TRANSCRIPT
Peter:
Welcome to unpacking the digital shelf where we explore brand manufacturing in the digital age. Hey everyone, Peter Crosby coming to you from the digital shelf institutes Cape Cod office. Rob's on from the Berkshares. Hey Rob Lou. So Rob, you and I are both avid readers of the counter.org which was a recent rebrand of the new food economy. It's a nonprofit side reporting on how America AIDS and their food journalism during this time. We've been reading writers like Jessica food, Claire Brown, Alexandra Jones, Lee Kunkel. I mean it's really been stellar, right? And, and just looking at the impacts across the food supply chain from producers to distributors to consumers. It's, it's a great site, right?
Rob:
Yeah, I mean this is just a little plug to the counter. It's the best journalism about the United States food infrastructure that I know of. I absolutely love their writing. They talk every day. Their subjects are wide range and they talk about things like aquifer protection in the Southwest and the dairy industry and cattle rearing and restaurant staffing and Rafe restaurant regulation and the alcohol unders. They talk about everything. In a tremendous amount of depth. And as you're saying, this changes that have been happening in covert 19, they'd been covering it better than, than any other publication that I know of.
Peter:
Yeah. One that so we've been tracking those stories and, and I know one of these stories really hit you where it hurts cause you're a Baker and you're a sourdough Baker. And it turns out that the demand for flour has skyrocketed. For the week ending March 21st Nielsen data shows that yeast purchases skyrocketed. 647%. I think most of that coming from the Berkshires,
Rob:
I don't have to buy you cultivate my own yeast.
Peter:
Oh my gosh. And the week ending March 28th, retail flower sales are up 154% baking mixes up 99%. The, the interesting impact of that is that the, you know, we see a lot of the, through the, through line in, in what's going on right now is just the inflexibility of supply chains. And it turns out that here flower production, you know, only 4% of flour production is sold to home bakers. And so 96% of it is made into 50 pound bags. And so the consumer demand of course weigh up the restaurant demand way down. And, and so everyone's trying to pivot.
Rob:
Yeah. This is, there's a lot of details like this in the supply chain pivots that I just find super interesting. I mean, that stat, again, only 4% of us flour production is sold to home bakers like me. And the rest of it is to and food service industry general. And so it's not like we're short of flower in this country. There's just an infinite amount of flour that we could be putting on grocery store shelves. But where the limiting factor is, is that packing of the flour into one pound, five pounds retail containers. And we just, that direct capacity, they can't, they can't pack it enough. And so they're, they're, they're trying to switch up the assembly lines that are packing. They're used to packing bags for food service and then instead packing them for retail. And so that's, that's really interesting. And they think that they're going to get there.
Rob:
So in the unlikely event that this lockdown lasts for many months, you know, at some point we're going to have the ability to have infinite flour that's available on shelves. But in the, in the short term it means that it's sometimes really hard to find, find flower. And when I do my baking these days I'm kind of making garbage bread. Right. It's whatever the flower that happens to be lying around that's available is what's going into my bread. Must be offending your Burke Sherry and sensibilities. Yeah. It's so noticing the difference. There's been some interesting loaves that have come out of the oven the last two weeks.
Rob:
So when you, when you are working your dough, is there music playing? Is this just Zen quiet? Is Sochi helping what? Well, it's, I like to work. I'm under the relaxing [inaudible] my two children being as loud as humanly possible invited someday. If you ever have your, your Island, you'll have a separate like isolated kitchen on the other part of the Island that you can go to. Well for, first of all, absolutely for baking. I'm actually, I've been trying to get my, my older one is three and a half. I've been trying to get her into it. Which has been a challenge because she hates things that are sticky. That's tough though, is primarily sticky, so uphill battle. But I'm trying well as you continue, you're bonding with your daughter over sticky things. There's another shift that the counter pointed out recently farmers are dumping their milk and, and what I thought was sort of, I don't know, heartbreaking, I don't know whether that's too much, but you know, many of these farmers for the first time in 30 or 40 year careers, like they've just never done this in their career, but you know, restaurants and school closures going down have led to a lot of dairy.
Rob:
But grocers are limiting how much milk their customers can purchase. So the milk that's meant for the food service industry is not getting where it needs to be. And so as a result, they're dumping their supply, which just seems crazy. But the crossover of supply chains, again, it's not easy. Yeah, we're again, the volume here is amazing. We're talking about tens of millions of gallons of milk being pumped out of the cows and just dumped and a lot of this milk, this isn't, this isn't for lack of need. Again, grocery store aisles are often missing milk these days, but it is often from the milk's supply chain for various for various producers is going to food service. So the milk is destined to be ricotta or destined to be mozzarella or destined to be some other derivative product where the milk gets shipped off to a production facility and that production facility serves restaurants.
