Food and beverage industry outlook 2024: Key strategies for navigating the year ahead

The food and beverage industry outlook 2024 highlights the key trends and strategic opportunities shaping the sector amidst evolving market dynamics and regulatory pressures. From mergers and acquisitions (M&A) and the Inflation Reduction Act (IRA), environmental and social governance (ESG) and sustainability initiatives and potential impacts of the 2024 election, discover top strategies to overcome challenges and seize opportunities for growth and resilience in the year ahead.

Mergers and acquisitions

In Q3 of 2024, the food and beverage sector saw 149 private equity deals – the highest since 2017. This surge is driven by strategic consolidation efforts as well as a clearer interest rate outlook. As the inflation rate stabilizes, many acquirers view the incremental sales volume gains that come with acquiring high-quality assets as an attractive growth strategy. Outlook for M&A is positive with many factors falling into place, such as, stabilizing U.S. and global economy, strong U.S. public stock market, lower U.S. inflation and interest rates, expectations of a more favorable regulatory environment and readily available debt from banks and private credit funds.

Macro trends that could drive more food and beverage M&A activity in 2025 include: demographics with Baby Boomer business owners seeking an exit, private equity portfolio company exits – due to pressure from limited partners to deploy dry powder and provide return of capital from sales of existing portfolio companies, non-core divestitures and aligned valuation expectations.

Food and beverage companies should consider capitalizing on these favorable conditions by evaluating strategic acquisitions or divestitures. Understanding valuation trends and aligning business objectives with market dynamics will be critical to success.

The Inflation Reduction Act (IRA)

Unlike previous regimes, both for-profit and not-for-profit entities can benefit from IRA tax credits. There are three main ways to utilize the credits:

1. Direct use: Owners can apply the credit against existing income, which is useful during profitable years.
2. Transferability: credits can be transferred to a buyer, offering flexibility in asset ownership and project management.
3. Direct pay: Tax-exempt entities receive a payment equivalent to the credit, similar to a tax refund.

The Section 48 investment tax credit under IRA is crucial for manufacturers, covering various energy property types and offering a base credit of 6%, which can increase to 30% with compliance to prevailing wage and apprenticeship (PW&A) standards. Projects that started after January 1, 2023, qualify, and additional bonuses are available for using domestic content and being located in energy communities. For a $10 million project, with $8 million of eligible energy property, the credit can range from $480,000 to $4 million, depending on eligibility and compliance with specific criteria.

Before year-end, consider the actions that should be taken by food and beverage companies. The IRA will be in effect for the next eight years, but energy property values will shift from being based on type to their carbon efficiency.

• Construction and safe harbor: To preserve current benefits, start projects under the existing rules by incurring at least 5% of eligible costs or beginning physical work. Proper documentation, such as contracts and purchase orders, is crucial to meet safe harbor provisions and extend current tax credit rules.
• Prevailing wage and apprenticeship: To get the five times multiplier for the investment tax credit under the IRA, PW&A requirements are essential. These requirements follow the Davis-Bacon framework but are distinct and contractors must comply with them to avoid penalties. Final regulations for the investment tax credits are expected soon and substantiation at the time of filing is necessary to earn the credits, especially when selling or transferring them.

Environmental, social and governance (ESG) and sustainability

Heading into 2025, the ESG and sustainability space is shifting from voluntary to regulatory reporting, requiring companies to align sustainability disclosures with financial reporting to meet new regulations and reduce risks. The California Climate Accountability Package and the EU Corporate Sustainability Reporting Directive (CSRD) are key drivers, with the latter requiring extensive disclosures and controls by 2026. Companies must prepare for these changes by enhancing procedures, engaging stakeholders and ensuring accurate, auditable data, especially for climate-related risks and Scope 3 emissions.

As far as specific areas of opportunity for the food and beverage industry, in 2025, the EU taxonomy will be adopted by EU investors, creating opportunities for U.S. companies to align with environmentally responsible themes and attract European investment. Companies should map their business activities to these themes to enhance investor relations. Additionally, revisions to net zero standards and carbon neutral claims offer new opportunities for food and beverage companies to set credible targets and engage stakeholders through offsets and renewable energy credits.

2024 election implications

The new administration’s policies, particularly around deregulation, trade negotiations and tax adjustments, could significantly impact the food and beverage sector. Deregulation might lower costs for businesses but could increase scrutiny from advocacy groups. Emphasis on domestic energy production could reduce costs but also decrease incentives for renewable energy investments. Trade policies and potential changes in labor and immigration could affect operational efficiency and supply chains, while expiring provisions of the Tax Cuts and Jobs Act could lead to tax adjustments requiring careful planning.

Proactive planning is essential for navigating 2025 and beyond. Food and beverage businesses should take a close look at their operations and growth strategies, ensuring they are positioned to adapt to regulatory changes and evolving market trends. As highlighted in our food and beverage industry outlook 2024, staying ahead requires a strategic focus on key areas like M&A, IRA incentives and sustainability.

Whether it’s optimizing your M&A approach, maximizing IRA incentives or aligning with sustainability standards, our team at Baker Tilly is ready to help you finish the year strong and start the next one even stronger. Connect with us today to explore tailored solutions that drive sustainable success.