Recession-resistant consumer packaged goods industry faces shipping challenges

Shippers of consumer packaged goods expect the remainder of 2020 to be challenging because of the COVID-19 (coronavirus) pandemic while the transportation sector sheds employees and truck orders fall.

FreightWaves recently completed a survey of consumer packaged goods shippers amid the pandemic, and the industry is expected to outperform others as transportation costs should fall this year from 2019.

Consumer packaged goods are one of “a few safe havens in the economy, and therefore in transportation,” the FreightWaves research shows. Some of the goods that are most familiar include coffee, toothpaste, diapers, potato chips, soda and toilet paper.

The nearly $815 billion consumer packaged goods industry accounted for about 3.8% of the U.S. GDP in 2019, and almost $40 billion is spent annually to transport these goods, according to the research. The industry accounts for about 5% of the $800 billion U.S. trucking industry, and as most of the products are less than $20, billions of these essential products are packaged and transported through the supply chain.

Some of the most familiar names in the industry include Coca-Cola, Kimberly-Clark, Kraft Foods, PepsiCo, Procter & Gamble and Unilever. The goods the industry produces are usually sold wholesale to brick-and-mortar retailers, but this has been changing as the companies have started to sell directly to the consumer, the research shows. This has allowed them to increase margins and have more control over the customer experience. The companies have established subscription services, and this has contributed to recurring revenue and higher values in the financial markets. Dollar Shave Club and eyeglasses retailer Warby Parker have been successful in establishing these services, according to FreightWaves.

Consumers tend to be loyal to one brand in a specific goods category, but this isn’t always the case when consumers prefer variety, such as with potato chips or candy. The industry might be recession-resistant, but it is highly competitive as companies fight for limited shelf space and consumer attention, the research shows. Private label goods have been fighting for market share, yet the share isn’t as large in the United States as it is in Europe where it’s often 50% or more. Private label goods tend to be less expensive than similar brand name products and appeal to those on a tight budget.

The industry also experiences margin and revenue pressure from their brick-and-mortar and online retail customers, including Walmart, Target, Costco and Amazon. Retailers comprise a large portion of the consumer packaged goods industry’s revenue, and retailers’ limited shelf space provides leverage over the industry. The top 10 U.S. retailers that receive a percentage of their sales from the consumer packaged goods industry account for more than $1 trillion in sales, or about 20% of total retail sales in the United States, according to the research. By comparison, the top 10 consumer packaged goods companies in the United States have sales of about $250 billion.

The industry’s e-commerce sales rose 35% to $65 billion in 2018, or about a 7% share of the overall $815 billion in annual sales that can be attributed to the industry. In 2016, the sales were $37 billion.

Analysts Justin Long and Jack Atkins, senior associate Brian Colley and associate George Sellers, all of Little Rock-based Stephens Inc., believe Lowell-based carrier J.B. Hunt Transport Services Inc. sees intermodal as an important part of the e-commerce supply chain. The Stephens analysts recently spoke with executives of J.B. Hunt, which comprises about 25% to 30% of the intermodal market in the United States. Intermodal is the carrier’s largest business segment, accounting for 66% of its income in the first quarter.

Nonfood items such as personal care and home care products are the most popular consumer packaged goods sold online, the FreightWaves research shows. Amazon accounts for 39% of online sales of consumer packaged goods, but its share is down from 43% over the past two years. Instacart comprises 8% of the sales, while Walmart accounts for 6%, according to Nielsen.com.

According to a recent FreightWaves article, Amazon has expanded its brokerage division to 48 states. The service, which was established more than a year ago, matches shippers with freight capacity. The shipper service is available in all U.S. states except for Alaska and Hawaii.

Respondents of the FreightWaves survey said they are making changes to their supply chains, and epidemics were their top concern. This was followed by the ability to find qualified workers and the upcoming presidential election.

TRUCKING JOB CUTS
In April, 88,300 trucking and warehouse jobs were cut, even as carriers were working to deliver needed medical supplies to hospitals and groceries to stores, according to a recent Transport Topics article. The number of jobs eliminated in April was more than the number lost in all of 2008, the article shows.

“It was a tough month, and when we start reporting volume numbers, I would expect to see some numbers that are not pretty,” said Bob Costello, chief economist for American Trucking Associations. “In March, we were all going out and buying food and toilet paper, and it was all hands on deck, and that’s slowed down a bit in April. I think we’ll see volumes fall in April, down significantly.”

TRUCK ORDERS FALL
North American orders of class 8 trucks, the largest truck class, declined 72% to 4,100 units in April, from the same month in 2019, according to ACT Research. The orders were down 46% from March.

“April represents the first full month of COVID-19 impacts on the trucking industry, and given broadly halted economic output leading to a sharp drop in freight volumes and rates, as well as more empty miles from fragments supply chains further impacting carriers’ profitability, a negative order number was within the realm of possibilities,” said Kenny Vieth, president and senior analyst for ACT. “We suspect that, as was the case in March, instead of canceling, order holders are content to move orders from close-in to later build dates, as they analyze the ongoing COVID impact. From a seasonal perspective, April is a relative neutral class 8 order month, and as such, seasonal adjustments add little to actual data. On that basis, April was the weakest class 8 order month since September of 1995, which actually produced a negative net order number.”

In the FreightWaves survey, about 75% of respondents expect transportation costs to be flat or down in 2020, compared to 25% who expect the costs to rise. About 45% of respondents expect transportation costs to be down a little or a lot.

Companies in the consumer packaged goods industry are changing their supply chains to become more efficient. They are changing transportation and logistics partners, diversifying their business risks by sourcing products from more suppliers and changing how goods move through the supply chain and improving speed, efficiency and accuracy at distribution centers, according to FreightWaves research.

The pandemic and the resulting stay-at-home orders have led to a “windfall” for the consumer packaged goods industry, the research shows. National brands grew about 70% between late March and early April, from the same period in 2019. While the same level of growth is not expected, the companies are expected to experience growth above normal levels as long as consumers are in quarantine.

Only 30% of respondents believe that sales will be higher in 2020, and this compares to about 45% who expect sales to fall. Consumer packaged goods, medical supplies and groceries accounted for about 40% of trucking volumes in late March, but they have since fallen the research shows. Whether consumer behaviors that have changed amid the pandemic will become permanent is uncertain, features such as curbside pickup for groceries from the Walmart app, grocery delivery from Instacart and subscription orders for essentials from Amazon are expected to become more popular and are likely to remain, according to FreightWaves.