Watch stocks you care about
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
Sriracha maker Huy Fong Foods stopped shipments of all its products last week to comply with California health department regulations. News of the 30-day delay caused Sriracha's huge community of fans to overheat and announce their plans to stockpile the spicy sauce. But it's not household customers who will feel the most heat from this latest legal issue for Sriracha.
Even some chefs are sanguine about the shortage, despite Sriracha's status as the must-have condiment. The spicy sauce, based on a traditional Thai recipe, has its own food festival, a new documentary, two cookbooks, and a fan base so hardcore that Sriracha tattoos are a thing. Pei Wei, P. F. Chang's, and Subway all feature Sriracha-flavored dishes. Last year, Sriracha rang up $60 million in sales.
But Huy Fong's distributors, the regional companies that supply grocers, restaurants, and other wholesale clients, are fresh out of Sriracha -- and at least one says it's already being threatened with breach-of-contract lawsuits.
Huy Fong in the hot seat again
This latest legal issue has nothing to do with the company's battle with the city of Irwindale, where its new plant is located, over claims of strong fumes irritating people's lungs. Instead, the shipping halt was called because state health regulators require a 30-day waiting period before uncooked processed foods can be sent out, in order to check for pathogens.
The requirement is purely a precaution. Jenn Harris of the Los Angeles Times writes that "there was no hint of possible contamination and ... no recall was issued for existing stocks." Which raises the question of why now?
An issue that simmered for months
It turns out that the state issued the new requirements to Huy Fong when it started production at the Irwindale plant, according to the company's executive operations officer, Donna Lam, but the company challenged them. Lam also told the Star-News' Lauren Gold that Huy Fong decided to stop fighting the rules this week and hold shipments for the required 30 days.
Are distributors getting burned?
Distributors who spoke to the press said they were surprised when the pipeline shut off. Damon Chu, president of West Coast distributor Giant Union, told Gold that after 20 years of regular Huy Fong deliveries, his company is flat out of Sriracha, with contract-holding clients making noise about lawsuits.
Chu told Frank Shyong of the LA Times that Giant Union could lose $300,000 over the next month because of the shipping suspension. The Giant Union website lists Huy Fong's two other sauces for purchase but no Sriracha. On the East Coast, Summit Imports of New York told Shyong it expects to lose money, too.
A prescription for better communication
In general, communication between producers and distributors isn't what it could be. In September, a study for industrial data management company Thomas Enterprise Solutions described an overall "critical disconnect" in product information flow between manufacturers and distributors, leading to wasted work hours and lost information. The ThomasNet Industry Marketing Trends blog returns frequently to the topic of poor supply chain communication.
It's not clear that Huy Fong's distributors would have been able to stockpile much Sriracha had they known the temporary shipping halt was coming -- Lam said the sauce was already back-ordered before the stoppage. And it's not certain that Huy Fong knew exactly when the shutdown would come.
But a heads-up would have given distributors the chance to plan for the gap and prepare their customers. And it would have been a courtesy to companies that have played a role in Huy Fong's success over the past two decades.
Distributors that rely on Sriracha for a big portion of their business don't have an easy way to make a short-notice substitution that their customers will accept, especially when those customers are upset. The apparent abruptness of the shutdown, the financial hit, and the damage to customer relationships may affect the way distributors regard Huy Fong going forward. And if grocery shoppers and restaurant chefs find an alternative they like better during Sriracha's hiatus, Huy Fong and its distributors could face more problems ahead.
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.