Stockout in aisle 6 -

The COVID-19 pandemic has affected many aspects of people’s lives. Companies’ supply chains were affected, unemployment rates rose dramatically and the government-imposed stay-at-home orders rendered grocery stores nearly our only source for food and other necessary household products. Shortages inherently occurred; the causes for the shortages varied, as did their durations. After several weeks, many shortages were resolved, but paradoxically returned as states began to reopen.

In May, we published a first look at grocery shortages  based on information we had received from grocers through the early months of the pandemic. Since then, we received extensive data for the first six months of 2020 from a regional grocery store chain to research their shortages and investigate the industry’s pandemic-related inventory challenges.

We also had unfettered access to managers. The company’s supermarkets span multiple states and are diverse; they service towns as small as 15,000 people and cities with more than five million residents. We investigated various supply chain challenges felt by the company’s procurement and distribution teams, their suppliers, and their supermarket managers and employees. We identified both demand-disruption and supply-disruption reasons for shortages. A variety of factors were recognized that impact the length and severity of the grocer’s out-of-stock situations.

Direct pandemic-related demand disruptions
As the United States population became aware of the pending peril of the novel coronavirus, consumer purchasing behavior changed rapidly. Retailers quickly felt the effects of direct, pandemic-related demand disruptions. A short-term run on bottled water was an example of panic-buying based on unfounded fears of potential water scarcity. The feared water shortages never materialized, as retail bottled water inventories quickly recovered. Some stores experienced shortages for less than a week.

Sanitizing items, however, are not typically purchased in significant quantities by grocery stores. During the viral pandemic – demand surged and shortages erupted. Inventories are currently increasing for sanitizing products and personal protection equipment (PPE); however, demand is still not adequately met. Hand sanitizer is a relatively simple product to produce. Merely a bottle, ethyl alcohol and aloe are required. The supermarket stores began having adequate quantities of hand sanitizer within ten weeks of the first shortages. In contrast, keeping sanitizing wipes on grocery store shelves is proving very difficult. During the final weeks of June, 56.2% of stores stocked out of sanitizing wipes on any given day. Production of sanitizing wipes is more complicated than for hand sanitizer. Manufacturing is at capacity.

Pandemic-related channel-based demand disruptions   
Government-imposed stay-at-home orders have drastically increased the amount of food and household products we consume at home. Toilet paper received much attention in the early phases of the COVID-19 pandemic. The popular media frequently blamed consumers for toilet paper shortages. Articles about panic buying and hoarding appeared in numerous media publications.

Early in the pandemic, panic buying certainly contributed to toilet paper stockouts. However, panic buying is a temporary phenomenon. There is enough domestic toilet paper production capacity. Curiously, as society implemented social distancing, a persistent toilet paper shortage evolved. Obeying the stay-at-home orders, most people were no longer using the restrooms at their schools, restaurants, hotels and workplaces.

Regardless of the venue, individual toilet paper requirements are constant. Georgia-Pacific estimates that we must purchase 40% more toilet paper by remaining solely at home than when we use more varied toilet facilities. Most toilet paper mills are optimized to produce toilet paper for only the commercial or retail channel. Transitioning toilet paper supplies from one channel to another is challenging. Through efforts by suppliers and creative sourcing by the grocer, supermarket stores resumed having adequate toilet paper on shelves within eight weeks.

Unlike toilet paper, the packaging is often the only product difference between the commercial and retail consumer food channels. When restaurant dining options diminished because of the pandemic, households began preparing more meals at home; spaghetti became abundantly popular. Spaghetti was also subject to brief panic buying and sustained stockouts; there was a brief pause before replenishment. The supply recovery for spaghetti took about five weeks.

Large-scale retail pasta producers typically are multi-channel suppliers. With the collapse of the foodservice industry’s demand, pasta suppliers switched to retail packaging. The grocer’s pasta suppliers, DeCecco, Riviana and their private label supplier, also produce for the foodservice industry (see Figure 1). When restaurants began reopening towards the end of May, the overall demand for spaghetti increased. During late May, spaghetti stockouts at the supermarket stores resumed. Shortages continued throughout June. Home-based spaghetti consumption remained elevated even as restaurants were reopening. Channel-based competition for pasta products occurred between grocery stores and the foodservice industry.

Commodity baking products sell through retailers and are used by the foodservice industry. Commercial bread production has continued during the pandemic, and bread sales in supermarkets increased. Home baking has become popular again, and demand for retail baking commodities has risen correspondingly. Baking items like flour and sugar were often unavailable in the early stages of the pandemic, but their availability on store shelves has recovered.
 
The retail demand for dry yeast has increased, and keeping it in stock has proven challenging. The grocer has a single brand of yeast, Fleishmann’s, and the product had never previously suffered significant stockouts. However, on average, less than 39% of the supermarkets had dry yeast available during the final weeks of June. Many grocery store food producers and even beer manufacturers require yeast. Yeast production may have reached full capacity, and retail shortages may persist.

Unlike most items at supermarkets, beer, soda and many snack foods are often delivered and stocked by the supplier. For sodas, direct store delivery allows bottlers control of shelf-inventory management. It permits the bottler oversight of pricing and promotions—the retailer benefits by essentially outsourcing the management of fast-turning products. In the states where the grocer operates, beer must be delivered and stocked by licensed distributors. Even though beer sales have generally increased during the COVID-19 pandemic, there was never a complete category-wide stockout. Individual beer brands did stock out, but the stockout rate was not appreciably different than before the pandemic.

