As we begin to emerge from a pandemic that will reshape nearly every aspect of our global, national, regional, and local economies, the fragility of one sector, in particular, will be reexamined in a manner not seen since the post-war era modernization, namely food production.
I am intentionally focusing on food production rather than agriculture in reference to the part of the food industry that exists between the farmgate and consumer. This supply chain for food ranges from truckers who move food, packers and shippers, primary processors, distributors, and retailers. It includes a multitude of stakeholders, economic interests, regulators, and policy actors, and is an industry segment that we at Better Food Ventures anecdotally call, the “messy middle” of Food & Ag.
As an early-stage investor in AgTech and Food Tech innovation, I talk to players across the entire value chain and I have to say, I don’t think the current system is really working well for anyone— not for farmers, or primary processors, or packer/shippers, or truckers, or grocers, or retailers. To be clear, there is not one group, organization, or even subsystem in our industrialized food system that is the culprit. Instead, it is the policies and pocketbook decisions of our generation, and those before us, that have collectively contributed to this modern food system.
Prior to COVID-19, I talked about our monolithic food supply chain with resigned pragmatism, believing that the current system was designed to withstand massive disruption, creating food security for many but making large scale disruptive innovation difficult. Fundamentally, I believed that slower incremental disruption, together with collaboration among incumbents and start-ups, would be a more likely evolutionary path in the sector. I was wrong.
What Can Be Learned from COVID’s Spotlight on Supply and Demand Dislocations?
Today’s food system is fundamentally supply-driven, in which farmers are price takers and disproportionate margins accrue to middlemen and market-makers. As brands, retailers, and foodservice providers continue to gather important consumer demand signals, this information is increasingly disconnected from the food producers and suppliers.
Without the right data to inform their operations, those in the "messy middle” of food — the massive production and processing facilities, logistics, and distributors— lack agility and responsiveness to adequately respond to the supply or demand dislocations. The dairy industry has been particularly hard hit by challenges in the messy middle. In the current system, repurposing processing plants to changes in demand requires time and millions of dollars in investment which many processors have concluded just isn’t worth it. Yet this reinforces the disproportionate share of economic risk food producers bear from both lost revenue and sunk costs. Similar stories are playing out in pork and poultry production, as well as fresh produce and seafood.
We are recognizing that there are essential components within each value stream of the food system that are intrinsically dysfunctional and must be reconsidered from the ground up. A fresh perspective is needed at a number of levels, such as: the role of physical and human assets; the imbalance between risk/reward along the value chain; as well as mistrust, a lack of accountability, and behavioral (mis)alignment among stakeholders.
In some places along the value chain, we may be able to fix what is broken. In many other places, we may need to abandon what is broken and redesign modern food production systems that can adapt to today’s environment. We should not double down on a hard-coded system architected to meet society’s needs 70 years ago.
Importantly, we will need precision in how we understand and talk about each food supply chain and its specific challenges and solutions. We need to analyze each food production system, recognizing the unique dynamics of fresh produce or permanent crops versus grains / oilseeds and dairy versus livestock or seafood. Sweeping generalities and pronouncements about food production reform may be well intentioned, but overlook unique sector influences from regional, trade, labor, policy, etc. which need to be well understood to advance system-level change.
Supply Chain Disruption is Making Room for Disruptors
While many processors, packer/shippers, and midstream players have adopted modern manufacturing approaches pioneered by Toyota decades ago (e.g. Six Sigma and value stream mapping), most still remain dependent on complex and costly equipment, a lot of labor, food safety compliance inefficiencies in old facilities, not to mention minimal integration among suppliers and buyers which hampers traceability, accountability, and trust.
In connection with the lack of agility that we see midstream, I increasingly find myself asking how this part of the value chain is going to respond to the proliferation of business model innovation that is coming (or has already arrived). While vertical integration is nothing new in Food and Ag, the disruptive impact arising from retailers who have invested in data management and analytics, coupled with strong supply chain management expertise, was felt by Walmart and Kroger’s decision to open their own dairy processing facilities, or Costco’s decision to build their own poultry farms in Nebraska. Will Amazon be next?
More recently, we saw some remarkably nimble action from restaurants who transformed into grocery stores in the wake of COVID-19; online grocery shopping grew from 13% to 31% in just a matter of weeks with many of those shoppers intending to remain on digital platforms post-COVID; and direct-to-consumer models that are creating massive pressure on processors to kit, package, and distribute in a way they have never done before, but also creating a valuable new route to market that is enabling differentiation and consumer insight.
