511 - Market Update Q1 2021

511 - Market Update Q1 2021

Market Update

January 2021

Summary

▪ While same store restaurant sales showed signs of recovery through Q3 2020, this slowed in Q4 as optimism for a post-pandemic recovery in the United States was tempered by surging COVID levels, a 2 nd wave of shutdowns, politically-delayed stimulus relief, faltering economic recovery, and early stumbles in vaccine distribution programs ▪ Instore dinning recovery, specifically independent operators, continue to lag national account and QSR segments who were able to pivot quickly to take out, delivery via digital infrastructure ▪ Overseas Manufacturing and Supply Chain challenges at the outset of 2021 are formidable − Limited availability and increasing costs for the critical raw materials required to make nitrile gloves − Unfavorable currency exchange rates are impacting manufacturer material acquisition and financial flexibility − Space on ocean container ships is limited and ocean freight will continue to trade at a premium in 2021 ▪ COVID has created fundamental changes in how businesses serve their customers on-premise, away-from- home − Customer expectations for safety and satisfaction are emerging and will remain in a post-COVID world, permanently increasing demand for gloves, PPE, safety and cleaning related supplies − Creativity and innovation – critical for any business, in any era – are now survival-essential as restaurants and service organizations figure ways to reconfigure and reinvent to sell through capacity restrictions, and ultimately, stay afloat  Although we expect demand for foodservice disposables to continue to recover in the later part of 2021, we believe that the residual effects of the pandemic will continue to impact consumer confidence, global manufacturing production, and supply chain performance throughout 2021 and well-into 2022

The Market Place Vaccine availability, increasing adaptation and the prospect of government recovery assistance have raised business confidence, but pace of recovery will be slow and subject to set-back through 2021, leaving a mixed and apprehensive business environment.

▪ Restaurant Industry Reels –

Warm-weather provided outdoor options for restricted full-service restaurants, and by July, the industry clawed back to pre-pandemic levels. However, late Fall temperatures chilled the industry’s 2020 rally and recession returned – 110,000 (17%) of restaurants have shuttered since March 2020 and less than half intend to reopen December 2020 NRA Operator Survey – 372,000 Restaurant and Bar jobs were lost in December, bringing total 2020 job cuts in this sector to 3.9 million (23%) US Bureau of Labor Statistics – The Quick Service sector ended 2020 slightly under 2019 revenue level, as drive-through and delivery geared facilities, thrived; Chipotle announced plans in January plans to hire 15,000 new workers Nations Restaurant News ▪ Demand Patterns for Supplies are Shifting … Some, Permanently – Gloved and masked servers have become critical customer safety branding issues for restaurants serving on-premise – Demand for individually-wrapped cutlery, straws, stirrers and other disposables that limit the potential for spread of contaminants is rapidly increasing and expected to endure, post-pandemic – Vaccine inoculation teams are expected to drive significant incremental demand for disposable gloves ▪ Emerging Concepts in Away-from-Home Dining are Here to Stay − “Ghost Kitchens” single-company, mass-production sites that make and market meals for on-line home delivery customers under multiple brand names − Return of the walk-up takeout window for pickup and delivery service – no seating, minimal footprint, low rental expense

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Global Manufacturing

Costs continue to increase driven by demand, currency and raw material drivers.

▪ Perspective from the 511 Foodservice Manufacturing team in China: –

Chinese Government has implemented strict bans on disposable plastic product usage, action that is likely to increase domestic (Chinese) demand for bagasse, and further stressing manufacturing and increasing costs of fiber-based products – Chinese manufacturers anticipate inflationary headwinds into the second quarter of 2021 for most categories of raw materials, driven by high demand and unfavourability in the US-China exchange rate – Concern is high in China about spread of COVID-19 during Chinese New Year celebrations, potentially leading to production shortfalls in March – 511 Foodservice continues to invest 511 Foodserviceoss the globe in manufacturing capacity to maintain flexible and responsive sourcing and production capabilities

Costs Declining Stable Increasing

Outlook for Key Supply Categories

Reminder ! Chinese New Year, February 12-26

Product Category Nitrile & Latex Gloves

Primary Country

Availability Manufacturing Cost Drivers Outlook

Nitrile

Expect intermittent availability, and continued price increases throughout 2021.

Malaysia

Poor

Latex

Input PVC

Vinyl Gloves Hybrid Gloves

Vinyl availability continues to improve apace with continued high demand. Vinyl is a good substitution option for Nitrile or latex gloves.

China

Reliable

DOTP Plasticizer

We expect that increased manufacturing capacity should emerge in the US market by mid year 2021.

China

Improving LDPE

Plastic

511 Foodservice has made investments to increase capacity of these key products including wrapped cutlery and disposable cutlery kits.

Cutlery

Asia

Stable

Molded Fiber

Plastic

Takeout Food Packaging

Very high demand for Takeout Packaging. Supply constraints vary by type; Plastics and molded fiber products will remain tight through the first half of 2021 while paper folded takeout boxes will improve sooner.

