The Evolution of Farm to Table

    Getting food from the supplier to the menu has never been more complicated. Here’s what you need to know about the evolving supply chain.

    National Cattlemen’s Beef Association

    Restaurant operators are looking into ways to make their supply chains more efficient so that premium menu items can more easily make their way to customers’ plates.

    Question James Cascone, co-leader of the Deloitte Center for the Global Food Value Chain, about trends affecting today’s quick-service supply chain, and he will offer a litany: rapidly changing consumer preferences, global pressures, menu labeling, infrastructure and transportation issues, the rise of co-ops, climate change—the list is long enough to overwhelm even the most sophisticated supply chain manager. Some matters lend themselves to easy action. Others require a fundamental shift in how operators and the producers, processors, and distributors who make up the foodservice supply chain approach sourcing for years to come.

    Mark Allen, president and CEO of the International Foodservice Distributors Association (IFDA), puts the status of today’s supply chain issues this way: “Everybody in the supply chain needs to be cognizant of what’s happening so as an industry we can continue to grow together.”

    Partner challenges

    Each step of the quick-service supply chain presents its own unique challenges. The farmers and ranchers raising the raw ingredients that make up menus are working to increase production as they deal with climate change, soil degradation, and limited natural resources, including water and energy. At the same time, processors are concerned with meeting global demands fueled by emerging economies and achieving scale to foster efficiencies.

    What is happening with today’s beef prices illustrates how those factors impact the operators and the customers. Sustained drought conditions in the West and Plains for the past five years led ranchers to destock in order to cut feed costs. At the same time, demand for high-value proteins like beef, pork, and chicken grew in emerging economies such as China, Mexico, and Central America.

    Limited domestic supplies forced U.S. cattle prices to record highs in 2014. In turn, wholesale beef prices increased by 28.6 percent year over year and are expected to increase another 4.5–5.5 in 2015, despite lower feed costs.

    Prices remain high because herds remain small. It will take two to three years for livestock producers to rebuild to pre-drought levels, says Mike Miller, senior vice president of marketing and research at the National Cattlemen’s Beef Association (NCBA).

    “Our producers are very much in growth mode today,” Miller says. “They’re increasing the number of cows being bred versus being put through the production process. Still, it takes a year to raise a calf.”

    RaceTrac, a Southeast-based convenience store with more than 360 units, immediately saw the impact of rising beef costs on its foodservice margins. The chain sells Nathan’s Famous beef franks and, faced with the choice of eating the rising costs or passing it along to guests, RaceTrac ate the cost and focused efforts on increasing unit sales.

    “Commodity costs are going up, and you really can’t source around that,” says Bart Stransky, executive director of merchandising at RaceTrac. “To stay competitive, we have to keep our prices low. We can do that by offsetting our lost margin dollars with volume.”

    Further up the supply chain, distributors are working through a short-haul driver shortage of approximately 35,000 people. Trucking industry analysts caution that shortage could grow to 240,000 by 2020. Foodservice wholesale will need 22,000 new drivers this year and is paying above-market wages to attract and retain them. Failure to recruit new drivers could lead to miss-picks (grabbing the wrong product), shorts, missed delivery windows, and rising costs for operators who rely on third-party logistic companies for goods. Already, rates per mile for long-term contracts have increased 8 percent, while those for short-term have increased 14 percent.

    Recent federal regulations limiting the number of hours drivers can be on the road and making it tougher to get a Class A license, along with competition from other industries and a 90 percent industry-wide turnover rate in trucking, are exacerbating the situation. But the unwillingness of Millennials to join the driver pool is the primary cause for the shortage; the average short-haul driver is 55 years old.

    “Young people simply don’t want to do the job,” says Bob Goldin, executive vice president at Technomic. “It is tough, physical work.”

    To offset growing labor costs, distributors are using technology to run more efficient operations.

    “We track industry financial performance on a quarterly basis,” the IFDA’s Allen says. “Distributor gross margins have been under pressure for the past five years. We’ve seen them even that out by investing in technology to streamline routing, monitor fuel consumption, and track the movement of goods in and out of their warehouses.”

    A need to know

    The information age has empowered customers. They expect to know where their food is coming from and what is in it. Luckily for operators, technology and supply chain–wide collaboration is making it easier than ever to track ingredients and share product information with guests.

    “I can’t tell you how many times I get asked if a value-add product is gluten-free,” says Richie Jenkins, senior director of marketing at Butterball Foodservice. “The conversation around ingredients is constant.”

