- We believe the pandemic's impact on food industry workers will permanently change how companies approach workforce safety, particularly at meat facilities, where coronavirus infection rates have been high.
- With consumers, regulators, and other stakeholders demanding change, food companies will need to invest, not only to adjust to new operating and safety standards but also to ensure continued global food supply.
- The social impact of COVID-19 already informs our opinion of food processing companies' creditworthiness; we believe the sustainability of their business models hinges on the ability to price in social factors while remaining competitive in the long term.
The pandemic has brought social aspects of the food processing industry further into the spotlight. S&P Global Ratings believes such factors, notably the health and safety of employees, will lead to more rigorous global industry standards over the next few years. In particular, we see the main push for change coming from government agencies and regulators seeking to reduce risks to the population from contagious diseases. Also, consumers are scrutinizing the source and quality of what they eat and drink more closely, especially because many are cooking at home due to COVID-19-related restrictions. Companies slow to meet stakeholders' demands for better production and quality standards could fall behind competitors.
The sustainability of food and beverage businesses will therefore increasingly depend on how companies address changing consumer preferences, engage with stakeholders, and manage production safety, just some of the social factors we examine in our ESG Evaluation. However, an improvement in operating conditions and social sustainability across the industry is still far off. In March, the World Health Organization (WHO) published recommendations to reduce the risk of transmission for workers handling fresh animal products. In June, more than 1,500 workers at Germany's largest meat processing plant tested positive for the coronavirus, prompting a lockdown of an entire region and demonstrations by residents and animal welfare activists. Meat processing plants in several other countries, including the U.S., U.K., and Ireland, have also emerged as coronavirus hotspots.
Ongoing uncertainty regarding the new coronavirus, and the risk of new deadlier pathogens emerging in the future, mean that tougher food processing industry standards are likely here to stay. And food processors aren't the only ones under scrutiny. Authorities in most developed countries have tightened health and safety requirements for restaurants, supermarkets, and other food handlers. In the short term, these tougher standards will mean higher costs for the industry. We foresee, among other things, an increase in investments for automation or plant reconfiguration, possibly higher labor costs due to shorter shifts and employment structures, as well as expenditure to bolster hygiene standards. However, in our view, most companies can eventually recoup these costs through stronger workforce morale, productivity, and consumer perception, provided consumers are prepared to pay more for food products.
Change Has Been A Long Time Coming
The food industry is one of the most mature and competitive globally, and has benefited from many unpriced environmental and social externalities. This is the case for both primary food production and food processing. In developed countries, in particular, food spending accounts for a relatively low share of personal incomes (see "Sustainable Agriculture: Governments Need To Weigh In To Effect Lasting Change," published March 3, 2020, on RatingsDirect).
We believe the COVID-19 pandemic will finally elevate social factors to the level of environmental factors in the ongoing debate on the true cost of food. In the first instance, this will affect retail and manufacturer brands sold in developed markets, where product claims need to be verifiable. Suppliers to retailer-owned brands won't be exempt from such scrutiny. In our view, food producers' only way forward is to modify their pricing and operational structures, and discontinue certain products. Many have started or completed this transformation to maintain profitability since the pandemic began.
Businesses farther along the food value chain, such as branded packaged foods, have been less affected since automation at those facilities is more common. The pandemic has not spared any region from a spike in health-related risks at food processing plants, but the impact has varied by sector and country. Operations closer to the food source, such as meat and poultry processing, tend to be more labor intensive, so the risk of transmission is higher. According to the U.S. Centers for Disease Control and Prevention (CDC), factors that may contribute to potential exposure include proximity on the processing line, particularly during long shifts; communal spaces; as well as shared transport and living quarters. The spate of coronavirus infections among food processing workers in recent months has led to temporary plant closures and called workplace practices into question. This also highlights the large number of workers from racial or ethnic minorities exposed to health and safety risks in the U.S. meat industry: A CDC survey shows that 87% of confirmed COVID-19 cases at meat processing plants in April-May occurred among non-white workers (see chart 1).
