The Supply Side: CPG manufacturers note COVID-19 supply issues, opportunities

Manufacturers of cereal, snacks and packaged foods have been playing catch-up the past six to eight weeks as consumers have hunkered down at home amid concerns of COVID-19 that closed much of the country in mid-March.

While many non-essential retailers have been closed, Walmart and grocery stores have been open and busy with unprecedented demand for shelf-stable foods to restock pantries while consumers prepare nearly all of their meals at home.

Walmart and other food retailers continue to have issues keeping canned soup and cereal aisles fully stocked more than eight weeks into the COVID-19 crisis. Despite the popular demand for many consumer packaged goods, several CEOs have said they expect 2020 profits to be challenged given the uncertainty that still exists.

Kraft Heinz Corp. said the start to 2020 has been better than expected due to consumer stockpiling, but it’s too early to know the full impact of COVID-19 on this year’s business. The company attributes 6% to 7% of the first-quarter sales growth to consumers filling pantries as the work-from-home orders began to be issued. Sales grew to $6.16 billion in the quarter. The company said about 75% of the sales growth came from at-home consumption trends, which more than offset the lack of shipments to foodservice and restaurants that have been closed in recent weeks, except for takeout.

Paulo Basilio, chief financial officer at Kraft Heinz, said during the April 30 earnings call that the company expects challenges in the back half of the year given the rise in unemployment and a  recession and its duration. He said the full benefit from COVID-19-related sales lift did not help the bottom line because of higher costs related to meeting the increased demand.

Cookie and snack maker Mondelez also reported more sales in March as the pandemic buying surge began.

“Originally, you would have said this was pantry loading, but this has now been going on for more than six weeks. And unless consumers are building a warehouse for Oreos at home, I think they are eating it,” Mondelez CEO Dirk Van de Put said during the April 28 earnings call.

He said the initial spike in North America occurred in March as more cities began to issue stay-at-home orders. He said the initial sales spike was about 30% but has since tapered to the high single digits, which is still above pre-crisis levels.

“A lot of the out-of-home eating has now gone in-home, and that leads to more snacking. … The second thing is that sharing a snack with your family, with your kids brings a feeling of comfort,” Van de Put said.

Given the lack of clarity about the economy slowing and the uncertainties around how long COVID-19 will linger, the company withdrew its full-year guidance until a later date. Van de Put expects continued growth for the company as it manages through the inventory challenges.

Kellogg Co. said April 30 it would have to postpone the launch of its Incogmeato line of meat alternative products until late 2020 because more warehouse space and logistics are needed to meet higher consumer demand. The company said sales of its cereals in North America turned positive for the first time in five quarters.

However, CEO Steven Cahillane said the boost in cereal sales was offset by higher operational costs from bonus pay, transportation, safety equipment and technology that allows employees to work from home. The cereal maker did reiterate its 2020 earnings guidance, while most CPG companies have pulled guidance in this time of uncertainty.

INVENTORY, CONSUMER EVOLUTION
PepsiCo executives were some of the first to speak out about the manufacturing challenges brought on by the health crisis. PepsiCo chief financial officer Hugh Johnston said many companies will carry more inventory to allow for faster responses to demand upticks.

“Many of us have run supply chains and inventory levels more leanly than five to 10 years ago,” Johnston said in late April.

PepsiCo reports repeat waves of higher demand for Quaker Oats, Tostitos and other products, which Johnston said points to more than just stockpiling and hoarding. He hinted to a bigger change in consumer behavior in a shift back to bigger brands. The Quaker Foods division had struggled in recent quarters as had Frito-Lay, but Johnston said each posted revenue growth of 7% in the recent quarter, indicating consumers are snacking more.

PepsiCo execs pulled earnings guidance for 2020 given the lack of clarity into the depth of the recession. Chairman and CEO Raymond Laguarta said April 28 the key uncertainty the company faces involves timing and when consumers may shift back to limited economic opening and a new normal. He said sales to the hospitality and entertainment sectors could take much longer to recover than convenience stores.

While PepsiCo did post strong first-quarter results, Johnston warned higher labor, logistics and service costs to meet customer needs are also expected to persist through 2020. He said the company will continue to make the necessary investments to support employees and customers, but the trade-off would come from closer management of discretionary expenses, which includes non-essential advertising and marketing spending.

“While we hope these challenges are temporary in nature, we cannot reasonably predict when the environment will improve or exactly how consumer habits will evolve,” Johnston said.

BAKING, SNACKS
The Hershey Co. reported April 27 that convenience stores account for about 15% of company sales and that business is down 10% amid the COVID-19 outbreak.

“The situation continues to evolve so rapidly that it’s difficult to predict the future with much certainty. While comparisons can certainly be drawn to weather-related disruptions or natural disasters or recessions, the reality is that we have never seen so many factors at play at the same time on such a global scale,” said CEO Michele Buck.

Hershey execs report baking chips, cocoa and chocolate syrup sales grew about 30% during March as more families spent time baking at home. Salty snacks like SkinnyPop Popcorn and Pirate’s Booty snack foods were 20% higher from a year ago.

Having gone through the COVID-19 outbreak in China, General Mills began to work with its U.S. retail partners.

“The partnership has been terrific,” said Jonathan Nudi, retail president for North America. “We’re talking about how we can simplify the supply chain. In some cases, that might mean running fewer SKUs [stock-keeping units] or running the big SKUs of soup and not running other brands, and there’s a significant time required to change lines.”

He said shipping in full pallet quantities has been required as opposed to mixed-layers on pallets. The company is also making a trade-off around direct-to-store deliveries for its retail partners.

“For us, it gets to be a bit more challenging on our side of the business,” Nudi said. “So we’re having lots of conversations with our largest customers, and it’s something we are looking at on an hourly basis, staying tight with our retail customers to try and serve their changing needs for the short and long term.”

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.