No doubt about it, the impact of coronavirus is already severe for consumer goods brands and the consequences will be disruptive, profound and persistent for businesses for much of 2020.
Consumer Goods Brands: The impact of COVID-19 and our suggestions on how to weather the storm
No doubt about it, the impact of coronavirus is already severe for consumer goods brands and the consequences will be disruptive, profound and persistent for businesses for much of 2020.
In light of changing consumer spending patterns, a recession and supply chain disruption, brands need to review many aspects of their digital strategy, as well as carefully plan their inventory and cash flow to maintain business continuity.
Using consumer insights, trend forecasts and general guidance from a number of different sources, we have provided an overview of some of the challenges that consumer goods brands are currently facing, as well as our recommendations how to address these challenges, to support business continuity through the disruption caused by coronavirus.
Matter Of Form is a strategic design firm that works with high-end brands to help them Adapt, Innovate and Thrive in a world that’s constantly being reshaped by technology. We use brand strategy, design thinking and technology to help shape successful online businesses for our clients.
Boston Consulting Group is producing a weekly consumer research report which tracks consumer sentiment across a number of markets during the Coronavirus outbreak. Sentiment polled in mid March strongly suggests that consumers expect we are heading for a recession in the United States and Europe. More recent data suggests that we are now in a global recession.
McKinsey is also running similar consumer surveys in the US. According to their research households are gearing up to spend less in order to protect their finances through the coming months. This will negatively affect demand for goods and services. In the UK retail spending is approximately 30% of household expenditure.
Data from the Department of Work and Pensions shows an enormous spike in Universal Credit claims. This suggests we are in for a sharp rise in unemployment as business struggles to keep going and the economy falters. This will negatively impact household income and expenditure.
A sharp recession in 2020 is a reality. Goldman Sachs has recently revised its forecasts for the US and Euro area GDP to -3.2% and -9% respectively for 2020. Morgan Stanley have predicted GDP contraction for the UK and Euro area of 5.1% and 5% in 2020. Second-quarter GDP growth will see massive double-digit output declines across the board.
According to the Office for Budget Responsibility, a 35 per cent contraction in Britain’s economy in the second quarter is predicted.
Data from China (where the economic impact is just starting to emerge) supports this view. Measures to control the virus have caused a 20% contraction in GDP in the first two months of the year.
There is some disagreement about whether an economic recovery will start in Q3 or Q4, but most economists agree that there will be a V-shaped recovery across all major economies (see chart above from Goldman Sachs’s Global Investment Research team). Much of the timing depends on how quickly coronavirus can be contained and therefore how quickly restrictions can be lifted. A Q3 rebound assumes that the pandemic reaches its peak in April/May.
The overall impact of coronavirus spending across consumer goods will undoubtedly be negative, but not for all categories. Spending will increase across food products, consumer healthcare, wellness and other necessities. Because of panic buying and the shutdown of schools, pubs, restaurants, hotels and universities in the UK, shoppers bought an additional £1.9 Billion of supplies across Supermarkets in the four weeks up to 22nd March, according to data from Kantar.
Discretionary spending will likely reduce significantly as demonstrated by the chart above.
Samuel Tombs, economist at Pantheon Macroeconomics, estimated that non-food retail sales could go down by 80 per cent in the UK during the lockdown.
However, Patrick O’Brien, UK Retail Research Director at GlobalData, comments: “While the food and grocery market will grow at 7.1% – the fastest rate for decades – this will not stop the overall market falling as non-food spend is forecast to drop by 8.9%. The impact on non-food is far worse even than during the financial crisis of 2009, when sales fell 2.9%. Clothing and footwear sales are forecast to be hit hardest, with sales down over 20% on 2019.”
BCG have forecasted that fashion and personal luxury goods sales “could drop 15% to 25% worldwide this year. For the $1.5 trillion global fashion industry, that could mean up to $270 billion in lost sales from 2019. For companies in the $350 billion global luxury market, which includes handbags, shoes, watches and other designer goods, the decline from 2019 sales could total $100 billion”.