Rob:
And obviously the restaurants aren't open. So none of that's happening. So we're dumping all this milk. And what's tough about this for the farmers is you can't just, you know, tell the cow to stop milking. You know what I mean? And you can't stop feeding the thing. So when the demand goes down, there's not much you can do other than just you keep beating your cows, you keep pumping the cows and there's nowhere to put the milks that you dump it. It's a lot like what's happening with the oil industry where it's, it's hard to turn off some of these Wells so they just keep pumping and we're running out of storage and you know, you're between a rock and a hard place and you see kind of weird things that are happening elsewhere. In food service you also see a pork having a similar similar bottleneck in the supply chain.
Rob:
Only the causes a little bit different. So the, I'm sure people have been reading the headlines, but Smithfield and other other major producers have had to shutdown lines because employees have come down with coven. Yeah. And spread it among other factory workers and they've had to shut down the whole factory. So these processing facilities that take pigs and turn them into pink products are closed. A lot of them, those are not factories set up for social distancing. It all, like you can't do what they need to do with people six feet apart. And yeah, it's a very dense dense operation. It's a dense operation. It's hard, hard to change it. And you know, they're often shut down for long periods of time. And the issue again with pigs is, I thought this was a little fascinating back. If you go back 50 years, a really big pig was 300 pounds these days, all the pigs with 300 pounds.
Rob:
Dude, do you know, do the way that we read the pigs, the size and the, all the lines in these production facilities are built for pigs that are, you know, two 50, three 50 basically. And the issue is that if once a pig hits 300 pounds, you put 'em out to slaughter. And right now there's nowhere to put them out to slaughter. So there's still a pig and they're still eating and they're 300 pounds under 300, five, three, 10 15 and so on. So on a 300 pound pig in one month will become a 400 pound pig and a 400 pound pig is too to put on these production lines. And, and also a lot of that, a hundred pound gain is evidently back fat, which a lot of it, they just discard anyway. So it's again, you're turning pig feed into pig and in this case you're turning pig feed into pig. That first of all may not be able to be slaughtered. And second of all, even if it's slaughtered, 25% of the mass of the pig is waste. And, and who the people that are, that are eating the brunt of this are the, of course the, the, the the pig producers. So eating the brunt of this, was that upon Rob? Oh, no, it wasn't.
Peter:
Yeah. if you could never use the term back fat again, I would be happy. But I, I understand the issue. No, I it, the, the complexity of all of this, I mean one of the fascinating things about spending this much time talking to brand manufacturers, manufacturer evolves stripes and sizes is just how complex and particular each one of these, you know, the supply chain of products from product ideation to getting it to market. And then of course the work of letting people know that you sell it. It's, it's really as fascinating and seeing a moment like this, which you really can't organize your business for moments like this. Like that's too costly. It's, it's you, you know, you need supply chains that are efficient and putting, you know, off roads into supply chains is not, is not an efficient thing, but it, it, the, the issues are there when you think about, okay, what do we learn from this? Are there things that can be applied or in, in supply chain design that would help for moments like this?
Rob:
The, I think, I think the answer is yes, but it's, it's hard to say exactly how applicable they're going to be to everyone. One one lesson which is expensive is to have a buffer for search capacity in your manufacturing base. This was illustrated by 3:00 PM 3:00 PM after SARS. I mean this is going, you know, the first SARS virus back in 2003 for they invested heavily in excess manufacturing capacity for eight 95 masks. So in January when it was becoming clear that to anyone who was paying attention that this was going to be a global pandemic 3m got together and said, let's turn on those, those, that access capacity that we had been holding in reserve, they always wanted to have excess capacity in, you know, to, to help out with something like this. Now it turns out that the real amount of capacity of manufacturing Fred 90 fives that we needed is still even significantly more than that.
Rob:
But still they had, they had buffer, you know, they could just, they could turn up that production line, turn on production lines that had been quiet. So that's one thing that, that manufacturers can do. Of course, that's not always possible. The other thing is, and I'm not actually sure what the lesson in the, in the second observation, but the economy is so efficient that everything is just in time right now. You know, you've, you're producing the pigs which then go to slaughter, which then are on the table in a vanishingly small period of time. And at no point is there hold in in the supply chain. So the amount of inventory on reserve and the amount of buffer at every step of the process here is as close to zero as these these companies can get it. That's it. That's all that's true in almost every industry.
