Preparing for a new normal in consumer markets

Preparing for a new normal in consumer markets

Over the course of last week, as the government drip-fed ever more restrictive measures of movement on the public as a result of the Coronavirus pandemic, it became clear that the effects of the crisis will be lasting and profound.

Past recessions have been characterised by a gradual tailing off that is easier for businesses to adapt to. What we are currently seeing is tantamount to falling off a cliff, with capacity suddenly at zero overnight.  Very few people will have lived through anything similar.

No sector is experiencing this sudden fall to nothing – or, for the few – the overnight explosion in demand, quite so visibly as the consumer markets. Regardless of the end of the spectrum, the entire consumer industry, from retailers, to leisure operators, to restaurants and producers of goods and food is now faced with multiple short term challenges as they try to navigate the next few weeks, while also planning for how to resume battle thereafter.

 

THE HARDEST HIT

Within obviously hit sectors, it would seem any business without the cash reserves to see them through to the early autumn at the very least, will struggle for survival in the coming weeks. Followed by hotels, restaurants and pubs, the sector where the highest impact will be felt is travel. With most airlines now almost completely grounded and staff on furlough, an already troubled sector faces its toughest time yet. The pubs industry – one that was finally showing a stable return to profits after many years of structural decline, will also doubtlessly see casualties. Some of these large groups – despite having huge properties that have very high turnover - carry within their estate many sites that are marginal, and it will not take a lot to push them over the edge.

The double-whammy of discretionary leisure and seasonality adds an almost unfathomable additional blow. Theme park operator Merlin, owned by a consortium consisting Blackstone’s long-term PE arm, KIRKBI (the family investment fund that ultimately owns Lego) and the Canadian Pension Fund Investment Board, was exposed to Coronavirus earlier in the crisis through its property in China and northern Italy. The business, which runs at a loss in the down season and relies entirely on spring and summer trade, is now indefinitely closed. As the business relies on many seasonal contractors, it is hard to see a way forward without additional government support.

The real losers are of course the multitudes of front-line staff and contractors associated with making these vast people businesses operate. In a rapid response to revenue decline, before the government’s extensive bailout plan was unveiled, we heard of mass redundancies taking place, particularly in the leisure and hospitality sector. Luckily most people have since been put on furlough, but fixed rent and supplier costs, though mostly frozen for the short term, will continue to mount. 

Finally, while there are signs that online non-food retail has been resilient in recent weeks, those with large bricks and mortar estates are surely to follow. No matter how strong your online sales are, losses created by hundreds of stores closed in a state of genuine lock down are irreplaceable.

 

THE WINNERS

In a similar manner to the hardest hit, the winners of the sector are extremely visible from a casual observer’s viewpoint: food retailers, pharmacies, Amazon, delivery and logistics companies, communications giants, subscription-based streaming services and other essential services providers.

To those who do not own pets it may seem surprising that panic buying spilled into the pet sector almost more fervently, with specialist pet retailers seeing unprecedented spikes in sales in recent weeks. One mid-sized pet retail business told us that like-for-like sales in store had been so high that they had to temporarily shut down online and click-and-collect services as they were unable to keep up with demand. 

None of these businesses, however, are immune to the inevitable threat of mass absence (with no corresponding decline in demand) and disruptions due to school closures, a significant uptick of which is beginning to be seen in suppliers and retailers alike. With the benefit of looking to the stats in Italy, particularly within food production and retail, we should be better poised to deal with the issue, but businesses must be nimble and act fast. 

As seen in Sainsbury’s, non-core categories, such as meat, fish and pizza counters, are being streamlined into the core proposition, and non-food vans are being repurposed to get them out to suppliers to bring product directly to stores to replenish supplies as quickly as possible, and John Lewis Partnership has closed all its department stores and moved all staff over to Waitrose.

 

COLLABORATION: THE MOST CRITICAL EMERGING THEME

As the spirit of togetherness and solidarity streams through the general consciousness, we are beginning to see very positive signs of collaboration in the business community, with many food retailers seeking the help of other retailers to provide additional staff to help pick items and stack shelves - and hope yet for the underemployed taxi and Uber driver from the likes of Amazon, Hermes and DPD urgently seeking to recruit drivers. Before half a million ordinary people signed up to help the NHS in its fight against coronavirus, we had already heard of ordinary people volunteering to help out their local supermarkets in similar ways, and applications such as Nextdoor being used to help isolated neighbours with errands such as shopping. Perhaps for those who are fortunate enough to have saved their jobs through the government’s furlough scheme, the ability to volunteer and make a difference to the community may have the kind of psychological boost that many will welcome.

