Chain, Chain, Chain: Natural Products Companies Take Necessary Steps to Assure Supply Chain Consistency Amid Covid-19 Crisis

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By Steven Hoffman, Compass Natural Marketing, Managing Director

This article originally appeared in Presence Marketing’s June 2020 newsletter edition and on New Hope Network’s IdeaXchange.

As the coronavirus crisis entered its third month in May, the U.S. saw concerns about its food system’s supply chain come to the fore. The media’s dramatic coverage of workers falling ill in the nation’s conventional meatpacking plants, crops wasting in the fields, and dairy farmers dumping milk continues to alarm Americans, and justifiably so, even as the country begins to open up in fits and starts. 

Despite – or perhaps as a result of – President Trump’s invocation of the Defense Production Act to keep the nation’s meat packing plants open, the nonprofit Food & Environment Reporting Network (FERN) reported on May 22 that in the U.S., “at least 220 meatpacking and food processing plants and 20 farms and production facilities have confirmed cases of Covid-19, and at least four food processing plants are currently closed.” In addition, FERN estimated that “at least 19,160 workers (17,360 meatpacking workers, 1,134 food processing workers, and 666 farm workers) have tested positive for Covid-19 and at least 72 workers (66 meatpacking workers and 6 food processing workers) have died.”

The outbreaks may be even more extensive, but large-scale meat processors and state and local officials are hesitant to provide data due to a “stigma associated with the virus,” the New York Times reported on May 25.

The problem is so severe for farmers that have been producing for the institutional food service market that in mid-May, USDA Secretary Sonny Perdue appeared on National Public Radio (NPR) to promote a $3 billion plan to establish a national “CSA” style Farmers to Family Food Box Program in an attempt to distribute food direct from farmers to low income families. 

"When you have the shutdown very suddenly of institutional food settings such as restaurants, schools, colleges and others, then that causes a misalignment in supply," Perdue told NPR’s Morning Edition. "And we've had to scramble in order to try to readjust that, and this food box program is one of those things which we've tried to do." 

Helping Both Sides of the Equation
When asked by NPR why not give people more money through the SNAP program to help people pay for food, Perdue responded, “That may help one side of the equation…it does not help those farmers and producers who have grown this food. They cannot make it to market because the supply chain they’ve been used to dealing with – the institutional food market – is no longer there.”

In seeking to reassure Americans that their food supply is safe, Perdue told NPR, “One of the challenges we had in protein – meat, poultry, beef, pork – had been the closure of some of our processing plants there. And we've had infections in those plants that caused some temporary closures. Essentially all those plants are back open. We've turned the corner, and while some retailers are suggesting they may not have the degree of variety that they once had, we expect that to be cured very quickly. I do expect us to be back up to 85-90% production in probably a very few days or weeks,” he said.

While USDA attempts to fast-track a direct distribution program, traditional CSA (Community Supported Agriculture) programs, where consumer members buy a “share” of the farm’s “often organic” harvest, are surging everywhere across the country, including record membership signups and waiting lists, reported NPR on May 10.

Food Prices on the Rise
Of greater concern, as nearly 40 million Americans have lost their jobs since the pandemic took hold in the U.S. in mid-March, the U.S. Bureau of Labor Statistics Consumer Price Index (CPI) announced that food prices in April recorded their highest monthly increase in nearly 50 years, reported USA Today on May 21. “Though overall, the April CPI declined 0.8%, consumers on average paid 2.6% more for groceries. It's the largest one-month increase since February 1974. During the past 12 months, grocery prices rose 4.1%. Price increases in the meat, poultry, fish and egg category were the steepest,” USA Today reported.

In addition, the Department of Justice and the USDA are reported to be investigating the four largest U.S. meat packers – Tyson Foods, JBS, National Beef and Cargill, who collectively control about 85% of the U.S. beef market – for price fixing. According to Politico, supermarket consumers are paying more for beef than they have in decades, but at the same time, the processing companies are paying farmers and ranchers “staggeringly low prices for cattle.”

