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April 14, 2020

Why change is inevitable in the wake of Covid-19

Our US columnist Victor Martino sets out what he sees as the stages of change that will impact the country's food industry – with analysis that will resonate beyond US borders.

just-food’s US columnist and industry veteran Victor Martino sets out what he sees as the four stages of change that will impact the country’s food industry – with analysis that will resonate beyond US borders.

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What is the impact of China’s Zero-COVID lockdowns on economic activity, consumer goods and the foodservice industry?

While wanting to protect the country from being overwhelmed by Omicron, China’s adherence to a Zero-COVID policy is resulting in a significant economic downturn. COVID outbreaks in Shanghai, Beijing and many other Chinese cities will impact 2022’s economic growth as consumers and businesses experience rolling lockdowns, leading to a slowdown in domestic and international supply chains. China’s Zero-COVID policy is having a demonstrable impact on consumer-facing industries. Access GlobalData’s new whitepaper, China in 2022: the impact of China’s Zero-COVID lockdowns on economic activity, consumer goods and the foodservice industry, to examine the current situation in Shanghai and other cities in China, to better understand the worst-affected industry sectors, foodservice in particular, and to explore potential growth opportunities as China recovers. The white paper covers:
  • Which multinational companies have been affected?
  • What is the effect of lockdowns on foodservice?
  • What is the effect of lockdowns on Chinese ports?
  • Spotlight on Shanghai: what is the situation there?
  • How have Chinese consumers reacted?
  • How might the Chinese government react?
  • What are the potential growth opportunities?
by GlobalData
Enter your details here to receive your free Whitepaper.

As recently as February none of us had any idea 2020 would be a year of fundamental change for the food industry.

But then came the Covid-19 pandemic, which is delivering a blow to the sector’s central nervous system like none we’ve ever experienced before. All that was solid as we began 2020 has melted into thin air. Change is inevitable in its wake.

First, as someone who works in the food industry, I want to thank everyone for keeping the supply chain moving and the shelves stocked, particularly those who are working on the front lines in the processing plants, warehouses, transportation sector and grocery stores. It makes me proud to be involved in an industry full of so many hard-working and dedicated people. 

I also want to thank farmers, without whom there would be no food to process, warehouse, transport or put on the shelf. Unlike many of us, they can’t work from their home offices or living rooms. Instead, farmers are doing what they always do, which is to work in the fields growing and harvesting the food that feeds the world. We should not forget that it all starts with the farmer.

The major challenge we face right now with the Covid-19 pandemic is uncertainty. For example, two weeks ago my main concern was how long it would take for us to re-balance the supply chain and get grocery store shelves filled for consumers.

That, however, has changed completely. My main concern today is the safety of our front-line workers throughout the supply chain who are, in increasing numbers, contracting Covid-19.

My concern is both for their personal safety and for the outlook of the global food supply. Two weeks ago, we didn’t look to be in danger of supply shortages. Today, it’s not certain that’s the case. If we can’t keep enough processing plants, warehouses and stores operating, or are unable to get products through the supply chain properly, we can’t feed people.

The four waves of change

Like you all, I’m spending a considerable amount of time thinking about what the Covid-19 pandemic means for the food industry and CPG companies, not just today but for the immediate future. What changes will we need to make to adapt in the wake of Covid-19?

There will be four waves or stages of change that will impact the food industry in the coming months. The severity of these waves or stages of change will depend on how severe the global pandemic is, which at this point in time is unknown.

We’re now coming out of the first period of change, which has been consumers’ panic buying and hoarding of products, based on a combination of fear and uncertainty but also on the reality the virus is a serious threat to personal and public health and isn’t going away anytime soon, despite suggestions from some governments things can get ‘back to normal’ by the end of April.

This first wave of change has been a shock to the food industry’s supply chain. In this era of just-in-time inventory, double and triple-digit percentage sales spikes on fresh, frozen and packaged foods, as is occurring in the US and many other countries, aren’t sustainable. This is why the supply chain still needs time to right itself.

We’re now moving into the second wave or stage of change, which I call “practical pandemic pantry-loading”. It’s not hoarding but consumers are still buying more than they normally would, largely because they are staying at home and therefore cooking and eating more at home. There is a rhyme to their reason for doing so.

For example, Credit Suisse estimates in the last six weeks or so food-at-home consumption in the US has risen to 80% from its historic 50% (food away-from-home historically accounting for the other 50%). This is due to the decimation of the restaurant industry in the US, along with the fact so many families are now spending most of their time quarantined at home. Additionally, Credit Suisse predicts CPG sales in stores and online could rise overall by 30% between now and the end of May.

This second wave will be helpful for the supply chain because it will put somewhat less strain on workers and there will be fewer out-of-stocks on store shelves, which we’re starting to see this week here in the US. Manufacturers of fast-selling products have also ramped up production, which will also help fill store shelves, both physical and virtual.

It’s impossible to know how long this stage will hold. Hoarding might return, for example, depending on the severity of the virus and on the duration of the shelter-in-place and quarantine orders currently in effect.

Normal as we knew it pre-Covid-19 will never return to the food industry

The third stage of change is what I call the “new normal.” Normal as we knew it pre-Covid-19 will never return to the food industry. I could be wrong but I believe the pandemic is a game-changer for the industry and for food companies in a myriad of areas: food safety; social distancing protocols in food plants and stores; how we treat and compensate our front-line people; how buyers and sellers do business, and more.

