The Supply Chain Outlook for 2023

Even as space frees up within FedEx and UPS' networks, shippers are poised to continue diversifying their parcel carrier mix in 2023, industry experts say.

Adding new last mile carriers emerged as a popular strategy during the pandemic after volume surges limited capacity at the two delivery giants. In recent months, FedEx and UPS have seen service levels rebound and demand normalize, but many shippers continue to keep other delivery options on tap.

If anything, shippers are adding alternative carriers at an even faster rate. The average number of last mile carriers per company account in December was 5.73, up from 4.86 the year before, according to project44 data.

A mix of factors is buoying this ongoing trend, including higher rates and concerns over UPS and the Teamsters' contract negotiations — their current agreement expires July 31. Increased capacity and more robust services from smaller competitors are also driving interest in alternatives.

The result is that last mile carrier mixes are starting to look more like shippers' varied LTL portfolios, said Caleb Nelson, chief growth officer and co-founder at logistics software provider Sifted. Looking forward, diversification isn't expected to slow down, leaving some industry experts wondering if Amazon will capitalize by launching a competing service.

"I think it's going to pick up pace this year, and it's mostly because shippers are a little bit behind and the regional carriers that have stepped in to offer competitive solutions to FedEx and UPS are far more advanced this year than they've ever been before," he said.

Rate hikes, surcharges leave opening for competitors

While a slowing economy is driving down ocean and trucking rates, last mile rates have remained persistently elevated, putting a strain on shippers' finances. The fact that rates in the sector have remained so high for so long is unusual, said Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS.

"In my entire career with UPS, there were only a few years over the 27 years I was there where it was a seller's market — that's not the typical state of things," Amling said. "The typical state of things is a buyer's market and you're creating [market] share and the carriers are really aggressive in how they're courting business."

Despite volumes declining in recent quarters, 2023 is set to be another expensive year for FedEx and UPS shippers due to higher annual rate increases and surcharges. The Cowen/AFS ground parcel index, which measures shipping costs, is expected to reach a record high in Q1.

Both companies have defended their rate increases and surcharges, saying they are needed to keep service levels high and combat inflationary pressures.

"Honestly, we have had very productive customer conversations," FedEx Chief Customer Officer Brie Carere told Supply Chain Dive in October in regards to rising shipping costs. "I think our customers really are very well-informed and they understand the seriousness from an inflation perspective."

While smaller competitors have also raised prices, some have undercut FedEx and UPS's recent 6.9% general rate increase with lower hikes.

"With this added capacity and new competitors, we are going to go back to a buyer's market where there are more alternatives and better opportunities to get lower prices in the market and still maintain service levels," Amling said.

As alternatives expand, is Amazon next?

Since the onset of the COVID-19 pandemic, FedEx and UPS have pursued volume growth in more profitable segments like healthcare and small business while demonstrating a willingness to let go of lower-yielding e-commerce packages from large shippers. UPS, for example, reached an agreement with top customer Amazon that will result in fewer packages from the e-commerce giant inundating its network.

Meanwhile, many alternative carriers have stepped up to fill the gap by gearing their services around delivering online orders. LaserShip/OnTrac, The Frontdoor Collective and Better Trucks are among the last-mile delivery companies set to expand into new markets in 2023 while siphoning volumes from the top carriers.

“Customers are usually coming to us because they are frustrated with service from some of the big players,” Better Trucks co-founder and CEO Andy Whiting told Supply Chain Dive in November. “There’s been challenges with either service or price or a combination of the two, or they’re looking for alternatives.”

Experts say another company could soon enter the parcel carrier fray, placing increased pressure on FedEx and UPS: Amazon. The e-commerce giant aggressively expanded its logistics network to fulfill and deliver in-house orders when the pandemic supercharged demand, and it has since grappled with excess capacity as sales have slowed.

At the same time, Amazon has rolled out new services that make use of its sizable logistics assets. Last year, the company launched long-term inventory storage services at its distribution services for third-party sellers. By the end of January, Amazon plans to expand its "Buy with Prime" service to all U.S. merchants, connecting their outside websites to Amazon's fulfillment network and delivery capabilities.

"They were all set to launch a third-party service before the pandemic hit, and then they had to pull it back," the University of Tennessee's Amling said of Amazon. "I would not be surprised if they dust off all those plans and execute those in 2023."

Lower rates and increased air cargo capacity may benefit shippers in 2023, as carriers contend with lower demand, according to industry analysts.

More businesses came to rely on airfreight during the pandemic as a way to circumvent lengthy delays caused by port congestion. But with ocean congestion clearing, demand for pricier air cargo services has declined.   

