The specialty food category is expected to grow more in 2020 than originally forecast—16.5 percent versus 13.3 percent, said David Lockwood, consulting director at Mintel, during the session The State of the Specialty Food Industry: Category Focus, held Tuesday as part of the SFA’s Specialty Food Live! Virtual Marketplace event.

Growth in the months since COVID-19-related surge buying hit 15-17 percent in May through August versus the 10 percent originally predicted, leading Mintel to adjust its forecast. While the forecast is based on a model of a second higher rate of COVID-19 infection hitting in fall 2020, Mintel is not expecting the same spike in panic-buying purchases as consumers and the supply chain become better prepared for a next wave.

Lockwood and David Browne, a market research retail and brand consultant, work with the Specialty Food Association to produce its annual State of the Specialty Food Industry research and 10-Year Category Tracking and Forecast reports. In this session, the pair updated the performance of the specialty food category overall in light of COVID-19’s impact and zeroed in on specific categories that had been influenced by the pandemic, specifically essentials, snacks, plant-based, and beverages. Lockwood and Browne discussed the specialty sales performance of each before COVID-19, during last spring’s height of the pandemic, and today.

“It’s the year of essentials,” said Lockwood, referring to an array of pantry categories meant for at-home consumption and meal preparation. “Their growth contributed to the overall growth of specialty food this year.”

The segment totaled $29 billion in 2019 sales, comprising 41 percent of the total brick-and-mortar specialty market. The top four categories alone (cheese, meat, bread, and water) dominate with 50 percent of sales.

The COVID-19 boost was undeniable for essentials, said Browne, in particular among baking mixes, frozen entrees, oils, vinegars, and sauces as consumers faced stay-at-home mandates and turned to cooking and baking. Some stagnating categories enjoyed a “rebirth” as a result, he said. “Soup, for example, has not been a very popular category, especially with younger consumers but in March alone it grew 125 percent year on year,” he added.

Some specialty essentials were passed over in the height of surge shopping in favor of conventional brands but then boomed as shoppers could not find mainstream brands.

Browne sees the essentials category retaining its importance amid continued sheltering at home. Mintel predicts the growth rate for sales of food at home in 2021 will be roughly twice what it would have been without the pandemic.

“Center store is having a revival as a result,” said Browne.

Among innovation opportunities, Browne and Lockwood point to upgraded pantry basics, special diet-focused essentials, and culinary exploration as consumers upgrade their cooking and baking skills.  

The pandemic did not slow growth of plant-based foods and beverages, which instead enjoyed a boost in most categories, especially milk and other dairy and meat alternatives. The segment benefitted from trial during surge shopping when consumers could not find traditional dairy or meat—and opted for refrigerated plant-based items or stocked up on shelf stable. The plant-based segment overall, which accounted for $5 billion in 2019 sales, has been growing at three times the pace of the total specialty market since 2017. The specialty category has a huge runway for growth, said Browne, with an increase of 10-20 percent annually through 2024. He noted that it has a similar trajectory to other lasting segments including organic and gluten free.

The category has an “unlimited amount of innovation” to tap into, said Lockwood, including meat and meat alternative mixes and cultured meat.

Specialty snacks grew slower amid COVID than one might expect as people hunkered in their homes. Though the segment is large—comprising $18.8 billion in 2019—it is also mature and consists of several large categories: chips, pretzels, and snacks; yogurt and kefir; and chocolate and other confectionery. The growth phase has passed as the segment matures, said Browne, but snacks are showcase items that get shoppers into the store. Comprising 27 percent of the total brick-and-mortar specialty market, they are nearly essential, he noted. The category was also hit by closed offices and schools and some grab-and-go wellness snack categories like yogurt and bars will likely gradually rebound as those institutions reopen. Innovations including plant-foward, grain-free, sweet/savory combos, and local/regional/small batch will drive opportunity in the snacks segment.

Growth in the $12.2 billion beverage segment experienced a surprising switch thanks to stay-at-home orders. While RTD and grab-and-go have ruled the beverage segment for the past several years, non-RTD coffee and water are the new stars. “It’s not a switch we would have predicted pre-COVID,” noted Browne. Mintel predicts growth will come from non-RTD coffee, hot cocoa, and tea, as well as water, with innovations in regional/local roasters, for example.

