The Stockout: When does D2C make sense for CPG?

The coronavirus has accelerated consumer spending directly from the producer instead of retailers due to numerous difficulties finding goods along with generally lower prices for goods when purchased through a D2C channel. The question is what does this mean for companies trying to adapt to new consumer spending habits?

It certainly will be cheaper in the long run for companies to sell D2C since they are able to cut out the middleman. Although it is positive for the bottom lines, companies will have to adapt their supply chain for quicker responses. Many CPG companies are used to sending out orders in bulk and not individualized packaging. 

Food and beverage companies will need to invest in more advanced technologies for fulfilling individualized parcel orders while it will be necessary for a clothing company to invest more in reverse logistics capabilities to handle customer returns. Along with these advances in their fulfillment centers, businesses will need to roll out visibility technologies for consumers to be able to track their orders. All of this will add expense but will improve the customer experience. 

COVID impacts Frito-Lay’s Vancouver plant. Frito-Lay announced Tuesday that they were closing their Vancouver manufacturing and distribution facility due to a COVID outbreak, but that it was going to be reopened later that evening. 

While this doesn’t necessarily seem like a huge deal, it is indicative of what will happen to more companies as COVID’s third wave peaks. On Thursday, the United States set a new record for new daily cases at ~213,000, which suggests that the spread hasn’t slowed considerably on the domestic front. 

Surging coronavirus cases pose serious threats to CPG supply chains across North America. A shutdown of one day is likely to cost a company hundreds of thousands if not millions of dollars due to their inability to produce products. 

Rising transportation costs hit CPG companies. There are many costs within the supply chain but there aren’t many as volatile as transportation costs, especially dry van and refrigerated trucking rates.

(Chart: FreightWaves SONAR. Truckstop.com dry van spot rates (white line); reefer spot rates (green)).

Since the bottom in spot rates in late April/early May, dry van spot rates have surged ~93% while reefer spot rates have soared 98%. Neither are showing signs of letting up. Along with the drastic jump on a percentage basis, spot rates are now at all-time highs for both modes of transportation.

The two main factors that determine spot rates are freight demand and capacity. Freight demand has exploded since the bottom and volumes have expanded 28.79% year-over-year (y/y). Relative capacity is near the tightest it has ever been with 25.82% of truckload tenders being rejected. A full 44.36% of all reefer loads are being rejected by carriers.

It is our belief that any tender rejection level over 7-10% is inflationary for spot rates. The longer a wide spread between spot and contract rates persists, the worse routing guide performance will be, putting upward pressure on contract rates. The real unknown in the current market is what happens in the New Year. While expanded capacity and intermodal surcharges recently announced by containership lines suggest they expect strong volumes through the pre-CNY period, the ocean carriers are typically the worst market prognosticators and demand forecasters in the global transportation industry.