The U.S. meat sector is concentrated, which has likely contributed to higher workforce infection rates relative to other sectors. In the U.S., the top four beef processors slaughter close to 80% of the country's cattle. The federal government has declared food and agriculture industry employees to be part of the country's essential workforce during the pandemic. Consequently, food processing facilities have stayed open to feed the population and keep exports moving, with some operating business as usual. But this also means workers continue to face health and safety risks stemming from the workplace environment. In recent months, various processors of seafood, meat, vegetable, and fruit--all labor-intensive operations--have reported outbreaks of COVID-19 (see chart 2).
Infection rates across Europe and Latin America point to similar health and safety risks for workers. Several facilities in Germany have seen spikes in coronavirus cases, including at the Tönnies factory in Rheda-Wiedenbrück, the largest meat plant in Europe, where 1,500 of the 7,000 employees tested positive. Ireland, too, has seen high infection rates, with outbreaks occurring in 28 of the country's 49 meat plants. Meanwhile, in Brazil, a leading global meat exporting country, there have been fewer stoppages due to coronavirus infection than in the U.S. and Europe. This notwithstanding, safety management remains a risk for the region, with unions alleging that around 20% of the sector's workers have been infected.
For low-skilled operations, such as farms and slaughterhouses, companies typically employ a large number of temporary or migrant workers. The European meat industry in particular depends heavily on foreign workers employed via temporary agencies. The European Federation of Food Agriculture and Tourism Trade Unions suggests this as another reason for high infection rates in the industry across the region. In response to the outbreaks in Germany and pressure from labor unions, the German federal government announced a ban on contract and temporary workers at meat plants from January 2021. This shift in standards, directly attributable to the pandemic, will now require meat processors in Germany to directly employ all staff, usually at a higher cost than for agency workers. A similar move is possible in the Netherlands, where the largest trade union FNV is demanding direct employment of food processing workers.
Consumers Are Paying More Attention To What They Eat And Drink
Staying at home during lockdowns, particularly in the second and third quarters of 2020, has led to an increase in online shopping. People are stocking up for longer periods and preparing food at home more often. With less on-the-go consumption and greater availability of information on the internet, consumers are looking more closely at the quality and origin of ingredients and precooked food. We believe this will have implications for the food industry that go far beyond an end to lockdowns.
According to a McKinsey survey, 20%-25% of consumers in developed markets are now researching food brand and product choices before buying. A similar share of consumers lists healthy, hygienic packaging and the welfare of employees as the top decision-making considerations. The numbers are much higher in emerging markets. In India, South Korea, and China, 40%, 35%, and 45% of consumers, respectively, are doing more research on food, with comparable numbers citing hygienic packaging and employee care as priorities. The link between product safety and employee health appears to have strengthened because of the pandemic.
The rapid growth of online food shopping could also lead to more permanent changes in distribution models. By the end of April, the sale of fast-moving consumer goods via ecommerce was up 41% across France, the U.K., Spain, and China, with the average share moving to 12.4% of channel value from 8.8% at the end of 2019, according to Kantar. The increase in online food sales will likely moderate once onsite work resumes and consumers increasingly return to out-of-home eateries. Yet we expect online purchase volumes to remain higher than in previous years as consumers retain some of their new consumption habits. McKinsey estimates that 60% of global consumers have changed their shopping behavior during the pandemic, although value, availability, and quality remain the most important selection criteria. Importantly, 28% of respondents to a global Euromonitor consumer survey in January-February 2020 made purchases after taking into account the sellers' social and political beliefs. We believe this indicates that brands pursuing growth would need to differentiate positively on social factors to capture market share.
Industry Oversight Is Tightening
Multiple outbreaks of COVID-19 at food processing plants, particularly meat facilities, imply a breakdown in health and safety protocols. This has attracted the attention of the media, unions, and human rights groups in different countries, especially because, months earlier, public health officials had posted recommendations on how to reduce the risk of transmission. Until the pandemic hit, regulatory oversight of food processing had focused mainly on preventing food contamination and the spread of food-borne diseases.
The authorities are now reviewing the health, working conditions, and treatment of the food processing industry's workforce. We expect that, as a consequence, the industry is unlikely to maintain the pre-pandemic operating status quo. Historically, regulators and other stakeholders had dedicated significant resources to ensuring proper sanitation and safety procedures, particularly at meat plants, where bacteria and other foreign substances can easily contaminate products. The virus is unlikely to be transmitted to people via food, according to the CDC and the U.K. Food Standards Agency.
