The food sector was facing headwinds before the pandemic began. And the pandemic, of course, brought never before seen ones. Now that the pandemic is subsiding, a whole new set of issues are being faced.
During the pandemic, as restaurants, schools and entertainment venues closed, foodservice revenue all but dried up. At the same time, retail demand dramatically expanded. This shift caused significant production changes to high-volume consumer-size packages.
Most companies were successful in making the transition. Others were not. Now foodservice channels are reopening as states ease COVID restrictions. Increased restaurant demand is immediate, as seen in states that have already reopened. Most food processors still have good liquidity positions, but there are significant challenges in transitioning back to foodservice products. Without careful planning, many will stumble, and the impact could be substantial.
Labor issues are nothing new to the industry. Finding dependable, long-lasting workers was difficult pre-pandemic, and this condition has continued. Exacerbating the labor shortage is the high level of government support that has been available to workers.
Workers are reluctant to return because they earn more from unemployment and stimulus checks than a regular job. "Call me in a few months” is a typical response. Owners have been reluctant to increase wages to attract workers because those increases will stick after the government benefits end. Already thin margins cannot absorb this additional cost.
Transportation and logistics have also been a challenge. U.S. port issues get the headlines, but companies are having problems moving goods within the country. The orders are in, but trucks are in short supply. The U.S. was short 60,000 drivers at the end of 2019, and pandemic-related training facility closures severely limited the number of new drivers.
The American Trucking Association estimates one million new drivers will be needed to meet demand over the next 10 years. This is a long-term issue. Companies should anticipate higher transportation costs for the foreseeable future.
The third challenge facing processors is the availability of inputs, specifically packaging. There are shortages in plastics, corrugated and cardboard products. The domestic plastics issue has been building for several months due to COVID-related plant shutdowns and transportation issues. Resin imports are a problem due to high ocean transport costs, and hurricane season is here. These shortages will last through late summer.
Besides the plastic issues, corrugated and cardboard have seen an unprecedented increase in demand. E-commerce expanded rapidly during the pandemic and shows no signs of slowing. This means corrugated and cardboard demand will remain high. Companies are experiencing price increases of up to 20%. One of the culprits is insufficient U.S. paper mill capacity. Packaging companies are also experiencing the same worker issues.
What does all this mean to the industry? The pandemic amplified many existing issues. The supply chain is even more fragile. Management teams have more areas that they must monitor. They must also anticipate higher costs for the next two years. Companies can take four immediate actions:
- Manage liquidity tightly regardless of revolver availability. Inflation is evident everywhere. Bottlenecks are present. Companies will need higher-cost alternatives to maintain production.
- Review the supplier base to ensure risks are clearly identified and contingency plans are in place. This may include carrying higher packaging inventory due to longer lead times and reduced availability.
- Assess both product and customer profitability. Based on new cost assumptions, determine which items or customers need to be addressed.
- Review one-, three- and five-year business plans. Particular attention should be given to cost assumptions and capital expenditure plans with a renewed focus on investments that increase automation and reduce costs.
The pandemic has elevated the challenges facing food processors and manufacturers. It is unusual because they are supply-based. Foodservice demand is returning—and quickly. An already fragile supply chain is being tested. By taking the steps outlined, companies can prepare and likely become stronger. It will take planning, vision, and perhaps even a bit of luck!
