Supply chain trouble takes big bite out of Minnesota's small food producers

D'Avocado was selling its chocolate-avocado spread in hundreds of stores in 2019, with plans to soon reach hundreds more.

The pandemic had other plans for the Minnesota company.

It's now a familiar story: COVID-19's immediate impact on lives, jobs and businesses. But the pandemic's long tail continues to whip.

Minnesota's smaller food producers are facing the same supply chain troubles as the big companies — labor and material shortages, cost increases and transportation delays — but without the same tools as the state's largest retailers and consumer-goods companies have: cash and leverage.

As a result, products have vanished and new brands are taking longer to reach store shelves.

Twin Cities-based D'Avocado survived blow after blow in 2020. First it lost a major funding round in March 2020 as investors backed away from deals nationwide. Then, one of its key manufacturing partners could no longer make its spreads, shifting production to pandemic supplies like hand sanitizer.

D'Avocado disappeared from stores.

Determined, company founder Greg D'Alessandro opened his own production line in Loretto, Minn., with plans to get the product back on shelves this fall.

Then the price of the plastic cups that D'Avocado needs to keep its product fresh went from around 3 cents to about 10 cents per cup. That seems like a minor increase until the cost of a minimum order for those cups comes into focus: $500,000.

"Bigger companies could take that hit, but that about folds my business," D'Alessandro said. "These supply chain issues are forcing me to find a partner that has the scale to help me withstand this."

The damage to small companies could be lasting, said Greg Hoyt, managing partner at food-business investment firm Gather Venture Group. Whenever the supply-chain traffic jam clears up, retailers will have already made decisions about what brands they carry.

"And who is going to be hurting the most? These formerly emerging young brands," Hoyt said.

But businesses have adapted, including these smaller companies, knowing consumer demand remains at record levels; it's just a matter of figuring out how to get products in their hands.

"I hope I look back on this as a good problem to have," said D'Alessandro, who is developing other avocado-based products while pitching his company to potential buyers. "It's forcing us to look at the bigger picture."

In October, Americans were spending 23% more on food than they were in the first few pre-pandemic months of 2020, according to U.S. Bureau of Economic Analysis data. While some of that increase can be attributed to inflation, it largely reflects greater demand.

"Consumers have money," said Mike Boland, a University of Minnesota agricultural economics professor. "Part of it is people have cut back and reduced other expenses, and part is eating at home more."

Innovation on hold

On the Wednesday before Thanksgiving, Kyle Hogan was driving around the metro, dropping off packages of Livia's Seasoning Salt to keep retailers stocked for a busy shopping weekend.

"Going the extra mile is the new standard," the chief executive of the 20-year-old company said by phone from the parking lot of Northern Fire Grilling & BBQ Supply in Minnetonka. "It's not all doomsday, you just need to be ready to shift and make changes."

This unprecedented demand for at-home products and food is exacerbating the labor shortage seen across the supply chain — retailers, distributors and warehouses, trucking and production — and frustrating consumers and businesses.

"Here I am dealing with salt, one of the oldest things in the world, and it's unbelievable the complications for something so basic, so simple," Hogan said. "If you're trying to launch a whole line of goods right now, it's hard. It's really hard."

For Pearson's Candy Co., the century-old St. Paul company behind the famous Salted Nut Roll, suppliers have told them to stop innovating.

"We've had major suppliers tell us: Don't create any new products that require our components in 2022, because we can't guarantee supply," said Nick Davis, Pearson's vice president of procurement and supply chain.

Beyond the cost and availability of commodities like peanuts, warehouse and packaging costs have risen, space on trucks is hard to come by, labor remains constrained and computer chip and equipment backlogs mean month-long waits to replace basic parts on the production line.

"We have our team salvaging electronics off of Ebay as one way to keep things running and MacGyver-ing things right in the plant," Davis said.

The upside: This is all caused by consumer demand that is helping drive growth for Pearson's and other food producers. The downside is the cost of making and shipping those products could eat into those gains and prompt price increases, which Pearson's will pass on to customers starting in January.

"I'd say near-term relief is not in sight," Davis said. "As long as consumer demand remains high, we will continue to see price pressures on all fronts."

Shelf life

Throughout the pandemic, retailers have been reducing the raw number of products they carry to streamline supply chains, according to national Advantage Sales surveys. That shelf space lockdown may be softening, as just a third of retailers said this fall they would be accepting fewer new items compared to pre-pandemic levels.

Still, it left little room for the maker of Flackers, an organic flax-based cracker brand, to get a new product on shelves earlier this year.

"We had a unique new item we developed that we delayed a bit and kind of soft-launched," said Donn Kelly, president of Dr. In The Kitchen, maker of the Flackers brand. "What's hard for a smaller company like us is we sell mainly to distributors. But it was more about retailers accepting new items."

Hoyt at Gather Venture Group said there needs to be a "reckoning" as products from startups and small brands become harder to find.

"That reckoning has to come from consumers, who will say, 'Well, wait, what's left on shelves now are these national brands, who have some leverage over distributors,'" he said, adding that retailers and consumers will both need to demand: "We want smaller brands."

Kelly said sales of Flackers overall have been up this year. And a reliable supplier relationship protected the company from the price of flax more than doubling over the past year.

But hiring remains difficult, as it is everywhere, and being able to grow will depend on being able to find more people to work more shifts.

Small food manufacturers face cash flow, employee and distribution challenges in the best of times, he said, and COVID-19 " just added another layer of uncertainty and unpredictability."