RTD beverages will rebound slowly as people return to normal routines but are a maturing category oversaturated with me-too brands, said Browne, and needs fresh ideas to grow. He expects shelf stable RTD, low sugar, functional ingredients including immunity boosters, sleep aids, brain health, and detox properties to be among innovation opportunities.

Browne and Lockwood also identified four trends to expect in the “next normal”:

1. Health and wellness; culinary exploration; transparency; and sustainability are attributes that will resonate with consumers.
2. Specialty food consumers’ ethical and economic awareness will shift. They are seeking to learn about and support women-owned, minority-owned businesses and local/regional brands.
3. Innovation pace will continue to be under-average as SKU optimization continues. Makers should think about target innovation to Gen-Zs and Millennials especially.
4. Consumers are trading down in price but not positioning. They’re committed to the environment, organics, plant-based, and non-GMO. Private labels are rising to meet this need.

Related: Taking a Calculated Risk: CBD in Specialty Food; Specialty Retailers Improve Selling Strategies Amid COVID.

Join SFA for the next Ask the Experts webinar on Thursday, August 13 at 1 p.m. EST. 

During this webinar, Laurie Demeritt, CEO of The Hartman Group will share recent consumer data and insights on functional foods and beverages, including usage, benefits, and ingredients sought. The webinar will address the impact of COVID-19 on consumers’ concerns and priorities, as well as opportunities and implications for specialty foods. Register now.

The Specialty Food Association, working with Mintel, releases its 2020-2021 Edition of the State of the Specialty Food Industry. The annual research explores the market and where it is going based on sales data from the past three calendar years, sales forecasts in key categories, and a consumer survey that tracks behaviors, preferences, and generational differences shifting the market. This year’s research includes analysis of the impact of COVID-19 on the specialty food industry, including supply chain commentary, to provide insight on market ramifications, challenges, and opportunities in the current business environment.

Specialty food sales hit $158.4 billion in 2019, a 10.7 percent increase since 2017, but growth had slowed as the market matured. Foodservice and online sales continued to be bright spots in growing sales, though both now have different landscapes due to COVID-19.
 
The specialty food and beverage market continued to outpace sales of all food, growing three times faster than the entire food and beverage market during 2017-2019. In 2019 more categories than ever before (12) achieved at least $2 billion in annual
sales. Cheese and Plant-Based Cheese; Meat, Poultry, Seafood (Frozen and Refrigerated); Chips, Pretzels and Snacks; Coffee and Hot Cocoa (non-RTD); and Bread and Baked Goods topped categories with the highest retail sales. Refrigerated and frozen categories accounted for four of the top five categories with the highest dollar growth and included Refrigerated Plant-based Meat Alternatives; Refrigerated Creams and Creamers; Refrigerated RTD Tea and Coffee; and Frozen Breakfast Foods. Shelf Stable Creams and Creamers rounded out the list.

Mintel tracked and forecasted retail sales for the specialty food market overall and 35 key categories from 2014 through 2024, including sales data from SPINS through first quarter of 2020 to incorporate the pandemic impact. Due to COVID-19, the specialty food industry  saw  an unprecedented sales spike beginning in March 2020. SPINS data shows that specialty food and beverages grew nearly 42 percent versus March 2019. 

“The impact of COVID-19 on the specialty food industry cannot be underestimated,” said Bill Lynch, interim president of the SFA. “Food retail is an essential business channel and while that has been beneficial to sales for our members, many of whom are small businesses, the overall landscape is both optimistic and uncertain.”

Highlights of this year’s State of the Specialty Food research can be found here as well as information to purchase the full report and 10-Year Category Tracking and Forecasts.
 

Specialty food buyers, makers, and foodservice operators are optimistic in their outlook for the new year, despite some potential headwinds from the new tariffs on certain foods from Europe.

Companies are largely enthusiastic about their investments in ecommerce and technology, and they expect these investments to pay off in the form of increased convenience and an improved shopping experience for consumers. Consumer demand for convenience is also being seen in the evolution of retail store formats, as operators continue to expand offerings such as prepared foods and experiment with smaller, neighborhood-focused designs.

