Summary: Months of lock-down around the world is finally giving way to relaxed restrictions, but what does this mean for countries, states, and provinces everywhere? Governments and health officials are cautious yet trying to balance the need to bridle the spread of further infection with the need to fuel stagnant economies. Understandably, consumers are becoming antsy to get back to their normal ways of life, with some pushing back on restrictions imposed, viewing them as a threat to their civil liberties. In one example, a customer in Illinois (US) threatened a grocery worker who asked him to wear a mask. Costco has seen a similar backlash to requiring all customers to be masked, so now they provide masks as customers enter their stores. Businesses are also anxious to unlock their doors to help recover lost revenue and to reinvigorate lulled economies. However, they are aware that consumers are tentative about venturing out and understand the need to develop frameworks and best practices for reopening safely.
As the world continues to maneuver through the trail left by COVID-19, all eyes are focused on those businesses coined as ‘essential’; those who had to retool in real-time throughout the pandemic. Today, we will look at how countries are unlocking for retail and how the grocery industry will act as the ‘blueprint’ for the retail industry as the world tightens the need for safety, cleanliness and awareness of what global health means in our connected societies.
Countries across the world have begun or are beginning to ease lock-down restrictions in the hope that they may return to normality, but they are in various states of readiness according to health officials. Some countries like those in Latin America, Singapore, and Russia are still seeing rising numbers of cases yet are anxious to limit the damage to their idle economy. While others like New Zealand and Australia stand to be the poster children for the ‘recovery’ as their early aggressive measures and border shutdowns have led to almost no cases being reported within the last week.
The US and Canada have put control into states’ and provinces’ hands. This means that a standard approach and set of protocols will be more difficult to enforce and measure progress on. As an example, hair salons, restaurants and retail chains were opened in Florida, Texas, Georgia and Tennessee, with restrictions on proximity between individuals, thresholds on the number of individuals in an establishment at a time, as well as the need for employees and patrons to wear masks. Wisconsin went from closed to fully open overnight. Other states or portions of states, in the Northeast remain in complete lock-down for several more weeks. Canada, similarly, is taking measures to ensure safety in salons, restaurants, and other sectors as provinces begin to gradually reopen in the coming weeks.
Southeast Asia is beginning to reopen yet fears of their migrant heavy workforce may mean a difficult journey as borders open for workers to reenter and bring with them the fear of virus reoccurrence. Malls in Thailand are reopening and have deployed automatic temperature scanning robots. They also have installed free face mask dispensers and shoppers must pass through disinfect mist drones as they enter. Note the use of technology to monitor and mitigate the resurgence of infection here. There is something all retailers can take from these high-tech and stringent measures.
Europe also has lightened restrictions with some countries beginning to open for retail as early as late April (Austria, Switzerland, Germany). Others awaited this last week for a scheduled reopening (Belgium, France, Greece) and still others like Portugal and Italy will have to wait another week for general retail to come back to life.
Pressures are also easing within the grocery retail sector after months of intensity and a requirement for almost daily protocol updates to respond to changing health and safety protocols. As economies unlock, grocers and other essential businesses have virtually created the blueprint for other sectors as they face not only the excitement but the anxieties that accompany what they face in the aftermath of the Coronavirus.
Retailers who have remained open have gone from extra cleaning in their stores to directing and managing the flow of traffic within their operations to maintain social distancing restrictions. They have measures in place to keep their employees safe by providing them with personal protective equipment (PPE), managing their workspaces through the use of plastic shields and supporting the personal needs of employees through improved benefits packages for services like stress and anxiety support and hero/incentive pay.
While it would be an easy thing to let their guard down and ease restrictions imposed so far, grocery retailers must continue their diligence and even do more to keep their teams and shoppers safe for the long term. According to C&R Research, a Chicago based insights firm, 60% of Americans are afraid to shop at a grocery store and more than one-third of shoppers think food retailers should be doing more to protect employees and shoppers. Many retailers are taking further steps to solidify and strengthen the best practices they have put in place by expanding their compliance throughout their networks. They will also need to ensure that shoppers are aware of these measures so they can feel secure in their stores. Here are a few examples of how retailers are stepping up to offer more to their employees, their shoppers and to serve as a guide for others easing back into the economy.
Advantage Perspective: As countries, states and provinces unlock, businesses and consumers are also unlocking a higher level of understanding around what the new normal will look like and how it will feel. Some say it will be a year, others say up to two years before we can revert to ‘the way we were’ or, will we be changed forever? Advantage believes retailers and suppliers are making changes that will make them be better business partners, better servants of our communities and better employers. Are the protocols we are putting in place restrictive, impacting the public’s civil liberties, creating difficulties for retailer and suppliers operationally? The answer is yes to all these questions. But we are also advancing in real-time the ways in which we collaborative, respond in a crisis and activate for the future. Our hope is that we will be able to look back in the next several years and see that the lessons of COVID-19 are being applied to help businesses be better together in serving consumers and the world in a bigger and a better way.
