COVID-19 Disruptions in the Global Food Supply Chain – Article
Supply chain disruptions from COVID-19 will take years to rebalance, particularly for the food industry
For food, implications stretch beyond when everyone else reaches a “new normal”
By Amanda Gibson, Owner Radix Strategy
For the Idaho District Export Council | 10 minute read
July 31, 2020
The catalyst for this article was a question that has been asked by much of the general public since virus-related shutdowns began impacting the supply chain: can’t manufacturers just shift their production from foodservice to retail? Aren’t they making up for what they lost in restaurants by what people are buying at the grocery store?
The answer is no – whether it’s toilet paper or food – due to the package size of the products, the way manufacturing lines are engineered, and the broader distribution systems that support each channel. Complexities of the food chain such as perishable raw inputs and highly regulated outputs make the web of decisions particularly more challenging for the food industry and all who supply it.
The international arena
In Idaho, agriculture and food processing combined generate 28% of the state’s economic output. In the United States, one of every three acres planted is for export. Top Idaho food and agricultural exports include dairy, fresh and processed vegetables (such as french fries), wheat, beef, and feeds such as alfalfa. 1
Agricultural exports are shipped primarily to Canada and Mexico, which combined receive approximately half of Idaho’s total. North Asian countries such as China, South Korea, and Japan also receive a large share –these three countries combined account for almost 20% of the total.
Many companies look to exports to diversify sales and achieve growth targets, often relying on more predictable domestic business to provide a solid foundation for some of the complexities that arise in the international space. With Idaho’s largest economic sectors being technology and advanced manufacturing, and these and other smaller sectors supplying directly or indirectly to the food industry, it makes sense that food and agriculture would be discussed among a meeting of exporters.
Though many of the details presented relate to the U.S. food industry, the effects are amplified globally. Every piece of the food chain has been touched by the current crisis, from the farm to the processor, to the retail and restaurant side where consumers begin to see gaps that were not resolved behind the scenes. For food, the rebalancing will continue well beyond when everyone else reaches a “new normal.”
The restaurant scene
In the United States, roughly 55% of food expenditures are away from home2, a category that is dominated by fast food and sit-down restaurants, but also includes places like lodging and recreational sites. This market virtually disappeared as lockdown orders were implemented throughout the country.
Even with reopening, most establishments are at half capacity or less as they strive to comply with CDC guidelines for social distancing and safety, and as more consumers opt to stay home until cases drop.
Restaurants have struggled to maintain profitability for years as food and labor costs rise, as well as manage a general shortage in restaurant labor. The current situation layers in additional challenges for the restaurant industry with increased costs for PPE3 like plastic shields, masks, and thermometers piling on top of declining sales.
The manufacturing line
Roughly 50-60% of many U.S. food manufacturer’s volumes are destined for the foodservice market. This number can be higher or lower depending on the specific farm, processor, or product (e.g. meat, potatoes, french fries, onions, butter, fluid milk). Regardless of the product, for almost any raw supplier or manufacturer, the percentage of business impacted is significant.
While retailers saw a large spike in dollars spent on food in March as consumers stocked up4, the overall increase in volume after the initial spike has been closer to 10% – whether on the farm side or the retail side. A 10% increase does not make up for an over 50% loss – and while many businesses plan for down times, not many expect such sharp losses over a prolonged period of time.
Even if it were possible to replace 100% of what was lost in foodservice, it is not possible to change the manufacturing process overnight. A large manufacturer may have 7 of 10 plants dedicated to foodservice production. For a smaller manufacturer with just one plant, half or more of the lines may be dedicated to foodservice.
Foodservice packaging sizes and regulatory requirements are quite different than retail. Manufacturing lines are engineered accordingly, so everything from equipment on the line to the size or material of final package to the setup for printing lot numbers and regulatory coding is designed to conform to requirements for foodservice.
Retail pack sizes tend to be smaller. Requirements for what is printed on the package tend to be stricter. Spec and grading requirements can be more specific. Number and detail of required quality or lab tests may be more extensive. More grading may require more graders; more lab tests may require more quality assurance (QA) employees skilled in collecting and reading certain types of tests. All of this combined equates to slower processing speeds, potential for more employees, and added cost.
So while it may eventually be possible to substitute foodservice production for retail, a number of steps must be taken before that can become a reality. The cost to change equipment on a line can be anywhere from a few thousand dollars for a smaller printing mechanism to tens of thousands for a piece of equipment to adjust a pack size – all the way up to tens or hundreds of millions to upgrade or add a line.
Naturally, costs to the line depend on the size and scope of the business, but for big food, it’s big numbers, and projects take months or years to complete depending on how complex the engineering is and the number of regulatory bodies involved. Regardless of size, companies typically do not favor increasing capital expenditures amid declining sales with no true end in sight.
The supply chain web
Manufacturing runs for food are usually planned months in advance and minorly adjusted weeks in advance if necessary. Planning helps to optimize the line and the purchase of other ingredient, manufacturing, or packaging components. In food, it is also necessary to plan around the raw product growing and storage cycles, as food processors work with perishable products that can only be stored in certain environments for so long.
