Covid-19 & The Grocery Supply Chain

Introduction

At the time of writing on 20th April 2020, it is 17 weeks since the first cases of covid-19 in China and 12 weeks since Italy’s first cases were noted. Since then the virus has spread globally with almost 2.5 million confirmed cases and 165,000 deaths. With no natural immunity and no vaccine, the world’s governments have focused on non-medical mitigations based on increased personal hygiene, restricted freedom of movement and physical distancing to reduce the speed of spread and protect health care systems from crumbling. 

As these strategies have been deployed, countries have witnessed a profound impact on their national psyche. The most obvious impact is the fear that food and basic supplies will become unavailable. This has led to several phases of sales in grocery retail stores:

Stocking up

With constant exposure to global media, and certainly when the first coronavirus cases are confirmed in a country, some shoppers start to stock up early. This isn’t especially visible in terms of empty shelves and there aren’t widespread supply chain issues. But, the retailers and their replenishment teams will have noted the blip and reacted by ordering increased quantities of hand sanitizers and non-perishable goods like pasta and canned foods. This was happening in Ireland from mid-February but kicked in more strongly during w/c 24th February, leading in to Saturday 29th February when our first case was diagnosed in Ireland. 

Panic Buying

This phase kicked in as soon as Government instigated the first steps to restrict freedom of movement and the scale of public gatherings. In Ireland, this started on Thursday 12th March after an Taoiseach announced the school closures. 

Panic buying was heavily challenged by retailers who reassured consumers that there was no shortage of food and basic essentials in the supply chain. In this critical phase, it was logical to point out that much of the food we were eating was harvested last year and is in storage or is produced every day e.g. dairy comes from cows that are milked twice daily. Retailers did trojan work to re-stock the shelves and build consumer confidence that there is plenty to go around, if shoppers buy the normal amounts.  

Sustained Increase

This phase comes after Governments instigate strict and extensive controls on freedom of movement and business activity, otherwise known as lock-down. In this phase, restaurants, workplace canteens and cafes are closed.  As a result, all of the out of home consumption missions switch to in-home. In the local Irish market, we have an out of home sector worth about €6bn per year, where take-home groceries are worth about €12bn per year. Whilst almost all of this consumption switches to in-home, not all of the spending switches. In summary, an out of home meal costs roughly 5x the equivalent meal in-home, so we could theoretically expect €1.2bn to switch to the grocery retailers, creating a sustained 10% increase in sales.

Medium Term Trends

After several weeks of stock-piling, panic buying and nervous shoppers, what does the next phase of sales look like? This will depend on three factors:

1. Out of home transfers: Some products and categories will see sustained changes thanks to other non-food transfers of consumables to in-home missions. Think of all the toilet paper and hand soap that was previously used in a workplace or school setting. 
2. Expandable consumption: Consumers are understandably changing their hygiene routines, using much more anti-bacterial sprays, cleaners, wipes etc. Equally, with the kids at home and everyone restricted to a 2km limit, home-baking and scratch-cooking is growing strongly.
3. Consumer confidence: Many consumers built up a buffer of non-perishable foods. If confidence remains low, consumers may continue to hold this buffer. If confidence improves, they may begin to consume this stock and we may see negative sales trends in these categories. 

In-store Impacts

Irish Supermarkets remain open for business but it is a very different world now, with restrictions on the number of shoppers allowed in-store and one in-one out policies. There are also physical distancing measures in place with ‘chevrons’ and signage on the floors to remind customers to keep distance from each other and from staff.  

Most Irish grocery retailers quickly followed the learnings from Italy and installed plexi-glass till fixtures. It is common for staff to wear gloves and most supermarkets are providing trolley sanitising and hand-cleaning facilities at the entrance.  