    In October 2009, IFDA, the International Foodservice Manufacturers Association (IFMA), and the National Restaurant Association (NRA), along with 55 manufacturer, distributor, and operator partners, launched the Foodservice GS1 US Standards Initiative, a “voluntary, collaborative industry effort seeking to drive waste out of the foodservice supply chain, improve product information, and establish a foundation for food safety through better traceability,” according to its website.

    “We asked ourselves what information is necessary to ensure we have a safe and secure foodservice supply chain, then went about gathering it,” Allen says.

    The program provides a common set of standards for location identification, product identification, and product information sharing among supply chain partners. Today, more than 100 foodservice manufacturers, distributors, associations, and operators—including Chipotle, Domino’s Pizza, Buffalo Wild Wings, and quick-service co-op groups such as Subway/IPC, Arby’s Supply Chain Cooperative, and Wendy’s Quality Supply Chain Co-Op Inc.—participate.

    Supplier members share and synchronize product data—nutritional information, country of origin, potential allergens, etc.—through the Global Data Synchronization Network (GDSN), a network of GS1-data pools such as 1WorldSync, FSEnet+, and iTradeNetwork Inc. A paid subscription is required to upload and access information. Costs vary on the data pools and their operating models, i.e. nonprofit versus for-profit.

    GS1’s reported benefits include improving product information, reducing inefficiencies, enhancing food safety and traceability, eliminating unnecessary costs, improving inventory track, facilitating faster recalls, and addressing local and federal food safety regulations.

    Organizers hoped to have 75 percent industry involvement by 2015. So far, 32,000 companies are publishing or receiving product data through the system.

    “We don’t have enough operators,” Allen says. “We need more companies on board to encourage distributors and suppliers to supply information. There is a commitment on the part of more progressive operators to make sure this gets done.”

    Sourcing for Millennials

    By 2017, Millennials are expected to spend $200 billion annually, according to the book Gen Buy by Kit Yarrow. Estimates expect the demographic will be responsible for $10 trillion in spending in their lifetimes. The sheer size of their buying power is driving foodservice toward more customization, healthier options, and fresh and local foods. Though demand for these items has not yet reached critical mass in quick service, forward-thinking operators are already working to meet it.

    “Concepts that are responding to these preferences are being rewarded,” Deloitte’s Cascone says. “Aside from consumer recognition, we’re seeing extremely high valuations for brands that tell a good ‘better for you’ story.”

    The better-for-you concept is not limited to healthier menu options, either. Millennial customers in particular are weighing the humanitarian and environmental effect of what they purchase, too.

    “People are starting to ask, ‘Is this something that’s going to be good for my family beyond nutritional value?’” says Kenneth Lander, founder of THRIVE Farmers Coffee, the Atlanta-based supplier of Chick-fil-A’s new specialty-grade coffee offering. “They are asking, ‘How do we connect what we put in our bodies with where it comes from?’”

    [pagebreak]

    With its partnership with THRIVE, Chick-fil-A is relying on a farmer-direct supply model that operates outside the conventional commodity coffee bean market. THRIVE enters into revenue-sharing agreements with Central American coffee growers that allow the farmers to maintain a stake in the beans used to process Chick-fil-A’s coffee. The end result is THRIVE farmers making up to 10 times more net profit than they would in a traditional producer model, and Chick-fil-A having a compelling narrative around its coffee revamp.

    Chick-fil-A launched CoffeeWithAStory.com in conjunction with the August 2014 rollout of its new coffee to tell that story. The microsite allows visitors to send personal notes to the farmers supplying Chick-fil-A’s coffee, then share their experience via social media. Also featured are videos highlighting individual farmers and their families and a breakdown of how THRIVE’s farmer-direct model works. Standard nutritional information is available, too.

    Chick-fil-A declined to discuss how the move to specialty coffee and the farmer-direct model impacted margins, preferring instead to highlight what it sees as an opportunity to stand out. “We are more focused on the big-picture approach,” says Paul Trotti, Chick-fil-A’s menu and sustainable food strategy leader. “We wanted something unique, something that would make guests switch.”

    Customer reaction has been positive for both the new coffee’s taste and story.

    “I can’t tell you how many e-mails that have come from CoffeeWithAStory.com,” Lander says. “Showing your concern for people has a real value in the marketplace. It’s not just the hipster and granola people. It’s deeper than that.”