China is the largest consumer of luxury and fashion goods and accounts for around 40% of global sales. Early indicators such as real estate floor space being sold, power plant consumption and traffic congestion are increasing, suggesting some sort of recovery is on the way. Economists expect a snapback in Q2 which could soften the prospects for the category.
Before the widespread adoption of social distancing measures consumers were already up and down voting sectors and activities based on risk of exposure to coronavirus. With major restrictions in place now in most countries this has exacerbated the effect. Given the comparative safety of online shopping and given most people are stuck at home or restricted to very local movements, eCommerce is not just a preference, it’s a requirement for many.
According to data in a McKinsey consumer survey, in-store retail sales will drop off significantly, with the exception of local purchases of groceries.
A channel shift from offline to online is occurring, but according to the data, this will only result in increased online spend for a few non-discretionary categories (with the exception of entertainment at home). Across discretionary categories online spend is expected to be lower across the board, but higher than in-store spend. There are some significant gaps between the two channels. For example, fitness and wellness could potentially perform 71% better online based on the McKinsey data (and some rudimentary maths). The gap for other categories are as follows: skincare & makeup 67%, consumer electronics 66%, apparel 64%, furnishing & appliances 50% and jewellery 43%. These gaps might widen over the next month or so, as in-store spending will most likely fall to zero.
Digital as a marketing channel is more important. According to research conducted by McKinsey, consumers are more engaged with a variety of different digital content formats and media channels.
Whilst products are getting to customers, global supply chains have been massively affected by coronavirus. This has impacted consumer goods brands across all categories, especially those seeing a surge in demand at the moment.
Staff shortages from illness and restrictions to keep workers safe has limited the availability of materials, caused manufacturing delays, warehouse and fulfilment center closures or capacity issues, disruption to shipping schedules and caused bottlenecks in delivery.
According to research by Accenture “71% [of blue chip companies] surveyed do not have a business operations contingency plan in case the outbreak lasts longer than a few weeks”. Cost cutting measures across the supply chain have limited this possibility as brands search for cost efficiencies through lean production, outsourcing and off/nearshoring.
According to an article in the Harvard Business Review, generally brands “usually carry only 15 to 30 days’ worth of inventory”. “So, for most companies, the inventory coverage they have will allow them to match their supplies with demand, with no additional supply, for between two to five weeks, depending on the company’s supply chain strategy. If the supply of components [and raw materials] is disrupted longer, manufacturing will have to stop.” Given the complexity and geographical scope of the supply of manufacturing inputs for any given brand “The vast majority of global companies have no idea of what their risk exposure is”. The possibility of upstream supply chain problems is therefore potentially a big risk to brands still.
The movement of goods through the supply chain has been affected as well. Governments have recognised the importance of ensuring goods reach consumers and businesses, and have categorised staff working in logistics and fulfilment as ‘key workers’ in order to support trade. Despite this, transportation, warehousing and fulfilment operations have had logistical problems due to several factors.
Firstly, staff shortages have meant businesses have struggled to maintain normal operations across their facilities and delivery network. Whilst automation exists in a few warehouse and fulfilment centres, most businesses are heavily reliant on labour to pick, pack, ship and manage operations. It only takes a relatively small number of staff not working to create significant gaps in logistical networks.
Whether they have contracted the virus or not, workers, en masse, have self-isolated if they have developed coronavirus like symptoms. At-risk staff who otherwise would be working have been requested not to work. This has impacted the ability for brands to get their products to consumers. For example, FedEx has suspended its service level guarantees for delivery, partly because it has struggled with attendance rates across its workforce.
Secondly, non-uniform spikes in demand across certain categories has put huge pressure on businesses. Grocers, for example, have struggled to keep up with consumer demand for household supplies and food. Ocado, who are online only and have highly efficient automated warehouses that pick and pack with machines have maxed out their capacity to fulfil orders, leading to a temporary shut down of their website, prioritisation of different customers and huge wait times. Similarly, Amazon has partly responded to capacity issues by prioritising “essential” items and Prime customers.
