Dive Brief:
- Conagra is incurring higher costs as supply chain issues snarl production and the omicron variant constrains the availability of labor, CEO Sean Connolly told analysts Thursday.
- The packaged foods company is paying more in overtime amid a rise in "omicron absenteeism," said Connolly. "I think, it’s entirely reasonable for all of us to project that the next month or so could remain strained within the supply chain as omicron runs its course."
- Labor constraints in addition to above-average inventory write-offs led the Slim Jim maker to absorb $21 million in supply chain costs in Q2, a filing from the Securities and Exchange Commission shows.
Dive Insight:
The fast-spreading omicron variant is compounding existing labor issues, raising costs and pushing companies to revert to some of the same tactics they used earlier in the pandemic to meet demand.
Conagra pulled back on merchandising activity to temper demand. The company is looking at focusing production on high-selling products, part of the playbook used by CPGs to reduce complexity and drive efficiencies when demand rebounded in 2020 following a pandemic-induced decline.
"As we saw early in COVID, there are steps we can take to maximize line efficiencies and throughput, things like SKU simplification, etc.," said Connolly.
Conagra's manufacturing footprint is also set up in a way that could isolate plant closures due to omicron cases. Instead of "one big mega plant," Connolly said, the CPG has several plants and co-packer plants. This means an outbreak among workers wouldn't necessarily shutter all production.
Labor has been one of the biggest constraints to production for the manufacturing sector. Hiring growth slowed in December, with the sector adding 26,000 jobs, according to the Bureau of Labor Statistics. Manufacturing employment is down 219,000 since February 2020.
A rise in omicron absenteeism is only expected to further strain manufacturing and reduce output across a number of businesses. However, a move by the Centers for Disease Control and Prevention' to shorten the quarantine period to 5 days from 14 days could limit the impact.
"Due to the rapid transmissibility of the omicron variant, supply chains will experience disruptions," said Spencer Shute, principal consultant at procurement consultancy Proxima. "The shorted isolation period will help reduce the disruption timelines and get operations back to 'normal' more quickly."
Conagra expects labor and other supply chain headwinds to continue into Q3, Connolly said. The company is willing to absorb the higher costs "to get as many boxes of product as we could in the consumers’ hands," the CEO said.