2020 Outlook: Legislative & Regulatory Concerns

• Tariffs
• CBD
• Plastic packaging

The recent tariffs the U.S. Trade Representative has placed on approximately $1.75 billion of European goods, including cheese, yogurt, butter, olives, pork products, and other tariff lines from members of the EU is high on the industry’s list of concerns as 2020 begins. In addition to suppliers and importers, retailers are worrying about the impact of the tariffs because of the importance of cheese in their sales mix.

“There is absolutely no question we are going to have to raise prices eventually,” says Richard Sutton, a partner with his wife, Danielle, in specialty food retailer and importer St. James Cheese Company, New Orleans. In a recent interview with Specialty Food, Sutton shared concerns that increased retail prices could alienate some consumers who already have a negative impression about the cost of cheese.

In addition, he pointed out, restaurants will be challenged to set pricing on cheese plates as prices increase. Chefs often look to specialty retailers for their cheeses, and those retailers depend on that business to move their inventory. “We have lots of chefs who buy cheese from us,” says Sutton. “When their costs go up by $1, $2, or $2.50, that adds up to a lot when you are trying to price these things on a menu, because of their margin structure.”

“The bottom line is that no one has the kind of margin that they can just absorb it,” says Matt Caputo, CEO of Caputo’s Market & Deli in Salt Lake City. “The consumer is the one who pays.” He estimates that about half of the 200 or so varieties of cheese he offers will be hit by the tariffs.

Caputo doesn’t anticipate that many of his customers will switch away from their favorite imported products in favor of American alternatives. In addition, he says, price increases on imported cheeses could open a window for American producers to raise their prices as well.

The tariffs will also impact several other products at Caputo’s, including olives and tinned seafood items—the latter of which have been among the company’s fastest-growing categories, he says.

Another issue that operators throughout the specialty food industry will be paying close attention to in 2020 is legislative and regulatory activity around the use of cannabis and cannabidiol in food products, following the increasing legalization of marijuana and the reduced restrictions on the use of hemp.

“With the emergence of both hemp and cannabis and related opportunities, there is a lot of regulatory activity we’re following at the moment,” says Ryan Meczyk, president at Norman Distribution, which supplies better-for-you grocery products to a range of venues in the Chicagoland and Las Vegas markets.

He notes that while cannabis is strictly regulated, the laws around CBD have been much looser. “We strongly believe there should be strict regulatory laws implemented for CBD-based products, as there are many products currently on the market that are not third-party tested or verified,” he says.

Retailers that are already selling CBD-based products should confirm that the products they carry are safe and verified, Meczyk says.

Additional regulatory activity that the industry is keeping an eye on includes restrictions on the use of plastic, Styrofoam, and other materials that retailers often use in their prepared foods operations, says Scott Zoeller, an industry consultant and former food retailing executive.

“There’s a lot of work that has to be done on this, but for foods that are taken out, the packaging will have to be something that is biodegradable or compostable, and has a low impact on the environment,” he says.

2020 Outlook: Retail Format And Footprint Trends

• Smaller formats with a fresh-market feel
• Community focus
• Natural/specialty-centered convenience stores
• Cashierless checkouts and click-and-collect capabilities
• In-store sustainability programs and education
• More space for fresh departments
• More shelves dedicated to single-serve and grab-and-go

The industry can expect to see more stores that strive for the “customization, premiumization, and experiential trifecta,” says Daena Rexho, director of growth solutions, KeHE Foods. Expect smaller store formats with premium assortments, a high-quality, fresh-market feel, and community focus, and stores that leverage technology to enhance the experience, such as cashierless checkouts and click-and-collect capabilities.

Rexho cites as examples Amazon Go, Meijer’s Bridge Street Market, and Woodward Corner Market small-format stores, Giant’s Heirloom Market, and the food-focused 7-Eleven lab test stores. Additionally, the convenience-store channel is poised to introduce more stores that cater to the natural/specialty consumer, along the lines of Green Zebra in the Pacific Northwest, she says.

In store, retailers will continue to expand perimeter departments with more space devoted to specialty cheeses, deli, seafood, bulk foods, and prepared foods, says Rexho. Throughout the store, look for more refrigerated grab-and-go sections in key destinations, and more shelves dedicated to single-serve packs and more portable formats, such as soup cups, nut butter pouches, and microwaveable rice/grain meal cups.