Summary: Innovative distribution models have emerged in the past few months as manufacturers and wholesalers are pursuing alternative means for getting their products into consumers’ homes. With the foodservice channel declining, and consumers opting to have products delivered over visiting stores, Direct to Consumer (D2C) platforms are being brought online as a way for manufacturers and wholesalers to offload excess supply.
New technology platforms are also launching to play an intermediary role in allowing independent farmers that historically supplied directly to foodservice wholesalers to sell their wares directly to consumers; essentially creating a ‘virtual farmers market’.
Restaurant closures have also left another distribution segment, meal delivery apps, with excess capacity. This has paved the way for meal delivery services to tweak their offering and partner with food wholesalers and retail chains to deliver essentials on top of restaurant orders.
Some of the biggest names in CPG are starting to bypass retail and sell their products directly to the end consumer via in-house managed e-commerce websites. Many of these tech startups took their cues from COVID-19 but were able to break into the restaurant delivery space because households were accustomed to ordering take-out. This allowed them to penetrate meal delivery in much the same way that ride-sharing apps such as Uber and Lyft broke into transportation services.
While accounting for only a small fraction of overall sales, some major CPG brands began to foray into D2C prior to the pandemic. They typically pursued this channel as a consumer loyalty play versus a revenue opportunity but now their focus is changing. As an example, last December, the Coca Cola Company launched its monthly subscription service “Insiders Club” in the US. For $10 a month, drinks enthusiasts receive a curated case of beverages from the company’s soft drink, waters and hydration, and juices divisions, with each delivery containing at least three new flavours not yet in circulation. This enabled Coca Cola to forge a stronger and more direct relationship with its most loyal consumers, and it also allowed these early adopters to act as brand ambassadors and endorsers for new product launches.
Not to be outdone by their cola rival, PepsiCo jumped on the D2C bandwagon last month with the launch of two new websites - PantryShop.com and Snacks.com. According to statements issued by the company, the sites went from conception to execution in less than 30 days, a testament to the speed in which CPG players are adapting in the wake of the COVID-19 pandemic. Rather than taking a branded or category approach by listing its products the way a typical digital shelf would, PepsiCo is bundling its product across categories to focus instead on the consumer experience. For example, the “Rise and Shine” package includes pancake mix, breakfast bars, bottled juices, cereal, and other items that a family would typically consume for breakfast. The “Workout and Recovery” package contains a mixture of protein bars, muscle milk and enhanced electrolyte water for those who would benefit from a regimen to accompany their workouts. Rather than having to navigate between different PepsiCo brands such as Tropicana, Gatorade, or Quaker Oats, patrons may search based on their needs and are presented with products that fit with that need state. In the UK, Kraft Heinz has similarly established its first ever D2C site, bundling shelf stable items such as beans, spaghetti, condiments, and soups that collectively make up a basket of goods typically purchased together.
While D2C allows manufacturers to own the customer relationship and retain margin that otherwise gets passed onto their retail partners, the ability and ease with which manufacturers can set up their own online platforms remain a challenge. Creating an appealing and user-friendly back and front-end sales website is a costly endeavour, and economies of scale are required to attain shipping efficiencies. For multi-category CPGs such as PepsiCo and Kraft Heinz, this route to market makes sense as they have the product portfolios to act as a one-stop shop. For a major multinational like Coca-Cola that spends significantly on advertising, offering a subscription service to engender further loyalty from their most enthusiastic customers could work as a cyclical marketing tactic. It is a more challenging proposition, however, for narrower category players to expect the average shopper to order directly from multiple manufacturer websites. In turn, partnering with new online platforms and emerging distribution channels is the more feasible alternative for smaller CPGs to have consumers access their products outside of omnichannel retail.
Wholesalers and intermediaries whose business models are predicated on acting as a conduit between suppliers and foodservice customers, have been finding themselves with unsold inventory as orders from restaurant and catering companies stalled as the pandemic spread.
Choco, a German-headquartered platform connecting suppliers and restaurants that also has operations in the US, France, and Belgium, lost about two-thirds of their restaurant clients as a result of the pandemic. Realizing that consumers were struggling to get a hold of essentials that were selling out at other retailers, tweaked their platform to allow consumers to register as buyers, enabling them to order fresh ingredients directly from local restaurant suppliers.
In Canada, Sysco, one of the country’s largest distributors of foodservice products, last month launched Sysco@Home to allow regular households to purchase grocery items online that are usually packaged and destined for restaurants and hotels. Cracker Barrel, a southern US restaurant chain that also runs a separate foodservice division, has launched an online store with a range of restaurant favourites such as biscuit and dumpling mixes that consumers can have delivered directly to their homes.