Earlier this week we witnessed London’s ExCel, convert its 100,000 square metre conference and events venue into an emergency hospital with the aim of treating coronavirus patients within days. Many more venue conversions such as this are anticipated, and Birmingham’s NEC Centre, which holds world-famous events such as Crufts, is also on standby to be transformed into another potential NHS facility.

As all major food retailers come together with the army and the government to work through the logistical jigsaw of ensuring the 1.5m people determined most at risk are fed without leaving their homes, we are also seeing inter-company collaboration all over the nation. Many of the big names within Deliveroo’s stable of brands were said to be combining their marketing and operations efforts with Deliveroo as they propose creating joint delivery hubs, preparing for an upsurge in demand. Although the expected uplift from the gig-economy giant has not been reportedly felt quite yet – in fact, it is the local brands that are currently most active on the site –  figures from Hong Kong, which is seven weeks ahead of us in crisis terms, would suggest it is. It makes perfect sense for coordinated efforts of organisation and communication across industries and companies to get ahead of the curve. 

But significant strategy shifts, and collaboration efforts should not be limited to the larger players. Wholesalers such as Natoora have switched from only serving restaurants, to using their delivery network to directly supply consumers, while Detox Kitchen has teamed up with 2-Serve to supply veg boxes.

In fact, all industries should be looking at ways of partnering with industries that have already hit peak disaster, such as Asia and parts of Europe. Much like we should be learning from their errors and achievements in managing the healthcare crisis, we must also be looking for answers from a business point of view. Industry bodies across hospitality, retail, food production etc must be coming together on a much more global basis to find solutions.

Collaboration is not just a positive by-product of a dreadful situation - it is a necessity. We find ourselves in an unprecedented situation that takes people away from each other, socially as well as in a work context, affecting demand as well as supply. Whilst the situation in Italy, France and Spain dictates that factories producing food and essential goods are not likely to shut in the earlier stages of the crisis, if people start getting sick, we face running at lower output with an increased demand. It therefore becomes crucial that critical key worker positions are protected, and we work with other industries to train people up to take their place.

 

NECESSITY, THE MOTHER OF INVENTION

Most businesspeople would agree that at some point, there will be opportunities to be seized.  Most sector leaders we have spoken to in recent days are focusing more or less on the same aspects, in a similar sequence. Once health and safety of employees has been ensured, risk mitigation plans go into place and internal and external communications are secured. Most businesses have got these items in place by now and will be moving onto the next two stages, the first of which centres on understanding that if the current state of affairs continues for three or four or more months then it will be a question of survival. Survival needs cash and liquidity, which means taking cost out. The second stage, for those fortunate enough to make it through, will be about thinking about opportunities. 

The consensus is that businesses that have strong brand propositions and were well run pre-crisis should survive, and therefore might be able to think about stage two, whilst many others inevitably face decline or even extinction.

The government’s request for help in this time of crisis has seen a number of businesses alter their supply chains and change the way in which they manufacture products in a national effort which is comparable to the production of Spitfire planes during the second world war. The likes of Dyson and Airbus have totally changed their manufacturing models to produce ventilators in a bid to address the shortage in the UK; production is due to begin next week. Such strategic flexibility and operational agility should not end with the crisis: companies that continue to think out thee box and react quickly to changing market dynamics will prosper in the future.

Surviving businesses will also benefit from accelerating their direct-to-consumer credentials. This includes being more focused on offering services and advice directly to the consumer and increasing the amount of service that can be delivered directly to the home. 

Some businesses are uniquely placed to take advantage of their vast customer base and endless data possibilities. As a proposition, Holland & Barratt’s importance in the community in the aftermath of Covid-19, for example, should be unassailable. Likewise, Boots can be providing so much more service in the community, not just in the aftermath of the disaster, but right now, and not just for the elderly, but also to other at-risk groups such as pregnant women and people with comorbidities. Having the flexibility to increase stocks in some areas while narrowing ranges in others, thus coming to the aid of the people in the community who need it, at the time they need it should at the very least be on retailers’ minds. Should it really take multiple weeks for stocks of hand gel and paracetamol to be replenished? Whilst many may seek to hunker down and drive for cash, the smarter and more nimble retailers should be dictating their SKUs to suppliers and leverage data held in loyalty programs in a much more forward-thinking way. 

For the food retailers under extreme pressure, the current crisis has exposed chinks in their digital armoury across the piece. It was encouraging to see Mike Coupe’s reassurance to the over 70s and the vulnerable that they would be prioritised for the ever-elusive online delivery slots, as it would mean those individuals can rest assured that they need not venture outside for essential supplies. I did wonder how on earth they would ‘find’ these people and if the company even possessed this level of data sophistication. Anecdotal evidence would suggest this was not the case, and instead healthy thirtysomethings have been offered these slots, while members of their own family within the at-risk category have been missed. The Freephone number provided for support was impossible to reach.