Is the Supply Chain Broken or Stressed?
After Tyson Foods’ Chairman John Tyson warned in late April that “the food supply chain is breaking,” Abe Eshkenazi, CEO of the Association for Supply Chain Management, in mid-May told Supermarket News, “From our perspective we don’t think the food supply chain is broken as much as it is stressed. We’re entering a different frontier, relative to food right now, and that’s food scarcity. We started to see it in the beginning of the pandemic with consumer packaged goods, specifically toilet paper and paper towels. We saw a significant run on those particular products, but what we've also seen is that the supply chain has responded, so those gaps in the supply for those particular items are being filled,” he said.

“It's taken a while for the supply chains to respond to the spike in demand, but it's also critical that we recognize that this is a spike, Eshkenazi told Supermarket News. “This is not a new demand signal at that level. When we take a look at utilization, we're not looking at an increase in terms of food or consumer packaged goods…It's just that we're seeing a shift in terms of where the demand is being sensed right now, and that is in a home-based environment.”

When asked about shortages where retailers placed limits on consumer purchases, Eshkenazi shared with Supermarket News, “As the system catches up, I think we'll see an easing of that but it also does present a problem because the quotas are not relative to family size. They're relative to the buyer. So, a family of five or six has the same quota as a family of two. We have to be aware of the current circumstances that these individuals are facing. It's not a one size fits all.” 

Natural Products Manufacturers: Necessity is the Mother of Invention
Meanwhile, in the natural and organic products industry, producers and manufacturers are being driven by the rule, “necessity is the mother of invention.” By being nimble, companies are working hard to ensure a consistent supply chain for their retail and distribution customers. We talked with a few leading manufacturers and industry experts on how they are handling supply chain challenges during the coronavirus crisis. Here’s what they shared with us:

Carla Bartolucci, CEO, Bionaturae and Jovial
U.S.-born Carla Bartolucci and her husband Rodolfo are the founders of the certified organic brands Jovial and Bionaturae. The company is based in Connecticut but the main ingredients – wheat, the ancient grain Einkorn, tomatoes and other raw materials – are sourced in Italy, where the finished products are manufactured. As a provider of pastas, tomato sauces, juices, fruit spreads, cookies and other products, the brands have been in high demand during the pantry loading and subsequent shelter in place phases the U.S. has experienced during the pandemic.

“We were coming off of big months in January and February, and suddenly, here comes March. We were definitely caught off guard with the increase in sales we saw in flour, pasta and shelf-stable products. I can tell you for the first time in 25 years there was a day when our warehouse in Connecticut was completely empty,” said Carla Bartolucci.

The company could have sold more, but was limited by availability of a special compostable window used in the product packaging, and by having to queue up with contract manufacturers in Europe who were experiencing increased demand from all their customers. “Also, we blew through the contracts with our farmers already in June (contracts normally last until October), so we will be sourcing from outside of our network come July and August,” Bartolucci said. 

During the peak, the company was shipping out so many container loads each week that there was no time to fill them completely. “The volume of demand made us ship out containers that weren’t completely full, so there were some losses with that, but we had to get the product out. We are still producing and loading twice as much product as we normally would have, but not three times as much, so we can fill the containers more efficiently again,” she said.

Seeing a longer term impact to consumers’ purchasing patterns, Bartolucci observed, “Suddenly, the new facility we built four years ago in Connecticut now may not be big enough. I can see the future right here in front of me – people will be home more and cooking more. We are responding and preparing for the future much more quickly than we normally would have.”

Scott Jensen, CEO, Rhythm Superfoods
Rhythm Superfoods, an innovator in plant-based fruit and vegetable snacks, did a lot of groundwork to secure its supply chain well before the Covid-19 crisis hit, and it’s paying off, says founder and CEO Scott Jensen. The company, which requires the freshest product delivered consistently for its dried kale, beet, carrot, dried fruit and other certified organic snacks, made a strategic decision to shift its sourcing from the U.S., where weather and crops proved to be uncertain for the company, to working with four farming families in the north central region of Mexico. It is there, a good day’s drive from the Texas border, where the Austin-based company grows and manufactures all its products.

