Can the Foodservice Distribution Industry Recover from the Pandemic?

BRIAN KENNY: On March 14, 2020, it was business as usual in the 24,000 or so restaurants and bars in the five boroughs of New York City. Packed to the brim with hungry patrons, there was hardly a hint that, within 24 hours, restaurants across the largest city in the United States would be shuttered, the first of a devastating series of events that would wipe out 48% of New York’s food service jobs over the next month. And restaurants were just the tip of the iceberg. Beginning in April, meatpacking plants across the country would face temporary closures due to COVID outbreaks, creating ruptures in the food supply chain. Throughout the spring and summer of 2020, grocery store shelves were laid bare of even the most basic necessities. What Americans and people all around the world were learning in real time is just how intricate is the food service ecosystem, such that a small disruption in one area can trigger huge gyrations in another. The food service sector is beginning to regain its footing, but significant challenges continue to cloud the future. Today on Cold Call, we’ve invited Professor David Bell to discuss his case entitled, US Foods: Driving Post-Pandemic Success? I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents network. David Bell is an expert in agribusiness and the food chain, who has run the HBS Agribusiness Seminar for executives for many years. He’s a first-timer on Cold Call. David, thanks for joining me today.

DAVID BELL: Thank you, Brian.

BRIAN KENNY: I’m going to ask you to start just by telling us what’s the central issue of the case, and what’s your cold call going to be when you start the case? I know you haven’t taught it yet. This will probably air after you teach it. But what are you thinking about for a cold call?

DAVID BELL: You set the scene very well, but the central issue, I think, is really the driver shortage. The food shortage is a major issue for the food chain writ large, but for US Foods, who delivers food to restaurants and other institutions that serve food, like Harvard Business School has a cafeteria, that food, A, has to go from the manufacturers of the food to their US Foods distribution centers, and then by truck from the distribution centers to the individual customers. One of the side effects of COVID, and other issues, is that there’s a driver shortage. What do you do when you don’t have drivers? The cold call actually is less dramatic than you would like for this podcast, but it’s, what is the food distribution system going to look like in 20 years’ time? I think that’s an interesting question because in the grocery business, where you and I shop, we go to supermarkets and get our groceries. At least traditionally, we go to the supermarket, collect our own groceries, bring them back home. We’ve seen a revolution in the last few years of home delivery of groceries, particularly during COVID. Certainly, the Bells made big use of Instacart. Will there be a similar development in the food distribution business? Walking over here, I was thinking about self-driving vehicles. Mr. Musk is making a fortune selling those things. Could that be the answer to the driver shortage? But even if it is, that’s a way in the future.

BRIAN KENNY: Yeah. We’ve seen in so many other facets of life how COVID has pushed the envelope on things that we always thought were going to be the same-

DAVID BELL: Exactly.

BRIAN KENNY: … and now we’re seeing things change in ways that we didn’t expect exactly. Even here at Harvard Business School, the way that we’re teaching has changed.

DAVID BELL: Yes.

BRIAN KENNY: The case definitely does a good job of surfacing some of those things. I spoke a little bit in the introduction about the work that you do in agribusiness and the food chain. I’m wondering how you found out about this case, why you decided to write it, and how it relates to the kinds of things that you think about as a scholar.

DAVID BELL: In the Agribusiness Seminar that we do once a year for about 200 executives, that’s a plug, we write cases that attempt to survey what’s happening in the food chain. We do a variety of issues, so we’re always on the lookout for what’s hot. Shortages in the food chain are very important. We did a case a year or two ago on labor shortages. This is an example of labor shortages, but obviously it’s a very critical aspect of it for this company. Not that this related to how I got the case, Pietro actually is one of my ex-students. He is one of our alumni-

BRIAN KENNY: Pietro is the protagonist in this case, and we’re going to talk about him a little bit.

DAVID BELL:

Yes, Pietro Satriano.

BRIAN KENNY: Yeah. For people who aren’t familiar with the food service as you are, can you describe a little bit about food distribution in the U.S., who the major players are and what that landscape looks like?

DAVID BELL: In food distribution, there are two main types. There’s food distribution through grocery stores and there’s food distribution through institutions, including restaurants, commercial buyers versus domestic buyers, if you like. During COVID, as an example, as you mentioned in the intro, a lot of restaurants closed, which meant that a lot of farmers whose food was destined for restaurants was now available. At the same time, you had shortages in grocery stores for various reasons. But the farmers who were growing for commercial couldn’t supply supermarkets. Why not? Because there are regulations about how food is labeled in supermarkets, and that is not the case in restaurants. The restaurateurs buy the food, they prepare it, and you as a consumer at a restaurant don’t see any labels at all. It was a case where regulation intended for one environment became a real issue in this other environment. The two distribution systems are separate. The food manufacturers send cases of food to Walmart’s distribution center, let’s say, and they also send food, packaged differently, to a US Foods distribution center. The distribution system to restaurants is through a myriad, very fragmented distribution system. The main player is called Sysco. They have about 15% market share. US Foods is more like 10%. I live near a supermarket, and when I pull out of my driveway as I come to work, often there’s a huge truck backing into the local supermarket. Now, that’s supermarkets. Now you think of all the little restaurants you know. A truck has to stop outside that restaurant probably every day, every couple of days, to deliver food, creating chaos in the streets. Jumping back to the groceries, almost all grocery stores source food from some large distribution center. The truck that comes from the supplier pulls into this huge distribution center with loading bays and machines, forklift trucks. Everything is very organized. Everything is relatively simple.