“As the year continued through 2022, the demand started diminishing to a more realistic level,” Jack Burt, vice president of U.S. cargo at charter company Air Partner, told Supply Chain Dive. “Ocean container services started becoming more reliable [with] more available capacity in the ocean market, making it more attractive for shippers.”

Lower demand also comes as more capacity hits the market. Air cargo carriers have added freighter capacity, expanded routes and resumed passenger operations — a complete flip from previous years where capacity was strained. 

That's led to a very competitive market, which is expected to provide shippers with more pricing and capacity options. 

“Demand year over year is quite different ... it has decreased, and that’s not a bad thing,” Burt said. “Markets are coming out of an equilibrium, which should train users for lower cost for transportation and, hopefully, lower costs for goods, overall.”

Shippers to benefit from softening rates

Spot rates in 2021 catapulted to among the highest in history, but prices began leveling off in 2022 with softer demand and greater availability of capacity.  Rates from China to North America, for instance, wrapped up last year at $6.76 per kilogram, down roughly 40% YoY, according to a Jan. 3 email update from Freightos.

“Overall capacity will continue to grow, and demand will, I think, decline,” said Xeneta’s Chief Airfreight Officer Niall van de Wouw. “That will have a downward pressure on load factors, and hence, rates, but I don’t expect a nosedive from a rates point of view, as we see on the ocean side. I think it will be more of a gradual decline.”

While the air freight industry is currently seeing a decline in YoY growth and spot rates, the turbulent market may shift again, van de Wouw said.

“We have seen the easing of rates to gradually continue,” he said. “With the big carve out, there’s not a lot of slack in the system, so if something happens, that gradual decline would bounce or even go up a little bit if something happens in your local markets.”

Shippers head back to the drawing board

Lower demand and greater capacity means that buying power has, once again, returned to the hands of shippers. But experts warn challenges may lay ahead as stakeholders look to find new carriers or renegotiate existing contracts to secure the best rates.

“There’s new airlines that have come up and been developed and opened in the last year, there are large freight forwarding companies and logistics companies that have opened up entire new divisions with owned or leased aircraft," said Burt of Air Partner. "So there’s going to be a lot of new choices for people that need to either ship something by air cargo, air charter, or even ocean or surface.” 

A November market analysis from Xeneta’s Clive Data Services found that shippers are opting for more shorter-term air cargo deals amid market uncertainty. 

“If rates are coming down, then people want to try and seize that,” Burt said. “Renegotiation is already in effect.”

Beyond capitalizing on short-term declines in rates, shippers are also taking new approaches around their long-term use of air cargo. Shippers need to work with partners to ensure that they’ve got the “right mix” of services, Matt Castle, vice president of air services at C.H. Robinson, told Supply Chain Dive. 

“It really comes back to the fact that there is still supply chain disruption, there’s still a need for shippers to recalibrate in this ever changing marketplace,” he noted. “One of the big themes that obviously played out the last couple of years, and one of the things we’re working backwards now with a number of customers, is we had to really restructure or reestablish their expectations.”

A labor union representing 350,000 UPS workers could strike this summer if a new contract agreement isn't reached on time, threatening the delivery of millions of parcels.

Teamsters leadership has made it clear they are taking a hard-line stance on pay, scheduling and other issues ahead of negotiations for a new labor contract with UPS. The current contract is set to expire July 31.

“Our union is resolved to win the best contract for UPS members and to reset the standards for wages and benefits in this industry by August 1, 2023," Teamsters General President Sean O’Brien said in a statement last year. "We won’t extend negotiations by a single day."

UPS, meanwhile, has stressed the need to reach an agreement, saying it aims to negotiate a contract that benefits all sides. The carrier has been touting its employee benefits and long-standing relationship with the Teamsters.

"Our focus is on reaching an agreement that provides a win-win-win, for our employees and the union, for UPS, and for our customers," the company said in a statement.

Here's what shippers need to know about the state of contract talks, the likelihood of a strike and how to prepare for any supply chain fallout.

Where do negotiations stand?

National contract negotiations don't kick off until April, Teamsters spokesperson Kara Deniz said, but the Teamsters' UPS National Screening Committee has been reviewing various proposals for what should be included in the Master Agreement.

Committee members sorted and compiled more than 11,000 proposals submitted by locals from across the country during a Jan. 9 meeting in Washington, D.C., according to a Teamsters news release. Five screening subcommittees also met to review proposals on areas such as safety and health.

"The screening of proposals will determine what will ultimately be put forth to the company when National Master Agreement negotiations begin," the release said.

What are the top issues UPS and the Teamsters need to address?

The Teamsters union is largely looking to address scheduling issues that have cropped up since the COVID-19 pandemic fueled a surge in package volumes, Deniz said in an interview. Some drivers say that they continue to be forced into working a sixth day or taking "excessive overtime."