Like beer, soda sales at the grocer have increased by approximately 15% during the pandemic, but soda never wholly stocked out. Distributors of beer and soda typically service multiple local channels. Locally-operated multi-channel distributors are proving more resilient to channel-shifts in demand. Beer and soda distributors deliver to the foodservice industry, vending locations, and retailers. Most of their products are interchangeable and are often identical across channels. Because of their flexibility and proximity to retailers, beer and soda distributors can react quickly when demand disruptions occur.

Pandemic-caused supply chain disruptions
In April, nearly 5,000 cases of COVID-19 occurred at 115 meat and poultry processing facilities across 19 states. JBS USA, Sanderson Farms, Cargill, Smithfield and National Beef Packing Company, among others, all closed or reduced operations at plants during April and May. While some plants were closing and cutting operations in May, other plants began reopening under new safety procedures. The implementation of COVID-related safety procedures reduced the production capacity of beef processing plants. According to the USDA, most meat processing plants were operating at 95% capacity as of June.

Early grocery shortages were primarily caused by demand disruptions when household consumption of supermarket items increased rapidly and dramatically. Continued meat shortages, however, are the result of supply chain disruptions caused by reduced production capacity. Unlike other product shortages, grocers have allowed the price of meat to rise. Before the pandemic, ground beef averaged just under $4 per pound. During June, the grocer’s average price was $6.19 per pound. During the early part of May, there were also substantial stockouts with a correspondingly dramatic dip in ground beef sales. More beef became available in June.

Meat producers supply their products directly to grocers and are, therefore, Tier 1 suppliers to grocery stores. Toilet paper manufacturers, canned vegetable suppliers and pickle producers are all Tier 1 grocery suppliers that have been impacted by COVID-19-related demand and supply disruptions. Tier 2 manufacturers produce products for Tier 1 suppliers. Tier 2 supply shortages began affecting product availability as the COVID pandemic has continued to persist. Increased retail grocery demand, combined with capacitated manufacturing, led to the exhaustion of safety stocks during the pandemic’s early months.

The challenge regarding glass jars is acute. Because of reduced city services, there has been a 30% reduction in glass recycling. During some weeks in late May and in June, Claussen pickles experienced a decrease in availability, often nearing 88%. During other weeks, pre-pandemic-levels of pickles were available. The availability of Claussen pickles has been inconsistent due to the unpredictability of their glass jar supply (see Figure 2). Unfortunately, if the COVID-19 pandemic persists, there may be unforeseen tier-based shortages up and down grocery supply chains.

Lessons and takeaways from the grocery store industry and the COVID-19 pandemic
Across channels, there is substantial production capacity and inventory for most grocery items. Since the pandemic began, there have been encouraging signs of supply chain cooperation and baffling occurrences of shortages. Few would have guessed that yeast would be troublesome to keep stocked during a pandemic. During the Easter season, cooperation occurred among egg suppliers to provide retail cartons to foodservice producers to keep store shelves stocked. When demand disruptions occur, improvements in supply chain management are required to facilitate the transfer of products across channels better.

A modest increase in the number of people eating and working outside the home alleviated toilet paper shortages. However, for spaghetti, competition among channels has contributed to persistent shortages. The unpredictability of COVID-19 hot spots has made forecasting consumer demand nearly impossible. Where possible, supermarket supply chains need to have more flexibility designed into them.

Personal protection and sanitizing products are challenging categories; rapid demand shifts can occur with little warning. Hand sanitizer expires after about three years and may be challenging to stockpile because the alcohol eventually dissolves. Consumer-grade masks and disposable sterile gloves have near-infinite shelf-lives; however, most are produced in China. As a supply chain management profession, we need to develop a solution for shortages of personal protection and sanitizing products. Perhaps a public-private partnership will be required to maintain stockpiles made available to retailers during public health crises.

There has been an opportunity for grocers to gouge customers. They have primarily resisted doing that. There have been substantial increases in beef prices due to scarcity and increased production costs for meat products. However, for the most part, grocers have held their prices relatively steady. Supermarkets have instead chosen to limit purchase quantities. Naturally, many promotions have stopped. Overall, the grocer reports that prices have aggregately increased in their stores by 3% during the pandemic. The grocer has also experienced increased costs due to social distancing requirements and production limitations. There have also been constraints in transportation, distribution throughput, and labor.
 
As the pandemic subsides, we cannot allow the observations made regarding the COVID-19 pandemic to fade with time. Grocery retailers must be vigilantly aware of the scaling capabilities of their suppliers. Having producers in each commodity category that also supplies the foodservice industry or other commercial markets is critical when demand disruptions occur. Their cross-channel production provides a pooled inventory not available to retail-only producers.
 
Hopefully, we will never experience another public health crisis like the COVID-19 pandemic. Pandemics affect supply chains and create demand disruptions for months, perhaps years. The impact on people and the economy is substantial. Despite frequent shortages of many frustratingly basic products, supermarket supply chains are proving remarkably resilient during this unexpected pandemic and its enormous disruption to our everyday lives. Our continued relative comfort and sustenance are thanks to the hard work of grocery employees, managers, and their suppliers.

Daniel Taylor is an Assistant Professor of Supply Chain Management in the Rawls College of Business at Texas Tech University. He can be reached at [email protected].

Alan Pritchard is an Assistant Professor of Supply Chain Management in the Rawls College of Business at Texas Tech University. He can be reached at [email protected].

Dale Duhan is a Professor of Marketing in the Rawls College of Business at Texas Tech University. He can be reached at [email protected].

Shashank Mishra is a Food Industry Analyst and holds an MS in Data Science from Texas Tech University. He can be reached at [email protected].