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This week we spoke with Massimo Nicolini, Country Manager for Advantage Italy, to understand how COVID-19 is impacting life and retail in the country.

Q1 - How has COVID-19 impacted Italy, and where does the industry stand currently?

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.

Q2 - What characteristics of consumer behaviour do you anticipate as we move into the next phase of reopening in Italy?

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.

Q3 - What changes in the Italian CPG industry have you seen that you anticipate will shape the market in the future?

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.

E-commerce

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. 

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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