bulk of our customers and employees by the turn of the next decade - has grown up interested in food and the story behind the food like none before. They demand responsibility and accountability. They heavily depend on technology for communication, information, and delivery mechanisms. And they experience a pandemic of anxiousness about the future of our planet. To keep them as customers and employees, foodservice organizations will have to develop a clear procurement strategy, informed by culinary expertise, and a tactical plan to deliver upon targets, measure and report performance, using data to create visibility, build momentum, comply with client requirements, and demonstrate impact. Progressive foodservice organizations today need systemic methodology and resources to ensure that they are in touch with a focus to get early adoption and be ahead of the waves of the future. The use of 4xi’s external, on-demand and fractional executive support – reviewing current practices, recommending strategies, and providing a constantly flowing innovation pipeline, at significantly less cost than bringing resources in-house, full time - can help you realize your competitive potential.

Surveying the Current Landscape The early part of the 2020s will be remembered for more than COVID-19. 1. SUPPLY CHAIN FRICTION created bottlenecks, shortages, and inflation that hadn’t been seen across the world since World War II. First, food was dumped on the farm even as people were going hungry because processing and delivery mechanisms were blocked. Then factory slowdowns reduced the availability of familiar foods. Sometimes, a lack of packaging materials was the cause for delay. Supply chain mechanisms haven’t completely recovered nearly 30 months after the slowdown began. 2. CIVIL STRIFE, including the RussianUkrainian War, caused trading of key food commodities to stop, as governments sequestered supplies to ensure food security for their own citizens. When wheat and cooking oil were blocked, other governments took retaliatory and reactive measures and the flow of goods slowed, causing double-digit inflation. 3. WEATHER EVENTS - both short-term and the emergence of feared longer-term weather patterns in major growing regions - caused shortages of key food stuffs and has begun to change where some food is grown (or not grown). Avocados, wine, coffee, and cashews are a few of the agricultural products now being planted in new areas because common areas have become less hospitable. Other products, like almonds, are losing acreage, due to chronic water shortages. China’s ongoing drought curtailed its wheat production, the largest in the world by a huge factor. Given their high consumption of wheat, a drought in China causes major supply chain and availability problems everywhere else.

4. ANIMAL TRANSMITTED DISEASES Avian Flu, now a chronic event every 5-6 years, reduced the availability of chicken, turkey, eggs and egg products, and caused inflationary pressure. 5. LABOR SHORTAGES The pre-COVID labor shortage of truck drivers, pot washers, front of house staff, and prep cooks (not to mention factory workers and field hands) was turned into a full-on crisis by 2022 as an estimated 75% of the industry’s labor force had left the field entirely, choosing other career paths, retirement, or re-emigration. Those who remained as the industry reopened demanded higher wages and/or unionized. 6. FINANCIAL INVESTMENTS IN ‘NEW’ FOODS During the same period, investments in AgTech, non-dairy beverage, meat or seafood analog products, saw exponential growth. Though the percentage of the population calling themselves vegan or vegetarian remains small, flexible eating is on a steep rise due to health, ethical, or environmental reasons as well as the practical consideration that more products are widely available and heavily marketed.

TRENDS

We see eight trends in procurement for the rest of this decade that foodservice operators should consider.

SKU rationalization isn’t going away COVID-era supply chain challenges have led to permanent changes, including fewer SKUs overall. Copackers’ lines have slowed due to social distancing, less staff, and lack of essential ingredients. The pandemic brought more stocking of frozen versus fresh products. The next five years will continue to see major players focusing on their bestselling items and reformulating some of them to ensure their key ingredients are in stable, ample supply. Simultaneously, new products will be introduced at an accelerated pace. A March 2022 report by Deloitte and PitchBook indicated that foodtech companies raised over $13 billion in 2021 alone. Even if no new investments were to be made, there’s enough money supporting novel plant-based proteins and ingredients to guarantee new product introductions for the rest of the decade.

