Who’s Getting Burned by Sriracha's Shipping Shutdown?

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.

Better make it last. (Image: Calgary Reviews).

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.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2013, at 3:08 PM, SFCGator wrote:

    Another business being shut down or interfered with due to big brother government. The business community had better get a clue and figure out that for all they 'pay off' the Democrat machine, they have no loyalty. Better to switch their donations over to small government, conservative type politicians. If the business community keeps feeding the socialist political monster, it will eventually turn on them and eat them as has happened with Huy Fong and it's Sriracha facility.

  • Report this Comment On December 16, 2013, at 9:22 PM, WTFCK wrote:

    the case against this manufacturer is actually helping it boost its sales as people are stupidly stocking up on the sriracha sauce....

    conspiracy ???

  • Report this Comment On December 17, 2013, at 2:08 PM, snakehater wrote:

    This is simple operations 101 involving appropriate business continuity planning and execution of that plan when called into action as well as a comprehensive supply chain sustainability plan to ensure suppliers and customers are communicated when changes will impact operations. A communication plan alon wiht a community engagement program would have avoided many of these issues. Also, a good, competent operations manager with strong backrground in HSE matters and how to deal with government agencies would have been a plus. The CEO has yet to come out and make a credibel public statement outside of some nonsensical comment tha they dont make killer gases there. Foolish!

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