I’m sure you all noticed the empty store shelves of toilet paper at the very beginning of this coronavirus crisis. My reaction at the time was astonishment. Why are people hoarding toilet paper? It’s not as if there’s a hurricane coming? I couldn’t understand the bottled water shortage either for the same exact reason.
I wrote it off as a demonstration of those certain kinds of people who don’t think about what they do and just react emotionally to unexpected things in their lives. They have a herd mentality, doing whatever everyone else does. In the meantime, we “smart” people are thoughtful and rational in the way we live our lives. Right?
Well, alas, I have been forced to rethink my conclusions after reading an article by Will Oremus from the online business magazine, Marker.
So, getting back to the question: Were the empty shelves a product of hoarding or was there something else going on? And by the way, this phenomenon wasn’t just a U.S. thing; this was happening in Hong Kong, Australia, the United Kingdom, as well as in the United States
Now I’m pretty sure there was some panic-buying. All you had to do was look at all of the pictures of empty shelves in your news feed and something got unleashed in your primitive brain, scattering your wits to the wind. I mean who doesn’t suffer from FOMO occasionally (FOMO is the fear of missing out, in this case having NO toilet paper).
But maybe it’s not irrationality at hold here. Maybe it’s something entirely different—something entirely…..boring. Maybe it’s just a supply-chain issue.
A couple of things we know for certain. A lot more of us are staying home so we are using more paper at home. Fine. And if we’re home, we are using less paper in the office and in restaurants which would normally take up the slack.
It turns out that there are two separate markets for the toilet paper that is produced in the U.S. There’s the consumer market (our homes) and there is the commercial market (our offices, restaurants, and schools). I mean, think about it—if 75% of us are staying home, we are using our own facilities not someone else’s.
Actually, according to Georgia-Pacific, maker of Quilted Northern, the average household will use 40% more toilet paper than usual. That’s a huge jump in demand especially for an industry that is mostly boring and extremely stable. Toilet paper manufacturing is a stable, volume business with thin profit margins, and producers crank out rolls from factories that run 24/7. If there is a large change in one market over another, it creates disruption.
So, why can’t they just shift production from the commercial side to the consumer side? That’s a natural question and it’s a good one.
The problem—and this is the gist of the whole mystery—the two markets are very different. The commercial market is geared to make large rolls that fit on large special dispensers; the rolls are thinner and too big to fit in our houses. They’re delivered on big pallets quite different from the individually wrapped rolls of 6 or 12 we get at the supermarket.
Also, the paper is not normally produced at the same paper mill. Some companies focus on the consumer, like Proctor and Gamble which makes Charmin, and some focus on commercial and some on both. But the markets are, in a sense, like oil and water and can’t really be mixed.
In theory, if this virus turned into a long-term problem, the mills would try to retool to meet consumer demand, but at this point, they are probably thinking, like most of us, that life will get back to normal relatively soon, though I know some of you will disagree with that assumption. Considering the low margins and the high cost of retooling, they’re probably reticent to start making the switch as of yet. There’s just too much uncertainty to justify the expenditure right now.
And toilet paper isn’t the only industry going through these types of challenges. For example, there is a commercial market for fruit as well as a consumer market—think school lunches. If schools and restaurants are canceling their banana orders, and supermarkets can’t keep them on the shelves, a problem arises because commercial bananas are smaller and come in boxes of 150, while consumers like bigger bananas in smaller bunches. I think consumers would adapt pretty easily to smaller bananas, so there probably won’t be the sort of shortage we have with toilet paper.
Beer companies have a similar problem as well. They serve commercial establishments like bars where they sell kegs and serve consumers where they sell bottles and cans.
So, I’ve decided to stop blaming those crowd-following, cliff-jumping lemmings who have made me worry about my supply of toilet paper. Actually, I have to hand it to them. How did they know they would be spending so much time at home, so early on? I admit—I was totally clueless, and my ability to predict the future a scant 3 weeks ahead was dreadful.
There you have it, a mystery solved. Now I’m going back to watching reruns of Agatha Christie on the Acorn Channel.
Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. There are no investment strategies that guarantee a profit or protect against loss. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however, their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.