Inflation has reset prices

Today’s war in Ukraine is creating long-term damage to the global food system. Russia and Ukraine are Europe’s breadbasket; their exports have been estimated to represent 12% of all food calories traded in the world. In April 2022, the USDA estimated that RU/UK wheat exports would fall by at least 7M metric tons annually, and China’s dismal wheat harvest will further tighten supplies. Prices for bread, pizza, and pasta will be affected the world over. Global food prices (and packaging costs, including aluminum and cardboard) spiked to an all-time high even before the war began as a result of pandemic pressure on supply chains. The last time food prices were this high—in 2008/09—civil unrest occurred around the world. Earlier price hikes in wheat (Russian fires, 2010), U.S. beef (100 days of 100-degree heat, 2012), and U.S. eggs (Avian flu, 2015) were never reversed. A new Avian flu is currently affecting eggs and poultry in 27 states. In the U.S., demand for workers is reaching an all-time high with near-record low unemployment, further increasing costs to manufacture, deliver, and serve food. Foreign workers went home during COVID and don’t show immediate signs of returning, especially as Congress’ appetite for immigration reform seems tepid at best.

Food export restrictions around the globe are making many commodities more expensive and difficult to source.

Ukraine, the world’s largest exporter of sunflower oil, has stopped exporting it, as well as wheat, oats, and cattle, in order to protect its domestic food supply. Russia has banned export sales of fertilizer, sugar, and grains.

Indonesia, which produces more than half of the world’s palm oil, has halted export shipments. This will affect the cost and availability of snack foods and candy.

Turkey has stopped exporting butter, beef, lamb, and vegetable oils - including olive oil. Turkey is the third largest exporter of olive oil; most of the US olive oil is imported.

China has stopped exporting fertilizer in order to preserve supplies at home, and is developing supply chains across the world to protect against their bad wheat harvests.

Frozen is the new fresh

During the pandemic, frozen proteins became more readily available because production and distribution patterns were inconsistent. In the past few months, the use of frozen items have increased for a second reason: as a hedge against inflation. Despite the mantra “fresh, seasonal, local” of the foodservice community over the past two decades, frozen meat, seafood, and produce are here to stay. Though chefs are likely to object, they will find untapped health, environment, and social virtues by embracing the old as new. Frozen proteins represent less overall food waste, easier inventory management, lower - and consistent cost than fresh. Frozen fish often has a lower carbon impact than fresh because only the edible parts are transported, and transported more efficiently than fresh products. The case for frozen produce is especially tough to make with chefs and clients, but frozen rather than fresh in winter months can demonstrate support for domestic, regional farmers as well as lower wastage. Other stakeholders might be persuaded of the benefits of frozen produce or fish with a health argument. Good freezing techniques lock in nutrients when a farm product is picked or a fish is frozen. The typical “fresh” salmon we get came out of the water 10-14 days earlier. “Fresh” produce, boated from far away in cold months, also take 1-3 weeks to get to our docks after having been picked before they are ripe.

New foods won’t be that important

Five years ago, meat and dairy substitutes were unavailable in the fast-food market and foodservice sites, and only a handful of coffee shops carried alternatives to dairy milk. Today, it’s hard to find an outlet that isn’t featuring at least one item as part of their core menu. But new products rarely find their first home in foodservice organizations managed order guides. Direct-to-consumer channels - supermarket sales or eCommerce are usually the first target customer, chain restaurants second. The advantage for foodservice operators is that the market usually shakes out weaker performers, and ‘winners’ scale up and reduce their unit prices before they become available for foodservice outlets to menu.

FOODTECH AND AGTECH Traditional venture capital has moved into the food space. Independent new funds (and corporate giants like Tyson, Danone, Unilever, Cargill, General Mills, Nestle, and many others) are specifically investing in new foods. Big Protein companies wouldn’t be investing in it if they didn’t see a need and an opportunity. A recent report by The Good Food Institute found that plant-based food companies will need to invest $27 billion in the next decade to expand their manufacturing operations to meet consumer demand. Faux meat, cell-based meat, and now 3-D printed meat: one of the more novel examples is Redefine Meat, which raised $135 million in its latest financing round to expand its operations globally and collaborate with restaurants. If you can 3-D print meat, why not any ingredient you need? FoodTech goes beyond dairy alternatives and meat and now includes a vast number of agricultural aids, to dehydrate unharvested fruit and vegetables, or make a dehydrated protein powder intended to reduce on-farm food loss, make nutritional ingredients more affordable, and introduce new ingredients.

