Welcome to InFocus

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

Edition 6 – May 13, 2020

FEATURED STORY

Voices on the Ground

We interview Joe Flanigan, Managing Director, Advantage Group USA to collect his team's perspective on how COVID-19 is impacting life and retail in the United States.

There is not a clear understanding of what the opening of states will look like. There are few official guidelines for those businesses that are reopening under restrictions. For example, there have been no guidelines on how to operate restaurants with fewer customers or whether to enforce rules requiring masks and social distancing. Starting this weekend, Costco stores are offering a mask (inside a Ziploc bag) to each shopper upon entering. Costco and Whole Foods are among the grocery stores now requiring shoppers to wear masks. However, this is an example of a proactive approach rather than a mandate.

 

Guidelines and rules vary within states and districts. Broadly speaking, states west of the Mississippi River (nearly 2,000 miles) have been much less impacted by the pandemic than those along the coast and in larger population centers. The retail landscape in the USA is quite fragmented with many retailers only operating in a few states. This will help them manage the rules better than national chains like Walmart or Target, who will have more rules to sort through.

One expert in building social media and web-based capabilities we spoke with, indicated the necessary e-commerce infrastructure was already in place, and the pandemic just forced those retailers that were reluctant to engage to finally jump in. The direct-to-consumer infrastructure through the post office, FedEx, UPS or through Amazon already existed. However, its viability as a channel became more apparent to new demographic groups and expanded into other geographies. The pandemic gave the platform the impetus to scale e-deliveries and “pick up and go” at the store for Kroger and Walmart.

 

E-commerce grocery sales have more than doubled. The estimate from IRI is that channel sales went from 2-4% to 9-10% of grocery sales. Acosta said that 33% of Households making an online grocery purchase in April did so for the first time. Retailers saw massive challenges supporting this increase in demand. Some had to set up order online / pick up in-store services. Others had issues hiring staff to make deliveries. Here in Nashville, in the first couple of weeks of the lockdown, it was virtually impossible to secure a delivery slot from Walmart, Kroger or Instacart (a delivery service used by many retailers). Impulse categories are negatively impacted by the rise in online shopping. Acosta said impulse sales seem to be taking a hit as shoppers move online and conduct “contactless shopping trips” i.e. touching as few things as possible and getting out of the store quickly.

 

The consensus seems to be that this will help accelerate the e-commerce grocery trend and some consumers will not go back to stores when they are permitted to. We have heard people say this puts e-commerce 2-3 years ahead of where people thought it would be in 2020. Having said that, even if sales are at 10%, 90% is still through brick and mortar, so brick and mortar is far from dead. Broadly speaking, e-commerce is a less profitable channel for retailers than in store. Additionally, it can impact out-of-stocks when a store becomes a delivery center. Retailers that use Instacart and other 3rd-party services lose connection to the customer and shopper data which can impact a retailer’s ability to target shoppers in the future. Most retailers have grown e-commerce sales, but many websites are still not optimized with good product images, search functions and product ingredient information, and their cost to serve will be higher compared to Amazon due to logistics. This may create opportunities for Amazon in grocery. This could impact their online sales potential and is a space where suppliers and retailers can really partner to capitalize on this surge in demand.

So far, everyone I have read about seems to be doing well. Acosta has said that their data shows that the Grocery channel has gained a little share and Mass/Club has lost a little. Long term, I have heard some analysts say they think Amazon, Walmart and Dollar General will pull away from others. The US could go into a bad recession. Low price retailers will appeal to consumers hit the hardest. We have already heard of the consumer going back down the value chain in pet food, moving from a super-premium to a grocery brand, which did not happen in the crisis of 2008. Walmart has a national footprint and leverage with suppliers to position its business for future growth. Private Labels could also get a boost. Not all retailers are as developed in Private Label as Walmart and Target. That too could have an impact on those retailers' long-term potential.

 

An Acosta shopper survey released this week said 53% of shoppers are shopping less but buying more on each trip. Bulk and higher count items are in higher demand. This means grocery stores may have to change their assortment in the future with higher demand for “club style packaging”. Three to four years ago, some suppliers would not sell “club packaging” to grocery retailers, due to lower margin and the fear of keeping the consumer away from the store for longer.

