April 15, 2020
By: Barry Friends | Bob Goldin
We all believe there’s a not-too-distant future in which we can leave our homes and begin doing the many things we’ve always taken for granted. And while so much about that future remains unknown and only broadly predictable, we believe that in spite of the changes that will come, our economy, and specifically, the foodservice industry, will look much as it did before. It will just be smaller; how much smaller, of course is the operative question.
In the context of “even a broken clock is right twice a day,” let’s examine a key element of the foodservice industry that will present new challenges and opportunities for stakeholders in the eventual foodservice value stream – distribution.
When we picture a foodservice landscape that has suffered the catastrophic effects of a prolonged shutdown and related business failures, we see some incalculable, but likely “absolutes.”
- There will be thousands, if not 100’s of thousands, fewer foodservice establishments of all types, particularly full-service formats that have been most negatively impacted. As the economy re-opens, “survivors” will collectively purchase far less than they and their departed peers were using pre-pandemic.
- There will be countless fewer distributors and DSD suppliers of products and services.
- The survivors among those distributors, themselves compromised, will be called upon to serve the needs of remaining and/or regenerated foodservice operators, most of which will initially require smaller-than-historic volumes of ingredients and supplies and may have additional service and support requirements (e.g., food handling).
- There will also be fewer manufacturers and the surviving ones will likely be more oriented toward retail and alternative channels, given the newly diminished relative importance of foodservice.
- Distributors will need to diversify their supplier base to reduce dependency; a diversification which comes at a cost that must be balanced against the benefits of risk mitigation.
With greatly reduced foodservice volumes comes a dramatically less efficient supply chain, one that has enjoyed (what we now realize has been) incredible stability, predictability, and (with minor exceptions) growth over the years. Large and medium sized distributors who’ve enjoyed the ability to purchase full truckloads from their best suppliers will need to find the best-cost way to order half or quarter loads. They’ll figure it out, but it will cost something, and they’ll have to pass that cost along. With more LTLs, one can assume re-distribution will likely become an even more important supply chain link.
On the downstream side, operators’ smaller orders (say, 30 vs. 50 cases per drop), will be much more costly to deliver and require that more stops be squeezed onto a truck to compensate for the volume deficit. With more stops and miles to cover comes less flexibility and accommodation of customers’ service preferences such as delivery frequency, a difference they will either accept in stride or reject by seeking new options.
Cash & carry stores have benefitted in previous downturns, and will likely provide “relief” for operators in this go-forward phase, although they too will be adversely impacted by lower purchase volumes. Club stores may benefit the most as they have diversified customer bases (business and retail customers) and efficient assortments. And speaking of assortments, look for distributors to offset the pain of reduced volume by stocking far fewer duplicate and triplicate SKUs of similar attributes.
We have repeatedly written about and discussed distributors’ “over-reliance” upon “independent” customers for their profitability. Independents are historically less efficient to serve than chains (for both obvious and nuanced reasons), a disadvantage that will be exacerbated by lower purchase volumes during a post-pandemic phase.
We all expect distributors to earn a profit, but if independents are to re-build and claim their traditionally vital place at the industry’s table, they’re going to need a lot of support from their suppliers, support that comes in many forms including lower prices, but importantly by way of transparent approaches to the difficulties of a shrunken supply chain and the unfortunate higher costs that come with it.
Foodservice industry stakeholders who quickly embrace a collaborative mindset will fare best. Supply chain adaptations in the post-pandemic environment will be vital if participants are to mitigate the margin squeeze inherent to shrunken volumes and lost efficiencies. Flexibility, transparency, and openness to new approaches will pave the way to an eventual recovery.
To continue the conversation on this topic and learn how Pentallect can assist in evaluating and re-building your organization’s strategic growth plan, please: