511 - Market Update Q2 2021

Market Update

April 2021

Summary of Key Drivers Impacting 511 Foodservice Customers

Raw material costs spikes and unprecedented challenges to global supply chain efficiency keep cost pressures high for foodservice operators and distributors as they prepare to emerge from the pandemic.

▪ Pricing pressure on Paper and Fiber-based products increased significantly during the first Quarter due to dramatic spikes in the costs of key raw materials. Rate of Raw Material Input Cost Increases, January – March 2021

Bleached Pulp (Paper) - 32% | Recycled Containerboard – 40% |

Chinese Bagasse – 22%

▪ Asian factories worked through Chinese New Year and recurrence of COVID-19 outbreaks have been less- than-feared, helping to stabilize Gloves and Plastic-product availability. However, key manufacturing materiel costs continue to rise.

Plasticizer (DOTP) - 29% | Latex – 15% | HD & LD Polypropylene – 20 – 24% | Aluminum Foil – 10%

▪ Global Supply Chains continue to struggle with unprecedented demand and resource disruption.

▪ As we predicted in January, Ocean Freight Container pricing is normalizing to new levels established by spot-pricing practices, 2.5 to 3 times previous norms. ▪ Containership schedule reliability is at historical low, with an industry-wide on-time arrival rate under 50% and a days-delayed average of nearly six. (theloadstar.com)

▪ 511 Foodservice has experienced nearly 40% higher in-bound overseas shipping expense and we forecast an additional 11% in Q2.

▪ Foodservice operators in all segments are entering a make-or-break summer and fall season where survival moves made in 2020, including shifts to delivery-only, outdoor dining, Ghost Kitchen and Virtual concepts, become permanent and are invested-in fully as strategies for staying viable over the long haul. ( Technomic )

Global Manufacturing

Production capacity improves but input costs and market trends remain a challenge

▪ In-theater reports from 511 Foodservice Sourcing and Manufacturing teams 511 Foodservice across Asia: ▪ Production Capacity : Production volumes are recovering as many Asian factories remained open during Chinese New Year, clearing backlogs and catching up with demand ▪ Environmental Bans : China’s ban on single-use plastics is diminishing availability of bagasse and other molded-fiber materials. Raw cost of Chinese bagasse has increased 20% since January. ▪ Currency : Chinese government moves lowered currency rates nearly 10% in the second half of 2020, weakening purchasing power of North American importers. ( South China Morning Post )

Costs

Outlook for Key Supply Categories

Declining Stable Increasing

Product Category

Primary Country

Manufacturing Cost Drivers

Availability

Outlook

Cost spikes in pulp and paper board are being driven by plant outages (planned and unplanned), supply chain disruptions, and demand increases due to pandemic consumption, and finally, behavioral changes (world-wide increased consumption of tissue-grade products for personal hygiene). A counter-intuitive example of supply / demand imbalance, finished goods prices for some lines of gloves such as vinyl, have stabilized due to strong production capacity, despite steadily increasing raw material and supply chain costs. Nitrile demand and high costs will continue through at least Q3 when manufacturing capacity is expected to begin restoring balance with market demand. Manufacturing capacity for Vinyl–Nitrile blends has increased with many vinyl factories producing these formats as nitrile substitute. It is reasonable to expect that this demand will fade if or when Nitrile availability returns and price decreases.

Pulp, Board

Paper

China

Stable

Nitrile

Latex

China, Malaysia

Input PVC

Gloves

Improving

DOTP Plasticizer

Cutlery & Takeout Packaging

Plastic

Preference & demand for individual wrapped cutlery versions continues to rise. Supply remains stable.

Asia

Stable

Molded Fiber

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The Market Place

Surviving restaurants have relied on Outdoor and Off-Premise dining to stay alive through the pandemic. These adaptations remain key to restaurant viability and are in-fact reshaping the industry.

▪ National chains are investing heavily in concepts introduced or proven during the pandemic, notably curbside delivery, outdoor dining, ghost kitchens, virtual concepts, and digital ordering applications. (Technomic) ▪ Declining Covid-19 cases, eased dine-in restrictions and more vaccinations have been contributing factors to increased on-premise dining in Q1. ▪ Customer satisfaction with delivered food quality, particularly heat-retention and moisture content, is driving attention toward development of improved carry-out meal packaging materials and solutions. (Nations Restaurant News) ▪ Sustainability, momentum for which abated early in the pandemic, has resurfaced as a regulatory priority with resumed legislative activities in Canada, Virginia, New York and Washington states and commercial programs of reusable packages for delivered or take-out meals are appearing in various larger metro areas. ▪ The restaurant industry's economic outlook may start to rebound in Q2, though haltingly. ▪ US hiring picked up substantially in late Q1, nearing 400,000 new jobs added per week. Canadian unemployment, however, spiked from 8.6% to 9.4% in February and was forecast to remain at that level in March. (Canadian Broadcasting Corp)  Nearly a third of independent full-service restaurants are permanently gone due to Covid-19 per National Restaurant Association survey. And, deferred rental payments loom as a significant post-pandemic recovery threat for many independent restaurant operators. In a study by Nation's Restaurant News, 29% of restaurant operators don’t expect to return to normal operations until well into 2022.  However, new business applications, of which restaurants typically comprise significant portions, are at record highs and restaurant hiring in the US topped 665,000 new jobs in Q1. (Congressional Budget Office)  Warmer weather and pent-up demand for eating out expected to drive restaurant sales over the next two quarters.

