The COVID-19 pandemic has placed significant stresses on food and beverage supply chains across the board, adding challenges to an already intricate industry. Shortages in labor and raw materials combined with higher than expected demand and logistical issues is leading to customers having to drive to three, and sometimes even four or more, different stores to get everything that they want and need. While the impacts of COVID-19 are still unfolding, it’s increasingly clear that food and beverage companies will need to continue to evolve their strategies when it comes to inventory management, real estate decisions, automation, packaging and sustainability among other things.
We recently sat down with food & beverage industry experts Betsy Power, Director, Global Real Estate, Frito-Lay/Pepsico; David Varalli, Director of Real Estate, TreeHouse Foods; Dennis Julio, Head of Global Real Estate, Nestle; and Ken Reiff, Co-Lead Food & Beverage Advisory Group, Cushman & Wakefield to discuss several of these topics in more detail. Some of these experts will be continuing this discussion on a panel at the IAMC’s Fall 2021 Professional Forum in Kansas City October 2-6.
Q. The pandemic has obviously challenged food and beverage supply chains, but what silver linings are you seeing come out of the changes over the long term?
Dennis: At Nestle, it’s been all hands-on deck on the supply chain side throughout this pandemic thus far. Our real estate team’s efforts in supporting our supply chain business partners has grown dramatically, and our industrial real estate transaction activity has increased as a result in order to service this demand.
Betsy: Demand for our products at Frito-Lay/Pepsico grew exponentially during the initial pandemic. With everyone eating at home, it was challenging to keep the grocery shelves stocked. Now, a year and a half into the pandemic, we are still seeing challenges in keeping products in stock. The silver lining we have seen is that our products are still greatly in demand and, during the midst of the pandemic, we’ve launched even more products,
David: After encountering new and different obstacles at every turn, the past 18 months has definitely increased our flexibility. Whether it was putting procedures in place to ensure our employees remained safe or dealing with issues related to labor, raw materials, packaging and transportation, we have continually proven how agile we are as a company and how quickly we are able to identify solutions.
Ken: I think everyone is trying to build in ways to add in extra supply, so the chain doesn't break like it did last year. Whether that means utilizing larger distribution centers or more smaller facilities nearby, adding in that flexibility and extra storage is crucial.
Q. How have real estate strategies shifted as a result?
Dennis: We are seeing a greater proportion of our overall global transaction activity devoted to industrial real estate, including land acquisitions for factories, expansion of existing production facilities, and additional lease acquisitions and relocations on the logistics side. This also includes larger-scale distribution centers than we are typically used to seeing.
For the most part, we like to keep terms flexible and try to avoid longer leases, but lately, we’ve had to resort to longer-term transactions because of the competitive industrial market and our reduced leverage. And now, given the dramatic rise in the industrial real estate market, we are also looking more closely at owning versus leasing when it makes financial sense, especially in key markets.
Betsy: At Frito-Lay/Pepsico, our warehousing has traditionally been owned real estate. These facilities are old, small, low clear height, etc. From a strategic sales perspective, we recently decided to update our infrastructure, expanding our buildings to larger footprints (average size used to be 40,000-50,000 sf and now they are generally anywhere from 150,000 up to 500,000 sf). We want to be able to mix operations that we couldn’t mix before, so we are shifting from an owned strategy to a leased strategy in order to gain flexibility and move more quickly if markets shift.
Given the growth we are seeing in industrial assets, we want to lock in rates for the long term, so most of our new leases are 10 years in markets that we know we will be in for a long time. In the past, five-year leases were standard because growth was organic, and not strategic. Now we are making sure we have the right-sized building at the right rate. We signed 20 new leases in the last nine months alone. It’s getting harder to find sites though and build to suit (BTS) is tough and so competitive.
We are also building many last mile facilities, that we call product exchange centers, to get closer to the market. And there’s been an enormous amount of construction going on for buildings ranging from 10,000 sf in rural markets to 30,000 sf in metro.
We have over 1,000 SKUs, but at the end of the day, if we don’t have room to stock them in a warehouse, we lose sales.
David: TreeHouse Foods produces private label—or customer-branded food and beverages. We have always prioritized flexibility in our supply chain in order to serve our customers’ evolving needs while meeting dynamic consumer demands, which has driven us to shorter lease terms historically. The competition for industrial buildings, however, has recently forced us to reevaluate our strategy and lock into longer term leases.
Ken: In talking with our clients, they are starting to realize that the supply of available space will be tight for at least the next two years and are now adjusting their strategies.
Q. How are you addressing the labor shortage, which is clearly a big constraint in supply chain?
Dennis: In our longer-term spaces, we are increasing our use of technology—especially in larger markets where we are piloting some programs. Our distribution demands and operational costs are our biggest factors.
