The Downshift Challenge: How AI Can Help Food & Beverage Companies Fight Back
According to the Bureau of Labor Statistics, prices for food at home increased by 13.5% in the 12 months ending August 2022 – the biggest 12-month increase since 1979. This has left 53% of consumers stressed about rising food prices, as what was previously just a small portion of their monthly budget is increasing rapidly.
To tackle rising costs, 80% of consumers are moving away from named brands and downshifting to generic store brand items. In other words: high inflation is costing you customers. But you’re not powerless in this situation.
Food and beverage manufacturers can use AI to identify cost-saving opportunities for their formulations. It will help them reduce the impact of rising costs on their bottom line, find innovative ways to reduce costs, and take steps to protect consumers from further price increases.
Identify and React Faster to Rising Costs
When ingredient prices rise sharply, AI helps you work out the best way to rebalance the ingredients in your products to reduce the quantity of the most expensive ingredients in your formulation. It also enables you to reformulate them quicker in order to reduce the impact of price increases on production costs and your P&L.
Prices for raw ingredients and manufacturing processes are increasing rapidly. According to the Producer Price Index, the cost of food manufacturing, in general, has risen by 25% since the start of 2021.
For example, the cost of manufacturing ice cream and frozen desserts has increased sharply from 2021 to 2022. Dirk Mischendahl, director of UK manufacturer Northern Bloc ice cream, spoke to iNews in July 2022 and revealed that in the past two months alone, the cost of buying in cream had gone up 63%, while milk prices had increased by 52%.
Companies either have to absorb those costs, increase prices for consumers, or find a way to reduce costs in their formulations. But traditional reformulation processes are slow due to resource constraints and the time it takes to run confirmation lab testing.
AI can save valuable time and reduce lab testing by using computer modeling rather than a repetitive, iterative approach. So, you get results quicker, using fewer people and lab resources. Food and beverage manufacturers can use AI to propose recommendations for revised formulations that’ll achieve the same results for lower costs while maintaining consumer liking or quality.
It achieves this by:
- Quickly running through many complex calculations and possibilities to identify the most comprehensive cost-saving solutions
- Identifying the main qualities of your product that drive consumer acceptance, for example, the creaminess of your ice cream or the natural vanilla flavoring
- Analyzing complex ingredient and processing interactions to predict the impact various changes will have on product quality and consumer liking
- Reviewing potential formulation changes to assess how they fit into your defined constraints, such as nutritional value, production cost, or sugar quantity
- Translating all these calculations and interactions into formulation possibilities that deliver on cost savings while maintaining consumer acceptance
This helps you react to rapidly increasing ingredient prices by providing your R&D team with a fast, easy-to-use tool to model different formulation scenarios so they can make changes to combat those rising costs.
Find Savings That Don’t Reduce Produce Sizes Further
One of the quickest ways companies cut costs is to reduce product size while keeping retail prices the same, but this can drive customers away from your brand in favor of private label or generic brands instead.
Customers are increasingly sensitive to changes in their shopping carts. Price, quality, and quantity are all major concerns when they’re trying to make every dollar count. According to Morning Consult, 68% of US adults are concerned about shrinkflation and have noticed it especially in snack foods and pantry staple items.
Many CPGs have already reduced product sizes in a bid to save costs, and while consumers might have tolerated it so far, it’s unlikely companies will get away with further reductions in product sizes. Doing so will likely cause a significant drop in brand loyalty and market share. Additionally, further reductions will likely require packaging and process changes, which introduces additional costs that will likely cancel out any savings you make from reducing product sizes.
So, it’s important to look for other opportunities to save costs. However, limited R&D resources, budget constraints, and short timelines make it difficult to spend time searching for more creative cost-savings initiatives.
But with AI, your R&D team can test unlimited “what if” scenarios to explore more innovative cost-saving ideas that you wouldn’t normally consider. These are the more “out of the box” ideas that a busy R&D team wouldn’t have time to ideate or test if you’re running all the experiments in the lab. These scenarios fall at the intersection of formulation and main drivers of consumer liking, making them harder to test for with a traditional, iterative approach.
AI in Action: How Food & Beverage Companies Use Turing To Reduce Costs
Turing is currently working with a leading food and beverage company and is forecasted to deliver a $5M benefit in 2022. Before the company added Turing into its R&D processes, it was taking between six and 18 months to reformulate its products, and the rising prices of ingredients were resulting in decreased margins.
To date, we’ve worked with the company to identify cost savings and increase consumer liking across two product lines:
- Using Turing has enabled the company to increase liking and reduce costs by 8% for its pasta sauce.
- The company has also increased consumer liking by 5% and decreased costs by 9% for its cottage pie product.
Based on the success the company has had using Turing’s AI-driven digital formulation platform, it has expanded its use of the platform across the business to look at 30 other products, including prepared meals, pastas, dips, and sauces.
Learn more about the Turing platform and calculate the ROI of adding it to your R&D toolkit.
Implement Changes Faster by Reducing Consumer Testing
Consumer testing takes a long time to do thoroughly and is costly. AI gives you the confidence that the changes you make to products will meet your needs and maintain customer expectations, so you can reduce the amount of time and budget spent on consumer testing.
Running consumer research and testing panels can take 3-4 months. Additionally, you have all the costs associated with consumer testing, such as making and shipping test products and working with a third party to run those tests, which can typically cost up to $100,000 per round.
Depending on the quality of information coming from your AI, you may be able to do less consumer research (or none) and just do technical testing instead. And as you get more comfortable with the quality of your AI-driven recommendations, you can do fewer rounds of consumer testing, which can cut several months off the time it takes between identifying cost-savings opportunities and going to market.
AI models leverage many sources of data for their formulation models. For example, Turing combines your product data with your team’s existing internal expertise. It also provides the formulator with confidence scores for each recommendation, so your R&D team can understand the changes they’re making without bringing in support from your data scientists. They can be confident that they’re choosing the best options based on your chosen parameters, whether that’s nutritional content, price, shelf life, consumer preference, or something else.
In addition, AI captures the valuable consumer drivers of liking in conjunction with the formulation so that learnings can be applied to future project cost savings projects.
Make AI Your Secret Weapon To Keep Your Loyal Consumers and Stop Them From Jumping To Private Labels
Using AI in R&D gives food and beverage companies the opportunity to explore a larger quantity of creative ideas for cost savings more quickly than traditional processes. Doing so can give you a real competitive advantage, especially in times of high inflation, when your customers are looking to downshift or switch to cheaper products.
About the author(s).
Co-Founder, Turing Labs Inc.