 

One big question remains: will consumers want to go back to stores for 'experiences' once social distancing is rescinded? Do they want to browse the aisles of Costco, Trader Joe’s or Mariano’s to sample foods and drinks? This could impact some retailers and more niche/experiential brands and how they will deal with sampling and new product launches. Acosta said, after discussions with their retailers, that they are not likely to open salad bars and self-service counters anytime soon. Prepared meals will be popular. This is especially important for younger shoppers who have tended to eat out more than older shoppers.

 

What about promotions? At this time many retailers have essentially stopped promoting. Acosta said prices have risen for the consumer because of a lack of promotional pricing. Retailers told Acosta that they think there will be promotions in the latter half of the year.

 

At what point does a brand that switched its manufacturing line over from foodservice to retailer need to switch back? And will there be the same demand from foodservice as before the pandemic? If it does come back, how soon and to what extent? These are the questions the c-suite within our supplier clients are wrestling with as it impacts how they structure their business and which “channels” they need to serve.

Consumer Behaviour

Battle of the Brands: The Growth of Private Label Sales Outpaces That of National Brands During the Pandemic

Summary: Sales growth of private and retailer own-label brands has been outpacing that of national brands in both the US and the UK; a trend that many industry analysts believe is likely to endure due to the impact of COVID-19. At the early stages of the outbreak and with shelter at home ordinances in place, much of this gain stemmed from otherwise brand loyal consumers switching to private-label alternatives as their favourite brands were selling out in essential categories. As the crisis persists and the economic outlook for many consumers dampens, those households adversely impacted may be looking to trade down to discounted private label as a means of reducing their monthly expenditures. At the other end of the spectrum, premium private label brands could also gain popularity as discretionary spending previously used for restaurant dining and out-of-home entertainment gets reallocated to more lavish meals cooked at home. 

Another way that private label products could capture the share of wallet relates to the agility in which private label vendors can pivot their manufacturing lines. As consumers seek out healthier food options and shift towards purchasing larger quantities in fewer shopping trips, food suppliers that incorporate healthier ingredients and adapt their packaging for bulk purchases stand to benefit. Although private label growth could outpace that of national brands, the more reputable and entrenched brands are well-positioned to ride out the crisis and potentially come out even stronger as anxious consumers continue to seek out the products they associate comfort with or have developed an affinity for. As retailers narrow their assortments and range, leading brands could consolidate ground. Trusted category leaders with valuable information and guidance to offer should gain greater access to retailers’ ears as they forge stronger partnerships to jointly navigate through these unprecedented times.

Advantage Perspective:

Reported sales for FMCG giants such as Nestle, Unilever, and Kraft were all up in the first quarter of the year as anxious consumers sought products that they found comforting and familiar. “At these times, consumers do seek the reassurance of big, familiar, trusted brands,” explained Unilever Chief Executive Officer Alan Jope during an earnings conference call that took place late last month.

The panic buying that ensued as a result of COVID-19 has, however, forced many brand-loyal consumers outside of their comfort zones. As supermarket shelves, typically stocked with high demand branded products in highly demanded categories (e.g. canned goods, household cleaning) became bare, many consumers opted to trial an unfamiliar brand or no-name alternatives rather than leaving the store empty-handed.

 

According to US sales data from Nielsen, private label gained about one-third more in both dollar and unit sales versus national brands over the course of Q1, with store brand sales growing 14.6% in dollar volume and 12.8% in unit volume compared to gains of 11.5% in dollars and 9.2% in units for national brands.

 

In the UK, sales growth of retailer own label groceries has been even more pronounced, with Kantar measuring sales figures in March to have risen by 20% to reach £5.6mn for the month.

 

Research from AlixPartners reveals that upwards of 65% of US consumers have indicated that they have substituted their preferred brands while sheltering in place, with the majority (79%) disclosing that they did so due to their usual brand being out of stock. Of these, 25-30% stated that they would be willing to stick with the newly trialled private label brand.