“We own two facilities in Guadalajara. Our farmers are all within a two- to three-hour drive to our production plant, and they are situated at different elevations, so we are able to produce all we need,” Jensen said. “Overall, the U.S. gets so much of its produce from South of the Border; it could be 30-50% of all produce sold in the U.S., depending on the season, and there are no tariffs on food. For Rhythm Superfoods, we need fresh, consistent, organic deliveries, and in that particular region of Mexico, they grow year round and our farmers are really good at growing a mix of crops,” he said.

“Our vertical integration also gives us the ability to sell beyond the U.S. market and to deal directly in pesos, which is a strong currency. We can ship to Asia and the EU and be competitive price-wise,” Jensen said. He also noted that the company has seen no slowdown in shipping at the border. “The crisis has prevented us from traveling to our farms for a few months, but we are getting everything we need from our producers.”

For its workers, the company has expanded cleaning protocols, implemented temperature checks, provided face masks, emphasized multiple hand-washing and continues to pay workers if they have to be sent home, among other heightened safety measures.

Jensen shared that his farmers have been impacted by the pandemic, as they grow for the food service market, too. “If we lost 50% of consumption of vegetables in food service, that hasn’t all shifted to retail; consumers don’t cook as many fresh vegetables at home as the chefs and restaurants who use a lot of fresh produce. As a result, all our farmers are recalibrating their plans for the growing season. I don’t think anyone can oracle out what’s happening in the next weeks and months, however, we are attentive to things going on daily and a slew of data, and we are communicating constantly with our leadership team,” he said. 

Pete Speranza, Cofounder, 301INC / General Mills
A former professional hockey player, Pete Speranza brings a competitive, team spirit as Cofounder of 301INC, the “brand elevator” arm of General Mills. As Director of New Business Development, Pete helped create a national scouting network for emerging natural and organic products brands, where he works closely with the entrepreneurs behind them. 

“What we’ve been telling our brands is that while external forces have changed, food values aren’t changing,” Speranza said. “Coming out of this, people will still eat more at home, and they may be looking for more nutrient-dense foods to support healthy immune systems. From a supply chain perspective, from the meat to the grain industry, we are moving beyond a commodity approach, where the farmer got paid the same price per bushel no matter the quality. Today, businesses are having to create supply chains that are nimbler to handle smaller producers. This will accelerate. People want transparency, higher quality and nutritious foods,” he added.

Speranza noted that a challenge smaller brands face today is that consumers are spending less time in grocery stores. “People are not browsing right now. They’re creating a list, getting their essentials, and there’s less impulse buying and discovery, which is what these new brands need.” Speranza is advising the brands he works with to be open to all sales channels and social media to reach and educate consumers about their products.

“Before Covid, everyone had their own zone and the supply chain was much more transactional,” he observed. “Yet, every part of that supply chain became nimble overnight. As a result, our brands will come out with stronger relationships with ingredient suppliers, co-packers and customers. This will bring some advantages in the future, as people may see they were more rigid than they needed to be, and that it may be more resilient to be nimble. It has reminded me how important a secure, transparent food supply chain system we will need in the future for people at any income level.”

Speranza also noted that “while forecasting tools were never dead on, in the old model, you weren’t off by more than 10%. In the next 10 months, efficiencies may be less because forecasts won’t be as accurate. We will need to build new data sets,” he said.

Cole Daily, EVP, Operations, Frontier Co-op
For more than 40 years, Frontier Co-op has been a leader in natural and organic herbs and spices, sourcing over 800 raw materials from more than 50 countries. “Needless to say, it made for a fluid, dynamic situation when Covid-19 hit; it was almost like watching dominoes fall when it hit China, then Southeast Asia, then Europe and then the U.S.,” said Cole Daily, Frontier’s EVP of Operations.

“Because the spice industry is uniquely vulnerable to outside forces, we have built a resilient supply chain by having alternative sources,” Daily said. “We’ve built some redundancy into our supply chain because, as they say, when Russia Sneezes, Poland gets a cold, which is very poignant right now. When you are sourcing from over 50 countries, something is bound to go wrong. As such, we are always planning for contingencies, but this is at a scale that is absolutely unprecedented.”

Daily noted that it hasn’t been so much a raw materials issue as it has been skyrocketing demand – company sales were up 100% for the latest four weeks in April, based on SPINS data, “and we are still tracking strongly, up over 36%, based on anecdotal IRI tracking data,” he said.

