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Thursday, April 2, 2020

Supply Chains Are Being Hit By Consumption Pattern Changes

Will Oremus has written an interesting article "What Everyone's Getting Wrong About the Toilet Paper Shortage." The key takeaway is that it is not all about hoarding or even inventory building, it is also a consumption shift. His source from inside the industry gave a guesstimate that 40% of toilet paper is for commercial buildings. With the shutdown in activity, that commercial usage is moving to houses. The problem is straightforward: commercial toilet paper is a completely different product than residential, with different inputs*, produced at different plants, and use a completely different supply chain.

There is no existing way to get commercial toilet paper to retail distributors, and with various lockdowns, the ability to improvise one is limited. (Apparently, the authorities do not consider toilet paper arbitrage to be an essential activity.)

Unless residential capacity can be ramped up to meet demand, the situation is awkward. Nobody is going to build a new plant to bring on line retail capacity just ahead of end of the crisis. The more likely patchwork solution is that commercial paper can get redirected to warehouse stores.

Although this situation is somewhat specialised, this changing of consumption patterns shows up in the food sector. Restaurant meal taking has collapsed, and so grocery demand is higher. The problem is that people are not eating the exact same things as they ate in restaurants, and so there is a supply/demand mismatch. For example, there has been a surge in interest in baking and breadmaking, and flour and yeast are in short supply. Many people are not accomplished cooks (what ever happened to home economics courses?), and so there is a run on canned soups and frozen meals.

This means that the short-term supply picture is even more chaotic, when we already have stocking up demand, as well as logistics disruptions. These short-term problems will presumably sort themselves out, but price movements are likely. Grocery prices will be under some upward pressure, while (largely closed) restaurant prices would hypothetically be under downward pressure.

To be clear, we need to separate these one-off supply chain disruptions due to a changing consumption mix from those that are created by disruptions to supply. Once the initial medical emergency has stabilised, food security is the net thing to worry about. My hope is that the damage will be confined to labour-intensive fruits and vegetables, and that cereal production will be enough to avoid disruptions to the global grain trade, which is a frightening prospect for many countries.


* An article in the Canadian press indicated that due to the power of advertising, American retail toilet paper is super soft, and has to be sourced from old growth timber. Canadians are somewhat more experimental, and there are some brands that incorporate recycled paper.

(c) Brian Romanchuk 2020

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