A driver works about 9 hours a day on average, but schedules can vary according to customer needs, according to the UPS statement. Still, the carrier recognized the need to find the right balance between serving customers and meeting drivers' desired work hours.

"Last year, UPS met individually with drivers to better understand their unique preferences, and we are making adjustments where possible," the company said.

Deniz said the Teamsters are also looking to eliminate discrepancies in pay and other areas between full-time drivers and 22.4 combination drivers. The latter category, with the number referring to an article in the current contract, covers employees typically making deliveries on a Tuesday-through-Saturday schedule.

"It's the same job for less pay and a slightly different schedule in terms of days on the job," Deniz said of the combination driver positions.

In addition to eliminating pay gaps, the union is also looking to negotiate a member pay increase for both full and part-time employees, but declined to provide a specific amount. Full-time package delivery drivers at UPS have a $95,000 annual average wage, while the average part-time employee earns $20 an hour, according to the company.

How likely is a strike?

Both sides aim to reach an agreement by the July 31 contract expiration. If that effort is unsuccessful, the Teamsters say they are ready to strike.

"We’ll either have a signed agreement that day or be hitting the pavement," O’Brien said last year.

A UPS strike wouldn't be unprecedented ground for the union. In 1997, 185,000 UPS Teamsters halted deliveries for more than two weeks before a new contract agreement was reached.

Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS, said in an interview that he believes the two sides will ultimately come to an agreement, though it won't be easy.

“But I also think the risk of a strike is the highest it's been since 1997, and it's a completely different environment,” Amling added.

This round of bargaining is also likely to be far different from 2018, when the Teamsters ratified a contract despite the majority of participating members voting against it. O'Brien, who will be the face of union negotiations this spring, had won his election for Teamsters general president in 2021 as a vocal critic of how the previous contract agreement went down.

"[The Teamsters] should've went back to the table or struck the employer," O'Brien said of the agreement in a candidate debate prior to his victory. "Unfortunately, that didn't happen and our members got stuck with a contract that they voted down.”

How disruptive would a strike be for shippers?

Out of UPS' roughly 534,000 employees worldwide, 350,000 are represented by the Teamsters, per a recent company report. A strike would create large-scale disruptions in the company's network.

It would also likely create headaches for FedEx and other last mile carriers as shippers attempt to divert their deliveries to alternatives.

"Even though I think UPS will try to maintain limited service in the event of a strike, the capacity being taken out of the market will drive up pricing with other carriers," Amling said.

UPS' U.S. ground delivery network handled more than 17 million packages daily on average in 2021. With that level of activity, the company held a strong position in the parcel delivery sector overall at 24% of market share by volume in 2021, according to the Pitney Bowes Parcel Shipping Index.

Despite concerns over the negotiations, in a July earnings call, CEO Carol Tomé said the company continues to win business with customers who are aware of the upcoming negotiations.

"We are building contingency plans, and we will take care of our customers," Tomé said.

What can shippers do to protect their supply chains?

Amling recommended for business-to-business shippers to have buffer stock on hand in the event of UPS disruptions, while business-to-consumer shippers should be ready to call on alternative carriers.

However, existing contract arrangements can make it difficult for many shippers to divert a large share of their volumes to other delivery providers, said Transportation Insight Chief Strategy Officer John Haber. Volume-based discounts incentivize businesses to rely on one carrier for much of their shipping activity, and minimum volume commitments penalize shippers that don't meet certain thresholds.

"For a lot of shippers, their hands are kind of tied if they move volume, which is dangerous if UPS goes on strike," Haber said.

Ultimately, Haber advised shippers to begin contingency planning as soon as possible, since capacity at other carriers will run out fast.

"If you wait until June, it will be too late," he said.

Many of the constraints to supply that caused headaches in 2021 and into 2022 have eased, for reasons good and bad. (Good: Capacity rebounded. Bad: Demand slumped.)

But shortages haven't disappeared completely. Specific circumstances — from geopolitical and environmental turmoil to localized demand surges and more — are leading to stockouts of some goods.

“The macro conditions around Ukraine, climate [and] China are not changing significantly,” Simon Geale, EVP of procurement at the consultancy Proxima, said. “They're all dragging on.”

While the war in Ukraine has pressured commodities including some food staples, the continued concentration of production in China for numerous industries has also created a whole menu of risks that companies are still managing. China has rolled back its strict COVID-19 protocols and is grappling with a surge in case numbers, but the country could soon rebound economically and spark a new demand rush.

“While China is starting to open up, there's still a big backlog from the length of time they were shut down and turning things on and off again,” Ron Scalzo, senior managing director with FTI Consulting, said. “That's affecting everybody.”