Retailer Communications

Some stores have reduced their opening hours to allow hard-pressed staff to replenish shelves. However this has the effect of concentrating shoppers within less hours and if staff and customers do not feel comfortable then it will have a negative impact on morale and ultimately sales. Retailers have tried to address this by agreeing 10% frontline wage bonuses with their staff. Retailers are also communicating a three-way message of thanks:

1. Firstly to their staff, since supermarkets are one of the few sectors still open for business, and where the staff are expected to leave the safety of their homes and mingle with the public, putting themselves at risk of infection.
2. Secondly to their suppliers for helping to keep the shelves stocked and dealing with the massive demand spikes.
3. Finally to their customers, thanking them for their loyalty but also asking them to not stock-pile, to respect the distancing rules and to think of vulnerable sectors of society. 

Most stores have now introduced designated times for older customers, carers and healthcare staff to do their shopping. Tesco are asking their customers to ‘think before they click’ and not to take a highly-prized delivery slot when it could be used to serve an over-seventies customer who is cocooning at home. 

Retailers are also beginning to show an awareness that they are possibly the only industry doing well from this pandemic. As a result, they are starting to communicate around their CSR activities and ‘giving back’ to society as well as their support for frontline healthcare workers.

Channel Differences & Market Share

Discounters: In the early stages of panic buying, if it looked like some discounter stores were not coping with the demand spike, it was likely because they only stock the highest volume sellers. As a result, they will have more obvious empty shelves during a panic buying phase. On the other hand, they have highly efficient supply chains and can absorb a sustained 10% uplift quite easily. The discounters will also have a price advantage for newly unemployed shoppers, looking to reduce spend. Based on the Kantar data for 12 w/e 22nd March, it appears that LIDL have benefitted more than ALDI. Their year on year market share position was up 0.5% at 12.3% versus Aldi up 0.2% also at 12.3%. 

This could be down to a number of factors. Lidl have more stores than Aldi and therefore a proximity advantage at a time when shoppers are not travelling very far.  Lidl’s new format stores are also bigger on average than Aldi’s so shopper density is lower in a new age of physical distancing. Lidl also have partial e-commerce capability via the Buymie app. Let’s see how this progresses.

Multiples: The bigger stores have flexed a number of advantages. 

Tesco particularly have a space advantage. Consider that their market share peaked at over 28% in 2013. They now have 21.3% market share with largely the same store estate as back in 2013, so they had significant capacity to increase sales and retain a degree of comfort within physical distancing rules. Dunnes have larger stores but not as many of them. The lack of proximity and the absence of a grocery delivery service means that, whilst retaining number one position, their market share has fallen to 22.3% and their year on year growth has declined from 0.5% to 0.0% in the latest 12 week period. 

SuperValu are in an interesting position, matching Tesco at 21.3% market share. They have a definite store numbers advantage and therefore proximity with over 220 stores. They also have e-commerce capability which is vitally important right now. But their market share declined versus the last 12 week period and their year on year position stayed steady at 0.1%. Arguably, they might have gained more during this crisis, but this might still come as the lockdown is extended, shoppers stay local and retailers get used to new volume patterns.

The fortunes of individual retailers in the coming months will depend on several factors.

1. Store Numbers and Locations: Retail chains with higher store numbers, and with good geographical spread will benefit from the limited travel of most shoppers. Consumers will want to stay local so this will benefit SuperValu, Centra, SPAR and other symbols with a big footprint in more rural areas.
2. Store Size: Where customers have a choice of retailers within a reasonable distance, they will likely chose the one with the most comfortable shopping experience. This will mean that bigger stores with wider aisles will benefit (Tesco, Dunnes and the larger ex-Superquinns).
3. Supply Chain Strength: Customers are quite worried about picking up infections whilst shopping. So, they will not wish to shop around and visit multiple store locations. Therefore the stores that manage their supply chain, and achieve the best product availability will win.
4. E-commerce Capability and Capacity: It looks like the current restrictions will be lifetd very gradually and cautiously so there will be sustained demand for online shopping and home deliveries. Tesco and SuperValu will be looking to increase capacity in this channel.
5. Care and Ethics: Pharmacy and healthcare aside, grocery retailers are effectively the only sector still in business. Their workers have gone above and beyond in the last few weeks, and are now regarded as an unofficial emergency frontline service. It will be important that retail organisations maintain this standing by treating their staff, customers and suppliers with total respect, transparency and fairness. Proper sanitation provisions are a must to maintain shopper confidence. Maintenance of frontline bonuses will help ensure staff committment. And flexibility on payment terms will be crucial to help suppliers stay in business, and keep the shelves fully stocked.

