Last week Conagra Brands had its 2022 Q1 earnings call. It was a solid, if unspectacular, result. Overall net sales were down one percent, driven primarily by the results of some previous divestitures. Organic net sales, a metric that strips out revenue from divestitures and acquisitions, increased by 7 percent. More good news is that despite being what I consider a legacy packaged food company, e-commerce sales now account for 9.6% of all volume. In short, Conagra Brands has done a good job of navigating COVID, especially the increased demand and accompanying stress on its supply chain, while building for the future.
One quote jumped out at me. It could have been better. “If we had the capacity to meet all of the demand,” CEO Sean Connolly told investors, “our numbers would likely have been even more impressive.”
So let’s break that down a bit, what could have been better, and what has Conagra Brands done to manage around the shortcomings.
What is supply chain management?
Like a lot of terms in business, it depends on who you ask. Personally, I tend to answer the question, “What is supply chain management?” with a simple answer: The processes and systems in place to ensure that you have enough raw commodities to manufacture the product. It seems that Conagra defines it a bit differently. When asked about the cause of their supply shortcomings, Connolly answered:
With my earlier comments within the kind of strain, as I’ll call it within supply chain, the three buckets that I mentioned are labor, obviously, materials and ingredients and logistics. So we’re working all three of those buckets aggressively every day.
Let’s take a deep dive into each one of the supply chain management buckets.
It’s the people required to transform raw materials into finished goods. In Conagra’s case, this is a very real constraint, and it also one management has a fair amount of control over. If Conagra is struggling to attract workers, it can increase wages until it’s a competitive offer. This, of course, comes at a cost to the margin.
Materials and Ingredients
The goods and materials that become finished goods. For Conagra, these are the commodities that it processes: beef, poultry, wheat. The good news is that most of their raw materials are sourced from America and not subject to international disruption. That’s about it in terms of good news. The raw material market is pretty crazy right now. Goods are subject to pressure from both the demand and supply side of the equation. Food processors looking to capitalize on new COVID-based consumer demand drive up prices. Farmers face increased material costs (fertilizer) and labor costs (wages) on the supply side. Throwing another wrench in the equation are uncontrollable things, like droughts. All told, the Federal government predicts a fair amount of commodity inflation in wholesale markets. The Procurement Team (the team responsible for sourcing) has their work cut out for them.
Transporting the raw materials between plants and the finished goods. Due to a strategic decision, this lever is almost completely out of Conagra’s hands. From the Annual Report:
Substantially all of our transportation equipment and forward-positioned distribution centers containing finished goods are leased or operated by third parties.
It’s also a competency in near emergency circumstances. From Bloomberg:
Trucking has emerged as one of the most acute bottlenecks in a supply chain that has all but unraveled amid the pandemic, worsening supply shortages across industries, further fanning inflation and threatening a broader economic recovery.
Supply Chain Management – Mitigating constraints
Supply Chain management isn’t easy. As you can see, of the three buckets, Conagra management only has complete control over one: labor. What can it do then to ease tension on its supply chain when you can’t meet demand?
When the supply chain is stressed, Conagra can try to temporarily increase prices to reduce demand—while maintaining overall net sales.
When you’re in a strange supply situation, we do look at promotional reductions to keep demand in check and not exacerbate supply challenges. So it’s we work with our retailers on some of the stuff that they like to get out on the floor during the holidays, you’ve got two aspects of those holiday promotions, you’ve got the location, getting it out on the floor, and then you’ve got the amount of discount, the magnitude of the discount.
Certainly, we want to help our consumers to find our products during the holidays. But the magnitude of the discount does not need, we don’t need to fan the flames of supply challenges. So you make a very fair, reasonable point much how we behave during the height of the pandemic with respect to promotion.
This holiday season you can expect a fair amount of in-store displays but minimum discounts.
Photo by Jacques Dillies on Unsplash