(Revised 10:20 AM 18 March 2020 - bad math now corrected - I think)
I’m writing this on Wednesday, 18 March 2020. Restaurants in
Illinois closed to dining-in two days ago, followed shortly by Indiana. We’ve
made all the jokes about having to learn to cook and toilet paper, and I think
we’re about to have a come-to-Jesus moment about how flexible our food system
is.
This is what woke me up at 3 am. this morning.
We’ve talked about this trend for the last few years, but it
has been little more than an indicator of consumer prosperity, the decline of
cooking, and any other cultural or economic observation one we wanted to validate.
What never crossed our mind – or should have – is what happens when half the
food delivery system is crippled by, say, a pandemic closing restaurants, just
picking a disruptor at random.
To reach any useful conclusions let’s make some crude engineer-type
approximations. First, money spent on food is not the same as amount of
food. Obviously, food in restaurants is more expensive per calorie or ounce
than a supermarket due to more processing: cooking serving, etc.
So the first step is to try to estimate how much volume of
food is delivered by each branch. The best numbers I could find for Cost-of-Goods
for supermarkets is ~70%. This figure includes shampoo and yes, toilet paper,
but work with me for a moment.
For supermarkets that means about 35% of total food dollars
are spent on actual food. Let’s assume that is roughly indicative of volume.
Using 30%, that means 15% of consumer food dollars are used
in restaurants for actual victuals.
The ratio for the two branches is then 15:35, so 30% of food
goes through restaurants and 70% through groceries.
Now let’s look at the restaurant industry structure by type.
Segment analysis of restaurants turns out to be hard to find – or hard for me
to find, anyway. The best I could come up with is ~60% of restaurant sales are “QSR”,
quick-service restaurants. Let’s go with that. This means 18% of food volume is
fast food, and the remaining 12% something else.
Next, how much does loss of dining-in decrease
outside-the-home food delivery? For
McDonald’s drive-thru is about 65%. But other fast food varies from 35-60%.
So say 50% for the whole QSR segment in normal times. How much could they ramp
up? My wild guess is 50% more across the industry so churning this all out
maybe fast food can increase their output to customers. Crunching all these
numbers means QSR drive-thru/pickup (D/P) might be able to expand from 9% of
total food volume to 13% in very round numbers.
But what about non-QSR? Their D/P is much lower – Olive Garden
and Texas Roadhouse really can’t easily expand D/P and I would think be
reluctant to even try, since the pandemic closures could be over in a few weeks.
I think the 12% of non-QSR food volume will shrivel drastically with loss of
dining-in. Let’s put in 3% for a total of 16% of consumer food dollars (and
hence food) could flow through restaurants.
The result is instead of 30% food volume from restaurants,
consumers will only be getting at most 16%. The remaining 14% will have to come
from groceries/supermarkets. This would be a throughput jump of 14/70 = 20%.
That’s a whopping step-change for any industry.
But wait, I have more bad news. The products between the two
types of food are not interchangeable – no consumer buys hamburger buns in
trays of several dozen like are delivered at McD’s. In fact, many of the ingredients
are specifically made for a given chain, and the recipes carefully protected.
It’s a SPECIAL sauce, remember. Restaurant supply delivery trucks can’t just
divert to the supermarket.
Moreover, the food processing industry will hesitate to
convert production lines to different products with different packaging, ands
could even decide to simply wait out the virus. Nor does this part of the food
chain have a lot of extra capacity sitting idle – price competition has forced
our whole food chain to be as lean as possible [pun intended].
My semi-informed prediction is this inflexibility chokepoint
for food caused by our bifurcated and specialized food chain will NOT adapt
easily or quickly. Wholesale supermarket suppliers will strain capacity
but not expand. Specialized wholesalers will hunker down, lay off, and clamor
for a bailout.
What does this mean for consumers? Your plans may vary, but
here is my approach.
·
Keep in mind that supermarkets will strain for
the duration of restaurant closure to supply consumers. Hoarding and panic
buying will exacerbate this problem.
·
Shop often; buy what’s there, keep a list of all
products you normally use and add those of people who need help sourcing food.
Buy what you can when you can. Expand your diet to include stuff that is there.
·
If you can afford it, buy premium products
(steaks) and leave low priced groceries (hamburger) for those struggling. DO
NOT BUY “WIC” marked products, unless you are in that program of course.
·
If you can afford it, buy drive-through/pickup
more often than usual. This is a headache when you live outside the edible-temperature
zone (20 miles is too far for French fries, for example). Our experience is
fried chicken, pizza, and Chinese can be reheated to palatable condition. Remember
this is where the unused capacity is in the food chain.
·
Try not to overbuy. This will be extremely difficult
to resist, especially on your third try to get hamburger or pasta.
·
Brace yourself for rudeness, selfishness, and
fear in the supermarket. The scarcity mindset
will take hold faster than you think, since we have little familiarity with shortages
of any kind, let alone food. Remember people’s attitudes during your last long
electricity blackout and multiply by 5. Food has a deep-seated urgency
hard-wired into our brains. Ag’s relentless boasting about our food supply is
about to be revealed as riddled with inherent weakness. Supply we’ve got – but the
links to that supply are perhaps more important.
I think rural America may experience disruption worse than
many places, since our market is already barely served. Watch out for hidden
hunger. Teachers are a great source for finding out what families could use
help. Don’t ask if they need help. Take food over and hand it to them.
The worst part is it will be hard for the system to
re-allocate more than ample supplies because systemic changes could need to be
reversed at any time. Watching COVID19 infection rates may be the best clue as
to when restaurants could re-open, but in areas where they are closed, we are
just beginning to glimpse the strains on the food chain. If the closures last
into summer, food processing and logistics may be forced to realign, bringing
some relief.
And for farmers, maybe now we will finally realize food is
not just about us. In fact, it’s not much about us. Producing turns out to be
the easy part.