Additionally, we might even see a significant shift in the channels consumers traditionally shop, more moving away from bricks-and-mortar retail to online grocery shopping and buying directly from manufacturers. The longer the duration of the pandemic the more likely the probability such a shift will occur.

The big question under the “new normal” is whether or not the huge sales gains (the 30% posited by Credit Suisse, for example) the at-home channel is experiencing will hold. It’s impossible to predict, although I do see at-home consumption continuing to grow in the coming months because consumers are unable to dine out at restaurants and prepared food delivery is too expensive for most people on a regular basis. The stay-at-home orders in most states also are likely to be extended beyond the end of this month.

Some percentage of these sales gains will be sustained over time under the “new normal”. Even once we’re through the worst stage of the pandemic, will people feel comfortable dining out in close proximity to total strangers? It’s hard to know right now. What the evidence does show us though is Americans can – and do – like to cook and eat at home (bread baking and sales of yeast are off the charts, for example) but until now they just haven’t had or made the time to do it. This is contrary to much pre-Covid-19 analysis, which argued most Americans, especially millennials, simply don’t want to cook at home anymore. Will that behaviour continue? It’s uncertain but if the pandemic lasts for many more months it could provoke a behavioural change.

Stage four – the coronavirus recession

The fourth stage of change is the coronavirus recession, which most economists and forecasting services say is already here or will be soon.

Morgan Stanley estimates for 2020, the global economy will contract 1.9%, while stressing its prediction is based on the virus peaking this month. If the virus peaks later, the investment bank is predicting a contraction of about 5% globally for 2020.

In the US, the rise in weekly jobless claims since the week of 16 March shows an unprecedented 16.8 million job losses in a matter of just three weeks. Unlike past recessions, the income and employment shocks are upfront and immediate, Moody’s Investors Service wrote in a new report last week. Moody’s predicts the US unemployment rate will surge in the second quarter to between 8.8% and 16.2%. It was under 4% just a little over a month ago.

Other economists are suggesting the US could see unemployment rise to nearly 30%, which is more than during the Great Depression, which saw a high of 25% unemployment in 1933.

The key challenges for food companies in this fourth wave or stage of change – again, depending on the severity of the virus and its duration – will shift from ramping-up production and supply chain issues to having to make some serious decisions in terms of employee lay-offs, to increasing prices in the middle of an economic recession and to continuing to ensure worker safety. 

It’s going to be hard to take back the hazard pay increases companies have given to workers deemed critical

These will be difficult decisions to make in a difficult time. For example, it is going to be hard to take back the hazard pay increases food companies have given to those workers deemed critical and essential because under the “new normal” for the food industry one can argue they are forever now critical and essential.

It’s also going to be difficult to increase costs to retailers if the recessionary economy makes doing so necessary because consumers are struggling financially already and the worst economically is yet to come.

The issue of profitability will also return closer to centre-stage in this fourth stage. Right now, most publicly-held food companies are either holding their own or seeing significant sales increases. Ironically, some of those struggling the most pre-pandemic, like Kraft Heinz and Campbell Soup Co., are seeing (so far) the largest sales increase percentages as consumers turn to pantry staples and legacy brands in their desire for familiar and comforting products.

However, be sure the “new normal” for food companies won’t exclude return on investor value, although during the coronavirus recession I think it’s going to be less an issue than some might think.

In all, strategically we need to think about the possible outcomes of the Covid-19 crisis, as well as the present circumstances, however difficult that is to do. 

We’re in uncharted waters with the pandemic. The industry has done a solid job of navigating this uncertainty and continues to put food on people’s tables, which, when all is said and done, is our primary mission as an industry. My main advice is we put the health and safety of workers first and foremost because at the end of the day we’re out of business without them.

just-food columnist Victor Martino is a California-based strategic marketing and business development consultant, analyst, entrepreneur and writer, specialising in the food and grocery industry. He is available for consultation at: victormartino415@gmail.com and https://twitter.com/VictorMartino01.

Related Companies

Free Whitepaper
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What is the impact of China’s Zero-COVID lockdowns on economic activity, consumer goods and the foodservice industry?

While wanting to protect the country from being overwhelmed by Omicron, China’s adherence to a Zero-COVID policy is resulting in a significant economic downturn. COVID outbreaks in Shanghai, Beijing and many other Chinese cities will impact 2022’s economic growth as consumers and businesses experience rolling lockdowns, leading to a slowdown in domestic and international supply chains. China’s Zero-COVID policy is having a demonstrable impact on consumer-facing industries. Access GlobalData’s new whitepaper, China in 2022: the impact of China’s Zero-COVID lockdowns on economic activity, consumer goods and the foodservice industry, to examine the current situation in Shanghai and other cities in China, to better understand the worst-affected industry sectors, foodservice in particular, and to explore potential growth opportunities as China recovers. The white paper covers:
  • Which multinational companies have been affected?
  • What is the effect of lockdowns on foodservice?
  • What is the effect of lockdowns on Chinese ports?
  • Spotlight on Shanghai: what is the situation there?
  • How have Chinese consumers reacted?
  • How might the Chinese government react?
  • What are the potential growth opportunities?
by GlobalData
Enter your details here to receive your free Whitepaper.

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