Retailers will also continue to call attention to their sustainability efforts throughout the store, says Rexho. “We’re seeing more retailers taking steps to educate consumers at the shelf on the sustainable products they carry. This takes the education beyond the side panel and allows for some cool endcaps/displays.”

Other sustainability-related efforts include carrying upcycled produce and other products that use recycled materials, and offering discounts to consumers who bring their own container or mug, or who walk or bike to the store.

Retailers have differing opinions on ecommerce’s role in their operations.

Caputo says his company’s online sales have picked up after years of investment. “That took a huge amount of effort for many, many years that didn’t pay any dividends, and then all of a sudden it is, which is great,” he says. “That’s an important channel for us, and I think that it will increase.”

Danielle Vogel, owner of Glen’s Garden Market in Washington, D.C., however, says she believes the in-store experience will win out over ecommerce when it comes to specialty food retailing.

“Specialty food retailers are the antidote to Amazon,” she says. “It’s been my belief and experience that our differentiator is the feeling folks get when they walk through our doors. We offer a sense of community and connectedness that can’t be translated to online retailing.”

Glen’s Garden Market experimented with online sales, but Vogel says the company discovered that its customers “were uninterested in buying our products on the internet—they chose experience over convenience.

“Grocery delivery services just don’t accord with our intention: to physically, emotionally, and intellectually connect our neighbors to each other in celebration and appreciation of food made here, by people who live here,” she says.

2020 Outlook: Maker Focus

• Online sales
• Speedier last-mile delivery
• Packaging innovations

An increasing number of specialty food makers are embracing direct-to-consumer sales through various online channels.

Jafflz, a brand of clean-label, toasted sandwich pockets filled with a variety of sweet and savory ingredients, is among the specialty food makers seeking to gain an ecommerce sales presence. The Park City, Utah-based company currently offers its products in several hundred stores, mainly in the Western U.S., and the company is expanding into 280 new retail locations in January.

“While we launched in traditional retail, we are well aware that emerging brands like [ours] will not make it without a strong ecommerce strategy and social media presence,” says Jafflz creator Meryl van der Merwe, a former high-end private chef.

To that end the company recently promoted its products on home-shopping TV network QVC, which she says was “very successful” and gained national exposure for the brand. It also benefited from a plug from celebrity chef Emeril Lagasse, who made an impromptu appearance during her QVC pitch and invited her to appear on his show.

The success of the QVC sales effort prompted van der Merwe to launch a QVC-style sales effort on Facebook Live.

While the company’s direct-to-consumer sales are still relatively low compared to traditional retail, van der Merwe said Jafflz has been seeing consistent improvements. “We are focusing our efforts on direct to consumer, and making progress daily,” she says.

She has considered selling through Amazon but says she will continue to focus on selling direct through the Jafflz website and social media channels for the near term.

Distributors though can be helpful partners in building online sales. KeHE, for example, assists makers with the tools to assess and improve their presence online through its BrandDriver platform, says Jay Rogers, executive director of e-commerce.

Brandon Barnholt, KeHE president and chief executive officer, says 2020 “is shaping up to be the year of digital for KeHE,” as they enable the supply chain to operate more efficiently and offer digital solutions to make supplier and retailer interactions easier and faster.

Rogers notes that he also sees more companies implementing last-mile, small parcel solutions to meet customer expectations for speedy delivery, as well as seeking packaging innovations. “Specifically, finding cost-effective and sustainable solutions to get products to market in an eco-friendly way,” he says.

2020 Outlook: Tech Trends

• Data science
• Machine learning and artificial intelligence
• Targeted promotions
• Blockchain in food safety and traceability
• Robotics

“Leveraging data and data science to derive insights is one of the biggest areas of opportunity,” says Brian Wilkinson, chief information officer, KeHE Foods. “New technologies such as machine learning and artificial intelligence will help us mine thousands of terabytes of data to detect trends, risks, and opportunities that we couldn’t have dreamed of just a few years ago.”

In addition, mobile technologies and the Internet of Things are maturing rapidly, he says, and stand to enhance the retail experience.

“The opportunity for personalization of the store experience through a digital medium will drive new ways to grow sales through targeted promotions, analytics around people behaviors, and seamless integration between online and in-store formats,” says Wilkinson.

Data may also play an increasing role in helping manage food safety challenges and traceability, he says, citing the potential of blockchain technology in that area in the future.

