The Grocery Industry “Takes the Cake” With Supply Chain Complexity

Emerge Editorial

Up until a couple of years ago it was a given that when a consumer walked into a supermarket, he or she would be able to find just about any product they were looking for. And while no one has ever been thrilled about the cost of grocery shopping, at least consumers had pricing alternatives for national, international, regional and private label brands that fit their budget.

This long-standing combination of convenience, selection and price has belied a very simple fact: the supply chains that support what are classified as “supermarkets & other grocery stores” are by far the most complex of any U.S. industry. Whether it’s the farm-to-fork logistics networks behind food products, or the raw materials-to-store infrastructure for household items, there is no doubt that whether gauged by market size, manufacturing base or number of product SKUs, the grocery industry “takes the cake” when it comes to complexity.

Of course, everything that consumers took for granted was upended by the Pandemic and the supply chain troubles that followed. Now ingrained in the American psyche, everyone knows about toilet paper shortages and the recent debacle with baby formula. While these problems were real, it is the contention of this blog that grocery supply chains were challenged way before 2020, and that both long and short-term developments have made those problems worse.

Within the above framework, we’ll take a look at articulating those challenges and trends, as well as offering some suggestions on how FTL shippers can remain flexible and cost conscious when moving goods around the country.

Market Complexity & Forever Challenges 

It doesn’t take a PhD in Market Research to quickly realize how complicated the grocery industry really is. Starting with market size, there are 330 million people in the U.S., all of whom are served by over 63,000 super markets. In addition to supermarket brands like Albertsons, Kroger, and H-E-B, the +$1.2 trillion grocery market is made up of mass merchants, discounters, shopper’s clubs, convenience stores and of course, on-line options like Amazon.

Because consumers only experience the grocery supply chain at the point of purchase, it’s understandable why they wouldn’t consider what goes on behind the scenes. What consumers don’t realize is that for each of the 47,000 SKUs carried by the average supermarket there are thousands of growers, food processors, household goods producers, packaging vendors, DCs, cold chain providers and truckers that make the final leap from the shelf to the shopping cart possible.

With so many complexities on the supply and demand side of the grocery supply chain, it’s no surprise that the average profit margin in this industry is a meager 2.2%. Clearly a high volume business, grocers have always had to deal with factors as diverse as the cost of running multi-tiered distribution networks, management of Full Truckload shipping programs, regulations for imported items and limited shelf-life for perishables.

Long & Short-Term Trends in the Grocery Industry  

Prior to early 2020, three trends that have impacted the grocery business are growth in online shopping, Autonomous/Electric Vehicles and the impact of Climate Change on food production. Regarding the first factor, grocers have had to reconfigure their logistics networks in ways that included the location and layout of distribution centers (DCs), the outsourcing of last mile deliveries and the handling of product returns. While Autonomous and/or EVs will continue to grow in significance, both are in their early stages, but should be paid close attention to.  

In a more ominous sense, Climate Change has wreaked havoc on the agricultural sector in the form of droughts, floods, fires, et al., all of which have conspired to alter the length of growing seasons and harvest yields. As a result, costs have gone up astronomically for the feed that ranchers use to raise chicken, beef, dairy, pork and fish, as well as for the ingredients that go directly into food items.  

In terms of the FTL shipping that enables many of these activities, grocery shippers were never happy about Full Truckload rates, but at least they could be baked into retail prices. To add perspective on this point, it should be noted that as recently as 2019 transportation costs amounted to 4.1% of sales. In what has been a complete upheaval of FTL rates since then, rates have gone up an astonishing 25%.  

Inflation Nation, What’s Your Duration?

Over the course of thirty months, the confluence of the above mentioned trends, along with increased demand for supermarket products, supply chain volatility and price spikes has brought us to the one statistic that matters most to the grocery industry: inflation. And although inflation is a super difficult problem to fix, the math behind how it impacts every shopper’s “cash register moment” is shockingly simple.

Every working person knows that their take-home pay is quickly depleted by monthly outlays for rent, mortgage, car payments, gas, etc. After that, folks use what’s left over to put food on the table. The two-pronged problem here is that not only is inflation up in general (8.6% from May ‘21 to May ‘22), but what’s called the “Food-At-Home Index” saw 11.9% inflation in the same period. In other words, everything is way more expensive, so shoppers have less money to buy food that’s already 12% higher than it was a year ago. 

Based on the above calculus, shoppers have to cut back on their purchases and stretch what they do buy for as long as possible. And eventually, that drop in demand will find its way all the way up the supply chain, impacting every one of the players that have been mentioned in this blog. For Full Truckload shipping, that means that the short-to-medium term probability of a drop in grocery loads is high.  

Advice for FTL Shippers: Focus on Flexibility, Rate Intel & Rapid Decision Making

Few can predict if or when inflation will drop. What we can say is that FTL transportation is the nerve system of the entire grocery eco-system and whether a shipper is a grower, manufacturer, packaging provider or DC operator, the attention that they pay to their FTL programs has an immediate impact on product availability and in the end, financial performance.

Given the importance of FTL shipping and the fact that rates seem to be in a constant state of flux, many industry analysts recommend that shippers remain flexible, stay tuned-in to market rates and then make rapid decisions about how loads will be moved. Historically a lot easier said than done, the good news is that Emerge facilitates and enables these activities through its Freight Procurement Platform.

Applicable to both dry van and temperature controlled loads, Benchmarking, the latest addition to the Emerge Dynamic RFP Platform, is its lane-specific rate index. With a few keystrokes, shippers can see pricing indices for lanes around the country, thus knowing whether or not their current rates are aligned with the market. Whether a shipper is moving loads during seasonally high periods (e.g. summer cookout season) or she’s heard a rumor that “rates are coming down”, the ability to move from anecdotes about rates to the facts is indispensable.

Given the seasonality and volatility native to FTL shipping, companies need to stop conducting yearly RFPs. The fact is that market conditions change too quickly and the ink is barely dry on a one year FTL “contract” when markets change, paper rates appear and load rejections increase. By sending out shorter RFPs shippers can run multiple bids per year, thus staying 100% in tune with capacity, service and rates, all at the lane level.

Based on the speed with which shippers can gain index-based market intelligence and run multiple RFPs throughout the year, flexibility is a key outcome of using the Emerge Platform. So, whether a shipper has to supplement a private fleet with common carriers, has to manage an outsourced FTL program or is looking to move high volumes of frozen turkeys in advance of the Holidays, all the tools they need can be accessed in one location.

In the final analysis, no one knows when inflation will subside, or if things will ever, “get back to normal” at the supermarket. What we do know is that the viability of the U.S. depends on its food supply chain and that FTL trucking is what connects all of the dots across that ecosystem. And while there are certain things out of our control, Emerge is here to enable FTL moves that are a reflection of market conditions regardless of whether rates are at a peak, in a trough, or somewhere in between. Now there’s a Value Proposition that really does take the cake!

Statistical Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, Food Marketing Institute, foodindustry.com, supermarketnews.com.

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