ABL Lenders Should Revisit Collateral Value in Shortage-Strained Foodservice Sector, Advises Veteran Tiger Group Appraiser

'Safe haven' foodservice distribution biz boasts solid long-term prospects, but post-pandemic disruptions merit a closer look at borrower fundamentals, cautions Eric Schloemer of Tiger Valuation Services

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Tiger Group

Jul 13, 2021, 08:38 ET

NEW YORK, July 13, 2021 /PRNewswire/ -- Asset-based lenders should closely monitor borrower health and collateral value now that some foodservice distributors are grappling with shortages of truck drivers, refrigerated trucks, warehouse personnel and even some staple foods, advises Eric Schloemer, Director of Business Development for Tiger Group's Valuation Services division, in an article in the June/July issue of The Secured Lender.

Schloemer: Foodservice distributors generally adapted well to the massive disruptions triggered by the pandemic. But the sector is feeling the strain of the latest shift-the rapid return of tens of millions of Americans to in-person dining."

"Foodservice distributors generally adapted well to the massive disruptions triggered by the pandemic," writes the Chicago-based valuations industry veteran. "But the sector is feeling the strain of the latest shift—the rapid return of tens of millions of Americans to in-person dining."

In his article ("Restaurant Rebound Tests the Limits of U.S. Food Distributors"), Schloemer notes that foodservice inventory and M&E have historically been stable forms of collateral. But recent disruptions in this "safe haven" sector do merit careful attention, especially the challenges associated with shifting back to restaurants after serving "essential" grocers for the better part of a year.

The dramatic surge in restaurant demand, Schloemer observes, is among the factors that have led to shortfalls of chicken and other basic food supplies; difficulty in finding workers, and mushrooming transportation costs: "Formerly highly predictable, the availability of many basic elements in U.S. food distribution—corrugated cardboard, plastic packaging, staple foods and more—is now uncertain."

Other headwinds include planned or announced price increases by CPG leaders. "Prices are expected to increase between 2.5-3.5% for the balance of 2021, per the USDA's April forecasts," Schloemer observes.

But there is good news, too: Demand for shelving, trucks, material-handling and storage equipment may in some cases be increasing collateral value, Schloemer observes. In addition, consolidation could further bolster collateral value as the strongest operators try to grow by snapping up their competitors: "In some markets, demand could be high enough that multiple food distributors could engage in a bidding war for the assets of other foodservice distributors," he writes.

In terms of borrower health, some "on the bubble" food distributors may be poorly positioned for the future. "During the height of the pandemic, their survival strategy could have included furloughing truck drivers and warehouse personnel to cut costs," Schloemer explains. "Those personnel may now be either unavailable or too expensive to hire back. In addition, some distributors may lack the rolling stock, distribution facilities or operating capital needed to meet the resurgent restaurant demand."

Schloemer, who has 14 years of experience in the financial services industry, notes that many distributors should be able to adjust their prices and pass rising costs to their customers.

Length of supply of inventory, which should remain in line with prior years, is one key bellwether as lenders work with appraisal firms to gauge borrower health, Schloemer advises. Lenders would also do well to scrutinize distributors' overall length of supply: "Companies that allowed length of supply to get too extended in 2020 may not yet have corrected the problem. As a result, some of that product could be nearing its expiration date," he notes.

Margins should remain steady, and lenders should look at the density of borrowers' routes—a key component of their profitability. "Make sure routes have been optimized, and personnel and rolling stock are at the right levels," advises the Tiger Group executive.

In conclusion, Schloemer describes the uptick in restaurant demand as a positive development for the industry overall, despite the rocky start so far. "Successful distributors will have the wherewithal to nimbly adjust to this great rebalancing."

The full article is available at:
https://tigergroup.com/restaurant-rebound/

Media Contacts: At Jaffe Communications: Bill Parness, [email protected], (732) 673-6852, or Elisa Krantz, [email protected], (908) 789-0700.

SOURCE Tiger Group