Foodservice operators are also embracing technology, both to enhance personalization and to streamline operations through robotics and other innovations.

One such operator is Ono Food Co., which recently opened a mobile smoothie truck that relies heavily on robotics and automation to process orders. The truck features a modular, robotic kitchen that functions like an assembly line to create a range of signature smoothie blends.

“At Ono Food Co., we believe the future of food is modular,” says Stephen Klein, co-founder and chief executive officer. “At its core, this means flexibility and adaptability. For example, our robotics kitchen could be used in a busy airport stall, sports stadium, or concert venue where real estate is at a premium.”

He says he expects to see operators scaling automation technology faster and more efficiently. “We believe that robotics and automation have the power to revolutionize the restaurant space,” Klein says. “We can expect to see more operators approaching their concepts with an eye toward automation that we haven’t seen in years past. That said, it doesn’t matter how well your technology is functioning if you don’t have a quality and consistent product.”

Another foodservice company that is embracing technology in its operations is Centerplate, a noncommercial foodservice operator owned by French foodservice giant Sodexo.

Centerplate has been testing a variety of advanced technologies throughout its operations, including a robotic pizza maker that the company deployed for the last 12 home games of the Seattle Mariners baseball team at T-Mobile Park.

The technology “could potentially be a game-changer for us and the industry, when it comes to addressing the labor shortage and ensuring product quality consistency,” says Steve Pangburn, chief operating officer, Centerplate.

“Technology is an incredibly important facet for the future of our food-and-beverage approach at our sports venues,” he says. “We are taking a careful, design-minded approach with our in-house data analytics and emerging payments teams to make sure our solutions are as forward-facing and user-friendly as possible.”

The goal is to move toward a more seamless and frictionless customer journey for game attendees, and to make food-and-beverage concessions user friendly.

Along those lines, Centerplate has also deployed technology called CLEAR, which allows customers to use fingerprints for payment and age verification at T-Mobile Park, and a new mobile ordering tool at BC Place in Vancouver.

“This type of innovation will only increase in the next few years,” says Pangburn.

Among the “next frontiers” of food and beverage concessions will be leveraging ticket sales data and order histories for specific seats in order to generate targeted offers, he says.

Capital Provides Opportunities

Overall, business conditions are looking good for the specialty food industry heading into 2020, says Barnholt of KeHE Foods. “It’s exciting that natural and specialty products are driving overall CPG growth heading into the new year—a trend that we’ve been seeing for some time now,” he said in a presentation at the distributor’s Holiday Show in June.

Access to capital is helping small, specialty brands get to market, he adds. “Capital is easier to find for food brands—specifically offers with lower interest rates from a more diverse pool of investors—which is helping innovative brands get to market quicker, while keeping more of their equity and innovative control,” says Barnholt.

Mark Hamstra is regular contributor to Specialty Food.

SFA News Live host Phil Lempert talks with Dave Donnan, partner emeritus of A.T. Kearney, about the industry's current discovery mode of possibility with at-home delivery and what challenges need to be overcome before it is successful. Donnan also talks about the challenges around the CBD market and the growing trend of DIY healthcare via nutrition.

In this SFA News Live segment, Ron Tanner, SFA vice president, philanthropy, government and industry relations, and Beth Haley, DPI's VP of vendor relations, talk about a new Association initiative with Cornell University- a 30-hour, in-depth online program created in collaboration with E-Cornell that trains buyers to be prepared to do business in the specialty food industry.

Describing it as if "7-11 and Whole Foods had a baby," Rachel Krupa talks about The Goods Mart, her better-for-you convenience store concept modeled after the general store in her Michigan hometown.  

SFA News Live host Phil Lempert talks with Mike Lee of Alpha Food Labs, who shares his product development plans for Crop Crackers, a biodiverse variety built on a system of crop rotation and soil improvement.

SFA News Live host Phil Lempert sits down with Plant Based Foods Association President Michele Simon to discuss plant-based foods evolution to the mainstream.

Plant-based foods, specialty beverages, reduced packaging, and customized foodservice options are among the industry hot points revealed in this year's SFA's State of the Specialty Food Industry research, 2019-2020 edition.

In this blog post, Specialty Food Association Directory of Content Denise Purcell shares some of the unexpected and interesting insight from the research. Association members can weigh in with their own opinions in the Q&A Forum by logging in with their specialtyfood.com username and password.