    As is the call for more natural and organic foods. U.S. retail sales of natural and organic foods and beverages rose 5.5 percent to nearly $53.5 billion in 2014, according to a report from Research and Markets. Boston Consulting Group’s 2013 Global Consumer Sentiment Survey of U.S. Millennial Saving and Spending Intentions found that Millennials anticipate spending the bulk of their disposable dollars on fresh fruits and vegetables, organic foods, and natural products.

    But catering to Millennial preferences for organic, natural, fresh, and sustainable food is not without its trials. When McDonald’s announced in January 2014 it would begin purchasing “verified sustainable beef” by 2017, for example, industry watchers immediately asked how the chain would deliver on that promise.

    For McDonald’s, the answer was partnering with stakeholders throughout the beef supply chain, including with operators such as A&W and CKE, to create the Global Roundtable for Sustainable Beef (GRSB). In November 2014, the group adopted its “Principles and Criteria for Defining Global Sustainable Beef,” which defines sustainable as a “socially responsible, environmentally sound, and economically viable product.”

    Still, experts say establishing criteria is not the same as establishing a secure supply chain. Food that is sourced fresh, ethically, or fair trade is not yet “big food.” The market has yet to develop a model on par with the economies of scale and efficiencies of standard foodservice sourcing.

    “Responding to consumer signals requires growing pains,” the NCBA’s Miller says. “When it comes to trends like organic and natural, there are constraints, [like] feed composition or the elimination of tools that make conventional production efficient. There are producers who are responding, but there is a risk that demand might outgrow the supply chain’s ability to produce the product.”

    Butterball’s Jenkins offers a similar view. “We’re seeing the demand for these types of products in pockets,” he says, “especially among our college and university accounts. But the supply chain can only do what it can do. There are limitations. You cannot turn an aircraft carrier on a dime.”

    One way to source fresh ingredients is to work with local distributors whenever possible. That is the approach HMSHost takes when sourcing fresh ingredients for its 350-plus concepts across the country. The concessionaire works with more than 30 local producers system-wide.

    “In every market, there is a local distributor who has good visibility on where to find fresh foods,” says Linda Dunn, vice president of supply chain for HMSHost. “Volume can be a challenge, but that’s where forecasting comes in.”

    Collaborative solutions

    Certain issues are not going to go away. Food cost volatility is one; Mother Nature, commodity speculators, and policy makers ensure that. Pressure from the rising global middle class is another. Population and economies will continue to grow.

    What members of the quick-service supply chain can control is putting the right people, systems, and resources in place to handle the growing complexities of the system. The shift starts with approaching supply chain management from a strategic versus operational perspective and hiring and training appropriately, experts say.

    “Today’s supply chain management requires financial skills,” HMSHost’s Dunn says. “You have to understand how it drives revenue [and] pricing. … There is a lot more information than there was five to 10 years ago. Analytics capabilities are a must. You’re going to need to be comfortable with data and how to use it.”

    Finding candidates with these skills is not difficult. Undergraduate and post-graduate supply chain and logistics programs are available across the country and are producing students with a strong understanding of macro-trends and how to use data to address them.

    “One of the big shifts we’re seeing is people coming out of college with supply chain degrees and immediately bringing fresh ideas integrating technology that change the game,”says Brett Connor, director of supply chain at RaceTrac Petroleum. “Often they are small ideas that really make an impact.”

    Modern-day supply chain management also requires the ability to communicate across functions and partners.

    This is especially important when it comes to the rollout of new items or limited-time promotions, so that operators have visibility into the supplier’s capabilities.

    “The more transparent an operator can be with its suppliers about its plans, the stronger we can all be,” Butterball’s Jenkins says. “There are those who know and share exactly what they want to do. Others might call and say, ‘We’re doing a two-for-one promotion next week.’ … ‘Oh, you are? Good luck with that.’”

    Dunn makes it a priority to meet with her distributors on a monthly basis and her major suppliers at least once a year.

    “Our regular business reviews with our suppliers help them know what’s on the horizon,” she says. “I rely on them to keep our team up to date on data related to the performance of our offerings and innovations that might drive efficiencies.”

    Those are the types of conversations Goldin at Technomic wants to see more of.

    “The big quick-service chains, for the most part, are pretty sophisticated when it comes to supply chain management,” he says. “There’s not a lot of low-hanging fruit. They’ve squeezed pretty hard in recent years to design and execute efficient systems. But there is always an opportunity to do better.”