Rob:
So, you know, just as an example, in media, if you are Disney or universal or you're a Fox Searchlight or you're any of these, any of these companies that produces movies or produces television shows, you're producing episodes or movies just before they go to market, typically. And right now the production shut down. You're not having movie sets, film anything means that for three or four months they're not producing movies that they had planned to produce, which means that, you know, they're not going to have movies for when they're ready. On the, on the flip side Netflix doesn't have a pipeline production. What they do is they invest really heavily upfront bulk. So they actually have their whole 2020 lineup and actually into 2021 done of shows that they have filmed and produced and are in various stages of editing and whatnot. So Netflix is not operating just in time.
Rob:
Netflix is very much operating with, you know, buffer, but they're doing that at a significant capital expense. So it's, I, I just don't know exactly what the lesson here is other than when you have entire supply chains that are all built in just in time, they can't deal with fundamental disruptions. They, it's just there, there isn't, there isn't flexibility in them. Yeah. I remember back when the big writers' strike came around, we saw a similar kind of, you know, production stopped down, stopped on basically every scripted show in town. And that was the birth, really the birth of the GLA of reality shows. But even they can't be producing right now cause they all require minimum social distance to be successful just for the parents out there. By the way, speaking of the reality shows and existential circumstances changing the way that things are produced. Disney plus put out a sing along where various professional singers saying Disney tunes. Oh, I saw that. It's wonderful. It's absolutely like if you have kids, 100% recommend definitely, definitely worth adding to the queue. Yeah, I have seen, I, I saw that and, and I thought, you don't need to just be a kid. Like I've been singing in my living room in Baytown. Like it's just joyful and it's good stuff at this time. You know, I think where we've sort of gone through this, this litany of,
Peter:
Of difficulty in the grocery chain sort of, when you think of all of these different things, including like fishermen have lost up to 85% of their revenue like fishes and getting where it needs to be. The story that really stood out to me, sort of tying together the impact of a lot of this is food banks and how and the incredible stresses they have come under during this time that are not only supply chain related, we can't get what we need. We used to get food from food rescue from grocery stores and restaurants. That's not happening. But meanwhile, demand has skyrocketed. Volunteers have dried up often cases because people are concerned about getting sick. And so like in California they called out the national guard like that you can see sort of in one microcosm, maybe it's a macrocosm given how important it is right now to our economy. The impact of all of these things kind of coming together.
Rob:
Yeah, I mean, food banks, it's real. It's a real tragedy. It's another example of just in time supply. I mean, food banks, a lot of them operate literally on the stuff that's past, you know, like right around in that day, right. That the grocery stores are going to throw out. And so there's regulations that allow for repurposing some of this stuff. Some States and locals have changed regulations so that restaurants can help provide food. But I mean, without the, without the purchasing of fresh products and whatnot the food banks supply has just absolutely driven up. So they're, they're hip on the supply chain side and they're hit on the labor side. And it's really honestly unclear what to do about it. I mean it's, it's, it's what happened. I mean, it's, it's all interesting things. It's what happens when you're doing the locally optimal thing at every single point in the supply chain. When [inaudible] global disruption happens, it's very, very, very hard to get things stood up and working in with massive changes. You know, another one that happened a few years ago, this is actually kind of an interesting aside, but, but it's another illustrative point of this recycling is something that the death's been [inaudible] invested in for decades in the United States. And what happened in the two thousands, in particular with the rise of China [inaudible] the Chinese manufacturing base could use additional raw materials. So they would
Peter:
Purchase
Rob:
The plastic in particular the plastic recycling from us municipality. So if you're Philadelphia, your recycling department collects all this plastic and sells it to China and then China breaks down the plastic and turns it into these little fine plastic balls, which can then be used to manufacturer toys and whatnot, which they then sell back to American to the prophet. And so there was this, this really important ecosystem that developed with plastic where the U S basically has lost its ability to recycle plastic because it was more optimal to send it to China. Now, a few years ago, China cut got off. They basically said, look, we're, we're done being the world's dumping ground for your recycled goods. We have plenty of our own now we're not purchasing it anymore. So what ends up happening is then cities like Philadelphia, first of all, they've got no nowhere to put their plastic.
