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The last two years brought many distinct economic swings: Pandemic, supply chain challenges, inflation, inventory glut. The effects of these aren’t playing out in isolation. Rather, they are overlapping.
While the conversation is currently focused on inflation and a potential downturn in consumer spending, it’s worth remembering that supply chain constraints are still present for consumer goods companies, even though the bottlenecks of 2021 are no longer as prevalent. Reports of shortages have continued, with products ranging from baby formula to tampons to sri racha hot sauce becoming more difficult to find in recent months.
Hershey recently delivered the latest sign that the supply struggles aren't completely over: The company warned that it won’t be able to deliver enough Halloween candy to meet demand.
Public company earnings calls to recap the second quarter offered insights into what’s going on behind the scenes.
Disruptions still present
For apparel company Skechers, delays remain present in Asia, where the pandemic continues to affect business operations.
“We continued to experience challenges from shipment delays, particularly in Asia as a result of COVID-related countermeasures to domestic processing congestion in our distribution centers and those of our customers,” said CFO John Vandemore.
Supply chain issues affect the future as much as they do the present, as goods are ordered months in advance to arrive for specific seasons. So it's a factor as the company looks toward the rest of the year, as well.
“Our supply chain and logistics teams are working diligently to ensure our products are delivered to our customers and stores and ultimately reach our consumers as quickly and efficiently as possible," Vandemore continued. "However, we do expect supply chain disruptions to continue to constrain our ability to fully meet consumer demand and to drive distribution inefficiencies throughout the balance of the year.”
Still, there are signs of improvement.
“Relative to the last time we updated you, we're starting to see the level of supply chain disruption ease, albeit nowhere near the pre-pandemic normal,” said Matt Puckett, CFO of VF Corp., the apparel company that owns Vans, The North Face and Dickies.
Puckett offered commentary on the steps that move goods from production to retail.
“In terms of logistics, we're seeing improved transit times across the water, reflecting a slight ease in congestion and shortened dwell times in port,” Puckett said. “This is leading to overall better predictability and reliability. From a cost standpoint, there is some abatement in spot rates, both ocean and air, albeit these remain high relative to historic levels.”
A whole new level
According to Nestle CFO François-Xavier Roger, the supply chain challenges for the food company are coming on three levels: Capacity, transportation and access to raw materials. Finding trucks and drivers was particularly "tense" in the second quarter, Roger said, while the war in Ukraine led to difficulty in obtaining raw materials.
“This has been a year of extraordinary supply chain challenges and input cost inflation,” said Mark Schneider, CEO of Nestle. “The situation was difficult before, but the war in Ukraine brought this to a whole new and unforeseen level, in particular for the food industry.”
Supply chain is one of the reasons Columbia Sportswear is taking a more conservative approach to its outlook for the rest of the year.
"Supply chain challenges remain elevated and are anticipated to continue throughout the rest of the year," CEO Tim Boyle said. "We have worked to mitigate supply chain constraints by taking orders earlier from our retail partners and placing orders earlier with our factory partners."
As-yet-unsolved labor negotiations in West Coast ports and continuing pandemic restrictions in China are among the factors playing into the company's considerations.
Hershey, which makes Reese’s, KitKat and Twizzlers alongside its eponymous chocolate products, offered a view into how supply chain issues have shifted over the last two years.
“Where we are now, I would say early on it was some of the basic logistics issues largely driven by labor, and as we've evolved, I'd say we're now starting to see bigger concerns relative to scarcity of ingredients needing to leverage different suppliers at higher cost and price points in order to secure production,” said Michele Buck, CEO of Hershey.
The war in Ukraine has led to issues sourcing raw materials, and natural gas disruptions in Europe, Buck said.
Combined with capacity constraints, this is leading to a shortage that may leave some trick-or-treat bags lighter this year.
When it comes to Halloween and holiday candy, “We will not be able to fully meet consumer demand,” Buck said. The company makes every day and seasonal candy using the same production line. When it made decisions about what to make in the spring, it identified a need to improve the every day inventory, which took precedent over the seasonal candy.
“We have a strategy of prioritizing everyday on-shelf availability,” Buck told analysts, adding that the company is still expecting single-digit growth through the fourth-quarter holidays.
“It was a tough decision to balance that with the seasons, but we thought that was really important.”
Trending in Operations
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.