Third, government and business measures to protect staff and associates have caused huge disruptions too. Amazon closed down several warehouses for cleaning, as staff contracted the virus and have been accused by employees of not providing adequate standards and equipment to protect staff (leading to calls for a strike). Other brands have shut their online fulfilment operations as well as their physical storefronts to protect workers. NEXT, who have the most trafficked website for fashion and apparel in the UK (over 30 million visits in December, according to SimilarWeb), have mothballed their business. Also, global logistics companies won't handle freight going to or from certain countries.
Finally, the collapse of international travel is creating trauma in areas of the transportation sector that rely on holidays as a major source of income. For example, the four companies which manage ground operations at UK airports, including air freight, have warned that they are close to collapse unless they receive government support quickly.
There are lots of resources available to businesses on how to protect employees and offer them support through the coronavirus episode. The UK Government has issued a series of guidance, which is available through their website. There are other sources of information that might help. Top management consultancies are constantly churning out valuable information about protective measures, business resilience and leadership - often this is sector aligned. We have been particularly impressed with the publically available contributions from Boston Consulting Group, Bain and McKinsey - these insights are available on their respective websites.
As highlighted earlier, it looks likely that we are headed for a short sharp recession. Brands should be prepared for a protracted period of lower consumer demand, which could drag into the fourth quarter of 2020. Consumer goods businesses should run cash flow scenarios against different demand forecasts, assuming varying degrees of supply chain disruption, across different timeframes and plan costs accordingly to stabilise their business. Store closures, headcount, discretionary spending, payment terms, CAPEX should all get looked at.
To help with cash flow issues, capital is readily available for those that have assets to borrow against, such as trade receivables and purchase orders. The UK government is offering tax relief and liquidity to businesses, through reduced business rates and business interruption loans, for example. Although brands should be mindful that it may still take some time for government backed funding to become available through the banking system. Businesses should speak to their banks and accountants to understand their options better.
Economists are expecting a Q3 or Q4 rebound in consumption in the UK, Europe and US, as restrictions are eased and the global economy is able to function in a more normal fashion. Chinese data supports this view at the moment, only six weeks after the initial outbreak real estate floor space being sold, power plant consumption and traffic congestion are increasing, but are not near 2019 levels yet. In addition, China’s official Manufacturing PMI rose from 35.7 to 52 (anything over 50 suggests expansion) from Feb to March [link]. These are encouraging signs and suggest that if the virus is controlled effectively, it is possible to kick start a recovery fast.
Consumer survey results from publically available Boston Consulting Group research support this, as evidenced below:
Given the above, brands should forecast some rebound in demand in the second half of 2020 and manage inventory accordingly. A Bain report predicts a post-epidemic consumption recovery will “largely follow patterns similar” to the 2002-2003 SARS outbreak. When spending on food and cosmetics saw a quick return to normal while demand for clothing surged beyond pre-epidemic levels.
Brands should prioritise non seasonal and essential products in their digital merchandising strategy as a quick win. If done in conjunction with product bundling this can be an effective strategy to not just encourage sales but increase AOV. Glossier, a fast growth beauty brand, are doing this really well. Firstly, they are providing a lot more visual real estate on their site to their daily skincare products. Secondly, they are bundling these products to create easily buyable ‘sets’. Thirdly, they have revised their prices down to make products more attractive during the crisis and presumably sell stock bound for their stores (which were closed down mid March).
There is a debate around how successful price promotions are in the current demand weak environment. Brands should review bringing forward promotions to outside of holiday periods or end of product seasons, if necessary. Our recommendation is to invest in online promotions when demand begins to recover to accelerate sales. Chinese brands are doing this at the moment. Alibaba and Tmall are partnering with Shanghai Fashion Week to provide fully digitised coverage of the shows, marketing and an online sales solution for fashion brands, in a bid to boost demand as the economy recovers.
We don’t think the eCommerce channel will cover all lost revenue for any discretionary consumer goods brand, but it will undoubtedly be the best performing retail channel. Most brands reading this will have an eCommerce capability already, but if you don’t it is crucial to get one setup and quickly - regardless of how quickly the recovery occurs many analysts predict that spending online will become more entrenched in the long run, GlobalLogic predict total online revenue to increase by 8.8% and 8.7% on 2020/2021.
