UNFI CFO drills down on the big issues with president of Minneapolis Federal Reserve Bank

On Wednesday, grocery wholesaler and retailer United Natural Foods Inc. (UNFI) hosted a virtual town hall during which the company’s CFO John Howard spoke with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. The two discussed the key issues facing the retail industry today, including the supply chain, labor and inflation. Here are excerpts from that discussion. (For a full video of the discussion, click below.)

John Howard, UNFI: Let’s jump into some of the current challenges of the day that we are seeing, certainly from a UNFI perspective, but obviously the country is seeing these. When we think about supply chain and we’ve seen some of the challenges caused by the shift and demand in services, it's been almost exactly two years at this point. As spending in consumption gets closer to a new normal, when do we think the supply chain's going to catch up? And we deal with this question a lot on our side. We get it from our investors, from the analysts, from our customers:  When do you think you're going to see some of that normalization come back?

Neel Kashkari: We are talking to a lot of businesses like yours to help you guide us. And the best information that I get, large global businesses that we talk to have reported that as soon as they put out one fire in one corner of their supply chain, something else is brewing somewhere else. It could be Omicron. When Omicron is spreading through Asia now, all of a sudden some factories are getting shut down in Asia, and that's coming up to supply chains here. So, people are guessing, they're telling us, "Hey, we don't think anytime soon, maybe by the end of this year, things are going to start to get to normal." If you go back and read a lot of history about pandemics, it actually takes several years for the pandemic to transition into endemic where this is something we all know how to learn to live with.

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John Howard: When we think about the Fed in general, and we see the supply chain challenges, are there levers that the Fed can pull to ease some of these constraints? Are there actions that can be taken? What are your thoughts on that?

Neel Kashkari: Not directly on the supply chains. There's two issues going on as I read it with supply chain. One is just the things that are gummed up because of the lack of workers, and COVID, etc. But the other thing is demand is very high right now. In some cases, demand is exceeding pre-COVID demand. So, it's not simply that supply chains are gummed up because of COVID, demand is far exceeding what they were demanding before, and supply simply has not been able to meet that higher level of demand. We can do something about that part. So, the way monetary policy works, we can soften demand by raising interest rates and by tightening financial conditions. That can help alleviate some of the excess demand, but that's not going to do anything to deal with, "Hey, the ports are jammed and packed because there’s not enough workers, or a factory in Asia is shut because of a COVID outbreak." There's nothing that we can do about that. But the demand side is something we do have the tools to help address.

Related:Supply chain, labor woes dominate retailer concerns for 2022

John Howard: The Federal Reserve Bank in New York recently unveiled this new barometer, this new index. So, when you think about that index, can you give us a little bit about that, and how you plan on using that information from that new index?

Neel Kashkari: Yeah. So, our colleagues in New York have come up with a thoughtful new index, which tries to take in a lot of these factors. So, what's the cost to ship commodities? What are the wait times for delivery? Various metrics in the U.S. and globally, just to try to get a thermometer of how's the global supply chain environment doing, and you could look at it over time and see how it has changed. And you could see prior disruptions for weather events or natural disasters that have had some effect on supply chains. So, it does seem like it is a useful barometer.

And it is reading much more stressed levels than those prior episodes, like a natural disaster somewhere. If a hurricane hits the Gulf Coast, that can disrupt oil and gas production, that can disrupt refining, that can have an effect on supply chains. So, those things will show up in the readings, but right now the levels are much higher than we have seen in prior disaster episodes. So, it's just one more useful tool to try to quantify, "Hey, where are we relative to, quote-unquote, normal? What's the trend that's happening?" And I think things are getting better, but they're just getting better very slowly is my read of it, and I'm not sure if that's consistent with what you all are seeing.

John Howard: I think it is consistent. We've talked publicly about how our suppliers have continued to move out the get-well date. As more information comes up, they have to adapt. They have to deal with labor challenges. All the things that you just mentioned, all the things that we all know about, they have to deal with those as well. And that just continues to kick that get-well can down the road on us, and we're all hoping for the same outcome. We know it's going to come. It's just a function of when.

So, let's talk a little bit about labor, because that's another one for us. We've got 28,000 associates between our DCs around the country and Canada. Our retail business, largely in Minneapolis and St. Paul area. So labor is obviously near and dear to our heart. What do you think is driving that 3 to 4 million shortfall in labor right now? Given some of the recovery that we've seen, but we still have that 3 to 4 million that's out there.

