Dive Brief:
- After CSX made changes to its operations, the company's rail network has been besieged by unusually slow service and delayed deliveries that have hurt businesses, including food companies, according to The Wall Street Journal. Some food manufacturers have slowed their production to ensure that key ingredients — including oil and sweeteners — don’t run out before their next deliveries arrive.
- Issues stem from efficiency efforts implemented at CSX under new president and CEO Hunter Harrison, who took the helm in March. Changes include idling excess equipment, closing freight yards, running trains on a tighter schedule and cutting 2,300 jobs. Harrison told The Wall Street Journal that short-term problems will lead to improved service in the long run.
- For now, businesses are absorbing costs associated with the shipping delays, but unless things improve, some food manufacturers say they may need to pass price increases on to consumers.
Dive Insight:
It’s always smart to have a back-up plan, something many businesses that rely on CSX trains are finding out. There have been bumps as CSX tries to get back on track following changes implemented throughout its rail network. Problems that started surfacing around May have worsened during the summer.
Food manufacturers and other businesses that rely on rail service to transport goods are paying the price. Some companies have told the Surface Transportation Board that they were close to shutting down factories due to CSX service issues, The Wall Street Journal reported. Others have switched shipments to trucks or another rail provider to try to avoid the worst of CSX's traffic snarls. Unfortunately, CSX is one of only two main railroads that operate east of the Mississippi, presenting a conundrum for many businesses.
Most food manufacturers have supply chains processes that run like well-oiled machines. But now, some big CPG companies impacted by the train snafu — Kraft Heinz, Kellogg and PepsiCo, among them — are deploying contingency plans, according to the paper. Kellogg reportedly had cooking oil trucked in to ensure the production of Pringles at a Tennessee plant was not interrupted.
Food companies have a history of dealing with rail backlog issues. In 2014, grain farmers lost millions of dollars during a record harvest season because of a lack of available railroad service, including railcars and track lines, to get the product to market. Unexpected weather such as snowstorms, avalanches and severe rain and flooding tend to present transportation issues for food businesses, too. Severe winter weather that hit the Pacific Northwest earlier this year severely slowed rail deliveries of crops.
A business can absorb as much as $100 in extra costs each day a railcar is delayed, Herman Haksteen, president of the Private Railcar Food and Beverage Association, which represents PepsiCo and Kraft Heinz, told The Wall Street Journal. “They’re doing everything they can so the consumer doesn’t see it. The customer might see it next year,” he said.
This certainly implies that manufacturers might consider passing these unanticipated costs of doing business through to the consumer in the form of price increases. But with price wars striking across the grocery sector, big CPGs may want to think twice before taking this step, since shoppers can quickly turn to lower-priced brands or cheaper private label alternatives.