Here’s a look at the goods that could give procurement officers a headache in the coming year.

Food

Last year’s invasion of Ukraine by Russia caused several commodities to spike in prices amid concerns about their supply.

Those troubles remain, though fears of disruptions to wheat have eased after Ukraine’s harvest was larger than expected. At the same time, environmental challenges elsewhere in the world are straining the supply of other important crops, including vegetables.

“The drought in California definitely had an impact on lettuce and tomato crops,” Scalzo said, noting also that recent floods in the state could have additional impact down the line.

Dole COO Johan Linden told analysts in November that the fresh fruit and vegetable producer was seeing “complete crop failure” in key commodities.

“This goes across the whole industry, where almost 30% to 40% of all the iceberg and romaine have failed and that is due to an extreme heat that we had in the beginning or late summer [and] beginning of the fall, followed by rain,” Linden said then.

Against that backdrop, buyers are managing inflated prices and tight supplies. Chick-fil-A, for instance, told customers that “some items may be unavailable or prepared differently” and Subway said it would temporarily use less lettuce in its sandwiches.

Eggs have also come under strain as avian flu has laid waste to flocks and driven up costs for farmers. Market prices per dozen eggs at the end of 2022 were up nearly fivefold from last January, according to USDA data. The term “eggflation” has, for better or worse, entered use.

“You can probably find eggs, but the prices have tripled in some cases,” Scalzo said.

Dine Brands Global CEO John Peyton complained in November that business expenses were falling more slowly at its IHOP chain compared to Applebee’s because “IHOP’s costs remain inflated due to the stubborn cost of eggs” as well as the war in Ukraine’s effect on grain prices, which feed into pancake batter.

Denny’s Corp. CFO Robert Verostek told analysts in August that commodity inflation had reached “unprecedented levels,” which included eggs along with pork, beef, dairy, poultry and other foods.

As often happens, tight supplies can translate into a boon for suppliers. In late December, Cal-Maine Foods, which calls itself the largest producer and distributor of fresh shell eggs in the U.S., logged a 110% spike in net sales and record profits, driven by highest-ever egg prices.

Lithium and other EV components

With electric vehicles seen as key to a global energy transition and decarbonization, demand has been on the rise for key commodities used in battery production and other green engineering components. The Inflation Reduction Act, which included incentives for EVs, is expected to raise demand yet further in the years to come.

Prices for lithium — a crucial material to making batteries — have soared with global consumption rising 33% in 2021 compared to 2020, according to the U.S. Geological Survey.

Lithium hydroxide prices were up 156% YoY in December, according to S&P Global Commodity Insights. The consultancy BCG noted in an August report that the price of lithium has increased ten times over in the past two years. High prices are likely to persist as chronic shortages loom, according to BCG.

“Costs are going up, demand is going up, supply is tight,” Geale said.

EV makers are feeling the pain. Tesla’s costs are likely to rise after a lithium supplier amended their agreement to peg the EV maker’s lithium costs to market prices, rather than at fixed prices as in their past agreement.

“[I]n electric vehicles, things like battery-grade lithium are still crazy expensive,” Tesla CEO Elon Musk said in October.

Supplies of other important materials for battery production are also under strain. Graphite, one of the primary components in the anodes of lithium ion batteries, has faced pressure as demand rises, with expanding shortfalls predicted over the next decade.

Shortage fears have also risen around cobalt, which was included in a Government Accountability Office report last year as a critical material for advanced technologies with high supply chain risks due to the U.S.’s reliance on imports.

Pharmaceuticals

“Tripledemic” is another recent addition to the lexicon, describing parallel spikes in various respiratory illnesses that hit the world’s population of children hard this year. The trend has pressured demand and supply for medicines common for children during the cold and flu season.

Stories abound of empty shelves and desperate parents. In December, drugstore giants CVS and Walgreens began limiting sales of over-the-counter children’s fever relievers including acetaminophen and ibuprofen. Walgreens said at the time that sales caps were meant to “prevent excess purchasing behavior” amid demand surges.

A form of amoxicillin used to make liquid doses for children also reached an “acute shortage,” according to the Food and Drug Administration in November. The agency said then that the supply shortfalls could “lead to potentially serious or life-threatening situations in particular in the pediatric population” as the respiratory illness season peaked.

The FDA has been working for more than a decade to combat pharmaceutical shortages. With many common medicines, the margins are thin, leaving little incentive for producers to build up excess capacity or stock.

In the case of amoxicillin, capacity is difficult and expensive to ramp up due to lack of flexibility in the equipment and processes used to make the drug.

“There’s not a short-term capacity answer for this,” John Gray, a professor of operations with Ohio State University’s Fisher College of Business, told Supply Chain Dive in December.

