The great foodservice diversion: can companies repurpose fast enough?

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Foodservice suppliers are scrambling to repurpose their businesses. Can they do it quickly enough?

And just like that, the UK’s eating out market - worth £81.1bn, according to MCA - as good as vanished. When Boris Johnson ordered that every restaurant, chain, café and pub in the UK no longer let customers in earlier this month, the foodservice supply chain lost nearly 80% of its market overnight, estimates the AHDB. The remainder also took a hammering with the closure of most schools last week.

Wholesale orders of food and drink, valued at £10.9bn a year by the Federation of Wholesale Distributors, were reduced from a torrent to a trickle in days. Some distributors have lost 95% of their trade. The fifth of beef volumes and 13% of potatoes (the AHDB estimates) eaten out are no longer. While some eateries are offering takeaway, the scale of such operations is minuscule.

“I invited the team in and told them their salaries and working time would be cut because there were no orders for the following week. I assumed 12 years of effort was gone,” says James Durrant, co-founder of food production firm Mustard Foods, which supplies around 25 restaurant groups and chains across Europe. “Then I decided no, we’re going to fight.”

A once-secure sector is now in a desperate struggle for survival. It is acting swiftly to change business models, adapt operations and move into new markets.

But can it divert supplies quickly enough to tap areas where demand is surging? How might a major diversion be co-ordinated at scale? And will it be enough for foodservice sector companies to stay afloat?

“What the grocery industry is experiencing now is Christmas on steroids”

The devastation facing foodservice comes as supermarkets are facing a huge increase in demand. March saw year-on-year supermarket sales grow by 20.6%, according to Kantar figures.

“We know that 50 million meals a day were eaten out of home and now we’re all in our homes not eating in restaurants, bars, schools or offices any more,” says John Vincent, CEO of Leon. “What the grocery industry is experiencing now is Christmas on steroids.”

To capture those customers facing empty shelves in supermarkets and long waits for online delivery slots, several companies - many of which must stay open to serve clients in the NHS, care homes, prisons and schools - have started direct-to-consumer sales.

“Our business changed overnight - last Saturday we had an emergency strategy meeting. By the end of the day, our next-day home delivery service was live,” says Sezer Ozkul, chief products officer at JJ Foodservice.

Shifted focus

Dorset-based Roberts Foodservice has also shifted its focus to consumers. “It’s not the nicest way in the world to make money, but at least we’re here,” says the company’s sales manager Jason Freeman. “We were expecting it to die off, for people to stop panic buying and the supermarkets to get it all together. But it hasn’t. If it can carry on like this fantastic because it keeps us going.”

More than 1,000 new members have registered with Savona Foodservice’s consumer site in the past week. “The only trading customers we have now are care homes and a small amount of school service,” says Jenny Squire, group digital manager. “All other income is coming from serving the public, whether via collections or home delivery.”

Bidfood and Brakes have followed suit. “As we see many outlets sadly shutting their doors for the foreseeable, the pressure on the retailers is only seeming to grow so we have launched a service that will be a mixture of click & collect and delivery to try and support the demand as best we can,” a Bidfood spokeswoman says.

While such moves are helping keep businesses running and people employed, sales are only a fraction of typical volumes. When supermarkets overcome the so-called bullwhip effect of demand, consumers shopping at foodservice companies could fade away.

“After the government announcement we lost a significant amount of our core business. While our business to consumer move is going well, it doesn’t make up for this large short-term loss,” Ozkul says.

McCain - which supplies chips to McDonald’s, Burger King and Nando’s - is trying to help customers stay open longer with free cases of fries designed for delivery and support. “In these unprecedented times, it is vital we all pull together as an industry,” says Richard Jones, commercial director of McCain Foodservice Solutions.

Others are hoping that satiating the needs of key workers - particularly those in the NHS - who are still out working, and those of vulnerable people, will keep their companies ticking over. Mustard Foods - which has seen output plummet from 30 tonnes of food a week to five - has partnered with nearby St George’s Hospital and a vulnerable children’s organisation to prepare meals on its site at cost price.

