COVID-19’s full effects will be studied in business-school curricula for years to come. The immediate impacts on food industry trade dynamics — from farmer to processor to consumer — have ranged widely.
While the pandemic’s direct impact has been detrimental to the food industry, the companies that survive may find their travails a sort of boot camp that strengthens them against future disruptions. In this article, readers will learn:
- How food supply chains turned upside down as a result of COVID-19
- The impacts on the labour market and the foodservice fallout
- Lessons learned and how to strengthen your food industry supply chains for the future
Table of contents
Conventional wisdom says that the COVID-19 pandemic is the epitome of the unexpected, uncommon event that ushers in dramatic, even disastrous, consequences.
And that’s certainly how it’s felt for food industry procurement teams who’ve seen their supply chains tied in knots as the pandemic has progressed. But scratch the surface, and you’ll find that the current crisis perhaps wasn’t as big a surprise as conventional wisdom would have it.
After all, everyone from Bill Gates to the makers of Hollywood films had warned about global contagion for years. And as any procurement veteran could vouch, ingredient supply lines were rife with vulnerabilities well before COVID-19.
Just ask Simon Frost, founder of London-based Frost Procurement Adventurer. Was he worried about supply chain weaknesses pre-pandemic? “I was,” he said. “But what COVID has done,” he continued, “is amplify and highlight them.”
In so doing, it’s also made those weaknesses harder to ignore. And it has given food manufacturers the opportunity — indeed, the imperative — to fix them using intelligence, analytics and technology. And that may be the silver lining to this pandemic, whether we saw it coming or not.
And indeed, as 2020 kicked off, procurement teams were gearing up to contend with the usual challenges affecting their workflow. But when spring arrived, bringing COVID-19 with it, “everything turned upside down,” recalled Tosin Jack, commodity intelligence manager at Mintec.
While the pandemic’s full effects will be the stuff of business-school curricula for years to come, the immediate effects on food industry trade dynamics — from farmer to processor to consumer — have ranged widely and have rolled out in a series of phases, Jack said.
The first arrived as borders closed and travel contracted, hampering ingredients from reservoirs of supply to sinks of need. “That led to surpluses at the source,” Jack said. “So we saw domestic prices for commodities fall in some origins — sugar in Brazil; onions, cotton and spices in India — while prices rose elsewhere.”
When India closed its borders, it closed access to export markets, too, compounding the drop in demand that occurred when China — a key purchaser of Indian spices — went through its own earlier coronavirus outbreak. The upshot: Over the course of one week at the pandemic’s outset, Indian cardamom prices plummeted 50%, per the Netherlands Enterprise Agency’s Centre for the Promotion of Imports (CBI).
On the flip side, spice importers faced both a dearth of supply and prohibitively high prices for what product they could secure. Again, the CBI reports that turmeric and ginger prices — in high demand during the pandemic for their purported immune-boosting capacity — at one point rose 300%.
“So with supply flows cut off and demand rising elsewhere,” Jack said, “you had the perfect conditions for high prices and scarcity.”
300% increase in demand for ginger during the pandemic for its purported immune-boosting capacity.
Labour markets also felt the aftershocks of closed borders and travel restrictions — and of the illness itself. Those working in meat-processing plants operate in close quarters, facilitating coronavirus transmission and precipitating shutdowns at major domestic slaughterhouses as early as April. Noted Jack, “In the U.S. and Europe, outbreaks in abattoirs and meat-processing plants affected supply and prices of these commodities.”
In fact, Bloomberg reports that since the coronavirus’s arrival, more than 10,000 meat-plant workers have contracted COVID-19. Further, American beef plants were at one point operating at 81% of the previous year’s capacity. Simultaneously, the U.S. Department of Agriculture (USDA) data found a rise in wholesale pork prices of as much as 90% since April.
Yet, despite rising prices, consumers never lost their appetite for meat or other supermarket staples. In fact, panic-driven stockpiling of everything from canned beans to baker’s yeast has been a signature of the coronavirus pandemic.
And as Jack noted, “Once the consumer side kicked in with all the panic buying we saw initially, that, too, affected prices.”