Changes closer to a scheduled run may not be possible, and if they are, they typically result in added cost. When the final mix of products changes (e.g. different quantities, sizes, or specs of product change because the final customer or destination changes), it may impact what raw product is sourced and where the final product can be made.
Retail or chain restaurant specifications may dictate which production facility can make a product. This may be due to audit standards or quality specs, which are sometimes detailed enough to state which raw product may be used in the run. Most specifications go through an approval process on both sides (the manufacturer and business purchasing from the manufacturer) to ensure compliance with internal and external standards for quality, cost, and other variables.
Adjusting the mix of the final product may impact distribution. If foodservice product is switched out for retail, a retail distributor that can handle the increased quantity is needed. There are only so many trucks, lanes, drivers, etc. to service the retail system, and with increased pressure on the retail side, securing a spot can be more costly or delayed at best, and completely unavailable at worst.
Further, a food manufacturer’s warehouse or freezer can only hold so much finished product. If restaurants are not able to accept product and storage fills, lines must stop running. Manufacturers work to avoid even minutes or hours of downtime – so closing entire lines or plants for months is particularly painful.
If lines stop running, there is no need for new raw product. This is why footage of farmers dumping piles of produce and gallons of milk began surfacing a few weeks after shutdowns began. While food banks saw an increase in demand, the supply chain is not set up to quickly redirect – further, food banks are typically equipped to store, prep, and serve more volume of processed products over fresh. The farmer may be reluctant to pay additional cost to transport and package when such large losses are already being experienced.
The production field
It all starts at the farm. Planning for next year’s crop will start after this year’s is harvested in the fall. Contracting begins in the winter so that planting can happen in the spring, and a new harvest next fall can be shipped to processors to be made into products that are sold to retail, restaurant, and beyond.
Much like other industries, the food system relies heavily on algorithms and forecasting to know what and when to order. Any ability to forecast production has been disrupted – both at the restaurant level and at the farm level – because past performance is no longer an indicator of future performance. Any heavier weighting of more recent periods also becomes unreliable.
By July 2020, 100,000 restaurants nationwide had closed with many more expected over the next year.5 The entire composition of the restaurant industry will look different in 2021 than it did in 2019. Even if more businesses open and the public resumes pre-COVID consumption levels, manufacturers have backstock of product to work through.
Just as the restaurant industry is experiencing permanent shifts and closures, consumers have had time to make major shifts in behavior that make pre-COVID purchasing patterns irrelevant. While the situation has accelerated trends that had already grown substantially over the last decade, such as delivery, it has also created an opportunity for habits like cooking at home to become more standard practice.
Making planting commitments for 2021 will be difficult given how much has been discarded this year and how much is unknown about future consumption. Disposal of unused product will continue as necessary to run through the oversupply from this year. At harvest, more product will be pulled out of the ground that may or may not be purchased for further production and distribution.
The future space
Several scenarios are possible over the next few years as farmers, manufacturers, and restaurants evaluate risk, balance cash flow, attempt to predict consumption, and make contracting decisions.
The following are not mutually exclusive and are meant to illustrate only a part of what must be considered when trying to match major supplies and outputs in the food chain. “Normal” refers to 2019 levels.
- Scenario 1: consumption returns to “normal” in 2022, but farms plant and harvest less in 2021 than they did in 2020. Outcome: not enough product to supply manufacturers that rely on fall 2021 harvest to produce for 2022.
- Scenario 2: consumption returns to “normal” in 2021, but shipments of raw product and processing of new finished product slows at the end of 2020 as inventory is worked though. Outcome: shortages in foodservice in 2021 resulting from decreased production.
- Scenario 3: farms and manufacturers use 2019 data to plan for 2021. They return to “normal” production levels in 2021, but the restaurant industry does not. Outcome: surpluses and losses similar to what is seen now.
Any of the above situations is going to make it difficult to match needs throughout the supply chain until at least 2022 when a “new normal” has been in place for a more extended period and trendlines can again be used as more reliable predictors of future behavior.
In the interim, for companies that rely on the raw product coming from the farm, they will shift to contingency planning.6 For restaurants, this may look more like financial contingency planning, and for manufacturers, the focus will be on supply options.
Contingency planning will be especially important for those attached to the international space as access to certain inputs has been cut off, depending on country. In cases where supply is available, lead times may have doubled, requiring manufacturers to commit to production quantities even earlier than they would have pre-crisis.
With as much as restaurants need help now, farmers are at the start of the chain and are critical to the continued long-term supply of the system. Many farmer contracts were cut early in the crisis, and farmers will be left with the longest lag in cash flow as the supply chain catches up. It is essential that public and private programs consider multiple years of support to weather the rebalancing period.
For all parties involved, this is a time of great risk and added complexity. However, with all great risk comes great opportunity for those that can hedge and plan accordingly, and for those that discover creative solutions to move product through the supply chain to the end consumer. Many businesses have already found ways to survive and thrive. For a food system already laden with complexity, a prolonged period of risk and opportunity lies ahead.
The author of this article, Amanda Gibson, is the owner of Radix Strategy, LLC where she works with companies to create strategic clarity, develop consistency in communications, identify areas for process improvement, and build programs that allow for repeatable results and increased efficiency across a business.