The E-commerce and CPG Implications of COVID-19
The E-commerce and CPG Implications of COVID-19
Equity Research Analyst, Food Retail & Distribution
Kelly is an analyst in BMO Capital Markets Equity Research covering food retailers, including traditional supermarkets; natural, organic & specialty food retail…
Kelly is an analyst in BMO Capital Markets Equity Research covering food retailers, including traditional supermarkets; natural, organic & specialty food retail…
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Of the many changes the COVID-19 pandemic brought to the food retail industry, changing consumer behaviors may be the most pertinent. From increased adoption of grocery deliveries to new shopping preferences, retailers, wholesalers and consumer packaged goods companies are working to determine which developments are temporary, and which ones are likely to last beyond the pandemic.
At BMO‘s 15th annual Global Farm to Market Conference—held as a virtual event for the first time—BMO Capital Markets food industry analysts Kelly Bania and Ken Zaslow hosted a panel discussion to examine the pandemic’s implications on e-commerce and CPG brands. Joining Kelly and Ken on the videoconference were:
Kelly Caruso, CEO of Shipt, a leading same-day grocery delivery platform. Acquired by Target in 2017, the company works with major retailers in 260 cities across the U.S., including Costco, Winn-Dixie and Meijer.
Vishwa Chandra, Partner at McKinsey & Company, the global management consulting firm.
Mike Duffy, CEO of C&S Wholesale Grocers, a Keene, New Hampshire-based wholesale grocery supply company (the largest in the U.S.).
A summary of their conversation follows.
Availability Issues and Shifting Loyalties
All the panelists agreed that the key for retailers and CPG brands is to understand what consumer behaviors are likely to be permanent versus what will continue to adapt as we move through the pandemic. There was a significant increase in households buying groceries online, particularly first-time customers. From Chandra’s point of view, the channel shift to e-commerce appears to be permanent.
“There’s a tremendous amount of volume going through e-commerce within grocery,” Chandra said. “What was 3% overall before was running north of 10% of all grocery sales going online. We see that settling around 5% to 6% once we get past the current timeframe.”
Another shift to pay attention to is store and brand loyalty. According to a McKinsey survey of 1,500 shoppers in mid-April, 20% said they switched to a new primary store during the pandemic.1
“Customers tend to be very loyal to their stores,” Chandra said. “So how retailers respond to that will be interesting. The discount channel has picked up a lot of new customers that haven’t walked through their doors before.”
Product availability is one of the factors driving new shopping patterns. Caruso noted that the lack of toilet paper on store shelves in the early stages of the pandemic was a leading indicator of the availability issues the industry faced. Along with that, Duffy said, shoppers were being more efficient in their shopping habits. Consumers were making fewer trips to the grocery store and stocking up on more items per trip.
“What we did across the supply chain was narrow the assortment over the last 10 weeks,” Duffy said. “There’s a lot of items today that are either suspended or temporarily discontinued, and the question is are they going to come back. Maybe this was a natural way to cull the shelves and take out some of the older brands or older SKUs that aren’t that necessary and are just clogging up the system. So I’ll be curious as we get healthier and production gets more in line with historic ways of producing, do we bring back those SKUs? Hopefully it’s a way for us to simplify the supply chain, because it will take some of those costs out that maybe can help offset the safety protocols and other measures that we have to put in place.”
Chandra said the McKinsey survey also found that 45% of customers have used a brand they hadn’t previously considered. Of those consumers, 50% cited availability as the main reason, but value is also a factor.
“As some of the economic realities have hit home, people are looking for better value,” Chandra said. “Sometimes that means cheaper, sometimes that means more quantity. Also, things that are easier to grab, what they come across first as they’re going through their shopping to try to minimize their time. So what are in more prominent and early displays.”
Incremental Costs
Along with tracking changing consumer behaviors, determining which coronavirus-related costs are structural rather than temporary is also a concern. And regarding the costs that are likely to last beyond the pandemic, there’s the issue of how much of it will get passed through the supply chain, ultimately coming out of consumers’ pockets.
“It’s the structural costs, from safety protocols and other potential wages,” Duffy said, “How much is that going to impact the cost of goods, and how much can we offset through productivity and cost-savings initiatives?”
Caruso said the situation has led retailers to think about the various channel fulfillment services—in-store, e-commerce, delivery—as a portfolio, rather than individual units. “Within that—from the retailer to the brands in CPG to fulfillment partners—it’ll be on all of us to figure out creative, innovative ways to lower that cost to serve,” she said.
Innovation
One point that’s become clear over the last few weeks is that innovation will play a key role throughout the supply chain. We’re already seeing examples like PepsiCo’s launch of two direct-to-consumer websites where shoppers can order the company’s food and beverage brands.2 Chandra said more emphasis will be placed on digital engagement with consumers.
“As traditional media and in-store displays are getting less effective because customers are spending less time in stores, what are ways to engage digitally with consumers?” he said.
For Duffy, innovation will come by way of building out the digital supply chain. “There’s still a big disconnect from a demand signal to a production signal,” he said. “There’s a lot of time between when those two meet. So how do I shorten that cycle time so I make my manufacturing processes more responsive to shifts in consumer demand, so I don’t have obsolete or excess inventory in the supply chain? I think you’ll see a shifting of some of those innovation dollars [from product marketing] into the supply chain.”
From a CPG brand perspective, adapting to new consumer habits will be crucial to innovation efforts. “As consumers are thinking differently about what they spend their time on—cooking more at home, spending time with families—I think you’ll see some innovation that starts blurring the lines between traditional ready-to-eat, ready-to-cook ingredients,” Chandra said. “I think it will be an interesting opportunity as CPGs and manufacturers start thinking about how consumers are engaging with a product.”
The Lessons Shaping Future Strategies
The particular long-term pandemic-related impacts on the industry remain to be seen. But all three panelists shared the lessons they’ve learned that will likely guide their strategies in the long run.
“For us it’s been that same-day delivery is no longer considered a luxury,” Caruso said. “It is a must-have and a convenience. I believe it’s here to stay.”
For Duffy, it’s making sure all stakeholders understand how food makes its way to store shelves. “How do we partner more with government and regulatory authorities?” he said. “Some of the decisions that were happening locally really inhibited the recovery effort in getting food to the shelves faster. How do we work together to improve the processes and not overburden it with extra costs and regulations?”
Chandra believes that in the end, the pandemic will cause the entire supply chain to rethink its emphasis on efficiency. “We’re going to take a long, hard look around resilience,” he said. “That’s not saying we’re going to drive up the cost dramatically for supply chains. We still owe it to be as efficient and as effective as possible. But it’s just a third lens that we will put to it.”
If nothing else, Chandra said, the past few months have led consumers to a deeper relationship with food than they’ve had in a long time. “We saw a long-term trend where there was almost a disassociation around cooking, around brands, around stores,” he said. “It’s really heartening to see how consumers have engaged, so I think that’s going to be a lasting benefit for everyone.”
1 Grocery Dive
2 PepsiCo
