Consumer buying behavior during the COVID-19 pandemic has been good for sales of food companies across the board.
However, on the operational side, it's also fraught with questions of liquidity, supply, employee health, access and supply chain. While Big Food is working its way through, every day brings a bigger question of survival for smaller food companies.
Specialty Food Association President Phil Kafarakis has been on the front lines of helping smaller and more niche food companies get through everything. The SFA is a nonprofit organization with more than 4,000 independent member companies, some of which are extremely small — less than $3 million in annual sales and fewer than 20 employees.
"The big challenge is for them to get through the [pandemic with] liquidity and be solvent," Kafarakis told Food Dive. "I mean, we're really concerned. ...The love affair in some parts of the country and the pantry loading by consumers has reached a plateau. ...We'll have a lot to say — particularly on the East Coast, Mid-Atlantic — on the return to replenishment of some of the inventories and the demand spike that people have seen."
SFA, which is best known for its twice annual Fancy Food Show — though the June event in New York was just canceled this week — has a much deeper mission than showcasing fine and unique food and drink products. The group exists to champion, nurture and connect members to create innovative products and get more consumers eating them. In this time of crisis, Kafarakis said, the group is accomplishing that mission by providing information and collecting resources for its members. From a series of free webinars to targeted advice, SFA is working hard to help its members survive the pandemic.
"We're also trying to connect them to the resources they need, whether it's the co-packing community, or even brokers that can help them in store environments where they need to be present to restock, or help their retailer or their foodservice," Kafarakis said. "That's the role where we've jumped into, and it's unique because people are finding out we're a community that goes beyond the Fancy Food Shows."
Keeping up with demand
While the virus has kept most consumers in their homes, food manufacturers across the board have seen huge upticks in demand.
Big Food has been a beneficiary of consumers' pantry loading, but Kafarakis said smaller manufacturers have seen it too. The largest spikes in demand among SFA members have been for healthy snacks, gluten-free items, cereal, infused mineral water, beverages that promote health and wellness, and frozen food.
But while larger companies can just run more shifts and have a steady stream of workers in their factories around the clock, many SFA members don't even have their own factories. Instead, they rely on co-packers, and Kafarakis said experience with co-packers in the pandemic has been mixed. While food manufacturing is universally deemed an essential service and plants have not completely shut down, there are different rules applying to different states, meaning there may be limits that companies have little control over.
Co-packers also have a tendency to prioritize their work based on contract size or configuration. Kafarakis said that manufacturers are getting their products, but they may not be the SKUs they would choose or in the quantities they are hoping for.
However products are being made, manufacturers are scrambling.
"Everybody's just focused on getting what they can get out the door, and that's their No. 1 priority," Kafarakis said. "No. 2 priority is they're trying to figure out if they're going to get paid, if they're going to be paid on time."
In such boom times, problems with cash flow stem both from the uncertainty over the entire situation and issues with actually getting products to market, Kafarakis said. While supply chains are running relatively smoothly for big players, it's less predictable for smaller companies. These smaller players don't have as much influence into how and when products are transported, especially in a time with high demand.
"Everybody's just focused on getting what they can get out the door, and that's their No. 1 priority. No. 2 priority is they're trying to figure out if they're going to get paid, if they're going to be paid on time."
President, Specialty Food Association
And once the products get where they need to be, there's a different sort of battle over shelf space, Kafarakis said. Because demand for all food products is higher, grocery stores put what they have on shelves, often when it arrives. For grocery retailers, right now the normal assortment of products isn't as important as simply having product. If a specialty product is getting to the stores more sporadically, it may have to wait to get its shelf time, taking away from sales potential.
In this case, Kafarakis said, the losers are more likely to be small brands that have achieved wider distribution.
"Members who've actually gotten their business started with local retailers and local customers and have gone deep into that local regional area seem to be doing better than members that have stretched their customer base wider across a deeper part of the country because of, again, the shipping — and the shipping logistics, getting it into the proper distribution channels, then [in] that distribution channel, placing it in priority," Kafarakis said.
