Future-Proofing the Food & Beverage Supply Chain - Cushman & Wakefield

While the impacts of COVID-19 are still unfolding, it’s increasingly clear that food and beverage companies will need to continue to evolve their strategies when it comes to inventory management, real estate decisions, automation, packaging and sustainability among other things.

The COVID-19 pandemic has placed significant stresses on food and beverage supply chains across the board, adding challenges to an already intricate industry. Shortages in labor and raw materials combined with higher than expected demand and logistical issues is leading to customers having to drive to three, and sometimes even four or more, different stores to get everything that they want and need. While the impacts of COVID-19 are still unfolding, it’s increasingly clear that food and beverage companies will need to continue to evolve their strategies when it comes to inventory management, real estate decisions, automation, packaging and sustainability among other things.  

We recently sat down with food & beverage industry experts Betsy Power, Director, Global Real Estate, Frito-Lay/Pepsico; David Varalli, Director of Real Estate, TreeHouse Foods; Dennis Julio, Head of Global Real Estate, Nestle; and Ken Reiff, Co-Lead Food & Beverage Advisory Group, Cushman & Wakefield to discuss several of these topics in more detail.

Q. The pandemic has obviously challenged food and beverage supply chains, but what silver linings are you seeing come out of the changes over the long term?

Dennis: At Nestle, it’s been all hands-on deck on the supply chain side throughout this pandemic thus far. Our real estate team’s efforts in supporting our supply chain business partners has grown dramatically, and our industrial real estate transaction activity has increased as a result in order to service this demand. 

Betsy: Demand for our products at Frito-Lay/Pepsico grew exponentially during the initial pandemic. With everyone eating at home, it was challenging to keep the grocery shelves stocked. Now, a year and a half into the pandemic, we are still seeing challenges in keeping products in stock. The silver lining we have seen is that our products are still greatly in demand and, during the midst of the pandemic, we’ve launched even more products, 

David: After encountering new and different obstacles at every turn, the past 18 months has definitely increased our flexibility. Whether it was putting procedures in place to ensure our employees remained safe or dealing with issues related to labor, raw materials, packaging and transportation, we have continually proven how agile we are as a company and how quickly we are able to identify solutions. 

Ken: I think everyone is trying to build in ways to add in extra supply, so the chain doesn't break like it did last year. Whether that means utilizing larger distribution centers or more smaller facilities nearby, adding in that flexibility and extra storage is crucial.

Q. How have real estate strategies shifted as a result? 

Dennis: We are seeing a greater proportion of our overall global transaction activity devoted to industrial real estate, including land acquisitions for factories, expansion of existing production facilities, and additional lease acquisitions and relocations on the logistics side. This also includes larger-scale distribution centers than we are typically used to seeing. 

For the most part, we like to keep terms flexible and try to avoid longer leases, but lately, we’ve had to resort to longer-term transactions because of the competitive industrial market and our reduced leverage. And now, given the dramatic rise in the industrial real estate market, we are also looking more closely at owning versus leasing when it makes financial sense, especially in key markets. 

Betsy: At Frito-Lay/Pepsico, our warehousing has traditionally been owned real estate. These facilities are old, small, low clear height, etc. From a strategic sales perspective, we recently decided to update our infrastructure, expanding our buildings to larger footprints (average size used to be 40,000-50,000 sf and now they are generally anywhere from 150,000 up to 500,000 sf). We want to be able to mix operations that we couldn’t mix before, so we are shifting from an owned strategy to a leased strategy in order to gain flexibility and move more quickly if markets shift. 

Given the growth we are seeing in industrial assets, we want to lock in rates for the long term, so most of our new leases are 10 years in markets that we know we will be in for a long time. In the past, five-year leases were standard because growth was organic, and not strategic. Now we are making sure we have the right-sized building at the right rate. We signed 20 new leases in the last nine months alone. It’s getting harder to find sites though and build to suit (BTS) is tough and so competitive.  

We are also building many last mile facilities, that we call product exchange centers, to get closer to the market. And there’s been an enormous amount of construction going on for buildings ranging from 10,000 sf in rural markets to 30,000 sf in metro. 

We have over 1,000 SKUs, but at the end of the day, if we don’t have room to stock them in a warehouse, we lose sales.  

David: TreeHouse Foods produces private label—or customer-branded food and beverages.  We have always prioritized flexibility in our supply chain in order to serve our customers’ evolving needs while meeting dynamic consumer demands, which has driven us to shorter lease terms historically. The competition for industrial buildings, however, has recently forced us to reevaluate our strategy and lock into longer term leases. 

Ken: In talking with our clients, they are starting to realize that the supply of available space will be tight for at least the next two years and are now adjusting their strategies.

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