Generations of American teenagers may consider the mall essential, but authorities trying to slow a pandemic did not. Virtually all U.S. shopping centers closed as the coronavirus started to spread—exacerbating the already perilous financial position many mall-based chains were in before the pandemic. So far, Neiman Marcus and J.Crew have sought bankruptcy protection, and analysts predict they won’t be the only ones. Some national retailers and restaurant chains refused to pay rent in April and are playing hardball with mall operators for May, even as stores in some markets begin to reopen. And each chain is having to navigate how extensively to staff stores, without really knowing when customers will come back in force.
To conserve cash, many chains have furloughed store employees, cut dividends, stopped buybacks, canceled orders, and delayed investing in updating stores—all things that in the long term will weaken many of them as businesses. But the industry is in survival mode right now. A recent S&P analysis found that the risk of default at many national retailers had risen quickly. To show how this crisis is playing out in America’s shopping centers, Fortune took a close look at Oakbrook Center outside Chicago, a sprawling mall owned by Brookfield Properties. Here’s who is poised to best ride out the crisis—and which of your favorite brands are hanging on by a thread.
Inside the Oakbrook Center
Source: Bloomberg Bloomberg default risk analyzes the credit health of each company by estimating the default probability over the next year as well as other factors.
A version of this article appears in the June/July 2020 issue of Fortune with the headline “Misery at the mall.”
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The toilet tissue business is a textbook example of an ultraefficient “lean” industry. But a surge in sales flushed its MO down the drain. Here’s what went wrong.
Before executives at paper-goods giant Kimberly-Clark rushed to shut their offices on Friday the 13th of March, they convened for one last emergency meeting. Commuting home that final time, Arist Mastorides, president of family care for North America, stopped at his local Walmart, on the edge of Lake Winnebago in Neenah, Wis., to see the emergency firsthand. Mastorides oversees toilet paper brands like Cottonelle and Scott, but that evening he could find none of his own products. “A long gondola shelf that’s completely empty of bathroom and facial tissue, I never in my life thought I would ever see that,” he says. “That’s a very unsettling thing.”
Indeed, that week will be remembered for the Great Toilet Paper Panic of 2020. The previous day, March 12, TP sales had ballooned 734% compared with the same day the previous year, becoming the top-selling product at grocery stores by dollars spent, according to NCSolutions, which tracks consumer packaged goods (CPG). As shoppers prepared to hunker down at home indefinitely to avoid the coronavirus, they wiped Amazon, then supermarkets across America, clean of the bathroom basic. People might need as much as 40% more toilet paper at home for “occasions” (as the industry calls them) that would otherwise happen at workplaces, restaurants, or hotels. But they bought far more: Sales were up nearly 71% year over year in the nine weeks through May 2, according to Nielsen. They would have risen even higher—except that people can’t find enough toilet paper to buy.
At first, experts waved off concerns about shortages. A editorial on March 22 declared, “There is one fear we can alleviate: the idea that America is running out of toilet paper.” But much of America did, in fact, run out. By March 23, toilet paper was out of stock at 70% of U.S. grocery stores (including online sellers). “When everybody forward-buys, then you do create a shortage. Perception becomes reality,” says Pete Guarraia, who heads consultancy Bain’s global supply-chain practice.
Some two months into the pandemic, the white stuff remains scarce. All types of Charmin are indefinitely “unavailable” on Amazon.com; Costco has suspended TP shipping “due to limited supply.” “It’s not like there’s troves of it sitting in warehouses that we didn’t get to stores,” says Dan Toporek, a spokesperson for Walmart. “There’s just truly such high demand it’s hard to have in stock anywhere.”
Major companies are now absorbing the reality that something as mundane as toilet paper represents a uniquely complex supply-chain challenge. Paradoxically, the great strides the CPG industry has made in efficiency in recent years—especially the near-global adoption of “just in time” manufacturing and distribution—have now clogged the pipes that get TP to customers. And toilet paper is merely one of the essential items, from disinfectant wipes to baking yeast, teaching business a hard lesson about weaknesses of modern manufacturing and logistics. “The fact that we’ve been working so hard to try to make sure our systems run as efficiently as they possibly can has necessarily meant that we didn’t have weeks and weeks of supplies sitting around,” says Leslie Sarasin, CEO of FMI, a trade group that represents the grocery industry.
