I read the recent quarterly reports from Tyson and Sysco (Q2, and Q3, respectively) and both reflect the deep impact of restaurant, hotel, catering and other volume foodservice shutdowns on each of their businesses (and by extension, the cold foods supply chain) due to COVID-19.
Tyson's Q2/2020 results show the company increased overall sales to $10.8 billion (from $10.4 billion in Q2/2019) due to high demand for retail refrigerated and frozen items like beef, pork, and prepared foods (chicken was the only decrease at -1.5%) due to consumer stockpiling/hoarding in March. But even with record retail business, net income declined due to higher operating costs affiliated with COVID-19 disruptions and the loss of foodservice business.
Sysco, a broadline foodservice distributor, saw U.S. sales drop 5.1% to $9.6 billion compared to 2019, while gross profit decreased 5.7% to $1.9 billion, and gross margin decreased 11 basic points to 19.8%, compared to 2019.
On one of our recent From the Cold Corner podcasts, Tom Swovick from Dematic mentioned Tyson's foodservice channel is approximately one-third of the company's total food sales (that information came from Tyson's 2019 annual report) so with restaurants and volume foodservice shut down due to coronavirus, the shift in the supply chain has been seismic for Tyson, and they're still catching up. It's not as simple as redirecting trucks full of food to grocery stores. Changes in pack size, case size, pallet quantities, and other considerations need to be made to accommodate the shift from foodservice to retail.
These changes take more than a few weeks to stabilize, and in Tyson's Q2/2020 report, they explain COVID-19's effect on the company and the loss of foodservice business in particular:
"We are experiencing multiple challenges related to the pandemic. These challenges are anticipated to increase our operating costs and negatively impact our volumes for the remainder of fiscal 2020. Operationally, we have and expect to continue to face slowdowns and temporary idling of production facilities from team member shortages or choices we make to ensure operational safety. The lower levels of productivity and higher costs of production we have experienced will likely continue in the short term until the effects of COVID-19 diminish. Each of our segments has also experienced a shift in demand from foodservice to retail; however, the volume increases in retail have not been sufficient to offset the losses in foodservice and as a result, we expect decreases in volumes in the second half of fiscal 2020. We cannot currently predict the ultimate impact that COVID-19 will have on our short- and long-term demand at this time, as it will depend on, among other things, the severity and duration of the COVID-19 crisis."
Sysco, which is even more reliant on foodservice than Tyson, offered a similarly transparent assessment of COVID-19's impact on their bottom line in their Q3/2020 report:
"Immediately after the onset of the virus, we took significant actions to reduce expenses. We expect cost reduction realizations to take effect beginning in the fourth quarter. In the fourth quarter of fiscal 2020 alone, we have removed more than $500 million of expenses from the business, which includes the difficult decision to reduce our staffing levels by approximately 33% through a combination of temporary workforce furloughs and permanent reductions in force. In addition, we have substantially reduced miles driven by re-routing our transportation fleet and have implemented productivity improvements in our operating companies."
Those at Sysco expect numbers to increase slightly in May as states begin to reopen, and with it, restaurants and volume foodservice in a modified format. Nobody knows whether reopening the states will increase coronavirus cases, so an increase in May business could be followed by another foodservice shutdown if the pandemic expands.
From a wider perspective, Tyson, Sysco, and others along the cold chain relying heavily on foodservice need to diversify their production and distribution targets. The biggest case study imaginable just unfolded in March and April, proving that when foodservice shuts down, consumers flock to retail foods--refrigerated, frozen, and everything else--to feed themselves and their families. A company continuing to rely on foodservice for one-third or more of its sales is setting up to be caught off-guard again if/when another pandemic happens.
That doesn't mean foodservice should be forgotten. Proactive companies should start identifying areas of need now to help restaurants, caterers, and other volume foodservice customers make the transition to a new norm. That new norm is still being formed, but it will likely result in fewer dine-in orders; smaller gatherings of people; less labor available; increased delivery, carry-out, drive-through and curbside pickup; and more signature "finish at home" menu items and restaurant/retail partnerships to distribute those items.
Companies that plan now for a post-COVID-19 world should see positive results from their efforts on future annual reports. Those waiting for foodservice to come back exactly as it was pre-COVID-19, may not be around to issue an annual report.
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