Betsy: Labor unions are challenging and labor costs are rising. We are also spending more on automation in our longer-term spaces. The typical DC has mechanical handling equipment and conveyer belts, but still has people. But they can pick orders faster with automation.
Going forward, we are moving towards more belt picking systems. You are not going to see a lot of complex automation, but instead simple forklifts that pull long carts of product and more safety-related automation to keep workers healthy and safe.
A third of our plant warehouses have ASRS systems (automatic storage and retrieval), which include very high clearances with palletized items stacked very high. These are all fully automated.
In the next six months or so, we plan to create a standalone fully automated pick center for distribution.
David: Finding good employees is critical, so if we have a warehouse that’s operating smoothly, we are reluctant to move the operation to a new site because we don’t want to lose those employees. In addition, we are also looking at additional ways to automate more of our processes.
Q. Where do you see things going when it comes to sustainability?
Dennis: Nestle is committed to a net-zero carbon footprint by 2050. We are just beginning to evaluate how our Corporate Real Estate function can influence this commitment. The production side of our business will play the biggest role, but we believe that we can increase our impact with more focused “green lease” guidelines alongside more efficient use of sustainably-sourced energy in all of our facilities. Formalizing this program within our real estate team will be an important initiative in the coming months.
David: We are trying to adopt as many environmentally friendly and sustainable practices as possible within our plants, warehouses and offices. Not only is this the right thing to do, but our customers expect it. Given the fact that TreeHouse Foods leases our warehouses and offices, sustainability efforts at these locations are a joint effort between our company and our landlords. As such, our primary focus on sustainability is within our plants to ensure our facilities adopt best practices as part of the manufacturing processes.
Ken: The focus on sustainability is going to continue to increase because it's a key metric for a lot of companies. Bottom line: investors and consumers are looking for companies that are sustainable—from how their building operates to how they’re packaging their products to idling their trucks. Going forward, everyone is going to be paying more attention to all of these details combined.
Q. As you look over the horizon, knowing there’s constant change and uncertainty, what are the biggest challenges you see? Conversely, where are some of the biggest opportunities?
Dennis: When it comes to the industrial sector, the biggest challenge is executing real estate transactions in the most efficient manner to enable Nestle’s growth, both organically and through acquisitions. There are several major markets with very active logistics needs, so we need to support the business by executing and completing negotiations with the necessary internal approvals as quickly as possible. It’s our role to ensure that we work closely with our internal business partners to identify the needs and establish approval criteria well in advance to ensure success.
We see a significant opportunity to leverage our scale and diversity among our operating companies when it comes to real estate, and we hope to positively influence this through focused portfolio optimization efforts.
Betsy: Uncertainty of the pandemic is a major challenge as it leads to uncertainty in construction. Will a building be delivered when we need it? Missing a start-up date can impact sales dramatically. Right now, things are good. But if there is another shut down and construction supply chain is still slow, we will have continued constraints.
As for opportunities, we are looking to bring some international flavors into North America to give customers more variety. Unfortunately, it’s hard to execute this because we need more warehouse space.
David: I think the biggest challenge is going to be managing expectations with my company. Historically, finding a building, getting a lease negotiated, completing construction and providing a building ready to occupy, has been a relatively straightforward and predictable process. That certainty has disappeared. We are now seeing strong competition for industrial sites with landlords able to pick and choose between tenants. Construction costs have increased dramatically and general contractors are now providing very short windows in which they will guarantee pricing. Construction schedules are now subject to change based on the lead time of many materials and the shortage of many key trades. All of these factors create an environment in which I will need a longer period of time in which to execute a specific project. However, this is juxtaposed with the reality that, as a company, we are trying to deal with a constantly evolving set of problems that need almost instantaneous solutions.
I think that the biggest opportunity is considering all of the headwinds that are impacting industrial real estate. Companies will be willing to look for solutions and alternatives, which two years ago, would simply have not been seen as viable options (i.e., more automated warehouses, alternative 3PL type alternatives, etc.).
Ken: Right now, we've got a shortage of buildings, so the ability for people to expand or plug gaps in their supply chain is going to be limited for some time. The vacancy rate is low and there's a huge demand due to the rise in e-commerce delivery. It's going to be a challenge for any company to get exactly what they want because there's so much competition for the limited space. Adding to that is the disruption and backlog of the building materials supply chain, causing delays in new construction deliveries which also will keep the available inventory limited. As far as opportunities go, companies will have to be creative to meet their immediate needs. It may mean cooperating on excess space back and forth between partners and competitors and using 3PLs to bridge gaps. Looking towards the long term as previously mentioned, ownership will need to consider longer term leases as part of the conversation. The bottom line is real estate costs will not be going down in the future and finding ways to hedge against that will be crucial.