By Nicola Longfield, Global DA Consumer & Retail Lead; Mitchell Collett, Director Deal Advisory, KPMG in the UK
Reaction, Resilience, Recovery, New Reality. Whatever your choice of terminology, the COVID-19 pandemic will be multi-phased. With the timing and severity of restrictions varying by geography, multiple phases are occurring simultaneously in different locations. It is increasingly clear that the world has changed over the last two months. Disaggregating which of these changes are temporary and which are transformative is key to preparing for future success.
Strength from stockpiling may be short lived
At the beginning of the pandemic, many consumers responded by stockpiling non-perishable items. IRI data shows that growth for the frozen food category peaked at 48 percent in Italy, 63 percent in France and 93 percent in the US in mid to late March. For some FMCGs (fast moving consumer goods companies), this made the first quarter of 2020 abnormally strong. However, data from UK grocery retailer Sainsbury showed that pantry loading may have been relatively short-lived with fortnightly grocery growth peaking at 39 percent in mid-March followed by slightly negative growth in mid to late April. Similarly, Ocado indicated that the mix of fresh and chilled versus ambient products has already begun to normalize.
While pantry loading may have ended – for now at least – at home consumption has taken a significant step forward with most consumers spending more time at home. Although this is likely to at least partially reverse as restrictions lift, it may never revert to prior levels as consumers become accustomed to new ways of working and socializing. This presents a once in a generation opportunity for FMCG companies, and the food segment in particular, to target a new set of consumer behaviors and consumption occasions. Consider whether your portfolio of assets is fit for this new reality. Use M&A to reposition it where appropriate.
Out of home is weak and recovery may lead to a new reality
The flip side of this is that out-of-home consumption has been heavily impacted by the pandemic. Coca-Cola European Partners indicated that away from home consumption was down 45-85 percent in the five weeks to 17 April in COVID-19 impacted geographies. Similarly, Heineken indicated that on-trade volume was -50 percent in Spain and -75 percent in Italy during March.
Another area of notable softness has been impulse purchases. Nestle’s confectionary business declined 4.2 percent in 1Q with the company flagging reduced impulse buying. While these more discretionary categories are likely to benefit from countries progressively loosening current restrictions, it is likely that the broader macroeconomic impact of the pandemic dampens the recovery.
The timing of consumers being able to return to the on-trade, making impulse purchases and beginning to travel will clearly vary by geography. However, with social distancing measures likely to remain in place and with consumers likely to remain cautious the path to recovery is likely to be very gradual and this may result in permanent changes in the way we socialise and use our free time.
It is unsurprising that discretionary consumer spending has been weak. Perhaps more surprising has been some of the segments that have behaved like discretionary categories under the current conditions. In France and Spain, cosmetics sales decreased 80 percent in mid-March and L’Oreal estimated that cosmetics sales globally decreased 8 percent in 1Q20. Unsurprisingly, people who stay at home more spend less time and money on their appearance. With consumers likely to work and socialize at home more going forward a lower level of spending on personal care may become a more permanent consumer behaviour.