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Glove Market Update

Higher production and stabilizing demand are helping normalize glove market volatility

Demand Update

Supply Update

▪ Production volume and product availability of Latex, Vinyl and Hybrid formats continues to strengthen.

▪ Demand and cost for Exam Nitrile remains high, driving demand for industrial grade glove alternates. ▪ Vinyl and Hybrid blend formats are reliably available and proving to be acceptably substitutes during the pandemic. ▪ Media stories and government action regarding manufacturer labor practices have spurred increased scrutiny of product sourcing by commercial glove customers. ▪ Vaccine distribution is in high-gear, expect the next 60 to 90 days of intense inoculation to contribute to high glove demand.

▪ Nitrile glove availability still constricted but expected to ease in the latter half of 2021. Estimated capacity growth is 20% YoY for the next 3 years. ▪ Although supply is improving, disposable glove supply and demand imbalance will continue through 2022, varying across product types.

Glove Market Timeline

2020 – Q2 2021

Q1 – Q2 2022

Q3-4 2021

• Pandemic demand spikes

• Nitrile popularity to be tested versus lower cost options worn during pandemic shortages • Demand levels off if / as pandemic pressures recede, alleviating supply chain imbalances • Ocean container shipping capacity and costs stabilize

• Increased production & leveling demand will tend to stabilize pricing, though raw material costs rose through Q1 and may again become a factor in price of finished goods. • Vinyl, Hybrid and Vinyl-Nitrile blends (Vitrile) utilization builds as costs decreased. • Nitrile production expected to ramp-up by Q4.

• Raw material shortages

• Aggressive price increases and long lead times (12 Mo.) • Factories selling out capacity to highest bidder • Ocean freight constrained, spot- market pricing

Glove Prices

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High

Low

Shipping and Supply Chain Logistics

Tight ocean freight shipping capacity, port delays and domestic freight increases will drive higher costs through 2021.

▪

Inbound Ocean Freight Insights

▪ As predicted, Ocean Shipping’s new-found profitability from spot-rate pricing practices is keeping rates high for trans-oceanic sailings. High freight rates are expected to persist through 2021. ▪ Shipping lines are reporting record freight prices and are prioritizing shipments to the highest money-making freight classes, often leaving lower-profit commodities at the dock. A February New York Times article cited typical 2019 container contracts for $2,500 are now priced at $7,000. ▪ Though 93 container ships are on the move again, after being stalled nearly a week by the grounding of the Ever Given in the Suez canal, ocean freight experts are warning of months-long shipping capacity and equipment constriction due to this single incident. (JoC.com) ▪ Port delays in processing inbound container shipments have been exceeding 35 days. Equipment shortages, and port-side Covid operating restrictions and outbreaks contributed to dozens of container ships off the coasts of major North American ports waiting to be off-loaded, throughout the First Quarter.

▪

Outbound & Domestic Freight

▪ Winter weather disruptions impacted ground transportation with a significant increase in the number of delayed or completely unshipped outbound domestic shipping tenders reported, contributing to 12% average increase in domestic delivery charges. ▪ North American trucking remains short of drivers, exceeding 80,000 open positions. This capacity constraint, similar to Ocean Freight, is leading to spot-pricing practices that are helping lift public carrier company profits to record levels. (CCJ Digital)

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Key Points

▪ Global supply chain inefficiency and increased expense will continue into next year, as ocean freight and ground transportation industries grapple with unstable demand patterns, equipment availability, winter weather, and staffing. ▪ Distributors should prepare for restaurant resupply demand to pick up ahead of the return of peak-outdoor season, which this year will arrive simultaneous with the first wave of post-pandemic euphoria. Signs point to a strong recovery of on-premise dining in Q3 and Q4 as vaccination rates increase and dine-in capacity restrictions ease. ▪ Patron expectations for safety are expected to remain strong after the pandemic and restaurant chains have begun announcing plans to retain forms of social distancing and PPE practices. ( Technomic ) ▪ 511 Foodservice is bullish about sustained growth in demand for Take-Out Packaging, Cutlery and off-premise dining accessories as outdoor and take-home dining solidifies as a core and primary mode of operation for all surviving restaurants. Earth-friendly takeout packaging options will regain favor as patron concern about environmental sustainability resurfaces. ▪ Ghost Kitchens, Virtual Concepts (restaurants in name-only that serve on-line clientele from a multi-concept industrial production kitchen) are here to stay, contributing further to demand for off-premises meal packaging products and solutions.

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.

Supply chain reliability and cost volatility will continue to be issues that working closely with your 511 Foodservice representative, can be mitigated. Review inventory and pricing strategies, product substitution options, and forecast and communicate demand frequently.

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

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