BRIAN KENNY: It’s very glamorous compared to-

DAVID BELL: Well-done. You put it well, almost glamorous.

BRIAN KENNY: At the heart of the case is the shortage of drivers. Like many other industries, we’ve seen an exodus of people working in that space. But it gets a little bit to the stresses. You don’t think about this, the stresses of being a delivery person in the food service chain.

DAVID BELL: Yeah. You may be parked illegally. That’s an off-the-cuff remark. You may be parked in difficult circumstances. You’re unloading these 70-pound cartons, as I say, going down narrow staircases.

BRIAN KENNY: We’ll come back to that. I want to go back to when Pietro Satriano took over the reins took over the reins at US Foods. He was already stepping into a difficult situation. Can you talk a little bit about the situation that he inherited and some of the innovations that he tried pre-COVID?

DAVID BELL: Yeah. I’m not so sure he stepped into a difficult situation. In a sense, any new CEO takes on huge challenges, so I’m not minimizing the challenges he faced. But what’s interesting, looking back, is that the way he describes it, US Foods was run as a commodity business. They had a salesforce that would take orders from restaurants. The trucks were gray and undistinguished; maybe it said US Foods on it, but nothing glamorous. Today, they have pictures of lettuce and carrots on them, and things like that. The salespeople that would deal with the restaurants and get the orders were, in classic B-School terminology, order takers… I may be exaggerating here, but this is the essence of it, played no role in advising the restaurants. What Satriano did was to try to shift the emphasis to being a consultant, being a counselor to the restaurants. One of the first things he did was this effort to try and provide prepared foods specially designed for their customers. In restaurants, there’s always a labor shortage. Can you provide foods that are designed to take labor out of restaurant’s preparation? Sauces. The case cites pickled red onions. Didn’t know it was an issue, but apparently that’s time intensive. Chopped salads. In the grocery store, chopped salads are a big seller because it’s time-consuming. It is in restaurants also.

BRIAN KENNY: Having worked as a prep guy in a restaurant, I can tell you-

DAVID BELL: There you go.

BRIAN KENNY: … chopped salads-

DAVID BELL: There you go.

BRIAN KENNY: … are a lot of work.

DAVID BELL: But that’s your job they’re taking away.

DAVID BELL: They developed a magazine that comes out a few times a year called Scoop that highlights products that US Foods has designed for their customers, and these have become big sellers. Obviously, because they are custom products made by US Foods, it helps tie the restaurants to US Foods because you can only get them from US Foods. Another thing he did was to replace many of the salespeople by specialized consultants, if you like. One set is called something like Fanatic Chefs, chefs that work for US Foods, but call or visit restaurants to advise them on how they might improve their menus. The case cites the idea that restaurants often view US Foods as somebody to be negotiated with to lower costs. They come three times a week, and you have this bill of $1,000, and your mindset is, “How can I make that $900, not $1,000?” The Fanatic Chefs try to give advice to restaurants on how to improve their menu, maybe ways to have a menu that is not as costly but just as tasty, or whatever, or ways to use substitute products, this sort of thing. It’s an interesting question. In general, across many, many businesses, and inside businesses too, is that you have people on the front lines who don’t always get advice. You probably, given the background you’ve just explained, probably know a number of people, your friends, who’ve started restaurants. I would say, without having studied it, that usually it’s somebody who aspires to be a chef, somebody who aspires to make great food, but they’re not business people.

BRIAN KENNY: Right.

DAVID BELL: So, where can someone get advice like that? There are candidates, but US Foods took the view that they would like to be that advisor.

BRIAN KENNY: Yeah, so they’re moving from a transactional relationship-

DAVID BELL: Exactly right.

BRIAN KENNY: … into a-

DAVID BELL: From transaction to a relationship. The relationship, one is the chefs, but they also had, I forget the exact terminology, restaurant operation consultants, something like that. I think that probably is it, who would advise them on how to actually run the restaurant as opposed to the meal side of it. So, that is the transformation that Pietro was encouraging, and he realigned his organization to try and deliver on that message.

BRIAN KENNY: This is marching forward and seeming to have a great impact, and then all of a sudden, COVID hits like a sledgehammer to the industry. How do they pivot during that time?

DAVID BELL: As you said in your opening, a lot of restaurants closed or reduced their hours drastically. In a counterbalancing move, the farms were disrupted too, so there’s also a lower flow, a lower availability of food. I wouldn’t say it was an ideal scenario, but in some sense those balanced out. One thing they did do now that they had this more consultative approach was try to help restaurants apply for subsidies that were being given by the government, the CARES Act.

BRIAN KENNY: I thought that was really interesting that they pivoted to becoming sort of financial advisors to the firms.

