How Hurricane Florence could spike food freight costs
- Hurricane Florence could create a challenging headwind for food makers' freight expenses even though consumers on the Atlantic coast are stocking up on supplies, according to a Credit Suisse report released this week. CPG firms such as Dean Foods, TreeHouse Foods, B&G Foods and Campbell Soup are particularly vulnerable, Food Business News reported.
- Dean and TreeHouse operate "at very thin margins," Robert Moskow, a Credit Suisse research analyst, noted in the report. He added that B&G inaccurately projected its freight inflation would drop to nothing by the fourth quarter. Campbell is temporarily shutting down soup production at its plant in Maxton, North Carolina, and plans to ship products to East Coast clients while highways are still open. Moskow said the higher costs will pressure profit margins.
- "Storms like these tend to provide a net positive to processed foods companies' sales trends because consumers stock up on supplies," Moskow said in the report. "However, distribution costs tend to shoot higher as food processors scramble in a tight supply environment to get truck drivers to show up at their facilities. We will have a better sense in the next couple of weeks whether Florence causes spot prices for freight to spike and whether it will shape contract rates for next year."
Logistics costs are typically a challenge for food companies, but with the potentially destructive Hurricane Florence approaching the Mid-Atlantic region this week, it's likely to make things substantially worse.
Hurricanes and other adverse weather events are notorious for disrupting supply chains. Credit Suisse's Robert Moskow noted in another report from last year that retail outlets affected by Hurricanes Harvey and Irma had trouble restocking inventories because of delivery delays.
Due to rising transportation costs and a shortage of trucks and drivers, some manufacturers — including Smithfield Foods and Hormel Foods — are beginning to build their own fleets of trucks. Others, such as Kellogg, are leveraging their supply chains to cover significant freight costs. Freight rates on the spot market jumped 29% from July 2017 to July 2018 — and have kept rising for 17 straight months, according to The Wall Street Journal.
The situation has also been a drag on recent earnings for some big food makers and distributors, including Dean, Tyson, Del Monte, Kellogg and US Foods. As Tyson CEO Tom Hayes said in a third-quarter earnings call last month, "Rising freight costs have been a challenge for all of our businesses. We now expect freight to be about $270 million more this year compared to last year ... ."
It's hard to tell how significant Hurricane Florence's impact will be to the overall food and beverage distribution system. It was downgraded to a Category 2 hurricane late Wednesday night, according to CBS News. But plenty of other storms or adverse weather events are likely to continue causing distribution problems for food makers.
According to the Credit Suisse report, Campbell is doing what it can to get ahead of the hurricane's impacts. The company doesn't need further problems after sales and profit declines, the sudden retirement of its CEO in May, plans to sell off its Fresh division and international brands, burgeoning debt, and rumors that the company may be for sale. Like Dean, B&G and TreeHouse, it needs to minimize financial damage as much as possible and find cost savings wherever it can in order to accommodate continuing increases in transportation and other costs.
If these and other food and beverage companies can manage to get goods to hurricane-ravaged areas in time for grocery stores and other retail outlets to reopen and restock, it could also provide a positive boost to their reputations as reliable brands that consumers can count on.
- Food Business News Hurricane may cause freight costs to spike