In the longer term, the Ag inputs and equipment sectors are also exploring game-changing business model innovations, including marketplaces seeking to create shorter supply chains and increase customer loyalty. I am particularly interested in the insights Shane Thomas lays out about migrating from transactional models to services-oriented, outcome-based models in Squishing the Fish in Agriculture and, if you really want to geek out, Bill Schmarzo has some good digital transformation analysis in his recent post Digital Transformed Business Models Go Beyond Win-Win.
Investing into the “Messy Middle of Food”
To date, much of the investment in food supply chain innovation has been reactive to regulatory externalities like wastewater treatment, utility consumption, and food safety compliance; there has been a dearth of significant investment in strategic business innovation like supply analytics, scenario modeling, more nimble production lines, greater automation and training, logistics optimization, warehousing analytics, and so on.
The incumbents’ resistance to investing in modernization and behavioral change has, unsurprisingly, left the industry unprepared and unequipped to respond to catastrophe. Many will say the industry crisis presented by COVID-19 is just a black swan event, but with the alarming increase in devastating weather events around the globe, we should expect more consistent supply / demand dislocations, leading to ongoing cycles of economic and social insecurity.
During and following WWII, our government and private sector funded massive investment in industrialization infrastructure that catapulted the U.S. into an economic powerhouse. Today we are presented with another golden opportunity and, while our policymakers and capital markets would be well served to now focus on our food production infrastructure, these efforts will likely result in “more of the same” absent radicle value chain alignment. If private sector leaders and innovators do not provide the foundation for system-level thinking and change to occur, we will continue to invest billions of dollars into a system that is unable to meet the needs of a 21st century economy.
At my core, I look at the world through an investment lens and recognize that change at this scale hinges on efficient (and increasingly mission-aligned) capital deployment. Furthermore, I understand that it is comparatively more difficult to find investor alignment without a deep understanding of the current system’s complex inter-dependencies, eccentricities, and pain points. There are many smart people thinking about what it takes to realign, invest, and strengthen the system, but more courage and conviction to embrace change is needed.
The Fern recently curated a great editorial piece, What Needs to Change in America’s Food System, that highlights leading Food & Ag leaders’ perspectives on topics ranging from paying workers a living wage to diversifying the supply chain. For those interested in digging deeper into the non-so-sexy (but critically important) world of food production and value-add, McKinsey did an insightful study in 2018 looking at innovation in food processing and handling which provides an in-depth look at drivers of business model innovation.
Looking Forward to the New Normal
This is not a moment for platitudes and future-casting; we need to think about what is failing NOW and how to realign the systems around agility, value creation, risk/reward sharing, and incentive structures to meet customer and market demand. We must not forget the devastating impacts we are seeing every day or allow ourselves to become complacent; this is a complex, daunting system-level crisis that we cannot shy away from.
I challenge those who have the talent, capital, and ideas to consider how might we re-architect critical, demand-driven food value chains for agility and resiliency with the following design principles in mind:
VUCA: borrowing a term from the US military that assumes Volatility, Uncertainty, Complexity, and Ambiguity are the new normal in the day-to-day operating environment, so how might business leaders design and invest in more agile systems and operations.
Trust: Adoption of processes, thinking, and technologies that are necessary to enable accountability and transparency among stakeholders, and in turn, provide the foundation for trust in the food system from the farm to the consumer.
Behavioral Integration: Once we have trust, we can engender resiliency through alignment of quality, cost, and customer service, where food producers are fairly rewarded and recognized for sustainable production.
Business Model Innovation: We need to reimagine new business models optimized for more efficient, fair, outcome-based risk / reward models for each stakeholder in the value chain, especially farmers and ranchers.
System-level change is difficult and messy. It requires bold investment, leadership, collaboration and, in some cases, creative destruction. We, of course, will need to develop the methods and means to finance the transformation of the food system and there will be more on this topic to come.
As I reflect on what we have learned about the fragility of our global food system, I am glad I was wrong. I believe this systemic shock has created an opportune moment that will allow us to leapfrog the evolutionary path from incremental, component-level change to disruptive, system-level innovation which will strengthen and secure our future. — Seana Day
Note: For a later discussion and outside of this “food production” system, are the important stakeholders within the support system of the farmer and rancher such as input suppliers, equipment manufacturers, trade associations, researchers, and advisors, etc. They play an essential role in re-imagined value chains but warrant separate exploration.