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How corona impacts the private label supply chain

For the May 2020 edition of PLMA Live, Pascal Kuipers did a report on the structural impact of the covid 19-crisis on the grocery supply chain – especially regarding retailers’ own labels.

Beyond the problems of keeping store shelves stocked are larger questions of how retailers will have to change their way of doing business in order to avoid a repetition of the current crisis.

In 1940 an iconic photo was taken of three men browsing the shelves in a London bookstore devastated by a German bomb raid. The image strongly illustrates the persistence of habit and business as usual even in times of crisis. But there is no business as usual for the private label supply chain which is facing the impact of the coronavirus.

Change is needed to create a resilient supply chain for post-corona times, which will be agile and responsive to future crises and disruptions. This new supply chain needs to overcome the vulnerabilities of the current version, which have been revealed by the corona crisis.

Chinese supply more vulnerable during crisis

Retailers are supplied by a myriad of private label manufacturers. Mostly small and medium sized, these manufacturers often struggle with demand volatility and logistic frictions. The corona crisis showed that to a considerable extent, many parts of the private label supply chain are China-centric. This has caused unavailability of ingredients, parts or products.

For consumer goods, this dependence on China and Chinese companies applies mainly to non-food supply chains. According to Euromonitor China has a high impact on the supply chains of household goods where it accounted for 35 percent of global production, and textiles and apparel where 54 percent of global production comes from China. Statista estimates that China accounts for over 19 percent of global gdp and it expects the share to increase in the coming years.

Food protectionism causes friction in international supply chains

In food there is no such dependence, but the crisis clearly has a strong impact on the food chain. Bloomberg refers to ‘food nationalism’, with stressed governments acting like stockpiling shoppers as they secure domestic food supplies. Especially in times of crisis when agricultural commodities like wheat or rice are treated like strategic assets, such protectionism leads to disruption. This particularly endangers international supply chains with interdependent links of small and medium sized companies, like the private label supply chain.

Opt for less mono dependent supply chains

The corona crisis shows that supermarkets are essential infrastructure for social stability. Commodity categories like canned food or paper items and fresh food categories are dominated by private label. The key question is: how to redesign this supply chain so supermarkets can fulfil their essential role, especially in times of crisis? Transactional short-term trade relations based on lowest price are not sustainable. Strategic partnership with long-term collaboration, creates trust. Besides this, companies need to reduce their risk despite additional cost and loss of efficiency, if companies create a geographically broader supplier base. Different experts advise three key steps:

  • Decoupling if possible from dependency from a single source of supply – be it China or another dominant country or supplier – by finding alternative sources and pathways to secure supply.
  • Mapping the supply chain and creating visibility on the different tiers of suppliers upstream and the logistic routes between them.
  • Drawing what-if scenario’s to be agile in responding to frictions in the availability of products or ingredients.

Lidl transparant about suppliers

Recently Lidl disclosed the names of all its suppliers of food, non-food and hardware. The German discounter sets a great example for the transparency which is needed to move forward.

Despite the persistence of old habits, the impact of the coronavirus shows that mitigating risk will be the key element of a future-proof redesigned supply chain.