Femvertising or advertising that celebrates women with feel-good messages encouraging empowerment, confidence, and self-esteem, is missing the mark with 61 percent of American women, especially those in Gen Z.

According to Kantar’s recent study, 74 percent of Gen Z women believe advertising directed at them is “completely out of touch” with them and their needs. Women have much more confident and assertive attitudes than in years past. Think of the winning female U.S. World Cup team—that’s who women connect to today, according to the research.

Now that 67 percent of women ages 16 and older say they’re in touch with their masculine side, up from 55 percent in 2014, it’s time to shift. Give women messages of equality, respect, freedom from harassment, and the power that men assume and feel they deserve, and you’ve got their attention.

The newly released SFA "State of the Specialty Food Industry research, 2019-2020 Edition" gives an in-depth look at retail and foodservice sales of specialty foods; retail dollar and unit sales and market share in 63 categories; consumer attitudes, preferences, and drivers and the generational differences that are shifting the market; supply chain insights on how the consumer and industry is evolving; and much more. 

In this webinar, David Lockwood of Mintel International and Denise Purcell of the Specialty Food Association highlight the comprehensive research that explores where the market is today and the opportunities and challenges it faces. SFA member price: $20; non-member price: $45; purchase here.

Nova Sayers of NSF International, a health and safety organization that monitors food products through independent verification based on common standards, talks with SFA News Live host Paul Barron about the food industry's massive impact on the planet and how NSF works with companies to reduce water usage, waste, and greenhouse gas emissions.

Coming Soon: The 200+-page State of the Specialty Food Industry Full Report and 5-Year Category Tracking and Forecasts

The Specialty Food Association, working with Mintel, releases its 2019-2020 Edition of the State of the Specialty Food Industry. The annual research explores where the market is today, the opportunities and challenges it faces, where it is going based on sales forecasts in key categories, and how the specialty food consumer is evolving.

The State of the Specialty Food Industry report explores:

• Sales data of where the market is today.
• Opportunities and challenges it faces.
• Consumer generational difference shifting the market.
• Supply chain insights and commentary from retailers, foodservice professionals, makers, and distributors.

Plus: 5-Year Category Tracking and Forecasts in 36 Categories

• Learn where the specialty food market is going based on sales forecasts in key categories
• See which categories are expected to slow down and ramp up by 2023.
• Discover strengths, weaknesses, opportunities, and threats for each category.

As part of SFA's Future Friday series, Max Kaniger, founder and executive director of Kanbe's Markets explains how his company aims to eliminate food desserts by helping mom and pop stores sell fresh, healthy food options. In his What's the Big Idea talk at the Winter Fancy Food Show, Kaniger explains that access and waste are two of the biggest issues of the food system, but this doesn't make sense. "There are 42 million people across the country who don't have consistent access to fresh, healthy, affordable food. And yet we're throwing away millions of tons of food every year," he says, "It just didn't make sense to me. These two main issues seem to be able to fix each other." Though Kanbe's Markets only exist within Kansas City, Kan. currently, Kaniger wants to scale his model to be replicated across the U.S.

View Kaniger's full talk above as part of SFA's Future Fridays series. 

Organized retail crime (ORC) is continuing to grow, with nearly three-quarters of retailers surveyed reporting an increase in the past year, according to the National Retail Federation. The report found 92 percent of companies surveyed had been a victim of ORC in the past year and 71 percent said ORC incidents were increasing. Losses averaged $777,877 per $1 billion in sales, up 7 percent from 2017's previous record of $726,351.

Retailers attributed the increase to the easy online sale of stolen goods, gift card fraud, shortage of staff in stores, and demand for certain brand name items or specific products. In addition, a number of states have increased the threshold for a theft to be considered a felony, meaning criminals can steal a larger quantity of goods while keeping the crime a misdemeanor and avoiding the risk of higher penalties that come with the commission of a felony. ORC typically targets items that can be easily stolen, and quickly resold, and top items range from low-cost products like laundry detergent, razors, deodorant, infant formula, and blue jeans to high-end goods like designer clothing and handbags, expensive liquor, and cellphones.

Related: Almost All Americans Shop at Discount Retailers; Online Grocery Shopping Gains Ground.