Lessons Learned About Just-in-Time Inventories

SAN ANTONIO—Many facets of the commercial real estate industry have taken the brunt of COVID’s wrath. Of course, the healthcare workers on the front lines are leading the charge but one of the other key CRE components is the food supply chain.

In the process, this segment has had its challenges. Just-in-time inventory strategies for food distribution are being re-evaluated and refrigerated industrial space is being called into service to address the challenges.

Neil Johnson, founder and CEO of Provender Partners, a US investor dedicated to food-related industrial buildings, recently shared his insights into COVID-related food supply chain challenges as well as reorganization solutions to help consumers during these unprecedented conditions.

“The United States, and particularly the US food industry, is facing an extraordinary challenge from the coronavirus pandemic,” says Johnson. “Supply chains have become strained overnight and need to be reorganized to fit the new dynamically changing environment.”

GlobeSt.com: How did the food supply chain fail during the pandemic?

Johnson: To most people, the obvious failure is the lack of food in grocery stores and the closure of restaurants, which wasn’t really a failure of the food supply chain. So the next natural question is: assuming we are consuming the same amount of food, aside from hoarding, why is it that there are empty grocery shelves? The answer is two-fold. You may have seen milk and eggs in the news being dumped as these products are the most sensitive to spoilage as there is no easy way to preserve them, i.e. freezing. Second, many of the farms producing product in bulk for food service companies, i.e. restaurants, schools, cafeterias, hospitals, etc. were not able to pivot to smaller individually packaged products that could flow through grocery store and food bank channels.

The shortages at grocery stores were compounded by grocers who over the past several years have pushed inventory back onto suppliers, in essence employing just-in-time inventory systems. This allowed them to carry less inventory at retail stores, expensive real estate, and other refrigerated warehousing alternatives that are also very expensive.

GlobeSt.com: What are your thoughts on the recent meat plant closures?

Johnson: Meat processing plants were developed with economies of scale in mind as the infrastructure including refrigeration, conveyor systems, associated power, waste water treatment, natural gas, etc. are extremely expensive. In part, this has resulted in some plants individually making up a large portion of the US meat supply. This also results in large numbers of workers in close proximity to one another, making them more susceptible to outbreaks and plant closures. This is becoming more of an issue as capacity at the farm level backs up. For instance, when hogs get to a size that doesn’t fit specific processing parameters, they require euthanizing.

Prior to the pandemic, Provender Partners saw this trend developing for a slightly different reason. Case in point, larger processors of food products or ‘Big Food’ have fractured as smaller, local, specialty diet, etc. processors have taken market share from Big Food. Unfortunately, many of these smaller users only have one processing facility for cost purposes. The larger buyers of food products started to put pressure on vendors to have redundancy in the form of at least a second plant, providing manufacturing redundancy and geographic diversity. Theoretically, this would help keep shelves full in the event of another food supply chain ‘disruption’.

In response to this observation a few years ago, we started studying food processing space very closely, as we believed that the trends mentioned earlier would result in additional demand. In fact, this was the thesis around our recent acquisitions of a vacant meat processing plant in Bolingbrook, IL and a school meal manufacturing plant in Chicago.

GlobeSt.com: Moving forward, how do you see the food supply chain adapting?

Johnson: Every CEO involved in the food supply chain is going to be forced to provide a contingency plan for a future disruption. Provender is a bit unique in that all we have done over the last six years is food and food only. Additionally, we touch all the different players involved in the food supply chain including farms, processors, grocers and food service providers. This is a short overview on how each major link in the food supply chain will change in an effort to keep supply chain working in the event of another disruption:

• Food service companies and farmers have been the hardest hit as they were unable to pivot from bulk product offerings to individually wrapped items. Sure, some farms were able to go direct-to-consumer and/or package some products for grocery channels, but that was just a drop in the bucket for the losses incurred. We believe that they will form strategic alliances to ensure that infrastructure for individual packaging is available.
• Fortunately, food service companies were able to stop orders from farms so they weren’t stuck with perishable products, but that didn’t change the fact that they were essentially put out of business. We saw several strategic partnerships formed on the fly with grocers relative to transport to help the over-burdened grocers. We assume that food service companies will seek more formal arrangements with grocers going forward.
• Regarding food processors, it wouldn’t surprise us if the USDA revises worker density policy after things settle down. Redundancy and geographic diversity are the names in the game.

If I was a betting man, I’d think that grocers would hold more product at the warehouse level. Nobody wants more expensive retail space, not even sure that’s possible, and move away from just-in-time to more traditional forms of warehousing.

I’m not sure any or all of these contingency plans together will truly make a difference, but it’s where we are today and it is exacerbated by the lack of refrigerated space available in the country.

While the pandemic intensified severe food supply chain challenges, Provender Partners sold additional food-related industrial building holdings, including a tri-temp distribution center in South Fort Worth totaling 1.12 million square feet. The company also announced a 10-year lease to Dollar General of a 285,476-square-foot freestanding grocery/foodservice warehouse, Provender San Antonio Food Center.