Reducing food waste is the best path to lower costs and amp up responsibility

The leading foodservice companies have all made ESG commitments and most have referenced the United Nations’ Sustainable Development Goals, which is a blueprint for actions to be achieved by 2030. UN SDG 12 (Responsible Consumption and Production) and UN SDG 13 (Climate Action) are guiding lights for all food companies’ commitments. While many erroneously view sustainability commitments as an added cost, no one argues that reducing food waste isn’t a good thing to do and a way to reduce cost. Companies that don’t commit to serious action in this area won’t be in business by the end of the decade.

ESG

ESG stands for Environmental, Social, and Governance, and refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. ESG criteria are increasingly evaluated for access to capital: investments and loans. The term has generally replaced Corporate Social Responsibility, or CSR, which wasn’t measurable against industry standards of optimal performance.

Embracing new technology tools supports business imperatives The industry is embracing technology in all forms. Technologies to know about, and monitor, fall into six categories: 1. Transparency tools and real-time connected communication in supply chains, will make your distributors more digitally connected to their networks, making them better able to deliver customized products to your sites. You can expect (and demand) better communications from your distributors. 2. Delivery mechanisms, including drones and Smartway transportation optimization, are no longer a future scenario. Real-time optimization of delivery routes will reduce the cost and carbon impact of distribution. This may require operators and clients to consider more onsite storage as you will be incentivized to receive fewer deliveries. 3. Fleet. Once a dream, electric vehicles will be the norm for light trucks by 2030. 4. Back of House: Food safety protocols (like High Pressure Processing for fresh foods) and energy use monitoring tools, including smart sensors to reduce refrigerant loss

(which has a massive GHG impact) and contributes to kitchen decarbonization, will help you achieve Net Zero commitments and preserve food longer using no preservatives. 5. New kitchen equipment is being manufactured making cooking food faster, less energy-intensive. The potential for energy-intensive equipment (like refrigeration) to power other equipment will be realized before the end of the decade. 6. Customer facing tools, kiosks, and delivery systems, including communications tools and robotic replacements of human labor in limited circumstances, onsite hydroponic growing of herbs and lettuces with minimal water and energy, and water coolers that use vapor in the air rather than being plumbed, are available now. However, a shake-out of tools hasn’t yet occurred.

Virtue-signaling really matters To be competitive in 2010, you had to buy some products from local farms or artisans, but the needle has shifted toward new concerns to signal virtue in procurement practices. The top issues to watch (and signal) over the next decade will be: 1. Measuring any commitment you make

4. Buying seafood and produce from regenerative systems

2. Adopting science-based, companywide Scope 3 carbon reductions including food waste reduction

5. Supporting emerging businesses and Black or Indigenous-run farms that build generational wealth

3. Reducing single-use plastics

6. Using upcycled ingredients

Single-use disposables and plastics While plastic service ware in foodservice locations (other than beachfront driveins) have never been a significant source of plastic waste in the ocean, and compostable service ware (or reusable ceramics and glass) have their own less obvious impacts and consequences, they have become The #1 symbol of environmental irresponsibility and are unkindly being referred to in some quarters as “throwaways.”

Compostable products for hot food and beverages will continue to have supply chain problems as they are produced in Asia with Asian plant materials Aluminum is in short supply as an alternative to PET plastic beverages Glass has a halo effect but is the most carbon intensive option and is rarely recycled Edible and compostable packaging will start in supermarkets and may not be available in the market in a significant way by 2030 Composting will be mandated in many more jurisdictions by the end of the decade, making it easier to meet environmental goals.