Rob:
Second of all, we don't have the ability to recycle that plastic domestically anymore. We can shut all that stuff down. And third, the city of Philadelphia was dependent on that revenue from China as part of their budget, which is, which is all of a sudden disappeared. So a change like that, which is locally optimal at the time makes you dependent on other businesses and other other pieces of the world and other pieces of the supply chain, which are, you know, risky. Right. So I wonder, I wonder in particular is part of this crisis, people have talked a lot about our company is going to learn a lesson about dependency on China as a manufacturing base. Are they gonna think about manufacturing being more distributed globally? Are they, you know, how do you have a main, how do you have a supply chain and manufacturing base that is more resilient to various types of disruptions where there's more optionality in the base, things like that. I suspect that's going to be a major topic for years to come at in the C-suites trying to figure out,
Peter:
You know, how do we, how do we do this better next time? I mean particular, you know, do you take another example? Of course right now of the personal protective equipment and the fact that we essentially have given up most of the manufacturing of that stuff for, you know, for totally smart business reasons and, and efficiency reasons. But when you look at this, you know, you'd think of that loss of manufacturing capacity put, put our nation at risk. And so there's probably that set which are, what are the things we really need to be able to do to run, when to be able to continue to operate as a country when everything goes to, to hell like this and and do, and how do we approach as a society, not to mention just manufacturers to make sure that that we, that we have some capacity to respond in these situations.
Rob:
Yeah. It's like the, in the United States, we subsidize agriculture and at least for, for many, many years, a key rationale for that subsidy for that subsidy was that in the case of war, we wanted to have our own food supply. And, and even though it's more expensive to produce food in the U S in a lot of cases than, than other cheaper parts of the world, we felt it important to maintain that manufacturing base. So I expect there's going to be a lot, a lot of that type of nationalism crap creep up. And in response to this, you'll see things like reagents and PPE and et cetera, manufacturing moved domestically, not just the United States but to other, other [inaudible] other basis that want to control a little bit more of their own destiny. You're also the, one of the other interesting things that we're, that the new food economy has covered is, is a regulation changes at the state and local level and sometimes at the national level. And and I wonder how much a dad is actually going to be durable. I mean, you see things, for example, like the FDA loosening nutritional facts labeling and an effort to help restaurants sell unused food. The context here is that
Peter:
[Inaudible]
Rob:
Do you need to actually label what's in the food a lot and [inaudible] in order to sell it as grocery? [inaudible] The restaurants are selling a lot of goods as grocery to that, selling that prepared plate. They're selling effectively supply that they have on hand flour and stuff like that. And in order to sell that, there's FDA regulations about how you're supposed to sell goods like that and they've relaxed it to let restaurants sell those products directly to consumer to help the restaurants and also help the consumers. Now that's a regulation that probably will be rolled back after this, but then, but then you see others such as how the alcohol regulations have changed too, to enable delivery in a lot of places that did not leave a allowed delivery before. It's pretty unlikely that that stuff's gonna get pulled back once because it's consumer oars, alcohol online and gets delivered and the experience is good. They're going to want the keep that ability. So I think it's gonna the whole regulatory regime is going to be interesting to see what, what changes and what sticks.
Peter:
Yeah. I've had particular experience with the first the restaurants selling, selling groceries, essentially becoming a grocer. Here in Provincetown there's a restaurant called the canteen. And it's run by two amazing guys that have really made a commitment cause Provincetown is it swells enormously in population in the summer months and then really contracts to kind of Hardy townies in the winter. But they made a commitment to stay open year-round, giving people jobs you around, standing up, you know, holiday markets and things like that. They are really become a center of the community. And one of the way they saw this change happen and they immediately jumped on it because a lot of people are obviously are concerned about going into grocery stores. So you can go onto their site, order the groceries that you want, that they list, right online, pay online, go up and then, and then the delivery is just ready for you when you arrive or it can be delivered to your home. And it just feels like when you see across the country and really around the world, all of the individual proprietors that are suffering during this time still making the effort, not, not to, they're not making money off of this, they're just providing a way for people. You know, they're making enough money to sort of keep their doors up?
Rob:
Well, yeah, like, I mean, fundamentally a lot of that is about the money. Yes. When I look at the, of what they're doing
Peter:
There, they're offering stuff cheaper than, they're not marking it up much. They're offering it cheaper than you can get in the grocery stores.
Rob:
I'm, I'm just saying like these, the restaurants are desperate, right? That a lot of this stuff is meant to give them a lifeline on cash, which is not, which won't remotely replace the, what they would get if they were open. But, but it's, I, I dunno, I, it's not a pure altruism. They're, they're doing what they can.