Also in short supply is the drug known by the brand name Adderall, used to treat attention deficit hyperactivity disorder, or ADHD. The FDA issued a shortage notice for the drug in October, noting that manufacturer Teva is “is experiencing ongoing intermittent manufacturing delays.” Supplies of other ADHD drugs are also reported to be under strain.

Semiconductors

The global chip micro shortage will enter its fourth year in 2023 after multiple disruptions stemming directly or indirectly from the pandemic.

Semiconductor constraints have caused headaches and delays for multiple industries. Supply is increasing for some chips, and 2023 could be the year when, finally, most of the industry stabilizes.

Reduced demand amid a global economic slowdown has lessened the pressure on supply. TSMC CEO C.C. Wei said in the company’s fourth-quarter earnings call, “As customers and the supply chain continue to take action, we forecast a semiconductor supply chain inventory, while reduced sharply through first half 2023, to rebalance to a healthier level.”

Chokepoints remain, though. As Kazunari Kumakura, chief officer of Toyota Motor Corp’s purchasing group put it in November: “[I]n some semiconductors, the supply is getting better and in other semiconductors the chips remains in short supply.”

As with lithium, the U.S. government is trying to boost domestic chip production. In August, President Joe Biden signed legislation that included billions of dollars in subsidies to boost U.S. chip manufacturing with a 25% federal tax credit for companies investing in semiconductor production.

For Mike Kirban, co-founder and executive chairman of coconut products giant Vita Coco Company, uncertainty has been a consistent part of doing business. 

Early on, executives at Vita Coco, which traces the company’s roots to a cold winter evening in 2003 at a New York City bar, had to convince people to buy its product. Then they worked to keep up when demand soared.

The past few years have brought on a new set of challenges, with industry-wide shipping costs soaring from $2,000 a container two years ago to more than $10,000 at its peak last summer, and the availability of shipping containers significantly throttling product availability.

Market conditions caused pineapple and mango puree shortages that impacted the availability of some of Vita Coco’s flavored coconut water on store shelves last summer. And for available products, it took longer for them to go from the factory to its warehouse; taking three months at one point from the customary two weeks. The elevated expenses sliced gross margins at Vita Coco nearly in half last year, and led to two price increases.

“That's the beauty of these businesses. There's always a new challenge,” Kirban said with a laugh from Vita Coco’s headquarters in New York City. “We've learned a lot. We've gotten better at a lot of things to be able to survive through the tough environment that we've [had] the last couple of years.”

He said Vita Coco, which also makes water packaged in aluminum cans, energy drinks and protein-infused water along with its namesake coconut beverage, has seen costs start to stabilize, though labor, packaging and ocean freight remain high. The last few years have prompted Vita Coco to make changes to the way it does business, spanning everything from how it sells and markets its products to the strategy it uses for samples and innovation.

Volatility reigns

Still, there’s mounting evidence that the challenges Vita Coco and other CPGs are facing will remain in 2023 and may force further changes at companies already facing one big hit after another.

Supply chain headaches, inflation, the ongoing war in Ukraine and surging input costs have proven to be a test for even the most seasoned executive. Leaders in the C-suite must now strategize how to plan for the future when there are few answers or historical blueprints they can tap into for a guide.

Krishnakumar Davey, president of client engagement at IRI, recently discussed procurement and supply chains with top CPG executives. He was surprised to hear the rather dire outlook they gave for this year.

“They said ‘Look, [2023] is going to be as volatile as [last] year and the last couple of years,’ ” Davey recalled. “I was quite taken aback by what they said.” 

Neil Saunders, managing director with GlobalData, agreed. He said most food and beverage manufacturers are expecting 2023 to be “quite a difficult year ... because the consumer is still under a lot of pressure.”

At Del Monte Foods, the manufacturer of canned vegetables and fruits, Contadina tomato products and College Inn broths and stocks, is moving forward with what CEO Greg Longstreet said will likely be its last round of price increases for a while in February. 

But with costs for packaging, ingredients and transportation remaining elevated, Del Monte Foods continues to look for ways to reduce expenses throughout its supply chain and increase the attractiveness of its product to the consumer, he said.

To do that, Del Monte has introduced more products whose price point resonates with consumers looking for value and convenience, such as multi-packs of fruit cups and canned vegetables. It's also more than doubled spending at its plants during the past four years to increase speed and efficiency.

“For us to compete ... we have to be highly automated, high speed and efficient to provide those units at a better value to the consumer,” Longstreet said.

More job cuts ahead?

The wildcard for many companies is whether the country is headed into a recession and how severe it becomes if it occurs.

