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Food companies make tough shift to supply grocers as COVID-19 closes restaurants

Coronavirus has sown chaos in food supply chains in a matter of weeks as consumers avoided restaurants and turned to grocery stores for a greater share of food purchases. Now, the companies that process and distribute food are figuring out how to catch up.

Foodservice distributors and manufacturers who sold their products to restaurants have suddenly found themselves with products never intended for sale directly to consumers, leading many to improvise in order to recover some of the lost revenue. But industry and supply chain experts say that will be a tall order since shifting sales to retail channels comes with costs, and even then, retail sales will not necessarily make up entirely for lost foodservice revenue.

Food sold commercially to restaurants such as Yum! Brands Inc.'s KFC cannot be easily shifted to grocery stores because it is often packaged differently and requires different approvals, Rob Handfield, a supply chain management professor at North Carolina State University, said in an interview.

"There's a very different set of components associated with that commercial food chain versus the retail," Handfield said.

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With foot traffic and sales at record lows, restaurants will be forced to dispose of ingredients as they expire and are likely buying less from their suppliers, Handfield said. "These supply chains are going to sort of dissolve if there’s nothing flowing through them," Handfield said. "Some of these, especially smaller businesses, could go out of business."

The hit on the restaurant industry drove down The Coca-Cola Co.'s volume by 25%, the company said during its April 21 first-quarter earnings update. The beverage company is adapting its supply chain and working with grocery stores to prioritize Coca-Cola's core products in the wake of consumer stockpiling. Coca-Cola gained inventory space at grocery stores because its supply chain remained steady, company CEO and Chairman James Quincey said during a call with analysts.

"We've had a lot of focus on supporting the grocery customers," Quincey said.

Investors will get more clarity on what changes food companies are making to their businesses as a result of the coronavirus pandemic as many report earnings in the coming weeks.

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Shifting focus

Mississippi-based Sanderson Farms Inc., which sells chicken to retail and foodservice clients, shifted some of its birds and production capacity to retail-friendly tray packing from production lines that have traditionally supplied restaurants and other food-away-from-home clients. "Given the current foodservice environment, though, we will still have too many foodservice chickens," Chairman and CEO Joe Sanderson said during an April 2 conference call with analysts.

The poultry packer is also scaling back its chick hatching operations and reducing production at its foodservice-focused plants, Sanderson said.

McCormick & Co. Inc. President and CEO Lawrence Kurzius said March 31 that even booming retail sales of the company's spices and flavorings are unlikely to offset sales losses among the company's foodservice clients in the coming months.

But adjusting production lines for more retail sales is merely one challenge for manufacturers, said Tinglong Dai, an associate professor of Operations Management and Business Analytics at Johns Hopkins University's Carey Business School. Selling more to retailers, especially the largest U.S. grocers, is unlikely to be as profitable for processors and their suppliers as selling to restaurants, where markups on individual dishes tend to be higher.

"When you work with Walmart Inc. and Costco Wholesale Corp., they have huge bargaining power," Dai said in an interview. "That's definitely reflected in the margin" many food companies are likely to receive as they seek to sell more to grocers, he added.

Some foodservice distributors face a different dilemma. Because of purchase agreements with manufacturers, they are left with an excess of products that have no demand in the market due to the pandemic, said Scott Raybin, vice president of sales at Boca Raton, Fla.-based Marvell Foods, which buys excess food from companies and redistributes it to retailers, food banks and other establishments. Raybin said Marvell has contacted multiple distributors about buying excess meat originally destined for restaurants, but few are willing to sell, opting instead to hold the product, even if it means using extra cold-storage capacity.

With most state and local stay-at-home orders likely to extend through at least May or June, many distributors must decide between selling the excess meat at discount prices or paying to store it for longer — and, potentially, to dispose of it once it expires.

"At the end of the day, it's a depreciating asset," Raybin said in an interview.

Acting locally

Handfield, of North Carolina State University, thinks the pandemic will bring an increased focus on making supply chains more local and better prepared for similar crises, and improving automation at some processing plants.

"Stuff that we get from overseas, from China, I think, is going to start moving over to the United States, or to Mexico ... and Canada," Handfield said.

Florida-based distributor Cheney Brothers primarily does business with restaurants, hotels and country clubs in the southeastern U.S. The company is now trying to develop more business with grocers as increased demand puts pressure on the supply chain for retailers, John Reisigl, president of Cheney Brothers, said in an interview.

"We have reached out to a lot of local and independent grocers and even some regional grocery chains," Reisigl said. "We've helped them fill their supply chain to keep their shelves stocked, and they've helped us move some cases through our facility, as well."

The question facing restaurants and the food distributors is how to capture the increased spending at retailers, Reisigl said. One answer has been for restaurants to offer things like cartons of eggs and sticks of butter alongside typical menu items like burgers and fries. Restaurant customers are selling off existing stock and buying new products that can be sold directly to consumers looking to stock up on things like gloves and raw chicken, Reisigl said.

"Some restaurants have even turned into almost a little local mini-mart selling cases of soda and bottles of wine," Reisigl said, adding that such measures are not enough to completely offset the losses. "It's certainly not stabilizing to where they need to be, but it's been a help."