Disruptions in the food distribution industry that started before the pandemic only intensified during the crisis—and they’re not going away. That’s because more shippers are testing direct-to-consumer delivery, and retailers are adding distribution hubs closer to consumers. And, with the rise of those regional hubs, demand for short-haul drivers has grown, worsening what is already a critical shortage of long-haul drivers.
These factors have driven up transportation costs, which trucking companies have passed along to manufacturers. But there’s a limit to how much they can charge. To meet the new demands, shippers need a view of the landscape and all the intersecting trends at play. With the right analytics, this is possible. In this article, we explore how to navigate these trends in food distribution, including:
- Ever-shifting consumer demand for restaurant and grocery purchases
- The growing role of the direct-to-consumer model
- The rise of suburban distribution
Table of Contents
Content Summary
Rebalancing Grocery and Foodservice
Micro-Warehouses Add Distribution Points
CPG goes DTC
Amazon’s Grocery Growth
The Suburban Surge
The massive disruption of food logistics during the COVID-19 pandemic in 2020 continues to reverberate throughout the industry and promises to have a long-lasting impact.
Key developments in the food distribution industry that had emerged before the pandemic have been accelerated. Retailers are adding e-commerce distribution hubs closer to consumers, and more shippers are testing direct-to-consumer delivery, for example, both of which could introduce additional inefficiencies into the food supply chain if not monitored and managed carefully.
These changes come against the backdrop of the other ongoing challenges that shippers face, including a shortage of truck drivers that shows little sign of abating.
For example, the sharp rise in e-commerce sales — up 32.4% in 2020, according to the Commerce Department — helped fuel demand for short-haul drivers and drain the talent pool available for long-haul labor, a trend that is expected to continue.
These factors have driven up transportation costs, which manufacturers across industries have been willing to pay to keep their customers satisfied and in-stock, said Ken Adamo, chief of analytics at DAT Freight & Analytics, which tracks freight trends and provides data insights for the logistics industry.
While trucking companies are passing increased costs on to their customers, there’s a limit to how much they can charge, he said.
“We’re hearing from trucking companies that regardless of how much they get for a lane, they can’t make a truck appear out of thin air,” Adamo said.
As shippers focus on navigating the ever-evolving challenges of food distribution, the following are five key trends to monitor going forward.
Rebalancing Grocery and Foodservice
Data from the Bureau of Economic Analysis showed that in February 2020, before the pandemic restrictions began appearing in the U.S., grocery stores accounted for 47.2% of total retail and restaurant sales. By April, that ratio soared to 67.7% amid the massive panic buying that occurred.
Grocery’s share of the food market settled back down to 54.2% of sales by February 2021, but that still represents a significant increase in volume compared to the year-ago figure, said Jason Miller, a supply chain economist at Michigan State University.
The sudden shifts in demand across the restaurant and foodservice channels disrupted food logistics, causing increased dependence on spot freight services and diminishing the efficiencies that are normally built into transportation routes, he said.
Shippers in the food industry will have to continue aiming at a moving target, as consumption patterns settle into a “new normal.”
“On the transportation side, the mix of carriers that shippers will be using may be changing” as restaurant volumes pick back up and grocery volumes ease, said Miller. “How that spend is going to be allocated is likely going to be changing back.”
Shippers planning will need to remain agile and closely monitor consumers’ spending patterns to optimize their logistical efficiencies, he said.
Adamo described the shift away from food service and into the grocery channel as “a shock that the system has proven it’s been unable to absorb.”
The challenges around adequate freight capacity could linger, he said. While trucking companies have placed significant orders for new trucks to expand their capacity, “there’s a whole laundry list of issues with why those trucks may not get on the road as soon as trucking companies would like,” Adamo said, citing the semiconductor shortage as one of several factors.
He also noted that as food suppliers increased their use of spot freight capacity during the past year, they developed more relationships with brokers.
“Shippers have had to rely on brokers like they never have before, and by and large, the experience has been positive,” Adamo said. “I think that is going to be a lasting trend.”
“ The shift from foodservice to retail grocery distribution has been a shock that the system has proven it’s been unable to absorb.” – KEN ADAMO
Micro-Warehouses Add Distribution Points
The growing use by food retailers of automated micro-fulfillment centers (MFCs) to support e-commerce is rapidly gaining traction. Many of the leading grocery retailers have been investing in these solutions to move e-commerce picking out of their retail stores.
Albertsons, which was one of the first grocery chains to test micro-fulfillment centers, said the facilities have helped reduce e-commerce costs and boost localized assortments. The grocery chain plans to open seven new MFCs in 2021. Walmart, meanwhile, said it would add MFCs to several stores this year.
H Mart, the largest Asian grocery chain in the U.S., with nearly 100 stores throughout the country, is among the latest to join this trend, with the announcement that it plans to add an automated MFC to an existing warehouse.
As retailers experiment with various forms of these new mini-distribution hubs, it raises questions for shippers about how those locations might be supplied and replenished, said Miller.
If a micro-warehouse is attached to a physical store, for example, it might require more frequent replenishment than the store required on its own. This could lead to increased demand for freight service from the retailer itself, as well as potential increased service from direct store-delivery suppliers.
“I also think this issue of the micro-DCs and warehouses raises packaging and product assortment concerns because a lot of these are going to be highly automated facilities,” said Miller. “An item may be very easy for a human to handle, but it may not fit an automated handling approach.”
Another consideration is that a MicroWarehouse that is primarily serving e-commerce orders might require different product assortments than a store primarily dedicated to in-store shopping, he noted.