“The squeeze has been on the packaging side of things. After everyone emptied the shelves during the pantry loading period, refilling them has been a bit of a challenge. There’ve been short delays but we are beginning to normalize now. We’ve added new manufacturing lines and we are pretty much working nonstop to meet the overwhelming demand,” Daily said.

Frontier Co-op deals directly with farmers because, said Daily, who has been with the company 28 years, “We don’t want the inventory sitting overseas. We want it in our warehouse. In general, we go a little heavier on our inventories, which has helped in the current situation. Our suppliers are increasing their capacity right along with us and making sure they do it in a safe manner, but the $64,000 question is how do we forecast right now? We’re doing our best  to plan now for all types of products and to make sure we are out ahead of the demand. The resiliency we’ve built into our supply chain helps us, as we can go to these sources to increase buying, if needed.

For Daily, he has learned a few things during the coronavirus crisis. “The resiliency of people throughout the world, not just outside your front door, but the farmers throughout the world, the processors, and here in Iowa, the work ethic is incredible. Everyone is trying to do their best; we’re continuing to work through it, sometimes alone, but everyone together.”

Nikki Nolbertowicz, Midwest Regional VP, Presence Marketing
“Before the Covid crisis, products including soup and cereal were slow. Now, there’s a joke that there’s no ramen available in the distribution centers,” said Nikki Nolbertowicz. As Midwest Regional VP for Presence Marketing, she manages distributor relations nationwide for the leading independent sales brokerage firm, which celebrates its 30th anniversary in business this year. 

When distributors have to solve out of stock situations, it can create opportunities for other brands, Nolbertowicz noted. “For example, a distributor might try to bring other rice brands in, or find alternative products to fulfill current demand,” she said. “Consumers, too, are either trying other brands or new products, or looking online.” Over the past few months, distributors Nikki works with in ecommerce sales have seen an uptick three times their standard volume, and could have sold more if it were not for being out of stock on certain items, she said.

For brick and mortar stores, shopping habits have changed – consumers want to make less stops, so the average basket amount has gone up, Nikki observed. “There’ll be limited travel this summer and the kids will be home more with many activities being cancelled or delayed, so there will be more meals at home. For people whose jobs have not been impacted, they are beginning to splurge in grocery stores again, with an emphasis on self-care. For consumers that have been negatively impacted financially from the pandemic, they are looking at value products. Later in the year, many people will look to do more with less for the upcoming holidays with their families. Distributors are starting to think about that now,” she said.

Acknowledging that the concern is real for manufacturers in making sure they can meet the needs of retailers and distributors, Nolbertowicz noted that the industry overall has done an impressive job in responding to the pandemic. “I give everyone we work with – distributors, retailers, manufacturers – a lot of credit. Under the circumstances, they’ve done an amazing job and have been flexible, nimble and have upped their communications game. Getting the message out is more important than ever; with none, there is chaos.”

For Nikki, she believes that this has been an optimistic time for the natural products industry. “It has given new life to manufacturers and independent retailers, and has changed some consumer behaviors where people will be focused on cooking meals in the home and more time with family. Life will go back to some sort of normalcy, but the experience of family meals and quality time – people will want that to continue, which just helps our industry. This experience has given us all a chance to pause, refocus, and reprioritize in our work and personal lives what is most important. That will resonate for more than just the short term,” she said.

Bill Evans, CEO, Kalona SuperNatural
As a small scale, certified organic, grass fed dairy producer, Kalona SuperNatural has built resiliency into its supply chain by working not only with its own community of Amish and Mennonite dairy farmers in Eastern Iowa, but also by becoming expert in sourcing and brokering organic milk from throughout the nation, said Bill Evans, CEO and founder of the company. 

Also, the brand, which is growing, found itself at an advantage when the Covid-19 crisis struck because its sales are primarily in natural products grocery stores. “The conventional guys are having issues because they’ve got a large portion of their manufacturing set up for food service; there’s no place for that to go right now,” Evans said. 

Since the pandemic began, Kalona has been filling distributors’ large orders. “We’ve been able to accommodate a 25-30% increase in sales volume, whereas larger producers are shorting people. Kalona SuperNatural has been more successful than others in balancing our organic milk supply,” he said.

