Assessing COVID-19’s Long-Term Impacts on the Food Industry
- Keywords:
- covid-19
While the supply chain across the food industry has not been materially impacted by the COVID-19 pandemic, the long-term impacts of the crisis have yet to be determined.
Kelly Bania, Food Retail & Distribution analyst at BMO Capital Markets, and Ken Zaslow, Food & Agribusiness analyst at BMO Capital Markets, recently discussed how some companies are responding to the current challenges, and the questions the industry will face in the long term.
Foodservice
There’s been much discussion around how demand has shifted from foodservice to retail. As the foodservice sector struggles, Bania said the biggest question for these companies is liquidity. Bania said the big four foodservice distributors—Sysco, US Foods, Performance Food Group and Chefs’ Warehouse—should have enough liquidity to withstand this unprecedented environment.
“We did a scenario analysis for this group, because we’re looking at possible sales declines of 50% to 90%,” she said. “After this exercise, we think the group has enough liquidity to get through this. Obviously a lot depends on how long this crisis lasts.”
Given that independent restaurants represent foodservice distributors’ core customer base, Bania said it’s difficult to determine what potential structural changes to the industry will result from the COVID-19 crisis. “I think there will be significant pent-up demand for eating out when there is government support for returning to that, but I don’t think it’s going to be an overnight change,” Bania said.
In the near term, foodservice distributors are forging partnerships with grocers. Grocery giant Kroger recently agreed to accept some furloughed employees from Sysco, US Foods and other distributors to fill current needs as temporary workers for 30 days, possibly longer 1 (C&S Wholesale Group announced a similar agreement with US Foods and Performance Food Group 2). Bania said she expects those partnerships to extend to products and beyond.
“We’ve been expecting them to partner with groceries, which can help supplement what are stretched supply chains,” Bania said. “They’re collaborating on employees, and I think there’s also collaboration going on in terms of products. Paper products, produce and proteins are categories where they can take foodservice sizes and turn them into grocery products. That’s really important for some of the distributors to keep inventory flowing and keep the value of their inventory.
“We would not be surprised to see some of these partnerships emerge into M&A down the road,” Bania added. “That could create more balanced supply chains for extreme situations like this.”
Finally, there’s the question of how many restaurants won’t survive and remain closed. While the number is unknown, some analysts are estimating as much as 30%. In addition, small distributors, which often have a less-diverse customer base than larger ones, may also be challenged to survive.
Retail Grocery
As retail grocers look to increase their workforce to meet a surge in demand, Zaslow noted that the industry’s tight labor constraints will loosen up, at least in the short term given the recent number of layoffs. Walmart plans to add 150,000 workers by the end of May,3 while grocery delivery service Instacart is looking to hire 300,000 workers over the next three months.4
For the long term, however, Bania stressed the importance of focusing on retailers that exhibited fundamental strength before the pandemic and are well-positioned to emerge in a good position after the crisis has ended.
“Retailers like Walmart and Costco have the advantage of having a presence in China, so they can learn from their experiences there and apply that to what’s happening in the U.S.,” she said.
Convenience
Historically the convenience store sector has been recession resistant. While its current status as an essential service helps, Bania said c-stores face a number of challenges unique to this time, including reduced visits (with fewer people driving, demand for gas is lower, which will impact c-store sales). Bania also noted that the industry’s heavy reliance on self-serve foodservice (hot dogs on rollers, for example) is not really COVID-19 friendly.
Permanent Changes?
The behavioral changes consumers have been forced to adopt may change the industry for the foreseeable future. The trick is in figuring out what those changes are, and how businesses should adapt to them. Zaslow said that while online grocery shopping had been expected to grow over the next few years, the recent surge may have accelerated consumer adoption. But companies will need the tools to figure out where the industry is headed post-COVID-19.
“Are you getting more trials of certain foods? How do you monitor that?” Zaslow said. “Do you have the data and analytics to be able to understand what trends will change and what trends will not change as much?”
Because of the unprecedented circumstances the industry is currently facing, it will be tough for companies across the food sector to make performance comparisons a year from now. That’s why Zaslow said the following are the keys to long-term success:
- Maintaining a strong balance sheet.
- Maintaining strong logistics.
- The ability to adapt to changing consumer behavior.
- Saving the incremental profits from increased sales and decreased discount merchandising.
For Bania, the big question is what types of structural changes will food companies face in the wake of the pandemic. “Clearly, patterns have changed massively,” she said. “Will people work from home more? Will people change the way they eat longer term? Those are the big questions that we’re trying to answer.”
