How Food Supply Chains Really Work
Fred Boehler isn’t a name heard very often during conversations about food retailing, but perhaps it should be. As president and CEO of Americold, the nation’s largest operator of refrigerated and frozen warehouses, Boehler has a unique perspective on the supply chain disruption caused by COVID-19.
His is also a voice of reason amid the chaos and confusion of COVID-19 about how the nation’s food supply chain functions and why there was never cause for alarm even after shoppers’ pantry loading in March led to rampant out of stocks and fueled concerns about the adequacy of the nation’s food supply. Those concerns were further exacerbated by the temporary closure of a select number of meat processing plants.
“A typical grocery store in the U.S. carries about a 30-day supply of food to meet normal consumer demand. These grocery stores are supplied by retail distribution centers, which also carry on average another 30-day supply of product,” Boehler explained during Americold’s first quarter earnings call on May 7. “These retail distribution centers receive product from major market distribution centers, which are located in major distribution hubs, such as Atlanta, Dallas and Northeast Pennsylvania, and carry product from multiple manufacturers.”
Americold operates 183 facilities, many of which are located near food manufacturing facilities which tend to be located in areas where land availability and local climate support individual commodities, Boehler explained. At these sites, product is brought down to the appropriate temperature, preserved, and stored until it is forward-deployed. Americold's production sites also carry, on average, a 30-day supply of food and are dedicated to specific customers. Food manufacturers outsourced 96% of their cold storage needs to companies like Americold and approximately 76% of Americold's warehouse revenue is generated by food manufacturers, according to Boehler.
“At any given time, there is typically four months of goods in the supply chain, spread across multiple nodes, many of which are owned and operated by Americold. We have one of the most diversified networks, both location, and product-wise,” Boehler said. “This diversity helps us withstand changes in food supply and demand.”
One area of concern regarding the food supply involved protein producers as several COVID-19 related plant closures generated considerable publicity. On this point, Boehler noted that consumers tend to adapt to product availability and readily substitute one type of protein for another.
“Consumers will shift from pork to chicken as needed. People are going to eat, but what they eat and where they eat may change as consumption is served through a balance of food service and retail,” Boehler said. “In general, when the economy is good, heavier weighting goes toward the food service side. And when the economy isn't doing well, it shifts to heavier retail. With COVID-19, we've seen an unexpected and very rapid shift in food service to retail, creating disruption.”
Boehler said it is important to keep in mind that food supply chains were designed for steady-state and holiday demand, not an unexpected event like COVID-19, which he likened to a hurricane hitting the entire country at once.
“This created a ripple effect as the retail distribution centers surged to replenish the stores. Major market distribution centers surged to restock retail distribution centers, production advantage sites surged to restock major market distribution centers and food manufacturers had to adjust production for retail-centric products,” Boehler said. “Every part of our infrastructure was stressed with excess activity to replenish these various nodes in the supply chain.”
As for the shift in how consumers are shopping, preferring click and collect and home delivery over in store purchase, Boehler noted that e-commerce does not drive additional demand. It is simply another acquisition point for consumers and temperature-controlled product that is purchased online is mostly serviced out of individual grocery stores.
“We know that grocers carefully select their store location, typically, within three to five miles of the targeted population. As a result, the best place for grocers to serve last-mile logistics, including both home delivery and click and pick, is the store itself. This is because transportation costs are typically the most expensive part of the supply chain. So utilizing space that is closest to the end consumer is the most advantageous,” Boehler explained.