2020, a year to (always remember)
for Animal Proteins.

Dec. 28, 2020

In an attempt to close out a despairing year for the foodservice industry, we once again take a look at the indicators we have analyzed in past reports. Back in March 2020, industry estimates suggested a foodservice sales contraction from 10 to 20 percent year-over-year. As of the third week of December, using data through November, it appears that 2020 will be closer to a 20 percent contraction. Furthermore, some recent states’ mandates on restaurant closures (e.g. New York), are likely to make this contraction somewhat larger. Our estimates even for next year vary widely, depending on how the recovery develops.

Sr. Analyst, UrnerBarry Consulting
Angel Rubio — arubio@urnerbarry.com

We continue to place a heavy emphasis on how foodservice sector sales hold up relative to retail (grocery stores). Seasonally adjusted data for October and November showed a decrease in sales from the previous month, halting a 5-month rally from April. We used seasonally adjusted data to show a plateau on the current trend rather than approach it on a seasonal year-over-year basis, which is usually the preferred measure for those in the industry.

So, as dining out contracts once again—mainly due to colder weather and many states shutting down indoor dining again because of back-to-back record figures of daily fatalities in December—it is likely there will be another not-so-abrupt increase in grocery sales shifting from foodservice.


This situation could once again shake the wholesale food industry, albeit, to a considerably lesser extent compared to March and April. What this means is, wholesale trade to the foodservice sector is also likely to suffer at the expense of gains in retail and the data suggests it as well.

Disposable income remains stable while unemployment, particularly in the foodservice sector, remains high. Consumer spending at both grocery stores and restaurants during the summer and into the fall offset the potential spending contraction caused by high unemployment. Yet, the fate of the economy will continue relying on government spending and the latest relief package passage will certainly provide more buffer to consumer spending. We must remember that about two thirds of the economy run on consumer spending.

We believe that after the initial shock in March and April, protein consumption has been largely supported by a growth in disposable income despite high unemployment figures. As a result, this has also provided relative support to wholesale trade and thus prices. On the production side, domestically produced land-based proteins have cut back production where possible.


Nevertheless, we have not seen any dramatic drops in wholesale prices for mainstream animal proteins. On a yearly-basis, wholesale values are up for pork, beef, eggs, but down on chicken; all remain within their historical and seasonal averages and confidence intervals, with occasional non-seasonal jumps or drops. Pork prices have been a tad more volatile, which is partly caused by African Swine Fever (ASF) dynamics. On the seafood side—generally perceived as higher-priced by many consumers relative to other proteins—prices for salmon and shrimp appear to be barely holding and hovering around multi-year lows. Maine lobster prices fell counter-seasonally in March and, as expected, as the summer kicked in; however, seasonal prices resumed their behavior albeit with an estimated 15% reduction in landings.


Retail prices, nonetheless, have all surged compared to last year. This could suggest many things, but one is perfectly clear and relevant to our industry; many retail spreads, which is the price difference between retail and wholesale, reached record (or near) highs this year with the exception of eggs.


In previous reports, we also predicted sporadic mild price volatility as supply chains shifted from foodservice to retail and vice versa. We still believe this will be true through the spring.

Therefore, we must consider each protein’s dependence on foodservice relative to retail.

Our assessment indicates that cuts in production, expansion of government relief programs for the unemployed, and the potential recovery as vaccine rollouts begin across the country, will help mitigate potential price drops in the wholesale market during the winter and very likely into the spring.

Conclusion

Our fundamental argument is that while consumers overall do not necessarily eat less during tough economic times, they certainly eat differently. In other words, people are likely to trade down to lower-priced proteins, dine out less, reduce vacations, and certainly eat more at home when they see their disposable income fall. We must also remember sporting events, concerts, cruise lines, movie theaters, and other similar establishments are all still significantly contracted.

Our premise made two months still suggests that as unemployment rises and disposable income falls, consumers are likely to trade down to lower-priced animal proteins. However, the recently approved stimulus package will continue to provide support to consumer spending and likely maintain current animal protein eating habits.

In addition, it is likely that the resilience seen by many operators during the summer through outdoor dining transitions as well as growth in food delivery and other innovations will continue through the winter. However, this resilience will very likely come at the expense of an inevitable contraction caused by colder weather and increasing indoor dining restrictions. Therefore, we expect another shift in consumption from foodservice to retail.

Although there appears to be light at the end of the tunnel, the real test has already begun and so far, is looking as tough as initially suspected.