Peter:
I mean, very few things in humanity are, but I, I think doing it in such a responsible way and not gouging on prices and and making sure that the community gateway is neat. I, I've, I've, I've seen a lot of heart behind the way in which a lot of restaurants, you know, take out restaurants that are choosing to engage with the community. I think, I think it's
Rob:
Awesome. So when I F I think that's a, that's an example of something that is absolutely going to stop happening when this is over. I guess so you know there's a piece of me which is
Rob:
Yay, it's nice and good Robin. Then the that I'm, I've been, I'm interested in what's actually going to stick. One thing that may stick that's similar to this is grocers around the country are starting to convert their stores into dark stores and I am really curious whether 100% of those switch back to just people shop in the stores. When coven 19 is through or whether it's 50% or whether it's 25% it feels to me like there are going to be some grocery stores that just say, you know what? Dark store Walmart in the last 10 years has done that with some Walmart locations where they have shut the location too, retail traffic and instead converted the store into a fulfillment center for walmart.com orders. So you know why not?
Peter:
Yeah. Whole foods has done that recently. Yeah. At this moment. Yeah. And we'll see whether it sticks. I was interested in the stat in that, cause this this came from Michael O'Brien and multichannel merchant. He has stat in there that's saying retailers have been basing their [inaudible] grocery roadmaps, like the sort of dark stores and all that stuff on planning on 30% annual growth representing about 6% of U S sales. But this has just overwhelmed that and that's sort of the stat we talked about last week were like, yeah, you know, is it now what would have taken five years is happening now? I, I think it's, it's makes sense to me that there will be some, there will, that trend will accelerate dramatically and I think stay.
Rob:
Yeah. So, so what, what does a grocer have to do in order to support that? Is it? Yeah, convert it. You know, they've already done the conversion of some of these stores to dark stores, but is it, do you keep it a dark store afterwards or you invest in, for example, a bolt on micro fulfillment center that can be attached to the store like that you get off from takeoff. For example, a Boston based technology company that produces micro fulfillment centers. That might be something that, that people start investing in as they switch the dark store back to a regular retail location. But they still need excess delivery capacity much more than they were planning to have. So how do they bolt it on quickly? And so I don't know. It's going to be interesting to see how that switch up and how that shifts.
Peter:
It's even more than the fulfillment piece. The what they're finding is that with the surge in, in pickers having to go through the store and, and pick for all these online orders, customers who actually are shopping there, it's the density. It's becoming a much more difficult experience. And I think also having pickers do it. You know, if you're thinking about dark stores, you know if you can make the picking of food much more automated than your margins on on delivery and and online shopping are going to get better. So there's a lot of incentives to do this switch, right?
Rob:
Yeah. I think I the, there's two types of guests that I want to get on the podcast to interview, one digging dark stores. So you know, dark, dark store is actually the name of a startup and the other one is somebody who runs a micro fulfillment center system, like take off if I think those are going to be massive investments, areas of investment and change not just in grocery but in apparel. I mean Neiman Marcus is filing for bankruptcy. JC penny looks like it's going to be, it's on the way there. There's a bunch of other distressed companies like a Victoria secret which didn't pay. It's April rents and Sycamore is now suing in order to get out of its acquisition of them. The gap is no longer paying rent as of yesterday. Yeah, exactly. And Lord and Taylor, which was just purchased out from under Hudson Bay a few months ago. It looks like it's going to file for bankruptcy. And so are we going to start seeing micro fulfillment centers or dark stores for apparel? Is that going to be a big, big shift in the industry? So I, I want to get a couple of these folks that are investing in the support, the types of at least last mile supply chain agility. Mmm [inaudible] we're talking about here and as, as future shifts in the whole market, I think that's going to be a major area of investment in 2021
Peter:
Well, certainly any listeners that if, if those desires for podcast guests strike a chord in you, peter@digitalshelfinstitute.org. If if you have any names to throw our way and we'll, we'll also be sourcing them on our side as well. Well, with a discussion of, of sour dose flower making the, the strain on supply chains and the shifting of regulations, it continues to be a wildly changing environment that would be if it wasn't so painful. Well, probably it's both, I think. And we'll be back next week to, to cover more of it. As always make sure you check in on our, our website to see what the digital shelf Institute is up to. And that's digital shelf, summit.salsify.com and you can check out all of the sessions that were coming up and please, if you have a chance, we'd love it if you'd leave a review for the podcast on whatever service you listen to. It's super helpful for us to get out to new audience and thanks as always for being part of our community.