Big purchases from those groceries have snowballed—by orders of magnitude—at manufacturers like Procter & Gamble, maker of Charmin, and Kimberly-Clark. That means that even as production has increased, back orders are likely to last well into the summer. Persistently bare shelves, meanwhile, perpetuate the perception that there is a true shortage; thus, the panic buying continues. “We are prepared for thousands of different events, from cybersecurity attacks to earthquakes to fire,” says Julio Nemeth, P&G’s chief product supply officer, whose earnest voice is accented by his native Argentina. “But we were not prepared for all of those happening at the same time, which is what the pandemic brought to us.”
As it happens, toilet paper really does grow on trees—eucalyptus trees, mostly, in Brazil. Whereas in the U.S. and Canada trees take decades before they can be cut down, the sweetly mint-scented Brazilian trees reach 100 feet into the sky in just six or seven years, growing faster than corn. “That’s what makes them so low cost,” says Mark Wilde, a packaging and forest products analyst at BMO Capital Markets who is widely known as Dr. Paper.
For a product like toilet paper with single-ply margins, every penny saved is key. And as sales of bog rolls have surged, demand for the virgin pulp used in Charmin and Cottonelle has also ticked up, sending prices of the commodity $30 higher in early May, to around $500 a ton, according to HSBC. But try charging more for toilet paper, and you’ll incur consumer outrage. That’s why the paper industry is more cost-obsessed than perhaps any other. “It’s as absolutely ideally optimized, as perfectly as it can be, between the supply and the demand,” says Yannis Skoufalos, who retired last year as P&G’s global product supply officer.
At least that was the case until the coronavirus upset the balance. Historically, it has been easy to produce just the right amount of TP because demand is so boringly consistent. And because of its bulk, no one wants extra rolls taking up valuable space. Those factors have made toilet paper the quintessential candidate for just-in-time manufacturing, the methodology that has come to dominate the CPG industry in the past decade.
But it also meant that when pandemic shoppers descended on paper aisles, there was no more than two or three weeks’ worth to sell, anywhere in the supply chain. As early as February, preparing for potentially greater demand and feared plant closures, P&G boosted production of brands like Crest toothpaste and Olay moisturizer. But “we never had more on hand in the paper category,” says Nemeth. Cost considerations played a role: Whereas you could open up another assembly line to fill bottles of Tide detergent for under $10 million, an additional paper machine would require an investment of roughly $300 million, explains Skoufalos.
Toilet paper machines ran at 99.8% of capacity in March, according to Fastmarkets RISI, up from their normal 92%. Even so, overall U.S. production increased only 8%, to some 700,000 tons for the month. “This pandemic has revealed the limits of lean supply-chain management,” says Bain’s Guarraia.
No retailer has taken the just-in-time model to more of an extreme than Amazon. Making a profit on one-day and even one-hour delivery depends on accurately forecasting demand. “If Amazon knows they can order on Tuesday and get it literally in their warehouses by Friday, it’s totally fine,” says Andrea Leigh, a former Amazon executive, now VP of strategy and insights at Ideoclick, an e-commerce optimization company.
The toilet paper production conundrum, however, has become an unprecedented challenge for Amazon, leaving it months behind on orders. Amazon even temporarily stopped allowing some goods into its warehouses altogether, “to prioritize stocking and delivering essential items like household staples,” CEO Jeff Bezos announced on March 21. But on basics like toilet paper, Amazon earns little profit, if any, even at pandemic-driven higher volumes, says Leigh. (Amazon’s additional revenue on many low-price items “is basically coming at cost,” CFO Brian Olsavsky said on a recent earnings call. Amazon declined to comment for this story.) And unprofitable as it is to sell, not selling toilet paper comes with a customer-service cost. “The fact that Amazon cannot deliver Charmin for over eight weeks in a row shows how pathetic it is,” says Burt Flickinger, managing director of the consultancy Strategic Resource Group, and a former P&G executive.
