Between Disruptions and the New Normal: Covid-19 Impacts on European F&A Logistics

The Covid-19 outbreak is a game changer for European F&A logistics. Short-term impacts quickly affected all food logistics sectors on a scale never seen before. Now it is time to take stock of which impacts will linger on and suggest a possible scenario for the medium term.

Building the Big Picture for the Medium Term

Mobility restrictions, health and safety measures, foodservice shutdowns and low food trade volumes are the main external factors impacting F&A logistics during the Covid-19 outbreak.

In the short term, those disruptions caused food logistics companies to operate with higher fixed costs, adapt their capacity to new lower levels, manage congestion and deal with revenue losses and liquidity issues.

We expect some acceleration in market trends such as consolidation, innovation, and horizontal cooperation, and an impact on food consumption patterns.

This note shows the big picture for the medium term, and aims to help food logistic companies plan ahead. Rabobank clients can log in below for more details on the impact factors and a broader analysis on medium-term market conditions.

Analyzing the Short Term to Understand the Medium Term

To build a medium-term (10 to 12 month) outlook, we analyzed the short-term impacts in four subsector of European food logistics: air freight, sea freight, road transportation, and cold storage.

Short-Term Impacts on European Food Logistics

Capacity adaptation, high fixed costs and liquidity problems influenced market fundamentals in food logistics:
-Air freight and sea freight were impacted by travel restrictions and low global demand; capacity management and liquidity issues are the main short-term impacts.
-Road transportation managed to operate, albeit under tough conditions and saw, at least in food transport, an increase in revenues due to high retail demand, coupled with higher fixed costs.
-Cold storage is experiencing congestion. At the same time, it has to provide an even higher standard of high value-added services to manage the product shift between foodservice and retail. Foodservice volumes are down, there’s a higher demand for retail and a lack of capacity for trading outside Europe.

Despite the current challenges, the majority of food logistic activities continues under the height of Covid-19, and the sector managed to solve intricate operational questions while providing a high standard of services.

A Scenario for the Medium Term

The impact of higher fixed costs, lower profitability, and the need to build resilience will dominate F&A logistics in the medium term.

Air and sea freight capacity might slowly return to normality in the medium term, but depressed global demand and a slower-than-expected pick-up of commercial flights (belly capacity) still present threats. Managing high debt levels, fixed costs and liquidity will be key for these sectors in the coming quarters.

Cold storage and road transport will most likely see both lower revenues and higher costs for a relatively long period, possibly ending a period of uninterrupted growth lasting almost a decade.

Figure 1: Change in revenues and costs vs. pre-crisis expectations in European cold chain for the period June-December 2020

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Source: Global Cold Chain Alliance, Rabobank 2020

Lockdowns, travel bans and shutdowns had, and will have, repercussions on costs structure, revenues and liquidity throughout the whole supply chain. Together with the economic downturn, these internal changes will define the conditions in which companies will have to operate in the medium term.

“The End of the Beginning”

Foodservice is reopening in many European countries but a speedy recovery of demand is uncertain (see Figure 2). The key period here is the summer and the peak of the tourist season in southern Europe. If in the busiest season for foodservice markets in Europe, i.e. summer and the peak of the tourist season, there is no recovery, it will be difficult to quickly solve the current congestion in cold storage. Moreover, a significant chunk of foodservice companies might go out of business, a factor that F&A suppliers will have to keep their eye on. Food logistic companies might be caught in the middle of these disruptive events.

Figure 2: Estimated evolution of foodservice volumes¹ in main European markets², volumes under Covid-19 in 2020 vs. average daily volumes in 2019

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Source: Rabobank 2020

The medium-term scenario will not only be negative. Positive lessons can be learned, and a proactive approach can provide a key competitive advantage.

Companies should pay particular attention to the following areas:
-The economic recession facing Europe in 2020 and much of 2021 will prompt shifts and accelerations in food consumption patterns, requiring changes for the whole food logistic sector.
-A higher degree of horizontal cooperation in cold storage, and especially in road freight, might be needed to build more resilience.
-Consolidation and outsourcing might accelerate in cold storage and integrate into road freight activities, especially in southern Europe, at a later stage. Targeted acquisitions might help companies to build further resilience.
-Innovation and sustainability should remain primary components in sector trends. The post Covid-19 period will see a revived interest for sector-wide traceability systems, blockchain instruments, smart contracts and the likes.

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1 The progression of foodservice volume recovery is based on a model developed at Rabobank which estimates the loss in revenues for the sector for different phases of the restart – from hard lockdown through to the expected average volumes, taking into consideration the impact of the recession in 2020. Reporting the results as a moving average helps smooth the line graphically.
2 The graph includes the daily average volumes for France, Germany, Italy, Spain and the Netherlands reported as a moving average from May 4 2020 to 31 October 2020.