Neel Kashkari: It's a complicated question. If we'd had this discussion a year ago or nine months ago, I would've pointed to a few factors. I would've said we know that there are these enhanced unemployment benefits that are... if not creating an incentive not to go back to work, then giving people the option of saying, "Hey, maybe I'll just wait for a little while before I go back." Schools were shut, and then, of course, fear of the virus. Well, those enhanced unemployment benefits are long gone. We saw no uptick in the data that all of a sudden, there's this big surge of labor supply. Schools are mostly reopened, but a lot of families are experiencing what my family just experienced, which is, "Yeah, they're open. My daycare was open, but my two children were out of it for three weeks, which had an effect on our ability to work." We also see some people who've retired early as a result of the pandemic. It seems like it's a mix of different factors from people caring for family members, either children or parents, as an example, or a sick relative. People who are still afraid of the virus.

You had the Delta wave. Now the Omicron wave, and hopefully that's behind us. Hopefully, people will feel more confident to go back into those in-person areas. That's another factor, and then, retirees. I mean, I'm optimistic. I think one of my lessons prior to the pandemic was that the vast majority of people want to work. If they can get a decent job at a decent salary, they want to work. And even people who we thought were retired, in many cases, they came back, and they said, "You know what? Maybe I'm not going to work 40 hours a week, but I'll work 20 hours a week." And maybe things like Zoom will make it easier for people to work from where they live in some type of hybrid environment. So, I'm optimistic, but I think it's going to take a while longer than I had hoped. In the last recovery, after the financial crisis, it took 10 years to put everybody back to work. Now, I sure hope it doesn't take 10 years this time, but it seems like it's going to take more than two to get everybody back.

UNFI's CFO John Howard spoke with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis about the supply chain, labor and inflation.

John Howard: So, when you peel back the onion on some of that labor data, Neel, is there any particular industry or pocket that's tighter than others?

Neel Kashkari: Right now, what I'm seeing is that there's a lot of churn in the labor market, and people are moving away from some of the toughest jobs into better work environments. I'll give you an example. We hear a lot about, "Boy, it's hard to find long haul truckers." And then, I saw a labor representative who represents long haul truckers, and he said something like, I'm paraphrasing, "Stop complaining that you can't find long haul truckers. These jobs stink. It is hard to be away from your family for a week at a time." So, you want more long haul truckers, make the job better, or make it pay better. Versus, people are saying, "Hey, if I can drive locally, I can sleep in my own bed. And that's a better overall work environment for me and for my family."

Or another example, you're seeing childcare workers way down, relative to pre-pandemic. And in Minnesota, prior to the pandemic, we were seeing home-based childcare centers going away. And when we analyzed it, it was because if you looked at the take-home pay of a home childcare provider, they made roughly minimum wage, after that hard work and all that headache. And they said, "Well, wait, I can go to Cub Foods and make more than that, or I can go to Target, or I can go to Walmart. Why would I go through all these heartache, if I can get a higher salary and an easier, better work-life balance working somewhere else?" So, people are choosing to go to different jobs that have a better overall experience, both compensation, quality of life, headache, and that's putting real pressure on some of those really tough industries. I'll give you that childcare worker is a tough, tough job for not a lot of money. And I would say long haul trucking is a tough, tough job that not everybody is cut out to do.

John Howard: I would agree with all of that. In UNFI, we have some jobs that are very difficult with that as well, and we're seeing some of the similar challenges.

So, I'm a pretty simple guy, Neel. When I see supply chain challenges that we're experiencing, I see the labor challenges that we're experiencing, the natural outcome of this is inflation, and that's something that we focus on. So, when you think about an inflation from your perspective, how do you think... You talked earlier about those interest rate, how do you think that's going to impact and affect the time horizon on the inflationary environment that we're seeing right now?

Neel Kashkari: Well, we focus on inflation. We look at a lot of different measures, other inflation, as you might imagine. I'm very focused on year-over-year measures of inflation. We can just do the math and look at when where prices really start to move. And 12 months later, you would expect... If you have a one-time boost of prices, that's painful for families who have to pay it, but that does not mean you have annual inflation year after year after year at these very high rates. So, most public sector, or most private forecasters, estimate that inflation by the end of this year would probably be around the 3% number. So, well below where we are right now.

So, just the math of that suggests inflation should start coming down over the course of this year. Now, obviously, if supply chains continue to be disrupted or get worse, as an example, or if there's another wave of the virus that keeps labor supply on the sidelines, we'll have to reassess. But my guess is that by the end of this year, we're not going to be back to our 2% target, but we should be well on our way back toward that. I mean, obviously I hope that is in fact the case, but we're going to watch the data over the next six months to see, are we in fact headed in that direction?