A recession would place further pressure on consumers already dealing with more expensive borrowing costs following a series of rate hikes from the Federal Reserve and higher prices for everything from food and clothing to medical care and travel. 

Reports last month that PepsiCo — widely seen as a bellwether — is planning to cut hundreds of corporate jobs in North America could be a prelude to further tightening at other food and beverage CPGs that have so far been largely immune to shrinking payrolls that have impacted other sectors, economists said. It could signal that even though price increases have helped offset rising expenses, companies realize they need to do more to reign in costs.

It’s a sharp contrast to the economic climate during the pandemic when food manufacturers were boosting their ranks to address elevated demand for products as homebound consumers spent less time going out, traveling or working in the office. While workers responsible for manufacturing the products should be largely protected in the coming months, corporate America may not be unscathed.

“The pandemic was quite good for most food and beverage companies because they saw a spike in consumer spending, and people were very carefree about hiring,” Saunders said. “Now that position has reversed and people are starting to say, ‘Well, we need to consolidate. We need to look at whether all these roles are necessary. We need to revisit some of the forecasts that we have.’ "

‘People have to eat’

Inflation data released last month by the U.S. government provided a glimpse of the struggles CPG executives are facing. The Labor Department estimated for the month of December that consumer prices for food at home rose 0.2% from November, contributing to an 11.8% jump from the prior year. Overall, inflation across all baskets of goods fell 0.1% in December, its biggest drop in nearly three years.

Even if inflation eases from its multi-year high, prices are expected to remain elevated compared to before the pandemic. Further price increases could still work in certain product categories, but, for the most part, many consumers may not be in a position to swallow larger ones on top of previous hikes implemented in 2022.

Valerie Oswalt, a former Campbell Soup executive who took over as the CEO of Kodiak Cakes in November, said the manufacturer of high-protein, whole-grain pancakes, waffles, bars and baking mixes is keeping a close watch on everything from demand for private label products to how often consumers are eating out. She said the company is monitoring product volumes and working closely with its suppliers and procurement team to drive efficiencies. 

“Our first job is to really try to drive productivity to offset the inflationary headwinds,” Oswalt said. “You have to be very careful with your pricing” so you don’t drive consumers away from your product.

Davey said CPGs may attempt to cut costs by simplifying production through fewer SKUs, cutting inputs — like something as simple as the number of bottle caps they purchase to boost efficiency — scaling back on advertising or marketing, and shrinkflation, a practice of reducing the contents of a package while keeping the price the same.

He said food makers also could replace or reformulate ingredients that are cheaper or more reliable, while incorporating more automation and artificial intelligence into their operations.

“There’s always lots of opportunities ... CPGs are just getting started. There’s still a lot of opportunities for them,” Davey said. “During the last two years, they haven’t been cutting costs as much because CPGs and food have had some really strong growth rates.”

With food and beverages an essential purchase for consumers, people may choose to look for ways to save money within the category.

Saunders said these options could include shopping more at discount stores, eliminating certain nonessentials, or trading down to cheaper offerings. Private label, which has thrived in recent years, will remain in demand.

At the same time, premium offerings are expected to remain in demand as shoppers take money saved from dining out less frequently to buy these products while continuing to show a willingness to pay more for an item is higher quality and has unique attributes. 

Despite the ongoing uncertainty plaguing the food and beverage space, the category remains relatively stable compared to other industries such as technology, manufacturing or retail, economists said. 

Marcel Koks, industry and solution strategy director at Infor where he works with companies to adapt to the market, said while “disruption is the new normal,” the food industry as a whole “has been a very stable” sector.  He noted its resilience after recent recessions around 2001 and 2008.

“When you look at the food industry compared to other industries, food has always done relatively well,” Koks said. “When you look at the total value, it will still be there. People have to eat.”

Ahead of the United Nations’ COP27 climate conference last fall, beverage giant Coca-Cola was announced as a sponsor. Immediate backlash ensued.

Sustainability activists accused the UN of greenwashing by inviting a company responsible for large amounts of plastic pollution, which is accountable for 3.4% of global emissions according to the Organization for Economic Co-operation and Development (OECD). A petition signed by 240,000 people was created, requesting that Coca-Cola be removed as a sponsor, which ultimately did not occur.

In an open letter, at least 60 public health groups called for an end to “corporate capture” from polluting companies in climate talks. Coca-Cola told PBS its participation underscored the company’s commitment to lowering its emissions.

The petition and the attention it received brought the deep rift between advocates warning of impending climate collapse and the food sector into sharp focus.

In response to increased pressure from sustainability advocates and consumers, food and beverage companies have laid out plans to lower the greenhouse gas emissions emanating from their supply chains over the next decade. But whether the companies can make real progress is a major question, according to experts.