In Canada, weekend farmer's markets have traditionally played a key role in non-commercial, family-owned farms displaying and selling their output in urban centers nearby. With farmer's markets closed due to a ban on public gatherings, Local Line, an e-commerce platform that acts as a virtual farmers market, has started to register new farmers to its platform at a record pace. So far, three provincial governments (Ontario, British Columbia, and Manitoba) have stepped up to cover the monthly fees that farmers are charged for platform use as a way of financially supporting these small-scale enterprises through the crisis.
The last decade has seen an explosion in the launch of third-party restaurant delivery apps. With people staying at home more than ever before, companies in this space are leveraging their geolocation technology and courier networks to deliver groceries in addition to restaurant orders and meal kits. They are doing so by investing in their own dark stores and signing on new food and drug retailers to their platforms.
Many of these tech startups took their cues from COVID-19 but were able to first break into the restaurant delivery space is because households were accustomed to ordering take-out from restaurants. This allowed them to penetrate meal delivery in much the same way that ride-sharing apps such as Uber and Lyft broke into transportation services. As COVID-19 leads to more shoppers becoming accustomed to purchasing their groceries online, it will be interesting to observe whether these mobile apps will be viewed as a disruptive threat, or embraced as partners by the omnichannel retail sector. Gig economy employers have faced recent backlash due to the lack of protections afforded to their couriers, with some going to great lengths to have them classified as “independent contractors” as opposed to employees eligible for social benefits contributions. Food delivery app Foodora exited the Canadian market last month after its couriers made significant strides towards forming a union. Pushback is also growing over the high commission rates that struggling independent restaurants are being charged by the likes of Uber Eats, Skip the Dishes and Door Dash. Restaurant owners argue that these apps are exploiting them as they become increasingly dependent on restaurants as home delivery and pick-up becomes their sole source of revenue.
Advantage Perspective: Collectively, these new platforms and partnerships are temporarily stepping in to offset an inability on part of food and drug retailers to stock and deliver products at the volumes being demanded. As with other emerging trends, they will likely have sticking power once the pandemic subsides, lessening consumer’s dependency on food and drug chains for their shopping needs.
While offline retailers are set to remain the dominant touchpoint from which households acquire their groceries, slowly but surely the power balance is starting to shift. Manufacturers and wholesalers are dabbling in alternate routes to market by selling directly to the end consumer and partnering with tech startups.
For all the hype that these emerging distribution platforms are creating, they are starting with a very small base. Brick and mortar retail still accounts for over 90% of grocery sales in even the more established e-commerce markets of the US and the UK. Once safe to do so, consumers will likely flock to their local supermarkets, drawn in by the appeal of picking and choosing between a variety of products that they can physically hold and see.
A small fraction of shoppers, however, will have grown accustomed to the convenience that online delivery affords, and the choice of websites and mobile app delivery services they can access for digital purchases will have grown over the course of the pandemic. Offline retailers who rest on their laurels and look to squeeze margin rather than embrace and collaborate with these new ecosystems may start to see their share of the pie erode over time.
As everybody knows, COVID-19 hit Italy very hard; it was very tough. Italy and Spain went into two one of the toughest lockdowns globally. Up until May 4th, people were only allowed to leave their homes to go for groceries, for work purposes upon special permission or for serious health reasons. We also could not leave our hometowns or cities. This had a big impact on retailers’ strategies, as well as consumer behaviour.
Due to everyone not being able to leave their hometowns, suddenly, smaller retailers were experiencing increased sales because of the geographic proximity of their stores to consumers. Larger hypermarkets, drugstores and shopping malls are typically located outside of towns and are only accessible by car. Due to the restrictions, no one was making these trips. The bigger retail players started to lose out while the largest growth was experienced by those smaller than 1,300 square meters. This had a tremendous impact and it will continue to have an impact into the future.
Drugstores were another channel that really suffered. They are a relatively new vertical in Italy but again, due to their geographic location, they were hit hard. They were classified among the category of essential shops that could stay open, but only a few people were able to drive to them. This localization of demand forced the closure of a lot of shops because they were not doing enough volume to justify keeping themselves open.
One of the problems the big retailers were and are still facing here is that the rules remain strict but are not always clear. Retailers I speak to express frustration that on the one hand, the government has set very strict rules, but on the other hand, those rules are not always clear. For instance, there is still no fixed guideline on the ratio between the size of a shop in square metres and the number of people that can be together inside the shop.
The strictest part of the lockdown was “officially” over on May 4th as a lot of other types of shops could reopen but rules were still quite strict around the public being able to go out. As of May 18th, the public was entirely free to leave their homes and they no longer need to have any certification to do so.