Grocery e-commerce sales hit $9.3 billion in March, up 43% from $6.5 billion in March of 2020, according to research from grocery e-commerce consulting firm Brick Meets Click.
CPG goes DTC
More and more CPG companies are exploring ways to get consumers to buy directly from them, such as through subscription programs like those that have emerged in the pet food space, and through IoT solutions that generate orders through voice commands or other means.
PepsiCo was among the CPG companies that crept further into the direct-to-consumer space in the past year. It launched two new, consumer-facing websites—Pantryshop.com and Snacks.com— that allowed consumers to order directly from the company.
Offering a direct-to-consumer business model creates challenges for CPG manufacturers because many have built their entire logistics systems around moving full pallets of product into retailers’ distribution centers, Miller explained.
“Parcel shipment from a small number of centralized DCs to end consumers is going to be very expensive,” he said. “If you are a manufacturer and you want to do more direct-to-consumer, you are going to need a footprint of facilities closer to the major population centers.”
That translates into more facilities that would need to be supplied with products, adding to the strains on transportation networks.
DTC efforts on the part of manufacturers also raise questions about the potential benefits versus the costs involved, especially when manufacturers already have a network of local distribution points— i.e., retail grocery stores — and risk alienating those partners by disintermediating them, Miller pointed out.
In addition to the potential impact on their retail partners, the DTC model also stands to strain food companies’ relationships with their carriers, depending on how they execute the delivery of the product, said Adamo.
“As a shipper, am I investing money in doing this myself, or am I working with my carrier to help pull off my strategy?” he said. “The carriers, especially some of the longer-tenured, more old-fashioned ones, are going to be a little reticent to adopt these types of strategies, especially if it’s incurring higher operating expenses for them.”
“ Parcel shipment from a small number of centralized DCs to end consumers is going to be very expensive.” – JASON MILLER
Amazon’s Grocery Growth
The world’s largest e-commerce retailer is determined to be a dominant player in the food distribution space, and it is capturing more and more share through both its e-commerce channels and its diverse array of retail stores.
Its acquisition of Whole Foods Market gave it a foothold among the Top 10 grocery chains in the U.S., and the company continues to test new grocery stores of its own, including the Amazon Fresh banner. Increasingly, it is using these stores as fulfillment centers for grocery e-commerce as well.
Adamo noted that as Amazon has expanded its local delivery capabilities, it remains to be seen how it might leverage that with its growing store network.
“Amazon proved to be a force in that space,” he said.
On the inbound side, Whole Foods currently relies on wholesaler United Natural Foods Inc. for much of its store distribution, and recently signed a two-year extension with that company, which will carry into 2027. Questions have long circulated in the industry about whether Amazon might seek to maintain that relationship in the long term, however.
Amazon’s grocery retail operations include (Source: Statistica):
- 500 Whole Foods Markets
- 26 Amazon Go stores
- 2 Amazon Fresh stores
The Suburban Surge
The work-from-home model appears to have some staying power, as several companies have reported they will adopt at least a hybrid version of telecommuting that will require fewer office visits by workers. That, in turn, will shift the demand for daytime food consumption out of urban business centers and into suburban and residential neighborhoods.
A January research report from PwC found that 55% of workers said they would like to work from home at least three days per week. Although corporate managers in the survey were less enthusiastic about the model, the report did conclude that the work-from-home trend was starting to influence their decisions about real estate, as they eye more efficient models for part-time office occupancy.
The trend toward working from home has already had a significant negative impact on restaurants in city centers; some restaurant chains, such as fast-casual operator Cava, have reported that they are focusing their development plans on suburban communities, in part because of this shift.
The resulting decreased density of restaurants across broader geography could diminish the efficiencies of distributors, said Miller.
“If you are spreading out that footprint over a wider space, that means more driving, and less productivity,” he said.
It also could impact what types of trucks shippers use to reach those locations, Miller added.
Adamo agreed that a shift toward more suburban restaurant development could decrease efficiencies for suppliers of these locations.
“If I have to drive even [a few extra] minutes further per delivery, and I’m making hundreds or thousands of deliveries a day or a week, that all adds up,” he said.
“I would stress making sure that as a shipper, especially if you’re predominantly an outbound shipper, you are working with your outside carriers, if you have them, and with your internal fleet planners if you have a private fleet, to make sure you’re capturing all of the impacts of these changes.”
Fifty-five percent of employees say they’d like to work from home at least three days a week, but only 24% of executives said they expect many or all office employees to work remotely for a significant amount of their time, according to PwC research.
The rebalancing of food distribution among restaurants and retailers will be a significant factor in logistics planning in the year ahead for food manufacturers, distributors, and retailers.
“Food manufacturers should be closely watching the retail sales data,” said Miller. “They should be really watching closely to see how that consumer share of wallet is starting to evolve.”
Another trend to watch carefully is school openings, he said, noting that many families had long relied on schools to provide one or two meals per day for their children. But, for the past year, many of those meals have been sourced from home and to some degree from restaurants.
It’s also quite possible, he pointed out, that pent-up consumer demand for restaurant dining will result in the pendulum swinging back in the opposite direction, and foodservice volumes will again overtake grocery sales.
“The key thing is just watching how consumers are responding,” Miller said. “Even one or two percentage point shifts represent billions of dollars a month, and that’s a massive effect on the freight footprint, as well as the manufacturing footprint.”
These and other trends are expected to continue to present challenges for distribution that will require timely, accurate, and comprehensive analytics.
“ Food manufacturers should be closely watching the retail sales data. They should be really watching closely to see how that consumer share of wallet is starting to evolve.” – JASON MILLER