Consequences for Irish Food & Drink Businesses

Beyond the panic buying and demand spikes, Irish food and drink manufacturers have been working hard to maintain business continuity through the crisis. In northern Italy, some factories were forced to close due to high levels of staff absenteeism due to sickness or quarantining. Equally, staff may have stayed at home due to fear of infection. 

To prevent empty shelves, Irish manufacturers have been implementing upweighted cleaning, shift segregation and staff distancing protocols within their factories since as far back as February. Many factories have even started doing temperature checking of staff, not as a way of diagnosing sickness, but rather as a reassurance to staff that they are not sharing a workspace with feverish colleague.

Supplier Survey

A survey was carried out with Irish food and drink manufacturers during w/c 30th March. Here are the top-level findings.

• To help deal with the demand spikes and sustained uplifts, many suppliers had agreed to supply simplified ranges to their retail customers in an effort to maximise overall output. This was the case in 44% of respondents.
• 87% of companies had created new staff communication processes to help hear their concerns and communicate new protocols during this highly dynamic period
• 51% of companies had already experienced cashflow difficulties. This was a major problem for those suppliers exposed to the food service sector. But equally, those companies dealing with demand spikes needed to be careful to finance this growth. And discipline was highly important at the back-door of the depot since most were not handling any paper-based proofs of delivery.
• Less than 25% of companies had seen increased absenteeism. However, in anticipation of ‘the surge’, 61% of companies had re-trained non-production staff so that they could fill gaps in the ranks as the virus infection rate progresses. 
• 82% of companies had started to actively secure their raw material supply chains. This will be an evolving picture as 2020 harvests are impacted by low availability of migrant workers.

Longer Term Outlook

Private Label:  With sudden mass job losses, the medium term reaction will be similar to the global recession of 2008.  Consumer confidence will fall and disposable income will reduce. Even if restrictions are lifted, shoppers will spend less on out of home consumption. Further, we know from the last recession that they will likely switch to Private Label to save money. Before the covid-19 crisis, Private Label already constituted over 50% of the volume purchases in Irish shopping trolleys. For any shoppers that had not already joined this trend, the panic buying of mid-march effectively forced a mass sampling exercise. If the shelves are emptying quickly, many brand loyal shoppers will have tried the PL version for the first time, albeit under duress. Many will have had a surprisingly good experience and brands will need to work hard to win them back.

Sustainability & Food Integrity: It’s not very long ago that the only conversations in the food industry were around veganism and plastics in the oceans. However, germ-fearing consumers have clearly stated a preference for packaged goods over ‘naked’ un-packaged foods. It will be important for retailers to continue with their sustainability commitments, but new opportunities will emerge as consumers and retailers will demand additional certification around hygiene standards, sanitising and supply chain integrity.

Online & Home Deliveries: The experience in Italy was that grocery retailers that were active in e-commerce could have tripled their sales in this channel. The only limitation was infrastructure and lack of capacity. This was mirrored in the local market, where two week delays in delivery slot availability have been common. It is likely that many shoppers will have had their first experience online shopping during this crisis. And many will never go back.

Malachy O’Connor is a Retail Consultant & Director helping both buyers & suppliers through Insights, Negotiation Skills & Strategy Development. He is the founder of Food First Consulting and is the Irish Consulting Partner for IPLC (International Private Label Consult).