Supply chain fault lines

Over the past few days KFC and Nando’s have been hit hard by supply chain shortages, some around chicken supply issues, some of it around other items such as packaging.

In addition, more than three quarters of pub operators are currently having issues with beer delivery delays according to a poll conducted by The Morning Advertiser. There is also the potential of a ‘beer draught’ later in August after a thousand draymen, who are responsible for about 40% of beer deliveries to pubs and other hospitality outlets, voted for industrial action following a “paltry” pay offer.

What is causing issues in the supply chain?

If you take a high-level view, there are really only two things behind the supply issues that are being experienced right now, according to David Read, chairman of Prestige Purchasing. “One is Brexit and the other is Covid.”

Read says both events are behind the current shortage of labour. This is not just manifesting itself within the hospitality sector but is also impacting manufacturers and logistics companies. Nando’s has blamed its current restaurant closures on staffing issues at its suppliers’ factories, with the company saying it had seconded 70 of its own staff to suppliers to help “get things moving again.”

The Road Haulage Association (RHA) estimates that there is currently a shortage of approximately 100,000 HGV drivers in the UK. RHA’s chief executive Richard Burnett has said: “The upturn in the economy since Covid-19 is increasing demand across supply chains,” with the recovery “exacerbating the already existing shortage.”

Burnett continues: “The pandemic also resulted in the loss of about 12 months of driver training and testing. The long-term ineffectiveness of apprenticeships for lorry drivers and the general hostility from authorities and government is also unhelpful as regards recruiting and retaining drivers. And while we welcome the increase in HGV apprenticeship funding to £7,000, this barely scratches the surface of the problem.”

According to the RHA: “Overall cost pressures are increasing. It is the case now that freight customers should expect higher freight rates to feed through to the end of 2021 at least.”

The recent ‘pingdemic’ has been another factor impacting the supply chain, with reports that nearly 90,000 HGV drivers were affected by it during July, meaning additional delays in deliveries. The impact of self-isolation has also been seen in factories, bakeries and meat processing plants, and has made existing staff shortages worse.

In total, the Centre for Economic & Business Research (CEBR) has estimated there could be a £4.6bn self-isolation cost to the UK economy.

While the pingdemic has undoubtedly made a bad situation worse, according to Ranjit Singh Boparan president of 2 Sisters Group the current challenges to food supply are “unique, era-defining.”

Boparan said: “I have seen lots of change over the years – but nothing compares to now. The use of the term ‘perfect storm’ has become a cliché, but never has that been a truer phase to use. No-one could possibly have predicted that this toxic cocktail would come together at this time.

He added: “Since May this year the operating environment has deteriorated so profoundly I can see no other outcome than major food shortages in the UK. Supply of chicken and turkey is under threat.”

Read takes a similar view to Boparan, explaining UK and EU chicken market is “really tight right now”.

“Getting available chicken particularly to contract out in the weeks and months ahead, particularly for Christmas, is a challenge. It will be met, but it is a challenge. And one of the main reasons for that is that production of certain proteins - and chicken has certainly be one of them - has been lower.”

Another factor influencing supply, according to Read, has been the difficulty in rebalancing manufacturers’ production lines away from almost exclusively supplying grocery retailers during lockdown periods.

“When hospitality reopened, they just weren’t ready for us. That is really impacting us at the moment,” he says. “The big brands like Nestle, Danone et al, these guys are really struggling to supply product, and it’s just because we [hospitality] have not been a material part of their life for a year.”

Meanwhile the pandemic has resulted in a lack of shipping containers, or containers being in “the wrong place”, making imported products much more expensive, Read says. 

Is the situation likely to continue?

Returning to the impact of Brexit, Read highlights the fact British ports have become more congested and are “slower and more paperwork-intensive than they were.” This is clearly a concern because, at the end of 2020, EU imports represented 52% of all UK imports.

Such delays can cause problems with short shelf-life products such as fruit and vegetables. In addition, Read suggests that certain European producers are now less willing to sell their goods to the UK market, “because it’s just a pain”.

In March 2021, the UK Government announced it was delaying the introduction of import controls at British borders with the EU. This means that Phases 2 and 3 of the Government’s Border Operating Model – the post-transition package of customs procedures to control imports from the EU into Great Britain – were postponed until at least October.

This suggests that the current situation regarding import delays could drag on for some time, while also indicating that any change in customs procedures will likely add to costs.

In June, Helen Dickinson, chief executive of the British Retail Consortium, raised concern around changes to border checks this autumn: “The Government must help to minimise the cost impact on consumers by ensuring that the new checks and documentation requirements this autumn avoid adding further friction to the import of goods.”

Meanwhile, 2 Sisters Group emphasises ongoing issues around labour shortages are also affecting issues around supply. It has suggested that the furlough scheme, which is due to continue until the end of September, is making the matter worse, as is a Brexit-related point to do with sharply reduced numbers of available workers across the food sector.

2 Sisters has seen, on average, 15% labour shortages for its 16,000 workforce this year, the majority who work in chicken and ready meal production facilities.

On the demand side, the next peak – according to the CGA Prestige Foodservice Index – will be in early September when schools and businesses return to near normal order levels.

What might be the consequences?

As well as continued tightness of supply, rising prices are likely to be a key consequence of current issues.

Prestige Purchasing believes that the remaining months of 2021 are likely to see further increases in the level of food inflation as the sector returns to some level of normality, the full effects of wage inflation work its way through the supply chain and Brexit continues to have an impact. The company is currently forecasting a variety of food price inflation (FPI) scenarios, one of which suggests FPI to be as high as +5.5% by June 2022.

“Chicken will probably remain a challenging market in which to buy for probably six to nine months,” says Read, when talking about specific categories, “and, as a result, chicken pricing will probably come under pressure.”

Read goes on to say that in the autumn the whole of the food market “is going to start to heat up,” suggesting that hospitality, rather than grocery, is likely to be affected. “There is still under-production on most protein markets right now. It is also going to be a difficult autumn for produce. These things are general now.”