Asia

Constrained

Molded Fiber

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Glove Market Update

Elevated demand and limited manufacturing capacity have resulted in product shortages and significant price increases

Supply Update

Demand Update

▪ Availability of Nitrile and Latex gloves remains highly constricted, and costs have increased 5-15% per month

▪ Pandemic-driven demand for Nitrile, the most popular type of disposable glove, is still exceeding industry manufacturing capacity, an imbalance that will likely continue through Q3 2021 ▪ Latex is filling the void, though not perfectly due to raw material constraints and allergy concerns - Vinyl glove supply is stable

▪ Manufacturing executives in Asia have expressed concern about resurgent Coronavirus impact on factory productivity

▪

▪ Vaccine rollout is will contribute to keeping glove demand high

Of particular concern are Chinese New Year travel and gatherings that will drive virus spread

▪ Cost for manufactured gloves have risen 2 to 3 times pre- Coronavirus levels ▪ Instances of fraud have risen as speculators and new, sometimes desperate buyers have intersected in the market

▪ Leading glove manufacturers have reported further outbreaks at plants in January

▪ Meaningful capacity of vinyl and hybrid gloves has started to come online in China

Glove Market Timeline

May/June/July

Q1 2021

Late Summer & Fall

Q4 2020

• Preparations for 2 nd wave of the virus in Fall drive continued demand

• Elevated demand will continue into 2021

• Demand increases exponentially

• Ocean freight constrained, spot-market pricing

• Lack of new capacity being added to satisfy new normalized demand • Prices will remain above historical levels thru Q3 • Challenging payment terms from glove manufactures.

• Factories raise prices as demand exceeds supply • New market participants enter further driving up prices

• Vinyl raw material availability stabilizes

• Raw material shortages

• Aggressive price increases and long lead times (12 Mo.) • Factories selling out capacity to highest bidder

• 60 Minutes profiles glove supply chain fraud • Pace of supplier price increases ramps up

• Prepayment requirements

Glove Prices

1. Allied Market Research

Low High

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Shipping and Supply Chain Logistics

The Ocean Freight industry struggles to regain smooth sailing in 2021.

▪ “Shipping space on container vessels is extremely difficult to obtain now, leading to overflowing warehouses that are filling with manufactured products awaiting shipment, leading to increased costs.” An 511 Foodservice General Manager based in Asia ▪ Annual contracts with Ocean Carriers normally help shippers stabilize freight expense; – In the current environment, however, container space is not-available and carriers have stopped accepting bookings at contracted rates – This forces shippers to pay spot-market rates up to $3,000 above normal contracted levels – Industry analysts predict that the new profitability of spot market rates will influence contract rate pricing upward going into 2021 ▪ Container shipment reliability on all routes from Asia to North America hit all-time lows in late 2020 – Inbound ocean freight delays are ranging 2 to 4 weeks regularly since November 2020 at Los Angeles / Long Beach and New York, examples that are playing out similarly at many other North American ports – Meanwhile, commercial inventories are tight and retailers are ramping up shipping from Asia to restock for Spring ▪ Severe congestion is resulting at ports on both North American coasts due to this situation is expected to persist for several weeks into 2021; COVID-19 infection rate among Longshore Workers is growing – In mid-January over 60 container ships were at-idle off the coast of Southern CA awaiting off-loading – Container ships are currently booking at 150% capacity in Asia - NA trade lanes – Example of virus direct impact on port operations: 1,800 Port of LA – Long Beach are off-the-job in late January, infected with, or isolating from, Coronavirus ▪ Trucking tonnage annual index spiked at the end of 2020, recovering to 3% below pre-pandemic level

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Key Points

▪ Until vaccines are thoroughly administered and consumer confidence improves, foodservice will be slow to recover during the first half of 2021. ▪ New modes of away-from-home dining and other activities are redefining customer expectations that will not change for the foreseeable future. ▪ The significant demand increase for gloves, PPE, take-out packaging, single use plastics and other supplies used to create and maintain clean and safe environments will continue beyond 2021. ▪ COVID-19 will continue to lengthen lead-times, challenge manufacturing, and potentially cause supply chain disruptions so it is critical to be proactive and plan accordingly. ▪ Product costs have increased due to supply/demand imbalance, raw material scarcities and other COVID related inefficiencies in both manufacturing and supply chains. ▪ The ocean freight market is tightening and likely impact supply chains, product costs and availability in 2021. National driver shortage stressed North American trucking capacity prior to Coronavirus, and with pandemic demand driving surges in domestic freight tonnage, further testing of the industry is likely in ‘21.

511 Foodservice Recommendations and Commitment to Customers

511 Foodservice continues to leverage its scale and unique relationships to manufacturers to maximize supply, seize available manufacturing capacity, and manage costs for our customers.

Allow your 511 Foodservice representative work closely with you during these challenging times to discuss inventory status and substitution strategies when forecasting demand and planning orders.

Utilize www.511Foodservice.com for the most current market information, pricing and purchasing details.

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