Exhibit A: When shelter-in-place orders sent consumers in search of wheat flour for home baking, the demand surge — coupled with increased demand for commercial baked goods at retail — sent wheat futures on the Chicago market to a new high of $5.80 per bushel in late March, more than a dollar above USDA forecasts for the 2019-20 season, according to a report from the International Grains Council.
Despite rising prices, consumers never lost their appetite for meat or other supermarket staples.
“Beyond the consumer,” Jack continued, “we’ve also seen country-level concerns about food security leading some governments to implement protective export quotas.”
Reuters reported that Russia, Ukraine and neighbouring Black Sea exporters capped their wheat outflows in April to preserve domestic supply. “And that was another phase of supply chain disruption impacting prices,” Jack said.
Panic-driven stockpiling of everything from canned beans to baker’s yeast has been a signature of the coronavirus pandemic.
Food Service Fallout
But the biggest COVID-19 curveball to hit the food industry may have been the chaos lobbed at foodservice. Stay-at-home mandates and restaurant closures dealt operators a blow, and as school and workplace cafeterias went dark, demand was all but destroyed.
Consider the effect on dairy. “Excess milk destined for schools and cafés had nowhere to go,” Jack explained, “leading to wastage and a buildup of supply.” In early April, the National Milk Producers Federation noted a milk oversupply of at least 10% above demand and predicted a widening gap to come.
As for foodservice spending, while McKinsey data found that consumers spent almost the same at the grocery as on foodservice in March 2019 — $56.5 billion and $57.8 billion, respectively — a year later their grocery spend had increased 29%, to $72.6 billion, while their allocation to foodservice fell 27%, to $42.2 billion. That left foodservice distributors hitting the limits of their storage capacity as a product that would have gone to busy restaurants sat unused. And foodservice producers felt the pain, too: With distributor demand slack, their production lines fell idle. And while many would’ve gladly fired them back up to satisfy booming retail demand, the cost and effort to reconfigure an industrial packaging line to produce smaller, retail-friendly formats was untenable.
On The Radar
It all adds up to a situation that even Frost has never seen before with two decades’ experience in procurement. “Yes, there have been tricky moments over the last 10 or 20 years,” he conceded. “But this has by far been the most significant.”
Yet, while COVID-19’s direct effect has been “absolutely disastrous” to the food industry at large, Frost continued, companies that survive may find their travails a sort of boot camp that strengthens them against future disruptions.
For one, Frost said, the crisis has put supply security and risk management “firmly on the radar” — which wasn’t always the case. “If you look back at procurement over time, it was often something of a neglected function in businesses,” he recalled, with its traditionally transactional way of operating seen as adding little value to bottom lines. Far more doted on were sales and marketing, which businesses valued for delivering top-level growth.
Yet even before the pandemic, C-level managers started recognizing procurement’s potential to build profitability. And with COVID-19 underscoring how essential procurement is, “now it’s straightforward to talk about risk management and get it on the agenda right up to the board level,” Frost said.
That’s given companies the green light to address gaps in skills that predated COVID-19 — basic skills, Frost added, such as category management, cost modelling, and supply chain mapping.
“Leaving these gaps in place is akin to hiring a bricklayer who cannot lay a brick wall or a carpenter who cannot cut a right angle,” he emphasized.
Joe Terino, a partner at Bain & Company’s Boston office and head of its global supply chain practice, agreed. Asked how COVID-19 has revealed procurement’s weak spots, he offered several examples.
“The first is that it shows how complicated and complex portfolios have become,” he said — and not just in the proliferation of SKUs, but of ingredients within them. “The commonality of ingredients across regions, products and so on has been difficult on supply chains for years,” he noted.
“Leaving these gaps in place is akin to hiring a bricklayer who cannot lay a brick wall, or a carpenter who cannot cut a right angle.” – SIMON FROST, Founder of Frost Procurement Adventurer Ltd
Then there’s the difficulty some companies have in tracing the precise flow of materials through their supply chains — a skill that’s all the more important given consumers’ increasing interest in food and ingredient “transparency.” So while a company may know its immediate supplier, Terino said, “as you get to the nth tier, that visibility disappears quickly.”
