Upheaval and Strategic Change in the Food Supply Chain. The Impact of COVID-19. [Or Why Food Gets Destroyed While Shelves are Empty]

This article is written in collaboration with Rima Chacar.

There are two and relatively independent food supply chains in the U.S.: the ‘eat-out’ and ‘eat-at-home’ value chains. Their independence has allowed for specialization and increased efficiency. It is also the reason there are food shortages in stores during the COVID-19 epidemic while lots of food is spoiling. The eat-out value chain serves ready made food. It includes restaurants, cafeterias, food trucks, and their suppliers and distributors. Before the COVID-19 crisis it served about half the food Americans eat. The eat-at-home value chain, includes the grocers and their suppliers who prepare the goods you take home to eat or cook. Both chains are facing today a major strategic upheaval. Why? And how are businesses in these chains responding? 

The hummus we make or eat at the restaurant may have the same four ingredients but often uses very different products that are not easily substituted. Moreover, the business economics in the eat-at-home and eat-out supply chains are quite different. 

For the eat-at-home value chain, home made hummus typically means more sales of the following: eight ounces chickpea cans or one pound bags of dry chickpeas, two-pound bags of lemons, half-pound jars of tahini, and three to twenty-six ounces salt packages. On the other hand, the eat-out system makes very large food packages that are delivered in big quantities with limited variety to restaurants. These products are very different from what we typically buy in our homes. Restaurant made hummus means the sale of fifty or twenty-five pound bags of dry chickpeas or seven pounds cooked chickpea cans or foil packages, cases of lemon, forty-pound pails of tahini, and fifty-pound bags of salt. The labor, technology, packaging and distribution needed to pack the eat-at-home and eat-out supplies are quite different. For an eat-out supplier to serve the eat-at-home value chain, many changes would need to be made. To pack two-pound lemon bags, an eat-out packer who sells lemons by the case would need a bigger facility, an assembly line, lots of small bags, relationships with grocers, a lot more trucks for delivery and so on. The supplier also would need a competitive offering. Moreover, changing the current business model is complex and risky. Vice-versa, for a restaurant, using eight ounces chickpea cans would not make any economic sense.

With the Covid-19 crisis, demand for the eat-out value chain collapsed. There is plenty of food in that chain but it cannot be easily channeled to the eat-at-home value chain. Demand for the eat-at-home value chain skyrocketed and grocers and suppliers need to figure out how to meet it.  

The problem is less severe in countries where more people eat-at-home. It is also alleviated when grocers still buy in bulk and break down their purchases for customers. In the U.S., the problem will ease over time but there are major short-term problems and important strategic implications to changes made today. Even if the system adjusts, there are large unsold perishable inventories in all levels of the eat-out value chain. Restaurants and their suppliers were left with inventory that often spoiled. Dairy farmers were forced to dump milk since schools did not need any, and packagers affected by COVID-19 could not or were not interested in it. Vegetable farmers in America’s bread baskets, Florida and California, had to dump lots of vegetables, and then let the crops rot in the fields. Now pig farmers need to cull piglets since slaughterhouses operations are disrupted due to a large number of COVID-19 cases among their workers. These losses jeopardize the viability of many of these businesses.

Businesses in both value chains are innovating, and increasing communication, marketing or discounting. Many are also trying to change their value proposition. Every change has benefits but also brings about important risks. 

For example, businesses in the eat-at-home chain are partnering with the eat-out supply chain to ease supply problems. Their actions may lead to increased competition in the supply chain in the future. Businesses in the eat-out chain have more fundamental choices to make. They must decide whether to pivot their strategy and how. Some restaurants and suppliers simply shut down and hope to rebuild the business later on. This reduced the cash bleeding but survival will depend on their cash position and the length of the crisis. The downside is obviously foregoing revenue for an indeterminate period of time. Others are redirecting the parts of their operations that are easily adapted to retail sales. This increases short term revenue and maintains employment. It will also complicate the switch back after the epidemic is over. Others yet may choose to invest in more flexible facilities and technology to be able to serve eat-at-home and eat-out customers. The downside is obviously the timing of such cash outlays and the danger of efficiency loss. Finally, some may develop an all new business model. One such model is to develop efficient direct to customer sales. Direct manufacturers and distributors to consumer sales were on the rise before the advent of COVID-19 but many companies still cannot beat the price of their own goods at the supermarket when delivery costs are included. And of course, the big elephant in the room is Amazon.com which is becoming more vertically integrated across many elements of the value chain -even providing technology and services to other grocers. Regardless of what happens, we are likely to see greater integration between the two supply chains. And once the dust settles, there will be lots of closures, mergers and acquisitions. Here is a sample of the types of changes we have seen:

1. Changes and Innovation Within Each Value Chain.

The most visible changes are marketing strategies used by restaurants, like ‘assemble your own taco at home’ to ‘family meal packages’ or adding toilet papers to each order. Some restaurants converted serving staff to delivery and many organized for curbside pick-up. One distributor is giving away caviar to help liquidate its inventory before food expires. Within the eat-at-home chain, demand is up but so are costs and new problems -like maintaining stores clean and employees healthy, and tracking evolving regulation and demand. Many businesses in this chain are operating around the clock, reduced production or sales to fewer types and sizes of items for greater efficiency, and hired more employees. Some grocers like H.E.B. sent some corporate staff to help in stores and warehouses to alleviate shortages. 

2. Eat-At-Home Grocers Reaching out to Eat-Out Supply Chain Companies For Partnerships.

Sedanos, a Latin focused Florida-based supermarket chain, has hired hundreds of employees from two local restaurants, La Carreta and Versailles that are sitting idle. In doing so. Sedanos eased its hiring problem, and did a good deed at the same time. Kroger also hired the employees of many companies in the eat-out value chain. In Texas, H.E.B. partnered with a number of local restaurants to sell ready made food packages. H.E.B. has also partnered with beer and other eat-out distributors to ease the pressure of the eat-in distribution system. These are clearly win-win partnerships between these two substituting value chains.

3. Eat-Out Establishments and Suppliers Entering in the Eat-At-Home Industry and Competing with Grocers:

A number of "eat-out" restaurants like Panera Bread and Subway have turned to selling groceries and basic supplies. Their offerings are less diverse, but they are using the eat-out supply chain, and their idle labor, to compete. Many restaurant suppliers, like Regalis Food, are also turning to selling directly to consumers. Their success depends on reaching the right consumer at the right price point, delivery included. Large produce packers, small and large farmers and dairy farmers who usually serve restaurants, are also trying to draw customers to the farm to avoid letting the crops rot. 

4. Eat-Out Supply Chain Companies Pivoting to Serve the Eat-at-Home Supply Chain.

Sysco, one of the two largest food distributors, partnered with Kroger. The second, US Foods, is also trying to pivot its operations to supplying grocery stores. In the meanwhile, it has partnered with Safeway and King Soopers distribution centers to provide employment for its excess workers.  

5. The Rise of Intermediaries.

Clearly more consumers are buying online globally. Their actions and COVID-19 have given a push to often-struggling intermediaries like Instacart in the U.S., Meituan Dianping and Ele.me in China. Their long term survival is still not guaranteed however. More grocers and restaurants will keep trying to figure a way to do their own deliveries and eliminate cost-adding intermediaries.  

What is happening in the food supply chains is a good indicator of whether food shortages will ease or get worse. It is going to be a barometer of how fast or slow the economy will recover post-COVID-19.

P.S.: And what can you do to ease the pain in the food supply chain? Buy more from the eat-out supply chain if possible, and especially from sellers of perishables like farmers.