Brands may not have the cash available to invest in doing this immediately and as such we have launched our Commerce Catalyst product which is designed to start or accelerate online channel growth for luxury and premium brands. We are offering ecommerce strategy, digital design, technology and marketing support services to help retail brands deliver a successful web channel. Commerce Catalyst is a growth product backed by financing from Funding Invoice. It is now out of pilot, with our first client PAPER London about to go live.
The programme is designed to deliver a first go to market through cloud based technology and has an approach that accommodates the challenges presented by coronavirus.
Needless to say, it is important to make your products available to customers wherever they are shopping right now. Focusing on your eCommerce capabilities doesn’t just include launching or optimising your webstore. Where appropriate, brands need to assess whether they should make their products available to customers via platforms such as Amazon, eBay and Etsy, for example.
On the luxury end, many brands might feel this doesn’t suit their strategy, identity or customer profile, but given the relative ease of setup, we suggest going in this direction anyway. The graph below from Boston Consulting Group research shows how consumers in Italy are shifting their spending patterns.
Social activity has shot up significantly over the past couple of months. Whilst engagement is down and people are focused less on brands and more on coronavirus, it is still important that all brands have their products available through their Instagram and Facebook accounts. Matter Of Form is offering free community management to any brand at the moment and can support building an effective social commerce channel.
Brands that have stores should also invest in an omnichannel approach towards order fulfilment too. We think it will be important to fulfil online orders from stores as well as warehouse facilities when restrictions permit. There are obvious advantages in being able to reduce inventory tied up in physical locations, assuming it takes a while for spending to resume to normal levels.
Brands need to digitise or update their inventory management and shipping technology to support this. CAPEX on technology can provide a transparent, real time view on where stock is located through the supply chain, fulfilment and logistics processes - which will be valuable when facing another systematic shock as well as providing better everyday business planning.
In order to offset the costs of setting up and managing an in store fulfilment capability, brands could assess incorporating third party fulfilment into their in store operations. In order to get products closer to consumers and to enable more efficient delivery options, carriers and technology companies have created micro fulfilment offerings that allow companies to pick, pack and ship other brands products from their stores.
Generally, consumers are not receptive to direct sales approaches right now. Brands need to be thoughtful about how they market to their customers. Customers are spending more time online but given that they are not spending, many brands are pulling their ad spend on social media, search and affiliate marketing. We are advising our clients to focus on an organic approach centred around building brand affinity, in order to stay top of mind. This is to help gently guide customers towards products and services whilst building advocacy - which can be cashed in when demand picks up again. Ad spend could be better used for community building purposes to support this, rather than performance/conversion.
Brands in China have pivoted their service delivery model in order to bring elements of its in-store offering online. According to Martin Reeves, a partner at Boston Consulting Group (writing for the Harvard Business Review) “a cosmetics company Lin Qingxuan was forced to close 40% of its stores during the crisis, including all of its locations in Wuhan. However, the company redeployed its 100+ beauty advisors from those stores to become online influencers who leveraged digital tools, such as WeChat, to engage customers virtually and drive online sales. As a result, its sales in Wuhan achieved 200% growth compared to the prior year’s sales.”
The situation across the supply chain is very dynamic and changes on a day to day basis. Speaking with suppliers, fulfilment and logistics partners regularly, won’t help brands get products to customers faster or iron out uncontrollable manufacturing issues, but it will help them better anticipate delays, lock in pricing and do more effective planning.
As important, brands should communicate what effect supply chain problems are having on shipping and returns with customers, to ensure that expectations are aligned.
The epicentre of the virus has moved West, from Asia to the US and it appears that China is showing the first signs of recovery. According to research conducted by Boston Consulting Group “With the worst of its COVID-19 outbreak now in China’s rearview mirror—at least for the moment, and hopefully, for the long term—we are seeing glimmers of potential economic recovery in the country: as of March 17th, 99% of industrial businesses there have resumed operations.”
With this in mind, brands should consider shifting inventory to less affected regions like China, where demand is beginning to pick up (especially for eCommerce). For brands that don’t have a digital sales channel in China, there are a number of agencies that can support regional marketing, eCommerce setup, logistics etc - the modus operandi is very different.