Durrant has approached local catering firms to help scale up preparation, but says they have shut up shop. “They’d rather stay at home and watch Netflix than come out and fight,” he says.

“If I’m going to keep my factory alive, I’m going to have to support these people as best we can,” he adds. “Otherwise I’m not going to have a factory, and I’ll have 60 staff trying to find free sandwiches.”

Other suppliers are trying to rapidly switch from their usual channels and into retail.

Mid-market milk supplier Freshways, facing a 60% drop in sales to the foodservice and hospitality sectors, earlier this month said it was putting the milk on to the spot market. It’s since been handed a lifeline after being taken on as a supplier for Morrisons’ wholesale operation (p43), but it’s only a fraction of the volume.

The AHDB estimates eight million litres of milk is sold to foodservice outlets every week. “While there appears to be enough demand to make use of the milk diverted away from foodservice markets, it will have serious short-term impacts on those processors who are heavily reliant on this segment of the market,” says AHDB lead dairy analyst Patty Clayton.

Foodservice giant Brakes has partnered with Iceland to supply milk and also Sainsbury’s to sell catering-sized packs of tinned goods in stores in Kent.

McCain, with both foodservice and retail arms, is better positioned to pivot to where the demand is. “From a retail perspective, we’re in a fortunate position as our products can be enjoyed in and out of home, which gives us cross-channel insight into what consumers are eating,” says McCain marketing chief Mark Hodge. “During this time we are experiencing unprecedented demand in retail as most people aren’t eating out at all.

“So in response to this we are closely monitoring sales and inventory, building contingency plans across the supply chain and adapting our plans as required to ensure we are able to keep up with this demand.”

Shelves in supermarkets are not as bare as they were just weeks ago. Mults are already removing buying restrictions. That could change, with government warning “up to one fifth of employees may be absent from work during peak weeks”. Companies will need to stick it out long enough to be ready to step up.

Foodservice: the numbers

50 foodservice wholesalers have stopped trading

200 foodservice wholesalers employing 17,000 people at ‘high risk of collapse’

Source: FWD

Too late to adapt

For many businesses in the foodservice supply chain, it may already be too late to adapt. About 50 foodservice wholesalers have already stopped trading, either permanently or with all staff furloughed and no business taking place.

“Many regional foodservice distributors are currently 80% or more down on turnover,” says FWD CEO James Bielby. “Some will close in the next two weeks unless support is provided, others within three months at most. These are businesses which were solvent, prior to the enforced closure of their customers.”

The federation says more than 200 of its members - accounting for around half the total foodservice sector by turnover - have described themselves as being at high risk of collapse, possibly within weeks. Those companies employ 17,000 people directly.

Alternative channels will not be enough to sustain many firms in the short and medium term.

In many cases, foodservice companies are owed money from customers that have shut their doors and will have no means to pay any time soon. Those companies in turn have little means to pay for goods bought on tick from suppliers who may be facing a similar issue with their own suppliers.

Chancellor Rishi Sunak’s £330bn pledge to keep the country going through the coronavirus crisis is welcome. But the available cash grants of up to £25,000 going to frontline hospitality businesses are not always being used to pay suppliers.

“The supply chain remains flexible and robust, and has once again demonstrated its unique ability to respond to fluctuations in demand”

“The theory does not match the practical reality,” says Darren Goldney, MD of buying group Unitas, which comprises 70 foodservice wholesalers and 27 on-trade specialists.

Says Bielby: “Hospitality customers are not trading and not paying their bills, so the distributors have both bad debts and stock they cannot move on. Their suppliers are not extending credit.”

And while little is coming in, they have “high fixed costs,” Bielby adds, that must be incurred to fulfil continuing service obligations.

Many foodservice supply chain companies also have cash tied up in stock that is perishing. Just how much stock is on the brink of being lost is not clear. Late last week, the British Frozen Food Federation, the Federation of Wholesale Distributors and the Provision Trade Federation joined forces on a project to capture this data from their members.

“We urgently need to understand the size of the problem we are facing,” says BFFF CEO Richard Harrow. “They’ve done some sterling work to repurpose what they’re doing. It’s quite remarkable. But there’s going to be a lot of food they’re going to struggle to do anything with.”