Many SFA members have increased their online sales during the pandemic. Kafarakis said this comes naturally to most of them, given that several started their business through online sales or taking advantage of social media marketing channels.
"It really is going to be a fascinating new world when we break through this and some of these brands have been able to develop the back end — when you think about the supply chain and getting products closer to the consumer — and not having to worry about all the middlemen in between," he said.
Helping companies stay alive
The food business of today is not always lucrative, but many of the larger companies are not in danger of insolvency. However, as American life began to migrate to individuals' homes in mid-March, many big food companies drew funds from their credit lines, just in case they needed extra cash on hand.
SFA members don't have these huge credit lines. Kafarakis said many were started with personal investments, and several members are working with banks to secure more funds. Small business programs through the latest economic stimulus bill can help these companies try to stay afloat financially. However, the question of staying viable seems to be looming over several companies.
And many SFA members are startups that were already dealing with the question of finding enough funding to keep going when the economy was strong, Kafarakis said.
"I don't think people understand the resilience in trying to break through and become legitimate businesses," Kafarakis said. "You know, they've never had obstacles and unprecedented challenges like the ones in front of them, but they've been able to endure."
In order to help these businesses keep enduring, SFA has been hosting free webinars twice a week on topics that food companies are dealing with during the pandemic. These webinars have been about things including employment law, insurance considerations and crisis communications. Kafarakis said it is vital for the organization to serve its members through this kind of education.
SFA is also helping connect investors and food companies during this time. Kafarakis said most investors that work with SFA members are not abandoning the companies they've put money into. If anything, he said, they are more committed to helping these small players know they will still be in business once the pandemic slows.
However, Kafarakis said, more uncertain business right now might open opportunities for some of these smaller brands to be acquired. There will be deals to be had on what Kafarakis called businesses that "were on the verge of making it." So far, there hasn't been much M&A during the pandemic, but many experts expect the effects of the pandemic to last for months.
Some small companies may not be so lucky, Kafarakis said.
"We do expect that there's going to be a downside here with some companies that were totally over-leveraged before this all happened, and they were trying to expand their distribution and get through that feeling where you can feel like you've made it as an entity and now you're breaking even," he said.
A changed landscape
Amid all of the uncertainties in this pandemic, there's one thing everyone agrees on: When business can get back to normal, it is going to be different.
Even on a shorter and more optimistic timeline to reopen cities and workplaces, Kafarakis said these months are likely to be a drag on SFA members' books for the whole year.
"We do expect that there's going to be a downside here with some companies that were totally over-leveraged before this all happened, and they were trying to expand their distribution and get through that feeling where you can feel like you've made it as an entity and now you're breaking even."
President, Specialty Food Association
"I think the majority of our guys are gonna struggle through this, trying to hold it together," he said. "As we get into the fall and the winter, I think we're all going to be praying for a great holiday season at the end of 2020, and that this pandemic does not return during the winter, and that we can get a real huge springboard off of holiday sales."
Because many SFA companies are scrappier startups, they are used to pushing through issues to stay resilient, Kafarakis said. They're already likely exploring new ingredient sources and connections in case the continuing pandemic impacts their access to exported goods — though Kafarakis said because companies keep inventory available, it may take a few months for that to have an effect on business.
What may take the biggest hit are new product launches. With companies suddenly so focused on survival, Kafarakis said innovation is probably taking a back seat. While some new products have likely been in development for months and still might be ready for a launch later this year on the company side, there may be unprecedented challenges with getting those products on shelves. Grocery buyers work months ahead of schedule, and Kafarakis said the current consumer buying patterns and uncertainty may make them leery to commit to shelf space for a newly launched product. That could be the type of thing that could upend a company that was counting on sales at the end of the year to level out investments already made into ingredients and R&D, he said.
Kafarakis said post-pandemic, companies may try to stay small: Launch in a local area and concentrate on getting business thriving there, instead of aiming to have products on shelves from coast to coast. It may also take months for companies that were once succeeding to figure out if they truly can make it.
"There'll be some wounded companies here," he said. "I think people are going to be really rethinking their models. It's like everything else: This disruption will bring transformation."