Ongoing logistical upheavals suggest that the chase for efficiency that made just-in-time (JIT) inventory models the industry standard may also have gone too far. “Extremes are never good,” Terino noted. “And I think that in some cases, the pursuit of JIT may have gotten extreme.”
Frost suspects the same. “A lot of businesses drove stock levels very low, expecting their suppliers to keep that stock for them, but neglected to check whether or not they had,” he said. “So, lo and behold, you had a situation where the customer didn’t have enough stock, and the supplier didn’t have it either — and, hence, what happens then?”
It’s a valid question, and one of many that food companies are working through.
Fortunately, Terino said, “there are actions that companies can take to maintain commercial success while also taking some strain off supply chains so that they can be even more efficient and productive. As we come out of this situation — knock on wood — the conversations we’re having with clients are about whether to go back or to learn COVID’s lessons and do some things differently.”
For example, the pandemic taught companies just how quickly they can move. Changing specifications and onboarding suppliers — decisions that once took months — got knocked out in “days or hours in the heat of the crisis,” Terino said. “So clients are wondering how not to go back to that tortoise pace.”
One solution: If COVID-19 pushed those decisions further down the organizational ladder, companies could leave them there — arming their procurement teams with the data and visibility they need to decide intelligently, and rapidly, themselves. “That’s one positive that could come out of this,” Terino said. “I think it’s long overdue that companies think of their procurement operations as strategic.”
Jack added that the pandemic had some companies reconsidering their sourcing networks. “It’s a reminder that we’ve become reliant on other countries — which is great; globalization has had many benefits,” she said. “But if another pandemic, or something similarly disruptive, strikes again, how ready will companies and countries be?”
Of course, some ingredients come from only some locations — but that doesn’t excuse purchasers from considering alternative origins. “We have to ask questions like, ‘Where else can I source if I used to buy here but now can’t access that market?’” Jack said. “And if that means bringing sourcing back home, prices need to be competitive, because, at the end of the day, businesses need to profit.”
For his part, Frost predicts that cost modelling will improve once the pandemic recedes. “I think there will be much more pressure on procurement to understand the cost structure of materials truly,” he said. “If a procurement team doesn’t have that skill, they can’t optimize their portfolio, and I’m getting asked by a lot of clients to help their teams with that.”
And Terino said he believed companies should reexamine JIT sourcing. “Supply chains involve trade-offs between being cost-effective and efficient, being flexible and being resilient,” he said. And where that balance lies will differ with each organization. The key, he said, is avoiding the big pendulum swings that the pandemic set off.
“Designing more flexibility into the supply chain can help if you need to turn one supplier off or turn another on,” he noted. “You can move things around to avoid those disruptions. Supply chains are there to find that right balance.”
As is technology, Terino added, “platforms that provide more visibility so you can see what’s coming and make decisions more quickly are an important component.” And that explains why he and others think that the winner in this situation is technology.
“I do think you’re going to see a much more digitized supply chain post-COVID,” he said. “For years, companies have been talking about developing ‘control tower’ capabilities with end-to-end visibility and predictive analytics to anticipate where disruption will happen next. But the acceleration rate of adopting these technologies is going to pick up.”
Jack’s already witnessed that acceleration among her Mintec clients. And while data is always “the first step,” she said, “accessing reliable data as quickly as possible is where technology comes in.”
“Platforms that provide more visibility so you can see what’s coming and make decisions more quickly are an important component.” – JOE TERINO, Partner at Bain & Company
Besides being current and accurate, data has to be easy to access and use, she added. “You don’t want to go to multiple sources to find the information you need. What teams need in these times is a technology that integrates data comprehensively and meaningfully. That’s how you make informed purchasing decisions.”
How long it will take to put these systems into place won’t be apparent until the immediate crisis is at bay. But, Terino said, smart teams, will start asking the right questions now.
“Companies should be thinking, ‘As we look out the next few years, what will our supply chain look like? What’s our strategy going to be? And how do we build new capabilities now?’ It’s one thing to talk about it, but it’s another actually to execute,” he said.
The food and beverage companies he works with get that. “They recognize that they need to adapt,” he said — and not just to pandemics, but climate change, geopolitics, trade wars and even e-commerce. “Companies are going to realize that their supply chain is a competitive weapon in these new environments. And it’s a really strategic place to invest.”