A Massive Opportunity Exists in Perishable Logistics
Logistics is a laggard industry for tech adoption, despite generating over $14T in revenues across both dry goods and the perishable goods sectors annually. For years, logistics would have been the perfect example for Adam Smith’s idealized capitalist economy — it was, and mostly still is, a model of perfect competition. With such little ability to differentiate between logistics providers, profits for the fragmented trucking, air and ocean shipping segments of the logistics industry typically hover between 1%–5%. With such low profits, it’s no wonder why innovation is only just starting to be seen in logistics. It’s taken young, outsider-started technology companies to reach billion-dollar valuations based on innovative technology. These companies (like Flexport, Convoy and Four Kites) are just getting started. So far, the technology coming out of these innovative startups has focused on optimizing freight loads and connecting shippers with demand (using ML/AI in the process). However, one question that has yet to be asked is whether the demand itself is coming from the right buyer. This is a problem, particularly in the perishable foods industry and in perishables it’s important to ask: is the product is being moved to a city where it will be consumed?
What’s Next?
Most of the innovation seen so far in the logistics industry has been specifically in dry goods (for the uninitiated, this does not include any form of perishable good). This is, in part because dry goods carry less confounding variables and fewer confounding variables introduce less risk/liability.
“But with less and less white space available and often driven by the need to provide a better customer experience, start-ups are now moving into areas of the value chain with much more increased risk.”
- Boris Wertz, Partner @ VersionOne
At the startup I co-founded, Coastline, we see the white space diminishing in logistics as a whole but a large, untapped opportunity in perishable logistics. Specifically, we see an opportunity to reinvent how perishable foods are brought into the city in which they’re consumed. Put more simply: we’re on a mission to reinvent the supply-chain for perishable food.
Why Perishables?
If you’ve driven in front of a restaurant in North America recently you’ve likely seen a truck belonging to one of the three largest broadline distributors for food: Sysco, US Foods or Gordon Food Service (GFS). Each of these broadline distributors operates more or less the same, they represent multiple city-specific wholesalers (companies who buy and hold food in warehouses destined for restaurants and retail). Because these city-specific wholesalers have experience in their given sector (for example in produce, beef or seafood) they know when prices are at their lowest (most foods are commoditized) and can hold the product for as long as two years. However, the success of these broadline distributors also belies on the principle of economies of scale. By representing multiple wholesalers in a single city — distributors like Sysco, US Foods and Gordon Food Service can use much larger trucks than the wholesalers themselves. This cost saving is enough to earn these distributors the business of most major wholesalers and still leaves room for them to earn an estimated 2% net profit annually.
Don’t believe me? Check out Sysco’s annual shareholder report
At first sight, this model appears to work for the supply-chain. However, as you dig deeper a couple of realities present themselves. Many wholesalers lack an ability to control the supply-chain upstream, this leads to lack of consistent pricing for individual SKUs, lack of clarity on where product is from and large variance on prices between cities for specific food items.
This model of buy-and-hold across the food industry has persisted for several decades and at Coastline we believe technology has finally advanced to the point where a more efficient and elegant solution can be developed. After two years of experiments to create a thin marketplace that delivers seafood on-demand (and surviving mostly off of profits) my team and I have discovered that the only way we can solve this issue at scale is by vertical integration.
Perishable Logistics Today, A Snapshot
To explain how the upstream supply-chain typically looks it would be best to start from the farmer and move downstream through the supply-chain. The efficiency with which a product moves can take many forms. For large-scale, store-front buyers like Mcdonald’s, an ability exists to lock in supply with a large-scale producer. For example, in the case of chicken burgers, a chicken farm, with the economies of scale generated by McDonald's an ability exists to build out a customized transport supply chain to maximize efficiency. In this specific case, McDonald’s even built a customized derivative market to hedge for price volatility on chicken meat amongst the doldrums of global supply variance (and reflexively, due to the commoditization of chicken, price variance).
The example of McDonald’s shows just how efficient the supply chain can get: immediately after highly automated processing, the product is centralized at a McDonald’s distribution center and shipped out with all other McDonald store raw materials. Done.
