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A curated content platform of COVID-19 news stories with a supplier-retailer lens by Advantage Group.

Edition 15 – July 15, 2020

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FEATURED STORY

Going Local: The Pandemic Gives Rise to Local Sourcing

In an effort to spur economic activity and invigorate local businesses in the face of globalization, governments and industry have been collaborating on “buy local” campaigns in recent years. When it comes to grocery purchases, this has been a cause that consumers, for the most part, have been willing to oblige.

In addition to showing support for one’s community and displaying regional and national pride, locally sourced food products are perceived as being fresher and healthier. They are also viewed by the environmentally-conscious as being more ecologically friendly due to the reduced carbon footprint compared with products that have been shipped and transported from afar.

The arrival of COVID-19 has introduced added factors on the supply and demand side of the equation that point to the purchase of local products gaining further popularity. On the supply side, border closures and logistics disruptions are motivating suppliers and retailers to reduce their reliance on imported materials as a means of strengthening supply chain resiliency. On the demand side, concerns over product hygiene and contamination are leading to consumers placing greater trust on locally sourced products over ones that have travelled longer distances and have been handled by multiple human touchpoints.

Hygiene factors aside, the pandemic has also strengthened many consumers’ sense of community, prompting them to support local independent brands and businesses more so than in the past.

Buying Local

Especially when it comes to fresher foods, today’s shopper demands greater visibility into where their products have come from along with the processes taken to ensure their hygiene and non-contamination along the way. This is putting supply chain transparency under the microscope and is placing mass-producing multinational brands that rely on sophisticated distribution networks at a disadvantage over smaller manufacturers that can market themselves with local credentials.

McKinsey recently conducted a study with 5,000 Asian consumers to gauge how COVID-19 is affecting their shopping behaviour and expectations. Across the seven countries surveyed and across multiple categories, respondents expressed strong preferences for local brands over international ones. 80% of Australians indicated that this preference had increased since the pandemic began: a trend that has prompted supermarket chain IGA to add shelf labels identifying those products that are Australian owned. In China, where foreign brands have historically enjoyed a more favourable reputation, the pendulum has swung in recent months, with 57% of Chinese respondents indicating a preference for local brands today.

The momentum for buying local also reveals itself in consumer studies conducted in Europe and North America. Research from Consumer Intelligence found that 65% of British consumers were more likely to purchase British produce as a result of COVID-19. In a report issued by Goldbeck Recruiting in late June, 82% of Canadians polled expressed that purchasing locally produced goods had become a bigger priority due to the pandemic.

While assurances around products that are deemed healthy and minimize unnecessary risks are arguably the most significant contributor to the gaining popularity of “buying local,” other COVID-19 related factors are providing further tailwinds. Locally sourced products are considered by many to be more environmentally friendly and also play into one’s desire to support their immediate community and society at large.

Since the pandemic took hold, Ernst and Young has been publishing a monthly survey tracking the sentiment and behavior of 14,000 people across 18 countries. Over the course of June, 42% of consumers said that the way they shop will fundamentally change as a result of COVID-19, with 34% indicating that they would be willing to pay more for local products. When digging deeper into the attributes that have the most influence in a buying decision, 26% cite “health” as their top concern. Next on the priority list was the “planet,” with 17% of the panellists revealing that they would pay higher prices for ethically sourced and sustainable products. “Planet” was followed closely by “society” (17%).

Over and above their sustainability credentials, smaller, locally based manufacturers are able to adapt faster to emerging trends and needs. As an example, many independent spirit distillers and craft breweries were able to shift their operations to produce hand sanitizer faster than their multinational counterparts once the pandemic took hold. Whether the hand sanitizer output was sold as an additional revenue stream or donated to front line workers generating positive PR, they were able to gain local relevancy over their larger competitors who might have been inhibited by less flexible operations and/or reliance on imports.

Sourcing Local

The Coronavirus has exposed the degree to which a significant portion of products that make it onto retailers’ shelves rely on globally interconnected supply chains. This is prompting manufacturers and retailers to reconsider the degree to which they rely on imports for raw materials and finished goods.

International logistics networks are set for bumpy roads ahead even after the full extent of the crisis subsides and travel restrictions and border controls are fully lifted. It is anticipated that the travel and tourism sector could take years to recover fully, and freight logistics capacity is tightly linked with passenger transport as airlines and rail carry a mix of cargo. Prevailing economic uncertainty will also add volatility to exchange rates and global commodity prices, providing further impetus for reduced reliance on sourcing from abroad.

Aside from adding a layer of supply chain resiliency, stocking more locally sourced products also caters to consumers’ growing expectations around sustainability. In today’s era of social media and public scrutiny, manufacturers and retailers are being held accountable for implementing environmental and ethically sound sourcing practices. Procuring locally, reduces one’s carbon footprint and decreases the likelihood of human rights and animal abuse violations occurring somewhere along the production and transport chain.

An Accenture study published in May revealed that 80% of consumers feel more connected to their communities as a result of the pandemic. In a May survey of US consumers conducted by ZypMediaMay, 53% of respondents indicated that they are more likely to buy from a local business instead of a national retailer during the COVID-19 crisis.

