Over the past several months, as a direct consequence of stay-at-home orders and related business shutdowns, U.S. retailers and food industry players have been battling to ensure that food supply chains remain robust in the light of unprecedented demand shifts impacting both traditional grocery retailers and foodservice, as well as emerging ecommerce channels. Physical distancing and associated lockdowns have dramatically altered how consumers spend on food. Consumers, forgoing public dine-in venues (although quick-service restaurants have fared reasonably well) to eat at home, stocked up on groceries and supplies (boosting sales for the month of April by 29 percent over the prior year’s same period; this trend is expected to continue until people feel comfortable eating out again). Meanwhile, sales have declined at restaurants of all sorts (but principally have impacted dine-in venues) by 27 percent.
COVID-19 Effects on the Food Supply Chain
As a result of these significant changes to consumer behavior, the food supply chain has been one of the most impacted segments in the U.S. and has, in many cases, resulted in acute shortages of certain product categories, owing to the wide-spread impact of these supply chain disruptions.
There are several ways that COVID-19 has disrupted the U.S. food supply chain:
- Economic Impact: The response to COVID-19 (including social distancing, travel restrictions, work-from-home policy enforcement and logistics and transportation restrictions) have all transformed the health crisis into a global economic slowdown that have never been previously experienced.
- Direct Impact on the Source of Material Supply: The global food supply-chain disruption had a direct impact on both the farming and animal-protein sectors. Many growers, such as some fruits and organic produce grown by smaller-scale farms, require more labor. This produce is often sold directly to restaurants or to consumers at farmers’ markets, many of which are now widely closed or have reduced service across the country. This has had an impact on markets and prices. In addition, while the nation’s food supply has remained abundant, the pandemic has exposed the system’s underlying flaws – a stress test of sorts. Decades of U.S. agriculture consolidation poses risks. For example, the country produces plenty of food animals, but there has been a bottleneck at meatpacking plants, where a limited number of major factories control much of the industry. As incidences of the virus occurred at their facilities, meatpacking plants were forced to shut down to protect employees and consumers alike with cleaning and new protocols that further reduced capacity.
- Rise in Prices of Food Products: Because of the significant changes in customer demand and behavior, the resulting food supply-chain disruptions increased the cost of raw materials and ingredients in many products used in food processing, which led to a spike in price for many finished food products.
- Food Retailers Have Grown Significantly: Since grocery retail chains are “essential businesses,” they have enjoyed a significant increase in demand. They have had greater control over the safety and hygiene of the food supply chain and are far less vulnerable to mandatory business closures.
- Downstream Food Supply Chain Face a Negative Impact: The downstream segment of the U.S. food supply network are experiencing the greatest impact. This segment includes all small and medium-sized companies that are labor intensive with high densities of workforces deployed in smaller work environments (e.g., meat packers as from above). Many distributors run just-in-time optimized and stable supply chains with upstream orders coming in that anticipate downstream orders going out. Because of unanticipated changes in demand, as well as production capacity reductions, bottlenecks were created. With margins dependent on there being a steady flow in and out and having only a subset of products in generally perishable inventory awaiting orders, constraints create waste and subsequent margin squeezes. Some distributors have also adapted by initiating online-ordering and delivery services, but that has not been universal. For those unaccustomed to supplying the retail channel, and in particular utilizing an unfamiliar ecommerce channel, redirecting sales to a new customers adds the complexity of modifying their current supply chains and internal organizations and also adds to costs. The flip side, of course, are new opportunities for revenue channels that did not exist before.
- Impact On Chinese-Produced Food Products: For consumer goods, dependence on Chinese-based companies and products applies mainly to non-food supply chains. According to Euromonitor, China has a high impact on the supply chains for household goods (accounting for 35 percent of global production) and textiles and apparel where 54 percent of global production comes from China. Statista estimates that China accounts for over 19 percent of global GDP, and it expects the share to increase in the coming years.
Looking to the Future
What distributors are trying to figure out now is what will happen when restrictions are lifted. Before the pandemic, 50 percent of all food dollars were spent on food cooked and eaten outside the home. Now, people are buying food to cook and eat at home and the use of meal kits has soared. Everyone in the food supply chain will need to think about what consumers will be comfortable doing next year when the restrictions lift.
If you have questions about the above, GHJ’s COVID-19 Response Team is as an experienced group of consultants specializing in cash-flow projections, strategy and operations consulting and re-organizations. We are here to assist businesses to succeed in these very challenging times.