 

Even as the stock of national brands gets replenished, many consumers could be switching to more affordable private label alternatives for budgetary rather than availability reasons as the economic impact of the Coronavirus worsens. In a March study conducted by S&P Global Market Intelligence, three quarters of shoppers surveyed stated that they plan to cut down their spending over the next 90 days.

Premium private label, while starting from a smaller base, is also experiencing strong momentum. Kantar data in the UK shows premium own-label sales to have increased by 21.6% in March; a growth rate slightly higher (20%) than its standard tier equivalents.

 

While a lack of alternative available options for essential goods could be a key driver behind consumers having traded up, a desire to “indulge” could also be a determining factor.  A sense of boredom is kicking in for many households and having higher-end meals at home serves as a way to break up the monotony when dining out or going to the movies, a sporting or cultural event is not a possibility.   

 

If and when restaurants are permitted to fully open up again, it is expected that many families will still choose to dine together at home. Previously busy on-the-go households have rekindled their appreciation for having sit down meals as a family unit during the lockdown. They have also taken to experimenting with new recipes and making meals from scratch and are adopting this habit as a new family routine. Add to this the fact that dining out is more expensive, and that eating at a restaurant could still be perceived as an unnecessary risk, premium ingredients, ready meals, and meal kits should all be in high demand.

Under current circumstances, visiting the supermarket is not perceived as a leisure activity. Most patrons want to get in and out as safely and quickly as possible, hastily grabbing as many essential items as they can from their shopping list.

 

Successful new product rollouts rely on an environment where sampling and impulse purchasing can take place. Many leading CPG companies put a freeze on new product development, knowing that the conditions for new product adoption are not in place right now.

 

This does not, however, mean that innovation and adaptation cannot serve as a competitive advantage. Branded manufacturers tend to have larger, and accordingly more rigid, production lines. As consumers seek to shop less often and save more when doing so, manufacturers who are able to upsize their packaging or offer multi-packs of the same item should reap the benefits.

 

As the lockdown continues, with gyms closed and those working from home find themselves frequently visiting their fridges, people are noticing the effects on their waistlines. A survey conducted in March by IGD found that two-thirds of British consumers are considering making changes to their diets to be healthier and more sustainable. Here again, private label may be at an advantage by shifting more quickly to healthier ingredients and labelling than their branded peers. However, their lack of production capacity and the requirement for longer lead time to procure ingredients and to bolster their supply chain capabilities may counter this argument.

Although private label sales are forecast to grow at a slightly faster rate than national brands, negating the importance and value of strong brand recognition would be premature. In times of anxiety and confusion, familiarity and trust are key purchasing criteria as they provide a sense of assurance and solace.

 

While families cooped up at home might be looking for healthy and more affordable alternatives, there is still a special place reserved for comfort and nostalgia. Many are returning to fondly remembered products from their childhood and university days in categories such as frozen pizza, instant mac & cheese, and microwaveable waffles.

 

One lasting legacy of COVID-19 could be a return to basics for CPG companies as they reduce their roster of SKU’s and re-focus their priorities to build on the power of their most reputable brands. As a result, brand portfolios may get narrower but stronger. With advertising budgets and spend reduced, brands with staying power and built up loyalty are less reliant on creative and constant messaging than newer or challenger brands that lack the same built-up traction.

 

Retailers, like consumers, are traversing through unclear times. Suppliers that stand out as trusted experts, who are driving their respective categories, will be called on by their retail customers to help them navigate through this era of uncertainty.

 

Those suppliers who act with integrity, communicate proactively, and share information during the crisis and recovery phase will be remembered. Once normality returns and product and promotional planning ramps up again, the goodwill generated should place trusted suppliers in a leading position to be at the forefront of their categories.

Sustainability

Cashing in on Coronavirus: Will the Trend for Plant-Based Proteins Earn a Place on the Plate?