DAVID BELL: It shows them being helpful. Second is helping their customers, who they need to be flourishing when this is all over. But third, it helps to establish that relationship that US Foods is there to help them in tough times and in good times. Obviously, none of this is positive in the big picture, but as you say, it’s an example of the company pivoting.

BRIAN KENNY: That brings us up more to the current day and the issue that they’re facing right now. I think all of us started to hear about delivery issues probably late in the second year of the pandemic. Just as the economy was starting to kick back in, all of a sudden we were hearing supply chain this, supply chain that, and it was clearly hitting the food industry pretty hard. What are some of the things that US Foods is trying to do as a way to address that shortage? How are they pivoting now, I guess would be the question?

DAVID BELL: Well, one thing we haven’t discussed, sure you’re about to, is the Chef’stores.

BRIAN KENNY: That’s what I was leading to.

DAVID BELL: I’ve ruined your transition. When I talked to Pietro early on, one of his early memories of being at US Foods was, this is in the case, going out in a truck, and he was talking to the driver about how it is competing against Sysco, Sysco this, Sysco the other. The driver basically said, “You shouldn’t be worried about Sysco. You should be worried about Restaurant Depot,” which is a chain of Costco-like stores for restaurants. As a result of that, US Foods now has its own relatively small chain that they call Chef’stores, where restaurants can go to a store. It’s like consumers going to the grocery store. You can go to the store yourself and pick up commercially sized food for your restaurant. In an era with a shortage of drivers, that’s obviously something they can do to help restaurants and help their business. On the driver side, when we drive around these days, I’m always behind an Amazon truck. I’m behind a UPS truck. There’s a lot of drivers out there. They’re just not working for the companies that they used to work for. I’ve never been a truck driver. A lot of people love being their own boss, so I can imagine it’s an attractive career to some people.

BRIAN KENNY: Well, I think you picture it being out on the open road.

DAVID BELL: Yes, exactly. No, but you don’t have somebody leaning over you, telling you what to do, that kind of thing. But on the other hand, in COVID, a lot of people who had enforced retirement, semi-retirement, discovered that retirement was not so bad. People fear retirement. One thing I’ve actually always said is that you need to practice retiring to see what it’s like. And a lot of drivers just didn’t come back from COVID, not because they were sick, because they realized they’d rather be doing something else. The case also points out that in an era where everybody is facing a driver shortage, it’s not a US Foods particular issue, a lot of drivers now see the value in being their own boss, literally, by having their own truck and being entrepreneurial. US Foods has to pivot, as you say, to attract more drivers. If there’s a shortage, you pay more, and they have been doing that.

BRIAN KENNY: Do the Amazons and Walmarts of the world impact them too? Now everybody is into next-day delivery, like you order something and the truck pulls up in front of your house within hours, in some cases. How does that impact the way that they approach this?

DAVID BELL: The truth is, I don’t know. But people who own restaurants are consumers too. If you’re a restaurant owner at home, you get stuff delivered in two hours, and at your restaurant you’re tearing your hair out because the truck is not here or something like that, or it’s every two or three days, the economics doesn’t work to have these big trucks visit a restaurant once a day, something like that, the expectations of the restaurants, I’m sure, are changing.

BRIAN KENNY: Yeah. The Chef’store play is an interesting one-

DAVID BELL: It is very interesting.

BRIAN KENNY: … because it takes the driver out of the equation. I don’t know if you looked at this, but I’m wondering what it does to their business model, what it does to their margins. Is it going to be enough to offset?

DAVID BELL: Well, again, to be honest, I can’t say I really know. What they say is that the margins of the Chef’stores are attractive, and they want to expand them. Ultimately, I imagine it’s going to be a combination. Well, I’m asking the question about what it’s going to look like in 20 years’ time, and the answer is I don’t know. I would say there has to be some response to the last mile, so to speak, of smaller trucks delivering that last mile to restaurants, or restaurants managing their own last mile delivery either by going to a Chef’store or having an Instacart-type company. Instacart does work in these Chef’stores and Restaurant Depot, delivering it for you. I think there’s going to be some change in that last mile delivery.

BRIAN KENNY: Well, like any good HBS case, there is no clear-cut answer, which is great. This has been a really great conversation. I can’t let you go without asking one last question, David. That would be, if you want people who are listening to this podcast to remember one thing about this US Foods case, what would it be?

DAVID BELL: Well, one is that David Bell writes great cases. That’s really the main thing.

BRIAN KENNY: Done.

DAVID BELL: The world is becoming more and more correlated, that is to say, things are happening to everybody at the same time. In the old days, if US Foods, let’s say, had a driver strike, it’s only US Foods. It’s not the restaurants. It’s not Sysco. It’s just them. But the driver shortage is affecting everybody at the same time. How do you manage against risks like that? You can’t hedge against every possible eventuality. Yet the correlated risks are the big ones because it’s affecting everybody. Diversification is not going to take care of this.

BRIAN KENNY: Yeah. David, thanks so much for being on to talk about the case. Really enjoyed it.

DAVID BELL: It was my pleasure.

BRIAN KENNY: If you enjoy Cold Call you might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Be sure to rate and review us on any podcast platform where you listen. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu.Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.