3 Walmart
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Erica Kuhlmann
Market Executive & Managing Director, Food, Consumer and Agribusiness Group
Erica T. Kuhlmann is a Managing Director and Market Executive of BMO Commercial Bank's Food, Consumer and Agribusiness Group. The Food, Consumer and…(..)
View Full Profile >While the supply chain across the food industry has not been materially impacted by the COVID-19 pandemic, the long-term impacts of the crisis have yet to be determined.
Kelly Bania, Food Retail & Distribution analyst at BMO Capital Markets, and Ken Zaslow, Food & Agribusiness analyst at BMO Capital Markets, recently discussed how some companies are responding to the current challenges, and the questions the industry will face in the long term.
Foodservice
There’s been much discussion around how demand has shifted from foodservice to retail. As the foodservice sector struggles, Bania said the biggest question for these companies is liquidity. Bania said the big four foodservice distributors—Sysco, US Foods, Performance Food Group and Chefs’ Warehouse—should have enough liquidity to withstand this unprecedented environment.
“We did a scenario analysis for this group, because we’re looking at possible sales declines of 50% to 90%,” she said. “After this exercise, we think the group has enough liquidity to get through this. Obviously a lot depends on how long this crisis lasts.”
Given that independent restaurants represent foodservice distributors’ core customer base, Bania said it’s difficult to determine what potential structural changes to the industry will result from the COVID-19 crisis. “I think there will be significant pent-up demand for eating out when there is government support for returning to that, but I don’t think it’s going to be an overnight change,” Bania said.
In the near term, foodservice distributors are forging partnerships with grocers. Grocery giant Kroger recently agreed to accept some furloughed employees from Sysco, US Foods and other distributors to fill current needs as temporary workers for 30 days, possibly longer 1 (C&S Wholesale Group announced a similar agreement with US Foods and Performance Food Group 2). Bania said she expects those partnerships to extend to products and beyond.
“We’ve been expecting them to partner with groceries, which can help supplement what are stretched supply chains,” Bania said. “They’re collaborating on employees, and I think there’s also collaboration going on in terms of products. Paper products, produce and proteins are categories where they can take foodservice sizes and turn them into grocery products. That’s really important for some of the distributors to keep inventory flowing and keep the value of their inventory.
“We would not be surprised to see some of these partnerships emerge into M&A down the road,” Bania added. “That could create more balanced supply chains for extreme situations like this.”
Finally, there’s the question of how many restaurants won’t survive and remain closed. While the number is unknown, some analysts are estimating as much as 30%. In addition, small distributors, which often have a less-diverse customer base than larger ones, may also be challenged to survive.
Retail Grocery
As retail grocers look to increase their workforce to meet a surge in demand, Zaslow noted that the industry’s tight labor constraints will loosen up, at least in the short term given the recent number of layoffs. Walmart plans to add 150,000 workers by the end of May,3 while grocery delivery service Instacart is looking to hire 300,000 workers over the next three months.4
For the long term, however, Bania stressed the importance of focusing on retailers that exhibited fundamental strength before the pandemic and are well-positioned to emerge in a good position after the crisis has ended.
“Retailers like Walmart and Costco have the advantage of having a presence in China, so they can learn from their experiences there and apply that to what’s happening in the U.S.,” she said.
Convenience
Historically the convenience store sector has been recession resistant. While its current status as an essential service helps, Bania said c-stores face a number of challenges unique to this time, including reduced visits (with fewer people driving, demand for gas is lower, which will impact c-store sales). Bania also noted that the industry’s heavy reliance on self-serve foodservice (hot dogs on rollers, for example) is not really COVID-19 friendly.
Permanent Changes?
The behavioral changes consumers have been forced to adopt may change the industry for the foreseeable future. The trick is in figuring out what those changes are, and how businesses should adapt to them. Zaslow said that while online grocery shopping had been expected to grow over the next few years, the recent surge may have accelerated consumer adoption. But companies will need the tools to figure out where the industry is headed post-COVID-19.
“Are you getting more trials of certain foods? How do you monitor that?” Zaslow said. “Do you have the data and analytics to be able to understand what trends will change and what trends will not change as much?”
Because of the unprecedented circumstances the industry is currently facing, it will be tough for companies across the food sector to make performance comparisons a year from now. That’s why Zaslow said the following are the keys to long-term success:
- Maintaining a strong balance sheet.
- Maintaining strong logistics.
- The ability to adapt to changing consumer behavior.
- Saving the incremental profits from increased sales and decreased discount merchandising.
For Bania, the big question is what types of structural changes will food companies face in the wake of the pandemic. “Clearly, patterns have changed massively,” she said. “Will people work from home more? Will people change the way they eat longer term? Those are the big questions that we’re trying to answer.”
3 Walmart
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