However, when one looks at the process of supply sourcing for most other storefront buyers (which make up over 68% of North America’s restaurant market) or for food types that are more difficult to source, the supply-chain becomes much more inefficient. On average, chicken is often bought and sold 3–4 times and is shipped over 760 miles before getting dropped off at a restaurant. This represents a 30% price mark-up by the time the independent restaurant actually receives the chicken relative to McDonald’s (assuming ceteris paribus logistics). This process becomes even more convoluted for specialty items that can only be produced in certain areas of the world, for example, Pacific Cod.
Why This Is Happening
Because individual restaurants (and even chains) are not able to deploy investment banks to set up derivatives markets or employ teams of supply-chain experts to drive efficiency many are forced to settle for what is convenient and consistent. These buyers accept a markup on their food costs in part because they don’t yet have the time and resources to find a more direct alternative. However, this convenience comes at a cost — wholesalers will inventory large amounts of product to have it available same day and because they too do not have the resources to deploy a large sales force, wholesalers specializing in specific types of food will often sell through distributors to try and gain more market-share (at a further mark-up). Looking upstream, these wholesalers will often buy from seafood traders and/or processors who will buy from brokers who will buy from fishermen and fish farms.
Furthermore, smaller buyers like restaurants or even wholesalers do not have the bandwidth nor the buying power to source from farms, fishermen, foragers and other producers that produce goods outside of their region of operation. Many simply need to buy their goods and focus on the next part of their business. A primary thought in many restauranteurs & retailers minds’ is how do they lower food costs (aka: increase their profits) while maintaining a quality standard that will attract more customers. It’s a delicate balance. One that they are often forced to consider the former before being able to ensure the latter.
How do they ensure the former? They maximize what little economies of scale they can — by ordering all their supply through one or two sources — believing that they can maximize their buying power with distributors like GFS or Sysco.
What We’re Doing Differently at Coastline
At Coastline we’re big believers that ideas are cheap and execution is what matters. In the world today there exists what we believe to be a multibillion-dollar problem unsolved in logistics. This blog post details anecdotal stories witnessed during my (continued) journey building a startup working to solve this problem and the math behind how this problem can ultimately be solved with a combination of business model innovation, software and scale.
At Coastline we’ve started by focusing on the most expensive vertical in this enormous value chain (seafood) and exercising control over the whole vertical chain from point of product ‘creation’ to door delivery.
Here is why the traditional supply-chain is antiquated for the modern, software-enabled world. They don’t centralize at the port of entry. To generate economies of scale as efficiently as possible it is important to centralize product as early as possible (ideally at the city where it originates). The issue with the current supply chain is that you have multiple buyers and sellers in multiple cities and supply regions (bifurcating supply lines and then reaggregating them later). This load splitting and then reaggregating leads to what are known as LTL loads (Less than truckload) this means that on a per pound basis shipments increase in price to untenable levels.
Why Coastline’s Solution Makes Sense at Scale
At Coastline we centralize product higher upstream in the supply chain. This ultimately results in reduced costs as economies of scale develop buying power developments from multiple harvesters within a region.
Today we’ve focused exclusively on seafood — having identified it as the best ratio good between high-value and inefficient supply chain. However, we see the long term potential of our airport centralization+harvest-on-demand model applying to all perishable foods. By grouping restaurants together to create economies of scale and by grouping different products together for a continuous process line we can generate economies of scale that are only seen by some of the largest processors in the world.
Once this distribution network is established by our best-in-class seafood products that compete with below-market pricing — we can see Coastline being owned by a parent company called Line which focuses solely on perishable logistics automation — specifically on the upstream supply chain for all perishable goods. Line would then enable us to deliver below market pricing to the whole mid-market restaurant segment as well as to retailer groups across a multitude of cities globally.
A few notes on Market Size
When you consider the value of the goods being shipped in perishable logistics many don’t expect the figure to be well over $1 trillion. Supporting links on that figure here, here, here, here and here