Other businesses that process or handle food, such as supermarkets and restaurants, will likely also undergo long-term changes. Restaurants have had to reconfigure their kitchens and reinvent how they prepare, cook, and serve food to comply with public health guidance for safe reopening. These necessary changes have meant extra costs and a drop in capacity utilization, at a time when businesses are already struggling with a drop in customers due to pandemic-related movement restrictions. Up to one-third of all consumer food-service outlets in the U.S. could close for good by the end of 2020, according to Euromonitor. The picture in Europe will be different because of furlough schemes, although smaller premises and secondary locations will still suffer. These businesses need to find a way to adapt their operations to survive in the long term.
We believe the impact of the pandemic on employees will lead to a lasting change in how the global food industry operates. We anticipate a greater emphasis on preventing human-to-human disease transmission, which will have implications for operating costs and future investments. We also envisage a new approach from public health authorities, which for decades have considered the transmission of pathogens to humans to be a low and manageable risk due to the development of antibiotics and vaccines. Governments' unprecedented measures to try to contain the COVID-19 pandemic have likely led public health authorities to revise their perception of risk in a way that the last pandemic, H1N1 (2009-2010), did not.
Regardless of how COVID-19 infection rates develop over the next 24 months, public health policies in most developed markets will likely mandate more stringent rules for surface cleaning, hygiene, and social distancing at food processing plants in the future. Otherwise, the global population faces the huge economic and social costs of another pandemic when the next pathogen to threaten the population emerges, which scientists believe happens on a cyclical basis.
What's Next For Food Processing Companies
We anticipate companies will spend more money on automating processes, reconfiguring physical work stations, implementing better employment and work practices, and improving health and safety standards. The German meat producer Tönnies has, for example, introduced new hospital-grade air filters into its ventilation systems, while other companies have shortened work shifts, thereby slowing production lines, and have imposed social-distancing conventions for workers. That said, the food industry has long lagged other consumer goods sectors in adopting advanced technology such as robotic automation. This is primarily due to the variability of products and the complex supply chain, which often includes numerous subcontractors, cold storage, and transport operators.
Government measures have facilitated the swift reopening of production facilities so far in 2020, but only after food processors implemented social distancing and sanitation protocols. Companies, however, cannot absorb the resulting increase in operating costs, slimming margins, and unused capacity, indefinitely. Added to this is the prospect of workforce shortages, as many migrant workers remain shut out due to travel restrictions to combat the pandemic. The meat industry has historically relied on cheap labor, which may now be less available, thereby galvanizing a shift toward automation.
Consequently, we anticipate a permanent change to food processors' business models in the future as they adjust to the new normal (see "Protein Processors Scramble To Adjust To Disruption From Pandemic," published April 29, 2020). Much has already changed in the food industry to reduce the spread of the coronavirus, and we've seen positive results. However, with a recent rise in cases across the globe indicating that we are likely seeing a second wave of COVID-19, whether these changes will be enough to avoid further plant closures remains to be seen.
- Protein Processors Scramble To Adjust To Disruption From Pandemic, April 29, 2020
- Sustainable Agriculture: Governments Need To Weigh In To Effect Lasting Change, March 3, 2020
- Meat and Poultry Processing Workers and Employers: Interim Guidance from CDC and the Occupational Safety and Health Administration (OSHA), https://www.cdc.gov/coronavirus/2019-ncov/community/organizations/meat-poultry-processing-workers-employers.html, July 9, 2020
- WHO recommendations to reduce risk of transmission of emerging pathogens from animals to humans in live animal markets or animal product markets, March 26, 2020
- EFFAT report: COVID-19 outbreaks in slaughterhouses and meat packing plants - state of affairs and proposals for policy action at EU level, June 30, 2020
This report does not constitute a rating action.
|Primary Credit Analysts:||Anna Overton, London (44) 20-7176-3642;|
|Maurice Bryson, London;|
|Chris Johnson, CFA, New York (1) 212-438-1433;|
|Secondary Contacts:||Raam Ratnam, CFA, CPA, London (44) 20-7176-7462;|
|Flavia M Bedran, Sao Paulo + 55 11 3039 9758;|
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