Some companies, like Mars, signaled their commitment by saying they would tie executive pay to meeting emissions goals. Three major CPGs — Mars, PepsiCo and Nestlé — each told Food Dive they are on track to reach their own lowered emission goals and aim to make substantial progress toward them in 2023.

While some experts view CPG efforts thus far as a step in the right direction, they are skeptical that the industry will be able to reach their time-based goals in the coming years. This will likely fuel even greater pressure from activists, who lay a large share of the blame for the climate crisis at the foot of food and beverage makers. The food industry is responsible for a third of global greenhouse gas emissions, according to the United Nations.

Sustainability advocacy group Food & Water Watch’s policy director Jim Walsh said the industry’s current efforts will not drive meaningful results on curbing emissions. “This is big agriculture really engaging in a marketing campaign to greenwash a destructive global food system.”

 

CPGs aim to sequester carbon

At least 110 different countries have agreed to achieve net zero emissions — which would mean achieving an equal balance of emissions produced and taken out of the atmosphere — by 2050, according to emissions measurement company Net0. This will require a massive overhaul of how countries, businesses, and consumers approach food production and consumption.

Marketing, as well as new product creation, have become an important piece to how CPGs go about communicating their carbon reduction ambitions to the consumer. Some brands — both legacy products such as Bud Light and new entrants to the market such as Neutral Milk — have launched carbon-neutral products, which they claim compensate for all of the greenhouse gasses emitted during production. This typically involves the company purchasing carbon credits or investing in carbon offsetting projects, such as replanting trees in areas hit by deforestation.

Reliance on carbon offset credits could prove to be an unsuccessful measure and call their credibility into question, said Shon Hiatt, an associate professor at University of Southern California’s Marshall School of Business.

“I think they’re going to set themselves up for some reputational threats, because people can say it’s greenwashing,” Hiatt said. “It’s not well regulated, so there’s a higher risk.”

Companies also are embracing carbon “insetting” projects — such as restoring forests and agricultural land — which do not include the purchasing of carbon credits and are about “doing more good rather than doing less bad,” according to the World Economic Forum.

Seizing on regenerative agriculture

The industry differentiates between Scope 1 and 2 emissions — those that emanate from their own operations and facilities — and Scope 3 emissions, which result from indirect sources, such as those stemming from the producers they source from and transportation of products. Scope 3 emissions account for 90% of food companies’ emissions, according to sustainability nonprofit Ceres.

In most food companies’ emissions goals, “regenerative agriculture” takes center stage as a key solution. These practices are a mix of agricultural techniques that farmers adopt to restore the soil and water used in the production process. According to the Chesapeake Bay Foundation, some examples of these practices are cover crops, continuous no-till farming and crop rotation. Tilling can erode the microorganisms in soil, which harms its biodiversity and overall health, according to Colorado State University.

But not all agriculture experts are on board with the practice. No-till agriculture requires significant pesticides and chemical fertilizers, making it more damaging than beneficial, according to Food & Water Watch’s Walsh.

“These companies throw around regenerative agriculture and because it's largely undefined, it allows them to justify ridiculous and harmful practices that offer little to no climate benefits whatsoever,” Walsh said.

While some practices that fall under “regenerative agriculture” could be beneficial, Tara Chandrasekharan, a senior ESG analyst at sustainability investor group FAIRR, said the companies must be more transparent about how much they believe regenerative practices can reduce emissions. Nestlé, she said, is one company that was sufficiently candid in detailing how its practices will reduce emissions in its lengthy Net Zero Roadmap document released in 2021.

“For these actions to be robust and reliable, companies have to both measure and disclose the extent that these practices can mitigate emissions,” Chandrasekharan said. “The main concern with soil carbon sequestration is how sufficiently it can sequester carbon, and that can vary by region and soil type.”

Nestlé — the largest food company in the world — said it has implemented a mix of techniques in order to reach its goal of halving its absolute emissions by 2030. These include regenerative agriculture practices and insetting projects. Individual brands in the company’s portfolio can offset their emissions by purchasing carbon credits, the CPG giant said.

In an emailed statement to Food Dive, Nestlé said one brand that is embracing reduced tilling of soil is pumpkin maker Libby’s. The company said it is working with a third-party organization, Sustainable Environmental Consultants, to collect and measure agricultural data in order to assess their emissions.

“By utilizing sustainable, reduced tillage practices, Libby’s farmers saved the equivalent of approximately 43 dump trucks of soil—or 694 tons of soil annually—from being lost to erosion in just the first year of our data collection, as compared to conventional tillage,” Nestlé said. “We are using our scale and global reach to find innovative and new approaches, leverage farmers’ unique expertise in their field, and to partner with third-party experts and industry leaders to ensure our work is effective.”