WHAT WILL 2030 HOLD? Let’s look at the major categories and how all the factors above will impact food by 2030

PRODUCE THE SALAD BOWL OF THE WEST (California, Arizona, Sonora) is dying from lack of available water. This situation will only get worse over time, and government intervention at scale isn’t likely. INDOOR AGRICULTURE is growing and trying to replace traditional lettuce production. Vertical farming is pesticidefree, much less water intensive, and can be local. Plenty, a leading indoor vertical farming company in CA, raised $400M in March 2022, the largest capital round for an indoor vertical farming startup. All of these efforts are currently focused on retail supermarket sales. SEASONAL, FRESH, AND LOCAL will continue to be themes, signaling ‘healthy,’ but seasonal and local have never been the majority of produce purchased in foodservice environments (think lettuce, tomato, zucchini, banana, tropicals, winter berries). Frozen will play a role. EMERGENCE OF REGENERATIVE FARMERS but no widely accepted definition of the term, and a lot of inconsistency unless the produce and grains industries coalesce around their own definitions. MINORITY-RUN FARMS across the country will be brought into wide distribution but are unlikely to represent a large percentage of crop land under cultivation. MORE PRODUCE, GRAINS, AND OILS will be sourced from Mexico and Canada.

MAJOR CA

MEAT & SEAFOOD, TRADITIO BEEF, PORK, AND SEAFOOD will continue to experience high inflation due to the cost of feed, fuel, labor, and voter mandates. Four meat companies control 85% of the market: Forbes reports they intend to further re-regionalize their operations to be more resilient, but significant capital investment will offer no cost relief to buyers. GLOBALLY, AQUACULTURE PRODUCTION is becoming increasingly responsible, has already outpaced wild seafood (total global tonnage), and will be more cost effective compared to other proteins. New technology tools will give buyers more transparency about origin, production practices, and quality.

ALTERNATIVE PROTEINS: PLANT-BASED MEATS AND DAIRY PRODUCTS HUGE INVESTMENTS backing them, fermentation and fungi should rise to the top of the alt-protein space and deliver products consumers want at the price operators can afford.

ATEGORIES

ONAL AND CELL-BASED CELL-BASED PRODUCTS will need 10+ years to be price competitive. They will be able to mimic the texture of traditional meat better than any plant-protein alternative because they are meat - without the animal welfare, land use, or climate concerns. SEAFOOD ALTERNATIVES aren’t likely to be foodservice alternatives by 2030 the way some alt-meat products will be. Producers are focusing on premium products, such as sushi- grade bluefin tuna and salmon, aiming for adoption among premier independent restaurants, and they will be expensive. Third party sushi vendors will only pick up these products if the cost of farmed salmon becomes prohibitive, which isn’t expected.

PLANT-BASED DAIRY ALTERNATIVES (milk, yogurt and frozen treats) are rising in popularity, sales, and variety. Originally soy and almond, now oat and pea protein are ascendant, but soy is still dominant. The barista counter could become crowded, but oat is likely to be the alternative of choice for flavor, texture, environmental, and allergen-free reasons. Plant-based cheeses have a long way to go. DEBATES OVER WHETHER PLANTBASED MEAT ALTERNATIVES are “nutritious” or planet-friendly will continue, though the evidence is clear on both. Mainstream organizations like the American Heart Association and leading universities argue there are no “good foods” or “bad foods” but that balanced diet pattern matters most for health, but a minority will continue to argue that meat analogs are unhealthy because they are “ultra-processed food.” PLANT-BASED EGGS now have a lot of competition from well-backed companies and will rise in popularity among foodservice providers due to shelf life, availability, and better pricing.

About the Contributors: Helene York is the Sustainability, Supply Chain, Menu & Product Innovation consultant of 4xi Global Consulting & Solutions. Now a teacher and an independent strategic advisor after, two decades as a global supplychain innovator, Helene York has made a career of questioning business as usual, partnering with chefs, and building trust among suppliers and distributors to move in new and impactful directions. Helene York Sustainability, Supply Chain, Menu & Product Innovation

Simon Elliot is Managing Partner and Co-founder of 4xi Global Consulting & Solutions. He is a Fellow of the Institute of Directors, Chair of the WORKTECH Academy, North America, and believes in the power of collective strength and collaboration in order to tackle big challenges, together. Originally from the UK, having visited 6 of the 7 continents, Simon resides in the San Francisco Bay Area. Simon Elliot Managing Partner Global Strategy, Growth, and Innovation

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