Welcome to Leading Edge, a semi-monthly Q&A forum where some of the grocery industry’s top executives share their views on several current and important topics. This week’s interviewee is George Knobloch, chief operating officer of Key Food Stores, the Matawan, NJ-based grocery co-op whose 160 members operate 357 stores, primarily in the competitive and unique New York metro marketing area. George shares his views about navigating through COVID with a diverse and independent customer base, the challenges created by supply chain dysfunction and the evolving landscape in the markets where Key Food’s members operate.

Q: What were the greatest challenges facing Key Food during COVID? Were there any unique issues that you had to deal with in dealing with a co-op structure with a diverse membership and sometimes different priorities? 

A: We had several challenges that others in the industry faced and some which were unique to Key Food. In March 2020, when the impact of COVID was causing businesses and school shutdowns, we moved our offices from Staten Island to our current headquarters in Matawan, NJ. Our team generally chose to work remotely as we were literally moving. Operating from a virtual environment was totally new to us – we had to adapt quickly.

Once we settled in, our ability to continue to support our members and consumers became a major concern – due to the rapid inventory depletion and the withdrawal of trade support. Because of our diversified membership we had some differences of opinion on issues such as continuing to run a weekly ad because of product availability challenges. In the end, we felt that we needed to run an ad to provide confidence and assurance to Key Foods’ consumers. Assurance that during these difficult times we would continue to support them.

Communications were also virtual with the type of unique structure that we operate under. We had weekly video calls with our members to update them on supply issues and changing mandates that, depending on where your stores were located, were not uniform. We also helped provide things such as masks and hand sanitizers for them to ease some of their day-to-day worries. However, no one should underestimate the resourcefulness of the independent retailer. They utilized every resource and contact they knew to get product when bigger chain retailers could not. For the past 30 years, manufacturers shifted to a “just in time” distribution model. When you have your weekly sales volume increasing at least 50 percent seemingly overnight, there’s no way that a supply chain meltdown won’t occur. In the end, I think our members acknowledged some of the harsh realities of the situation and made the adjustments necessary to keep their businesses productive.

Q: Regarding supply chain dysfunction: on a 1-10 scale (with 1 being the least critical and 10 the most critical) rate these current problems as they relate to Key Food from both the supplier and member perspective: labor shortages; product scarcity/allocation issues; wage increases. And when do you believe we’ll see some improvement in the big picture?

A: In my opinion, all the supply chain problems are labor related. People exited the workforce for several different reasons and in a large part haven’t come back. All labor- oriented factors contributed to shortages in raw materials, packaging, transportation, distribution, and production. These shortages also played a significant role in increasing the inflationary cycle we’ve experienced since last year. So, as to my take on current conditions, I see the labor shortage impacting our headquarters as a “7”. Product scarcity would be the most challenging problem today, so I rate that a “10”. Wage increases would be about a “7”.

As far as when we can expect improvement in product availability, that’s very hard to predict. But I do see signs of improvement when you look at particular categories. Our raw fill rate is up to about 78 percent. I think by the end of April we’ll see that number increase to the low 80s. By the end of June, I believe we’ll see a fill rate close to 90 percent. And by the beginning of the fourth quarter, I believe our inventory levels will be close to normal. However, I think transportation will be an ongoing concern.

Q: What do you regard as the biggest opportunities for Key Food’s growth over the next three years?

A: As I’ve told the trade previously, significant growth opportunities remain because I believe we offer the independent retailer the best overall financial proposition in this marketplace when it comes to markup, rebate and services combined. Those opportunities remain available in the five boroughs of New York, on Long Island, in New Jersey and Connecticut. Additionally, we’ve increased our Florida presence to about 50 stores and I believe that in the next three years that number will double. After that, there are other fill-in opportunities in the Carolinas and the Mid-Atlantic. Honestly, anywhere that UNFI operates a distribution center we would consider to be a growth target.

Q: The majority of Key Food’s members are in the five boroughs of New York City. How do you see that retail landscape changing in the next five years?

A: Before I answer that question specifically, I think COVID taught us how quickly things can change and that putting all your eggs in one basket – or market – has risks. It was important that we expand beyond the Metro New York market which remains our dominant market area. Obviously, since COVID, other factors have contributed to market change. E-commerce certainly is a bigger factor, even for smaller retailers or those who serve an urban customer base. However, it remains my firm belief that our consumers still want to shop inside four walls – they want to touch their fruit, pick out their meat, seafood, and deli. Even dry grocery, in our market, is not going to have the growth in online shopping as many have predicted. That said, our members need to have an e-commerce presence to preserve loyalty for those who already shop at a Key Food store. In the future, we’re going to help our members by delivering an SAP-driven online solution app.

Q: You recently switched primary suppliers from C&S to UNFI. Can you give our readers a recap and update of where things stand with your new wholesaler?

A: So far, so good. UNFI built a state-of-the-art distribution center just for Key Food that’s located 120 miles from the center of our marketplace (in Allentown, PA). That’s a brand new, 1.3 million square foot warehouse – 800,000 square feet of dry storage and a 500,000 square foot cold storage facility – specifically for us. Our strategy in moving to UNFI was to bring in another wall-to-wall supplier to create more competition and protect ourselves from the possibilities that one of the existing wholesalers serving our marketing area would be sold.

Even though we are still in the infancy stage of our relationship, one clear advantage is that our stores can receive a full order from one truck. That in and of itself has significantly improved the on-time delivery efficiency to our stores.

We did have some early hiccups with temperature control issues, but they have improved those initial problems that they can control very well. Both sides need to make some adjustments, which I’m confident will happen.