The irony is that with people stuck at home, Amazon is flushing away potential sales of other items while it plumbs its TP pipeline. Says Mark Mahaney, Internet xranalyst at RBC Capital Markets, “I’m sure they must be kicking themselves in the butt.”
Wally Nowinski, a San Francisco–based e-commerce executive, subscribes to toilet paper via Amazon, receiving biweekly deliveries. But beginning in late February, while his subscriptions to shampoo and soap kept arriving on time, Amazon missed four straight TP shipments. Then, at the end of April, three 24-roll packs of Quilted Northern showed up in the span of a week. Not that it did him much good by then. “We went out to the store and bought toilet paper. I don’t suddenly need, like, two months’ worth,” he says.
Nowinski’s experience provides a glimpse into how the shortage is constipating companies behind the scenes. Because demand still exceeds production capacity, TP is “on allocation,” meaning retailers are getting only a fraction of the amounts they’ve ordered—a measure generally applied only to the season’s hottest toys or games. Since Amazon prioritizes subscriptions, says Leigh, delayed shipments suggest it hasn’t gotten enough TP to fulfill even orders placed long before the pandemic. Facing a similar problem, Costco has decided not to sell TP online for the time being. “We have chosen to keep our warehouses in stock as best as we can,” Bob Nelson, Costco’s senior vice president of finance, tells Fortune.
What no business wants is to be stuck with mounds of rolls when buying finally slows. (Consumers in pricey cities can relate. Says Nowinski, “We pay $5 a square foot a month in rent—I don’t want to be storing all this toilet paper.”) “You can build supply chains that are 100% resilient to all shocks,” Guarraia says. “But the analogy I use is you can build a car where if you have an accident you would never be hurt, but you would never want to drive that car.”
Still, manufacturers are adapting to the likelihood of prolonged higher demand as people work more from home. After leaving the office that March Friday, Kimberly-Clark’s Mastorides spent the weekend deciding which kinds of TP to stop producing—cutting “SKUs” by at least half. The company has focused on six-packs of Cottonelle “mega rolls” versus 12-packs; that keeps plants from having to stop the machines as often to switch out materials, minimizing downtime. Some variants likely won’t return post-pandemic. “I think we’ll have a very different assortment as we exit this,” Mastorides says.
Over at P&G, after two months of record-breaking production, Nemeth’s team is implementing lessons learned from the crisis. “We are turning those into essentially a reengineering of our supply chain,” Nemeth says. Having adapted its operations for ultra-predictable demand, P&G is now redesigning them for “a significantly more volatile environment.” That includes fast-tracking onboarding for new suppliers, adding distribution sites, and using data to generate earlier demand-shock warnings. The necessities of social distancing have also helped P&G realize it can staff plants more efficiently, by spreading workers across more shifts.
Even desk workers have lately pitched in on factory floors. After all, shortages have chafed Charmin executives as much as they have the rest of us. “I buy my toilet paper where anybody buys it,” says Nemeth. Unless, of course, it’s sold out.
Rolling with the TP punches
500 companies grappling with toilet paper shortages are plunging ahead to keep up with surging demand.
Kimberly-Clark (No. 175)
Look for more “mega” than “double” rolls of top brand Cottonelle: Manufacturer Kimberly-Clark has cut the number of TP variations it makes to avoid pausing its assembly lines. It’s prioritizing six-roll packs over 12-packs, which helps spread the supply among more customers.
Procter & Gamble (No. 50)
Even office workers have lately taken shifts on the factory floors to push production to record highs. The company is also relying more heavily on analytics to foresee demand fluctuations and give it “more flex up and down,” says P&G’s Julio Nemeth.
Costco (No. 14)
The wholesale-quantity grocery seller has limited purchases to a single jumbo pack of toilet paper per member (helping prevent tussles between shoppers). Costco has also stopped selling TP online until at least June.
Walmart (No. 1)
Since March, Walmart has been hiring 5,000 new workers a day—with the aim of adding 200,000 in total—to help keep shelves stocked and orders filled as shopper demand strains its supply chain. It’s also having manufacturers ship toilet paper directly to its stores, bypassing warehouses and slowdowns from trucking between them.
A version of this article appears in the June/July 2020 issue of Fortune with the headline “The case of the missing toilet paper.”
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