In the UK, market data released by Kantar reveals that small independent stores captured 69% more sales in the three-month period leading to June 20th. National retailers will always find themselves at a disadvantage versus local independents when it comes to their perceived connection with the community. By supporting local businesses through stocking and promoting their products, national retail chains can demonstrate to the local communities in which they operate stores that they are an important and valued stakeholder.

In Australia, Coles Liquor has added 24 small independent brewers into the retail group’s national supply networks and will be listing their beers in the 900 stores they operate across the country. Most independent breweries rely on bars and restaurants for between 40-60% of their sales, and the initiative is aimed at helping these businesses make up for the losses of this channel, having been closed for extended periods.

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Advantage Perspective

With both retailers and consumers placing more attention on where and how their products are sourced, CPG brands will need to find ways to demonstrate local relevance and provide assurances around health, safety, and sustainability. Those that have invested in local sourcing or manufacturing operations should tout these credentials in order to make shoppers aware. While those unable to market the localization of their procurement should utilize industry body and verifiable, third-party accreditations and endorsements to assure shoppers that they still practice ethical and sustainable sourcing. They can also look at other ways to demonstrate community support by donating products or funds to local causes, or by supporting and partnering with small business and NGO’s.

Irrespective of the heightened public attention COVID-19 is placing on distribution chains, joint partnerships between suppliers and retailers can reduce waste, yield efficiency gains, and lower the overall environmental footprint. Sharing of logistics vehicles and partnering on “last mile” delivery, for example, are tangible ways that suppliers and retailers can minimize their carbon footprint.

COVID-19 and major crises have a unique way of instilling in people and businesses a collective sense that “we are all in this together.” Big businesses supporting and propping up small businesses, even if they compete in the same space, should not be perceived as a zero-sum game. Multinational brands and national retailers offer size, financial muscle, and know-how that their smaller, independent counterparts lack. Conversely, these smaller independents offer a community connectedness and local focus that larger sized enterprises cannot naturally replicate. With many smaller businesses suffering and multinationals looking to further engage the communities in which they operate, now is the perfect opportunity for fruitful partnerships to take shape.

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Voices on the Ground

This week we speak with Pablo Sánchez, Regional Director for Advantage Colombia, Central America, and The Caribbean and Sofía de Grajeda, Director for Central America, to understand how COVID-19 is impacting life and retail in the region.

This is a wide and diverse region, spanning from 6 countries in Central America, to Puerto Rico, an Island in the Caribbean, also a US territory, and to Colombia, one of the largest countries in South America.

One of the challenges that has been common to all markets has been the need to adapt to the new “normal” of sanitary requirements, including the use of facemasks, social distancing, and constant handwashing. Businesses in the region, were not prepared for the transition to a remote work environment. This may have been due to lack of employee trust, technology issues, or both. However, this period has demonstrated that people can work from home, as efficiently or more so than in an office environment.

Many suppliers in the region have cut or eliminated their budgets, including advertising, research, and consulting, aiming to meet their profit goals despite imminent sales losses.

Consumer purchasing power has been significantly reduced, and despite government aid and subsidies, one of the segments that was the most impacted is known throughout the region as “informal economy”. This includes street vendors, construction workers, and others, particularly in countries where public transportation was limited or shut down.

Where has Advantage played a role: Suppliers have approached us suggesting we advise retailers in the region to consider the crisis when evaluating suppliers in their feedback, particularly on the difficulty in meeting forecasts and fill rates, and orders being on time and in full. Suppliers would also appreciate their retailer partners to acknowledge areas where their efforts were exceptionalespecially, when orders were met well above forecast (in some cases even five times above the original quantity).

Supply chain has been a major challenge for both suppliers and retailers throughout the region, which in general, they have been able to manage. For example, in Central America, a small but diverse region with six different countries, in-land freight is the most efficient form of transportation, either between countries or from large manufacturing hubs like Mexico. However, having the border between Nicaragua and Costa Rica completely shut down due to sanitary concerns in Nicaragua, the supply chain was interrupted, forcing companies to find alternative supply sources, such as in Colombia and ocean routes, which were not readily available.

 

In Puerto Rico, where most of the goods are sourced from the US, their challenges have been managing complex and limited ocean routes, and ensuring that their suppliers were able to provide them with the goods required, particularly those that generated an unexpected demand, such as hand sanitizers, household disinfectants and cleaners, wet wipes, and paper products. This is because they have had to compete for these directly with the heightened demand in the United States.

 

It is important to note that Puerto Rico was better prepared than other countries for this crisis from a logistics perspective, since they are constantly hit by natural disasters, such as the annual hurricane season. Puerto Rico also experienced multiple earthquakes earlier this year. The main difference this time, was that services such as water, electricity, and roads were not interrupted, allowing for their supply chain to continue.

