Amazon’s entry, government regs are complicating an already difficult supply chain
Amazon is betting big on fresh produce and organic foods, as evidenced by its $13.7 billion bid for Whole Foods, but it may be facing a mountain of a problem in trying to distribute fresh and organic fruits and vegetables direct to homes. That’s because the logistics of delivering such products, not just the final mile, but starting with the first mile, is such that many larger carriers do not wade into the market. That leaves a largely patchwork network of smaller carriers, owner-operators and brokers to ensure product reaches store shelves in a timely manner.
It all starts with the seasonality of the products, some of which have peak growing seasons of just six to eight weeks in certain locations.
“It’s a very complicated market, a very sophisticated market in terms of transportation,” Tom Finkbiner, co-founder & CEO of Tiger Cool Express, explained in a Stifel Transportation & Logistics conference call this week. “Produce shipments out of California vary from about 1,000 loads a day to 7,000 loads a day at various times, which makes it very difficult for even the largest carriers to have that flexibility.”
While the market is large, some $40 billion, there are a number of challenges that shippers and carriers face on a daily basis – and that Amazon will also face as it tries to grow a fresh and organic business. These include the types of commodity, seasonality of the products, short shelf lives, density of the products and quantity.
Consumers have been pushing for more locally sourced products. Amazon has tried to tap into that market with its AmazonFresh brand, but the products can be difficult to handle with small shipment sizes that require LTL to deliver to multiple stops. And the reality is that in most areas, locally sourced represents a limited timeframe.
“They have a very perishable shelf life, especially for fresh produce: less than 15 days for tree fruit and 15 to 30 days for grapes,” Finkbiner said, noting that “neither organic nor ethnic produce is grown in enough quantities to make a full truckload, so that requires multiple stops.
“If you are a supermarket, you have to have fresh tomatoes on the shelf 365 days a year,” Finkbiner added. “If you are in Chicago, New York or Boston, that tomato is going to come from very far away [most of the year]. The fact that produce follows the sun makes it very difficult to build infrastructure.”
A Stifel analysis following the conference call concurred with Finkbiner’s assessment of the difficulties the market faces.
“[We concur with Finkbiner’s thoughts] that inbound fresh produce transportation and logistics may indeed prove significantly more challenging than the non-trivial task of delivering groceries, fresh produce, frozen foods, etc. over the last mile,” the analysis said. “With capacity reductions likely in the produce transportation space just as Amazon’s acquisition of Whole Foods may accelerate the rate of consumption of fresh, organic, and ethnic produce, opportunities may abound for large carriers and brokers to develop service offerings in this potentially underserved market.”
Stifel believes it’s possible that some of the trucking challenges may result in long shelf-life produce moving to rail, especially if Amazon’s purchase of Whole Foods leads to a large bump in consumers purchasing organic foods.
“Heavy density, long shelf life produce may gravitate towards refrigerated boxcars, while lighter density, shorter shelf life produce will remain the domain of team-expedited refrigerated truckload carriers,” Stifel said. “Medium density, medium shelf life freight will likely become the domain of rail intermodal and whatever remains of legal solo-driver truckload capacity.”
High density, long shelf life products include pears, carrots, onions, and potatoes. Medium density, medium shelf life produce includes broccoli, avocados, asparagus, and apples. Grapes, squash, cabbage, and cauliflower are examples of light density, short shelf life product.
Just as demand for products and capacity might be ramping up, so too have regulations, which will put a crimp in the already complicated logistical planning.
The Food Safety Modernization Act (FMSA), which went into effect in April, and the upcoming electronic logging device mandate, which goes into effect Dec. 18, 2017, could trigger a rise in rates in the segment, which Stifel thinks could be hit hard by a capacity drop.
Finkbiner and Ted Prince, Tiger Cool COO, who also spoke on the conference call, suggested that the ELD mandate could hit the industry hard as many of the truckers regularly exceed legal driving times. This can be due to a host of reasons, including long wait times in fields for product to be loaded that eats into allowable drive time combined with a limited window to deliver the goods.
Finkbiner said that shippers believe that every day spent in shipping results in $1,000 of product spoils.
“Because of the nuances around loading fresh produce at a shed in the field, driver delays of many hours are common,” Stifel wrote. “The same is true on the receiving end where deliveries are specified in the early morning hours at stores and distribution centers often located in congested areas within our nation’s largest cities. These challenges will likely exacerbate the hours-of-service issues once the ELD mandate is fully in place.
“The potential capacity shortfall in 2018 and beyond could be dramatic and could be especially challenging should the Amazon/Whole Foods deal accelerate the transition to fresh produce and organic produce consumption,” Stifel added
The FMSA is already complicating the supply chain. The rule stipulates that all participants involved in the movement of food become responsible for ensuring proper procedures are met along the way.
“These rules govern the cleanliness and frequency of cleaning of trailers, the types of allowable loads previously hauled in the trailer, and the assurance that proper temperatures have been maintained while the load is in transit or storage,” Stifel said. “This rule combined with the ELD mandate make it increasingly difficult for small carriers and owner-operators to operate in the produce space and to maintain all the necessary records.”
Those moving fresh and organic produce were already facing challenges due to regulatory concerns and the general volatility of seasonal products, but the Amazon/Whole Foods dynamic is set to potentially disrupt the industry dramatically, perhaps triggering less capacity and higher rates, which means higher prices on store shelves.