In addition, to its own production facilities, where workers have ample space for social distancing, Kalona owns its own trucking company, which has been a big advantage in getting deliveries out during the crisis. “We have the capacity to secure additional trucking when we need it. We provide dated, perishable product, and it needs to turn quickly; that means distributors will get us unloaded, even when their docks are crowded,” Evans noted.

“We have workers that have to be here to bottle milk and load and drive trucks. We’ve been taking all precautions and those folks have felt safe coming to work. What I’m most proud about is that our team has stuck together and gotten the job done,” he said.

Brad Barnhorn, Board Member and Business Advisor
After successfully building Fantasia, a leading natural juice brand that merged with Naked Juice and was subsequently acquired by PepsiCo, Brad Barnhorn has been advising CEOs and serving on numerous boards in the natural products industry, giving him a unique perspective on what’s happening with emerging and established brands during the pandemic.

“During this period, though there may be different dimensions, the questions are the same – how do you treat your customers, employees, supply chain and other partners?” Barnhorn asked. And how do you respond to the pressure to focus on performing items, Barnhorn also asked, referring to the compulsion for companies to do “SKU rationalization” as manufacturers, as well as retailers, focus their resources on the products most in demand.

“If you’re a company with sales north of $50 million or $100 million that has great brand equity, that allows for flexibility to temporarily stop some SKUs. The tough space is when you are a mid-sized company, say in the $15 million to $20 million range, odds are if you take some SKUs out, you might not get them back in the stores. That might not be the right decision, strategically. If you’re a small brand, you might not have the market power to bring the SKUs back,” Barnhorn said.

Instead, he offers, “I might make the decision as a small company to change my production schedules. Maybe I produce the item less frequently but with higher inventory levels, try to find ways to reduce complexity, have more efficient runs, and take a risk on higher inventory. Many distributors have been more flexible with brands on their standard requirements for the amount of shelf life that needs to be remaining on the product when they receive it into their warehouses. For example, UNFI typically requires 75% of shelf life remaining, but it has been making exceptions to that. It is essential to be in close contact with your distributors on an ongoing basis to understand this dynamic, as well as other elements of working with them that may have been altered in this unique period to provide companies a measure of operating flexibility ... but also, are more than likely to change back to the previous rules of engagement in the future,” he said.

Barnhorn advises, “If you have not audited your supply chain in the past two to three years because things have been going on as normal, it’s time to analyze, talk to other manufacturers and co-packers, get up to date on the flexibility and options you have in your supply chain. Take this moment of urgency to have these conversations.”

Daniel Fabricant, CEO, Natural Products Association
As CEO of the largest trade association representing the natural products industry, Daniel Fabricant, Ph.D., is concerned about fraudulent products as consumer flock to dietary supplements to strengthen immunity and health. “Elderberry is very popular right now. There is such consumer demand and the margins are so big that we are starting to see adulterated product come out. We may see many more fakes in the market because that’s where the demand is,” Fabricant warned. “If it sounds too good to be true, it probably is. It may be best to stick with the brands you’ve always seen in your natural products retail store – they’re well established and trusted,” he advised.

On the plus side, Fabricant noted that 70% of Americans use supplements, though many of those have been casual users. “But now many of those consumers will take extra supplements, such as zinc and Vitamins C and D. These products will stay part of people’s regimen,” he said. However, Fabricant noted that the sports nutrition category has taken a big hit as gyms have closed down.

“The biggest thing for us as an organization was when the Department of Homeland Security issued their first guidance, there was no mention of supplement manufacturers. However, in the second guidance, we were successful in getting the language in to protect the supplements supply chain. We wanted to keep as many channels of distribution open as possible, said Fabricant.

“The supply chain in the next five to 10 years is going to be a very fast moving target. We can do manufacturing smarter and cleaner now, and there is strong interest in vertically integrating in the U.S. Also, while people say that everything is going to the Internet, there is still strong interest in going to stores; people want to go to independent retailers. Most importantly, “Fabricant advised, “as an industry, we always have to stay engaged. We are an essential business, and that messaging should never stop.”