 

Another historical key issue in bringing imported goods into these countries has been the regulatory requirements, which in recent months have been expedited. Products that have had registrations become expired or come close to expiration, have been allowed in the countries under the promise that the companies will comply with renovation requirements. This has kept the supply chain flowing, reducing the possibility of out-of-stocks, particularly for “essential” items.

As was the case around the world, the first step that retailers took during the pandemic was to ensure the safety of their employees and customers, while doing their best to maintain shelve stocks. In the early stages, when Supermarkets started to experience the incremental demand generated by “panic buying”, they were quick to react by stocking essential items such as hand sanitizer, wet wipes, and even toilet paper and paper towels. But when suppliers could not keep up with the unexpected demand, they reactivated products previously delisted or being considered for delisting. To reduce the impact of out-of-stocks, retailers also reacted swiftly in registering new suppliers and products, particularly local small to medium sized companies which were not considered previously for distribution to chain grocery retailers.

 

In Puerto Rico, another challenge that grocery retailers faced was at the peak of the pandemic. Even though they could open, they were not permitted to sell general merchandise as it was considered unfair competition for general merchandise retailers that were not allowed to open.

 

Both retailers and suppliers have experienced significant growth in non-core categories, such as school supplies (due to attending on-line classes/homeschooling), exercise equipment (due to gyms being closed), board games to entertain the family, and all sorts of food items for more meals being prepared at home.

 

In this region, it was impressive to see how fast the “new” game rules were established, Retailers met with suppliers and agreed on how to operate, being clear on which products and categories were a priority and working better together to find solutions. From the beginning, retailers and suppliers set a positive example on how to successfully tackle the crisis through two behaviours: by being transparent in all processes, especially logistics, and by making joint pacts/agreements. Among the agreements, one that stands out was the temporary elimination of penalties for suppliers not meeting logistics KPI’s.

 

Additionally, “new retailers” have emerged throughout the region, such as hardware or department stores, particularly those located in closed malls. These retailers started selling groceries, thus meeting the government requirements to open, as groceries are considered essential items.

This industry has been one of the most affected by the pandemic, and nowhere more than in Puerto Rico. When the economy was shut down, the foodservice industry was immediately impacted, as hotels, restaurants, bars, and other businesses were closed. Some foodservice distributors reported a 60 to 70% drop in sales in their foodservice divisions, including food, beverage, liquor, as well as paper products.

 

Foodservice distributors throughout the region have been forced where possible to adapt and repack the larger/foodservice items to smaller packs fit for sale in the grocery channel, which continues to thrive during the pandemic.

 

At the height of the pandemic, an excellent example of collaboration between industries arose. Local Supermarket Chain SuperMax and Grupo Colón Gerena, operator of temporarily closed Red Lobster and Sizzler restaurants in Puerto Rico, agreed on an alliance designed to safeguard over 150 restaurant employees, relocating them to supermarket operations to help the supermarket chain manage the increased consumer demand.

 

As of July 1st, the Governor of Puerto Rico extended the nation’s nightly curfew from 8:00 pm to 10:00pm. This will allow restaurants, movie theaters, and other establishments to remain open longer, signaling a long awaited, slow start of the recovery of the industry.

In general, retailers were not prepared for the growth of e-commerce brought by the pandemic. Experts have commented that in the last two months, retailers and business, in general, have pushed forward their e-commerce plans for the next two years. They had to quickly adapt and accelerate their mid to long term plans to start now! This included plans for their websites, online product offerings, applications, social media marketing, sales and promotional campaigns, and their delivery options.

 

Throughout the region, orders can be placed to retailers by phone, WhatsApp/text, webpage, app, and other platforms, all with different product portfolio offerings. Delivery can also vary in models such as: 1) Curbside pick-up, 2) Express (small quantities, quick delivery), and 3) Large quantity orders (2 to 3-day delivery).

 

According to a Forbes Colombia article, “This is the moment to adapt, advance, restructure and digitize the way of interacting with people and channels through which sales are made. While uncertainty and generalized fear increase in society, now, more than ever, retail and FMCG companies are fighting to adapt, seeing a great opportunity for building optimized digital platforms”.

 

The Pandemic has accelerated e-commerce around the world and this region has been no exception. Here are a few examples:

 

  • A retail chain in Central America saw its online sales grow by over 400% in the past couple of months.
  • Through strategic alliances with “Last Mile” delivery companies throughout the region such as Rappi, Uber/Eats, Glovo, and Hugo, both these companies and retailers have seen their revenue grow exponentially. We have also seen the rapid growth of online supermarkets such as CornerShop, which has been recently acquired by Uber. In Central America, a leading grocery retailer joined forces with car-rental companies to repurpose their operations for express deliveries. These car-rental companies were otherwise sitting idle due to the lack of tourism. An article from puertoricoecomerce.com indicated that “Many companies that contemplated integrating e-commerce to their business model have advanced their plans and opened online stores, so they have been able to continue operating both physically and online (even if their online operations are temporary).”

 

In summary, e-commerce has played a key role during the pandemic, and it is here to stay. It will be a differentiator and a competitive advantage in both the short-term and future of retail.

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A Pulse on Big Brands

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July 24, 2020

very informative.

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