We’ve been kicking the can down the road for way too long. Here’s where we need to focus. Now!
Come on, let’s get real. We’ve seen today’s troubles heading our way for years. But as usual, we just kept kicking the can down the road. It’s time for retailers and manufacturers to work together on plans and solutions to avoid even more serious trouble later this year.
PERFECT STORM CLOUDS
Take a look at the rapidly approaching “perfect storm” clouds. Inflation is up at least 4% to 6% since January, and I expect another 6% to 8% by year’s end. You can’t turn on a TV or walk down a grocery aisle without seeing inflation’s effects on everything. The wage hikes recently put into place? Already eaten by inflation. The manufacturer’s response to higher costs? Reduce package sizes and raise shelf prices, “you know, just a little.” Brilliant! Keep kicking that can down the road!
Unemployment is low, but businesses can’t find enough people to work in their stores, factories, restaurants and farms. It doesn’t make headlines, but growers are having a particularly hard time getting people to work in their fields. And in general, many folks have quit or retired, putting a big strain on the job market.
Our ports and railroads are jammed, and truckers are nowhere to be found. COVID remains a challenge, and a game-changer. Mother Nature has been sending us extreme weather as climate change takes hold. We’ve known about climate change for years, but mostly just argued about it without doing anything. Sound familiar?
Everyone’s been talking about the driver shortage for a long time, but there’s been little planning and even less training for new drivers. Retiring truckers aren’t being replaced quickly enough. Personally, I don’t expect self-driving trucks and drones to pick up all the slack anytime soon.
We’ve tried the usual magic tricks to cut waste and improve efficiency. We’ve cut inventories, but couldn’t meet our fancy new productivity goals. Those goals might work in a perfect world, but unfortunately, we aren’t in one.
Russia and Ukraine account for 30% of all wheat exports, 20% of corn exports and 80% of the world’s sunflower oil. Ukraine is being invaded; Russia faces global sanctions.
Pretty bleak, huh? So, what can be done and by whom? Well, first we need a deep dive into commodities so we can plan around shortages and/or skyrocketing prices. We’ve faced shortages, but this time it’s different. I was convinced of that recently when I read a story on Seeking Alpha (an investment advisory firm) by Garrett Duyck. You can Google it. (Hey, there can’t be that many Duycks around.) I’d suggest reading his whole article, but here are a few highlights from it:
—Russia and Ukraine exports account for an estimated 12% of all food calories traded in the world. That’s 30% of all wheat exports, 20% of corn exports and 80% of the world’s sunflower oil. Ukraine crop production is almost nonexistent because of Russia’s invasion, and Russia is facing global sanctions.
—Many American farmers are reporting price increases of 100% to 300% this year, with fertilizer, fuel and chemicals key problem areas. Fertilizer prices in North America rose 53.7% between January and mid-March. Farmers are beginning to cut back and change production practices as they face shortages and prohibitive expenses.
—The aggregated price of wheat, corn, soybean and rice futures rose by 28% from January to mid-March. Corn accounts for 19.5% of global caloric intake; rice, 16.5%; and wheat, 15%.
I could easily go on with much more, but you get the idea. And while all this related just to crops, equal or even more severe problems exist with meats, poultry, seafood, ingredients, logistics, fuel and pretty much all facets of our business.
So if you’re smart and don’t want to become road kill later this year, what’s your next step? First, become informed. Read Duyck’s full article, along with research reports on commodities. You need to know what you’re talking about when you have serious discussions with your trading partners. Then, reach out to your suppliers for their input and guidance.
Once informed, you need to look downstream and see how shortages and changes will affect other parts of the food chain. What will the impact be on bread, pizza dough and pasta? How will egg prices filter their way into mayonnaise and bakery products? What about beef costs?
Work with those suppliers, category by category, to know what their forecasts are. How will any shortages affect you? What changes might be needed in terms of package size, SKU count, promotion or flavor? Do all the costs justify themselves through the total supply chain? What is your Plan B? Or Plan C or D?
Tough talks on cost by item, which need to include breakouts by ingredients, packaging, labor and transportation, need to be done quarterly.
History has shown us time and time again that shoppers tighten their belts and look for value and savings when inflation hits. So, I would suggest that buyers look at their private label assortments and allocation of shelf space, since they will be seeing increases in many categories this year. Buyers need to make sure they have the right number of suppliers that can handle these increases as well as supplying them with their needs as far out as they can. Tough talks on cost by item, which need to include breakouts by ingredients, packaging, labor and transportation, need to be done quarterly to insure all are on the same page and the game plan is on target.
It’s important to keep in mind that supply issues will create product and category shifts, and sales will be changing to reflect them. Buyers need to be aware of these changes and highlight them to management. Otherwise, shelves may sit empty due to shortages. Or, equally bad, they may sit full because high costs and retails stall product sales. At the same time, buyers need to be watching the unit sales, NOT just dollars. Also, keep an eye on any such shifts between national brands and store brands.
This is going to be a tough year for inflation. I’m predicting that Europe will go into a recession. The United States may follow — I give it about a 30% chance now,
but that may be low. There are two wild cards out there:
effects of the war in Ukraine and more lockdowns in
China and other Asian countries due to Covid.
END ‘KICK THE CAN’
The food industry has been through difficult times before, but not with as many other issues hitting it all at once. This perfect storm is unlike any we have seen before. It will be critical to have an all-hands-on-deck approach with both retailers and manufacturers working together. It’s time to end “kick the can.” n
Bob Anderson is the retired vp/general merchandise manager at Walmart, where he worked for 17 years. He can be reached at email@example.com.