This is one example of how this crisis should push the sector overall – even those operating in the most discretionary of segments – to accelerate their digital and data strategies, in an effort to significantly mitigate risk. There are examples of businesses in categories such as beauty and even fashion, such as Gymshark, that were already very well optimised in the digital realm and will manage to weather the storm.

As illustrated by the graphic below. In a post-Covid-19 era, there are many ways in which consumer businesses must adapt and change in order to stay relevant:

 

AS THE CONSUMER CHANGES, SO MUST BRANDS

As Asia emerges from the peak of its crisis, luxury groups remain optimistic, as 90% of growth is coming from Asian consumers, who are yet to show luxury goods fatigue. Although the luxury brands group Kering’s numbers ten days ago were down overall, there are no signs of the unstoppable cash cow that is Gucci slowing down. For them, even losing a few hundreds of million in profit terms is unlikely to have a hugely detrimental effect as there will still be very high demand for brands like Gucci from new consumers hailing from emerging markets, and indeed, the group is famously altering its supply chain to import three million surgical face masks to France’s health service, whilst factories that typically produce garments for Balenciaga and Yves Saint Laurent now preparing to manufacture masks themselves. Notwithstanding this incredibly robust position, the group and others like them are accelerating steps to ‘be more digital’, such as creating more engagement with consumers through digital channels and being more aware of topics that they care about, such as sustainability and waste.

Not just in the luxury sector, symbiosis with the consumer mind-set now must now be a matter of course, rather than seen as pioneering in a post-Covid era. Some themes that have come up through our conversation with industry leaders include:

 

TEAMS AND HIRING 

Whether there is a sharp ‘V’ shaped return to business as the more optimistic among us believe, or  a long and deep ‘U’, it is clear that when things return to some level of normality there will be a scramble for talent. Whether it is companies that have frozen their recruitment needs for hires that were more or less crucial, or those that will inevitably go a bit too far with restructuring, there will be a talent-building period, and much like the consumer, businesses will have to start to look at their people and organisational structure in a different way.  The ability to navigate chaos, ambiguity and uncertainty will be prized assets, as those leaders that went quiet, burned out or choked when the chips were down will be scrutinised. 

Beyond the ability to build and accelerate digital and data capabilities, there will be a need to bring in real core functional talent, cross-pollinating talent across sectors (as we can see from early collaboration efforts, it leads to real solutions), and entrenching strong leadership across organisations will be all the more pronounced. It will become more apparent that well-run businesses are those with profitable, rather than over-promoted, sales. The focus will be about making sure you have teams that know how to generate cash and making sure they are always looking for the big stories in their businesses. Leaders with that level of duality, who are few and far between, will be all the more in demand. Furthermore, the behavioural competencies of agility and resilience will be key.

 

CONCLUSION

Watching the markets feels futile, as most would agree that what we are facing is not systemic or structural: shares and stocks will undoubtedly come back. The current crisis feels more like a natural disaster, or the sharp recession felt in the wake of 9/11. Only once we can start to see a clearer path out of the disaster, starting by observing our neighbours as they emerge from their darkest periods, can we really evaluate the potential for a bounce back. The faster we get back to using the vocabulary of recovery and carrying a normal agenda, as opposed to distress, the better.

Certain sectors will decline, and many companies will go out of business, but if you have a good proposition, a good relationship with consumers, the right talent, and a very clear business model most indicators point towards decent recovery. Improving digital and data capabilities and aligning products and services with direct-to-consumer models will be essential, and the fever for collaboration borne out of necessity in the current climate, must become a way of the future. Brands, retailers and operators must able to deliver absolute expertise, and real authenticity and credibility across product, brands, and stores.

Coming out of this, culture too shall change, and for the better. To quote Rishi Sunak in his moving speech last week; “when this is over, and it will be over, we want to look back at this moment and remember the many small acts of kindness done by us and to us…We want to look back on this time and remember how, in the face of a generation-defining moment, we undertook a collective national effort - and we stood together”. We will become more community oriented, kinder and more supportive and these are values that a lot of businesses will have to build into their propositions. 

In disruption comes opportunity. Businesses that are well run and surviving will take advantage of opportunities. While for many the world may stop turning for four or five months and life will feel completely different, if the optimist in you is the stronger internal voice in such uncertain times, you must be fighting fit and ready to run fast on the other side.