Overview: The pace of change is beginning to slow in many markets as the peak portion of the COVID-19 crisis begins to subside. Demand for many items is levelling out, as the industry catches up after months of shopper anxiety and stockpiling. Now, retailers and suppliers will have to navigate through the long tail of lingering supply issues, as well as confront how changing consumer habits will ultimately impact supply and demand. It is not yet clear where consumers’ tastes will end up but one trend and an associated supply issue will likely feed into one another in the near future; the demand for plant-based proteins as an impending meat shortage sweeps North America and touches export markets.

Advantage Perspective: 

As referenced in the InFocus Edition 5 feature called “Kinks in the Supply Chain”, COVID-19 continues to rage on the global economy and impact food value chains around the world due to resourcing challenges, transportation restrictions, or supply deficits. One of the cited examples unfolding in North America is the threat of a meat shortage due to the meat processing plant closings and reduced capacity operations due to internal COVID-related illnesses. Retailers and suppliers have begun to respond to manage potential outages. Just last week, retail giants Kroger, H-E-B, Publix, Costco, and others began to limit meat and poultry purchases to manage against potential supply gaps and limit the need to dip into their cold storage supplies. Restaurant chains such as Wendy’s and McDonald's have also begun to brace for the potential hit. Wendy’s, specifically, has stopped serving hamburgers in 20% of its locations.

 

As impending meat shortages loom, there are also companies who are looking to move into the vacancy and ‘cash in’ on others’ shortcomings. Plant-based meat providers are looking to leverage their meagre yet growing share in the retail market as well as replace some of their COVID-19 related losses in foodservice where they have had longer-term traction. Industry leaders Beyond Meat and Impossible Burger, as well as others, are facing a once in a lifetime opportunity to get consumers’ backing and with it, a larger helping of the Western plate historically reserved for meat beside the potatoes.

 

Sales in plant-based meat alternatives have grown 200-300% YOY as shoppers filled their pantries during the pandemic. Now, with meat supply in flux, there is more impetus for plant-based protein manufacturers to push further into the grocery space and retailers are partnering with them to keep their own shelves stocked with suitable alternatives. For example, last week Kroger rolled out Impossible Burger in over 1,700 stores to support the growth of the plant-based category and to position for the potential meat shortfall. Beyond Meat is also emboldening their offering by offering value-packs, reducing their prices to be more competitive and is setting up a direct to consumer operation to meet potential demand increases.

Led by millennials, consumers are trending toward ‘healthier options’ in their daily diet. Heavily impacted by the virus, consumers are taking the link between health and nutrition more seriously than ever before. Thus, sustainable food sources, organic and plant-based alternatives are growing in appeal amongst consumers around the world. These categories have experienced bumps in demand as the world progressed through ‘the curve’ and as consumers strive to maintain their health and overall sense of well-being as they weather pandemic anxieties. Even the desire for comfort foods and snacking, heightened during the virus as a result of restrictions to shelter in place, is changing to include ingredients that have a ‘health halo’ or promote immunity such as nuts, spices and probiotics.

 

This push toward sustainable food sources is also top of mind for manufacturers as they review their portfolios post COVID-19. As consumer palates become clearer and as businesses weigh the lessons from the pandemic, we may also see a wave of plant-based players emerge to feed consumer tastes. Danone for one, announced last week that it will increase its plant-based category from €2 billion in 2019 to over €5 billion by 2025. Stay tuned to find out if others will follow.

Advantage Perspective: While no one can effectively predict the consumer patterns that will stick as a result of Coronavirus, there seems to be a perfect storm brewing in which evolving consumer habits around healthy nutrition and a growing openness to plant-based meat offerings will hit at the same time as plant-based proteins roll onto more grocery store shelves to mitigate meat supply issues. This trend will undoubtedly create new opportunities for innovation and partnership between retailers and suppliers as they strive to meet shopper needs. As the industry works through COVID-19 related supply issues, it will be implicit for retailers to continue to work with existing meat suppliers and plant-based protein providers to navigate the coming months as meat supply waivers and as newcomers push their way onto consumers’ plates echoing a strong sustainability message to strengthen consumer loyalties in the pandemic aftermath.

Meat and Poultry Supply Issues:

Consumer Trend in Plant-based Foods:

A Pulse on Big Brands

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