The platform lets companies list their top 10 overstocked chilled and frozen lines and the total value of the stock under threat. Days after the platform launched, £1.7m of stock had been listed.

Only so much stock that can be frozen will be. “We expect continued inflow into storage from food growers, processors and imports, but demand from customers will be lower. Consequently, cold stores will get full,” says Cold Chain Federation CEO Shane Brennan.

Co-ordination and collaboration

It is time for collaboration among the survivors. The crisis has seen many trade associations and companies join forces to work out solutions and lobby government.

The perishing stock data capture project is one such initiative. The priority is to gather data, and “then work out solutions to help the companies deal with that stock overhang” Harrow explains. A rescue package could be necessary “because they’re obviously not going to recover the commercial value on the product had they sold it down the normal channels”.

Defra has been instrumental in bringing together a steering group together with the Food & Drink Federation and FWD to seek out companies, organisations and initiatives that will help to repurpose goods once destined for the hospitality sector.

Communication channels between the sector and the government are open. A newly formed Food Resilience Industry Forum, dubbed ‘the War Room’, converges regularly. Associations FWD, NFU, ACS, BRC, UKHospitality and FDF are engaging with Defra and environment minister George Eustice three times a week. Supermarket CEOs, meanwhile, are hooked into 10 Downing Street and the Home Office.

The FWD says government officials have agreed to relax labelling laws in principle beyond consumer safety and may “limit bigger enforcement to allow opportunities in other channels”. The federation is also putting pressure on the Cabinet Office to allow potential tax breaks for food that must be written off.

The FDF is working “hand in hand” with government for greater protection of the sector, says its CEO, Ian Wright. “The supply chain remains flexible and robust, and has once again demonstrated its unique ability to respond to fluctuations in demand, no matter how extraordinary,” Wright says.

The NFU is also “leading talks with government” on ways to more easily divert supply destined for foodservice into retail. “There are several obstacles in the way of simply moving product from one market to another, including packaging, logistics and contractual agreements” it said this week.

Further relaxation of competition laws to allow businesses to talk about stock levels and work collaboratively to manage short-shelf-life products is also happening.

Foodservice: the numbers

21% of beef volumes go through eating out

51% of meals out involve dairy

8m litres of milk sold per week to foodservice outlets

9.8bn meals eaten out last year

Source: MCA/AHDB

There is little doubt financial aid will be needed. The Chancellor has already announced any viable business with a turnover of up to £45m can access government-backed finance of up to £5m.

Anecdotally, however, foodservice supply chain companies that fit the bill are being turned down by banks due to the value of their assets.

“The interest-free loans still appear inaccessible to wholesalers who, for generations, have worked to create an asset value that may preclude these loans and force a situation where they can borrow, but at commercial rates and with no guarantee of debts to them being paid in the future,” Goldney says.

“Some might argue this is a disgrace. Some may argue it’s a lack of understanding, but either way, it’s a heart-wrenching situation,” he adds.

Survival of the supply chain is crucial, adds Harrow, for when the crisis is over. “We need to get help to these companies to try and keep them going,” he says. “When we come out of this we’re going to need these companies there to restart the economy.”

What’s needed most now, though, is big, ambitious ideas. One such idea is coming from Leon’s Vincent. Online platform Feed Britain will launch on 7 April, to link struggling restaurant suppliers to consumers at scale.

“What we are trying to do is link up all of the people who are going under because they don’t have a restaurant to see how they can repurpose their restaurant offering for the customers at home,” explains Vincent.

“Lots of people have started to do this, some have succeeded, and some have lost money. Some did nothing, some repackaged and realised it was uneconomic. What we need to do is find an economically sound way for those suppliers to substitute their demand with consumers,” he adds.

The platform will initially involve six suppliers, growing to 200 more who have already committed to having a presence. The first products sold will include basics such as milk, bread, fruit & veg, ready meals and Leon’s grocery range, which is currently stocked in Sainsbury’s. It is worth a punt. “My view of life is try - that will tell you the answer,” says Vincent. “Get going. Don’t f*** about, then we’ll see.”