Candy giant Mars Wrigley — which has pledged net zero emissions across its company by 2050  said it’s on track to hit its goal of reducing total emissions in its operations by 42% before the end of 2025, based on its work to eliminate deforestation and embrace “climate-smart” agriculture practices, specifically in the cocoa sector.

“We have a number of future forward programs, such as our farm-level cocoa initiatives at Mars La Chola in Ecuador and the Bacao Farm in Columbia, where we’re optimizing inputs like fertilizer and water use, using renewable energy, and leveraging the power of trees to sequester carbon in soil and biomass,” Alastair Child, chief sustainability officer, told Food Dive in an emailed statement.

Soda and snack behemoth PepsiCo sees its regenerative agriculture approach as the key to transforming its supply chain and reaching its goal of achieving net zero emissions by 2040. The company believes it has a solid foundation to build upon its emissions reductions in 2023, Roberta Barbieri, vice president of sustainability, said in an emailed statement.

Some new efforts the company has adopted include a project to decarbonize a snacks plant in the Netherlands through storing and transforming renewable energy, and installing a biodigester — which breaks down materials like fat and greases — at a PepsiCo factory in Portugal.

But Barbieri said there are difficulties associated with getting partners in its supply chain to deploy new technologies, which require greater investments. Another challenge standing between the company and its regenerative agriculture goals is being able to manage data about how the projects are progressing, which she said has room to improve.

“Outside of some of our large suppliers, there is a broad need for more education and capacity building to address climate change,” Barbieri said. “Small and medium size suppliers also struggle with lack of staffing needed to lead change at the scale required.”

Skeptics raise questions

While companies focus on these goals, experts are doubtful companies will be able to meet them in their intended timeframe, given the significant and costly overhaul of global supply chains that would have to occur.

Some of the practices that fall under the umbrella of “regenerative agriculture” are questionable, said Jason Hill, an environmental expert and professor at the University of Minnesota. For one, the term itself has faced accusations of greenwashing from some activists because of its lack of a clear definition. There’s also the question of whether the farming methods reduce emissions as much as the industry claims.

“With reduced tillage of row crops, the jury’s still out on whether that results in carbon storage to the extent that it’s often held up to do so,” Hill said.

The meat and dairy sector is responsible for 14.5% of manmade emissions according to the Food and Agriculture Organization of the United Nations. The sector has come under specific scrutiny because of its production of methane, a greenhouse gas which is at least 300 times more potent than carbon dioxide according to the Environmental Protection Agency.

Sustainability investor group FAIRR, which tracks the emissions of livestock companies, said meat giant Tyson will not be able to reduce emissions 30% by 2030. This goal is outdated compared to its peers, FAIRR said, and emissions stemming from its operations have increased by 7% compared to its baseline target. Tyson said in a 2021 statement it aims to update the baseline of its emissions goal by the end of 2023.

In order to track emissions, many companies rely on third-party organizations to get an accurate picture of their carbon output.

Climate Trace, a nonprofit that tracks emissions for livestock companies, said it is challenging for companies to determine their progress toward emissions goals because there is a lack of accurate data sources to determine if they are succeeding. The nonprofit estimates emissions from farms by calculating the methane they produce — through cattle burps and manure, rice cultivation and application of synthetic fertilizers.

“The Environmental Protection Agency does not regulate or monitor greenhouse gas emissions from animal feedlots and in fact, does not even have a complete inventory of feedlots in the country,” said Lekha Sridhar, partnerships manager for Climate Trace. “We apply satellites, other remote sensing techniques, and artificial intelligence to deliver an independent look at global emissions and get as detailed as possible.”

Can policymakers and investors force the industry’s hand?

While CPGs indicate confidence in their own abilities to curb their emissions, sustainability groups do not think that is enough. These groups strongly advocate for U.S. lawmakers to regulate the carbon footprint of Big Food companies.

Senator Cory Booker, a Democrat from New Jersey, introduced a bill in 2021 that aims to reform the farm system to improve its sustainability. 

Walsh said passing Booker’s bill is the number one thing Congress can do to both lower the industry’s emissions and add more structural security to the supply chain in times of crisis — especially with the factory farm system.

“Factory farms are creating a food system that is less sustainable and less resilient to various shocks in the supply chain,” Walsh said. “When you have massive agricultural entities and Big Food giants, one problem within those institutions can have repercussions around the world.”

FAIRR, with its investor network representing assets worth $70 trillion, believes its reporting of carbon emissions in supply chains can be used by investors to pressure companies to enact more robust emissions goals, said Thalia Vounaki, senior manager for research and engagements at FAIRR. “We've got that information, that data set is available for investors to then use as part of their individual engagements.”