One Year Later: Lessons Learned in the Food Supply Chain

It’s been a turbulent 14 months for the food supply chain. And while it doesn’t appear that 2021 will be any easier, the lessons the industry has learned should help it emerge stronger than ever.

At last year’s Farm to Market conference, I spoke with four leading food distributors about the supply chain issues they were dealing with in the early days of the pandemic. Now, with the U.S. economy reopening, three of the original panelists returned to discuss the lessons they’ve learned, as well as the outlook for the industry amid continuing challenges. Our supply chain panel at BMO’s 16th Global Farm to Market Conferencefeatured:

• Brandon Barnholt, President and CEO of KeHE Distributors®, a Naperville, Illinois-based distributor of fresh, natural and organic, and specialty foods.

• Leon Bergmann,CEO of Harvest Sherwood Food Distributors, a Detroit-based distributor of proteins and perishable foods.

• Thom Lipari, CEO of Lipari Foods, a Warren, Michigan-based distributor of deli, bakery and specialty grocery products.

Following is a summary of our discussion.

Lessons Learned

The common denominator for all industries throughout the COVID-19 pandemic has been uncertainty. But for food distributors, Bergmann said that unpredictability extended to consumer behaviors.

“Specifically, how quickly both supply and demand can change,” he said. “A lot of times one predicates the other in a normal market, [but] this was not a normal market. We saw incredible swings in supply and demand that were independent of each other. I think that we will see a return to more seasonality, but it won't be a quick return.”

Barnholt noted that the industry finds itself dealing with what he calls “microtrends”, something that kicks in for as little as a week. “We’ve got to be in contact with our retailers asking them, ‘This has been hot for three or four days – is this going to continue?’ The answer is usually ‘yes’, so we are having to inventory things that normally would be blips on the radar. Instead, they turn into massive demand patterns.”

For Lipari, it’s been the length of the adjustment period. "We thought we were dealing with a surge, and it ended up being a marathon,” he said. “Early on we were making adjustments for short-term changes, and then all of a sudden, we had to change direction and say, these changes are going to be here permanently, or at least for a much longer time than we thought. It's much easier to handle a surge than something that we have to plan long term for.”

Barnholt noted a pleasant surprise that emerged from the struggles early in the pandemic. “We expected the smallest manufacturers to have the biggest problems, and in fact our experience was it was exactly the opposite,” Barnholt said. “The smallest manufacturers were the most reliable and agile. They were extremely responsive, their supply was steadier than we would have thought.”

SKU Reduction and Home Cooking

In the early days of the pandemic, distributors had to build up large stockpiles of inventory for the surge in demand. At the same time, manufacturers reduced their SKUs to manage the rush. Now that demand is returning to more normal patterns, what does it mean for SKU selection and product innovation?

Lipari believes SKU reduction is a long-term trend, driven both by manufacturers realizing it allows them to operate more efficiently and by consumers becoming used to less variety on store shelves.

"Every time they walk into the store, they don't have to see something new, they're just happy to see something on the shelf,” he said. “Over the course of several years, will it get back to where it was? Possibly. But I think in the next few years, we're not going to see products come to market as fast as they did in the past, and I think [manufacturers are] going to be more selective of what they do and how expansive they make their offerings.”

The pandemic changed another consumer habit that could have long-term impacts on the supply chain: eating more meals at home. Last spring, much was made of the demand shift from foodservice to retail. With restaurants fully opening again, foodservice demand should pick up again. But Lipari believes the 50-50 split between eating at home or going out has been upended for the foreseeable future.

“I think COVID has taken a whole generation of people that grew up eating out, [and] last year they learned that they could cook at home and it wasn't that difficult, and they realized it’s a lot cheaper to eat at home than to eat out,” Lipari said. “People are going to go back to restaurants, but I think the grocery industry is really going to benefit.”

Downstream Supply Challenges

Lipari and Barnholt noted that even as manufacturers are returning to normal production levels, downstream supply issues are becoming a problem. A slowdown in production capacity to process wood means pallets are in short supply, which Barnholt said is causing food manufacturers to cut back their production. Similarly, manufacturers have found that glass jars and film for packaging have been hard to come by.

"It's other things in the supply chain that in the past would never be an issue—they would just go somewhere else and get it,” Lipari said. “So, it went from the frontline supplier, who delivered the product to us, and now they're having problems with their suppliers, which is affecting our supply lines. It's a different dynamic than we've dealt with in the past.”

"Everyone has to remember that the entire supply chain over years has been built for efficiency,” Bergmann said. “It wasn't built for this type of environment, so everyone is adapting as we go.

Inflation Concerns and Labor Challenges

Consumers are noticing rising food prices, and the consensus is that the situation will only get worse in the near term before eventually cooling off. What’s driving food price inflation? And how much does the supply chain have to absorb the increased costs behind it?

In the protein space, Bergmann pointed to three factors driving inflation. Input costs—corn is trading at a seven-year high, in large part due to the drought in the Midwest and Upper Midwest. Fuel and transport costs have also skyrocketed. The third factor is rising labor costs. But Bergmann noted that it’s not just rising wages; it's the costs involved with types of labor within the supply chain. That, in turn, is having an impact on what appears on store shelves.

“For proteins, that forces the manufacturers to focus on certain cuts,” Bergmann said. "It's a lot more expensive to process certain things. It's easier to sell bone-in than deboned products—things that require more labor. So, it's not just the inflation, but it's the product mix itself, and I believe most of it is being passed on [to consumers] in the protein markets. The demand allows it, and there's a variety of ways they can pass that on. They could pass it on through price increases, and they pass it on through a lack of promotions.”

Like many industries, companies across the food supply chain are struggling to fill job vacancies. “I really think there are two major factors,” Bergmann said. “One is bringing new people in, but just as important is retaining the great longer-term workers that we have.” He added that it’s more than just pay increases that help keep workers happy, “Sometimes it’s not the big spends; it’s the little things that add up and the message that you send to your people.”

Noting that there are more questions than answers, Barnholt believes there isn’t a quick fix. “I think we’re all going to re-engineer the way we think about our workforces and the way we think about hiring and retention, and there’s going to be a major shift to be able to solve this problem.”

Ultimately, Lipari believes the industry will have to absorb much of the rising labor costs.

“For the middle-class worker that we employ, those wages have been depressed for probably a decade, and now it's turned around and those wages are going up, which is great for the middle class,” he said. “But it is going to put a lot of pressure on costs and drive prices up, and I think it's just something that the industry is going to have to absorb and build into their pricing, because I don't think it's going away.”

Predictions

As the economy starts to roll again, all of the panelists expect the rest of 2021 to be a challenge, but ultimately one that will make the industry stronger.

“We will get through it, but it will be a tough year in my opinion,” Barnholt said. “It's not going to be an easy year, but it's going to be a year where if everybody in the supply chain—manufacturers, retailers and distributors in the middle—are going to be made better by how complicated this is going to be, and we'll come out of this year seeing a more resilient supply chain. We've learned some things about where the weaknesses are. And I think it ultimately will make us better.”

Lipari noted that the supply chain has demonstrated its ability to adapt. While he laments the fact that Lipari Foods lost a year of opportunities to innovate, he hopes to get back on track through the rest of 2021.

“It seems like we spent a year just treading water, handling the volume coming in,” Lipari said.  “Now that it is starting to wind down a little bit, we can get back to being innovative, bringing new ideas, new products to our customers, and really growing the business.”