Food & Beverage Crystal Ball: Trends We're Following

January 04, 2016

We’ve taken a look at some of the top trends and provided a snapshot of how they may impact your business in 2016 and beyond.

Mergers, acquisitions, and PE activity

2015 was a strong year for M&A/PE activity in the food and beverage space, and that activity will persist in 2016. Consumers continue to demand specialty offerings such as organic, non-GMO, craft and gluten-free, all of which carry a premium price. Established food and beverage companies will likely obtain these healthy offerings through acquisition, rather than through new product development. P/E shops clearly see specialty food and beverage companies as having the potential for high-returns. Adding to that, record low interest rates and the fact that many established companies and P/E shops are flush with cash that they need to put to good use, 2016 will be a seller’s market as established food companies look to broaden their portfolio through strategic acquisitions and PE/shops look for “the next big thing.”

Demographic shifts/new product development/branding efforts

Demographic shifts and buyer behavior continue to impact branding and product development initiatives, and we’re seeing a large increase in the number of Hispanic and Asian food offerings. Consumers continue to demand artisanal and locally grown foods, as well as ready-made options. The demographic shifts and the focus on the new products have resulted in increased trademark filings. We anticipate that consumers will continue to have a strong impact on new product development and branding efforts at food and beverage companies over the coming year.

Food labeling

We expect an increase in the use of clean labels (i.e., labels in which the ingredient list is short and understandable with no additives, preservatives or other synthetic ingredients). The approach to clean labeling is not without challenges, however, given food company requirements on labeling and ingredients to increase shelf life and/or prevent waste.

The SmartLabel Transparency Initiative, announced in December 2015 by retailers and manufacturers, promises to gain a good deal of attention in 2016. SmartLabels will allow consumers to obtain nutritional and other information about food products by scanning a QR code or conducting an Internet search. An estimated 30,000 products will participate in the program by 2017, and some predict that within five years more than 80% of food, beverage, pet care, personal care and household products will be using SmartLabels.

In 2016 we also expect the FDA to issue final regulations related to nutrition labels. The proposed regulations require replacing vitamins A and C with vitamins D and potassium, eliminating calories from fat, requiring serving sizes to more accurately reflect the amount consumed at a sitting, and requiring companies to identify the amount of “added sugars” in their products.

The FDA is also accepting public comments until May 10, 2016 on the use of the term “natural” in the labeling of food products, “including when, if ever, the use of the term is false or misleading.” After years of uncertainty and litigation, the FDA points to “the changing landscape of food ingredients and production,” along with consumer requests, as its rationale for the present interest.

GMO labeling may also continue to be an important issue in the coming year. Vermont’s mandated GMO labeling law is set to go into effect in the summer of 2016. It is likely that other states will seek to implement similar legislation, thereby increasing costs for food companies across the nation.

Craft alcohol

We anticipate an increase in alternating proprietorship arrangements whereby established producers contract with fledgling distillers, vintners and brewers to share premises, perpetuating the “sharing economy” that has become so popular in other industries and services. These arrangements allow early-stage brewers and distillers to take advantage of veteran producers’ equipment and facilities, while delivering quality product to consumers who demand more variety and quality than ever before. Veteran producers, in turn, can continue to invest in new technology, and the costs of doing so can be defrayed by tenant distillers, vintners and brewers. Custom crush or contract brewing arrangements accomplish the same sharing of costs in theory, but afford the “new” entity fewer privileges than alternating proprietors enjoy. Although neither concept is new, we predict that new players will continue to enter the market in 2016, taking advantage of state-based economic growth incentives like New York’s Empire State Development Fund.

As consumers grow more concerned with supporting local artisans, the craft alcohol industry has responded. Many craft breweries and distilleries are working to create limited-edition products featuring collaborations between alcohol producers and local artisans—namely, coffee growers and roasters, honey farmers, chocolatiers and local farms. Small batch production and exclusivity are overtaking more traditional seasonal offerings as brewers and distillers get more creative and the market shows support for more experimentation.

Class action lawsuits

Courts across the country are paying increased attention to “ascertainability” of class members. The First and Seventh Circuits (and a sprinkling of Ninth Circuit precedents) have created and endorsed a consumer-friendly methodology for identifying class members that has been rejected by other federal courts. Companies in the food and beverage industries, where consumers do not typically retain receipts, may find this circuit split to be especially important. We anticipate the United States Supreme Court will grant a petition for writ of certiorari on this issue in 2016.

Recycled water, waste disposal, and greenhouse gases

With the drought continuing in California and beyond, we foresee more states and locales allowing, if not promoting by grants and otherwise, the use of “recycled water” or the use of treated wastewater as a replacement for potable water. Current uses include sanitation, dust suppression and landscape purposes, and 2016 will likely see expansion into these areas, plus groundwater recharge and direct use in food production and agriculture in some circumstances. Regardless of where one stands on the issues, allocation of risk among the recycled water providers and the recycled water users for potential problems with mistreatment, potential soil and/or groundwater contamination and/or nutrification will be contested issues.

Hazardous and universal waste disposal remain key enforcement issues in the food and beverage industry. Big box retailers, grocers and producers of pharmaceuticals will likely continue to be the target of regulatory “dumpster-dives,” as enforcement agencies seek evidence of improper disposal. Regular internal checks and environmental audits are strongly recommended to avoid potentially hefty fines.

As weather patterns shift and temperatures become more unpredictable, related shifts in agriculture locations, harvest timing, irrigation, land and water allocation, and the regulation of greenhouse gas emissions are expected. While the most obvious food and beverage parties to be affected remain the growers, the spill-over into other industries and operations will continue in 2016, including increased regulations for water use, road and non-road (i.e., forklift) emissions.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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