We do not know exactly what is going to happen next, but the one clear thing about how people are reacting is that they are doing so in a very polarized manner. On the one hand, a lot of people are going out for the simple experiences that they have been deprived of for a few months. On the other hand, some people are still staying in and this has to do with our psychology as human beings over fear and uncertainty. They call this “cave syndrome”, whereby some people are still really scared to leave their homes. So, while there is a new euphoria for some to return to the experiences they have missed out on for several months, many are all still fairly scared to go out. In the northwest Lombardy region, which makes up one-sixth of the Italian population and is among one of the richest regions in Europe, we had over 15,000 deaths, which was nearly one death for every 700 people. You cannot talk to anyone who does not personally know someone who died from COVID-19 and everybody has been affected very deeply and intensely. This is really influencing consumers.
We learned to stay safe and protected the hard way. Therefore, the level of uncertainty is and will remain very high. It is not only a new reality, but there are also new psychological mechanisms we must deal with. Psychologists observed important behavioural and attitudinal shifts in both adults and kids. From a shopping behavioural point of view, this will certainly have consequences that retailers will need to face. Bringing promotions back to the market will not be enough to compensate for this new reality and we expect new innovations related to the consumer’s experience and consumption. It will be interesting times ahead.
We will soon understand how the “next phase” will be characterized by people’s willingness to go out and how it will drive consumption. It will also be interesting to see what happens during the summer holiday season, as we do not know yet if people will be able to go to the seaside and how the tourism industry will perform in general. This is an important market for July and August. there are not yet any clear rules for the beach and how many people can be there. All of those in the on-trade channel that is linked to the tourism industry and the summer season will be affected, particularly suppliers in the ice-cream and beverage categories. This “cave syndrome” is something we will have to look at very carefully because it will affect both retailers and suppliers very dramatically.
Smaller Store Formats
What we will likely see is that the bigger retailers will try to finetune their business model by prioritizing geographic proximity to customers and creating smaller stores where shoppers can feel more in control and safer while having a more personalized shopping experience. For instance, Esselunga, which is one of the main players in Italy, is already starting to open a lot of new smaller formats that are closer to where people live. This is meaningful for the future. We think that this move to smaller formats will probably be one of the biggest innovations and it is not only a matter of size. The new hygiene rules and habits together with people's new anxieties are here to stay. Access to larger stores is difficult and the customer experience at larger stores is more anxiety-inducing due to long lines and wait times. Some stores, even the smaller and independent ones are creating their own solutions to queuing with very basic online booking systems where you can book an appointment to go into the store. This will no doubt have implications for the shopping experience evolution.
What we can expect to see is a transformation of the shops over time. Smaller shops will be much more focused on the consumer experience. It will also be an opportunity to find the right balance between physical and online commerce. We will see the shop becoming more experiential and closer to where the consumer lives, and e-commerce will not necessarily be an alternative to but rather a complement to physical shopping. The big retailers are already discussing this because they need to change their formats. They are building their e-commerce capabilities, and all these things need to be balanced and inter-connected. We think this will be a big innovation in the coming months or even years.
It is now clear that the other big innovation has been and will be in e-commerce. E-commerce was under-developed in Italy in the past. The retail landscape in Italy is very fragmented and it was very difficult to create the critical mass to build and maintain a proper structure in place.
However, this has changed because of the increase in consumers wanting groceries to be delivered to their homes. We know from experience that when consumers start demanding something, conservatism and defensive positions are quickly swept away, and necessary innovation always finds its way through. E-commerce in Italy will not be an exception to this.
The speed of innovation also depends on geographies in Italy. Broadly speaking, the south of Italy is more flexible and agile and therefore is more open to new creative solutions and innovations to combat problems and issues. This is because there is less legacy infrastructure in the South to support supply chains and adapting and applying new models is simpler. The retail industry in the North of Italy is more saturated with larger retailers and as such it requires more effort to transform and change. The South is much more fragmented. This fragmentation creates winners and losers. Some retailers are growing quickly because they are finding solutions by having cashflow and ideas, while others are really struggling. The “cave syndrome” will influence the size and type of experience consumers will have and how e-commerce will grow. They say e-commerce in Italy will do a leap forward of 10 years in 6 months. In Italy, we were probably 5 years behind other countries in Europe in e-commerce. This will change.
Prior to this interview, Massimo and the Italian team surveyed FMCG professionals from 32 suppliers and retailers at the peak of the COVID-19 crisis to understand their performance and partnership needs during and post-crisis.
For this analysis: How Italian Suppliers and Retailers are Coming Together During COVID-19
Your insights on the CPG industry with regards to Direct to Consumer (D2C) models is invigorating! This type of synopsis needs to be brought in front of many more eyes. Thank you
love the Italian report