The Simply Good Foods Co., the US-based health snacks maker, said it has ramped up inventories and shifted the focus of its marketing spending as more consumers shop online rather than in retail stores amid the coronavirus outbreak.
Earlier this week, the Denver-based firm pulled its financial guidance due to swings in demand related to Covid-19, which caused volatile foot traffic in March, particularly in the first two weeks of the month when there was a noticeable decline before picking up in the latter half.
Simply Good Foods president and chief executive Joseph Scalzo, speaking to analysts on Monday (6 April) after reporting second-quarter results through 29 February, gave a more detailed picture of consumer behaviour in light of the coronavirus pandemic, which is now hitting the US hard.
“I think, right now, the big driver of this has been shopping behaviour influence more than it is consumption behaviour influence,” he said. “The weekend of the 20th and 21st [March] appeared to be an inflection point in people’s shopping behaviours – a dramatic fall-off, double-digit fall-off that has remained through the end of the month in people’s shopping patterns and going into stores.
“We saw significant channel shifting, so e-commerce, online, pick-up and delivery all accelerated, and then bricks-and-mortar saw a significant fall-off that’s kind of remained until now.
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“That has led us to shift marketing spend already to promote our brands in those channels in order to keep some marketing pressure on the business.”
Scalzo described his own observations when shopping in-store relative to the Simply Good Foods’ business, noting how consumers appear to be keen to complete their shop quickly, focusing on staple items in the centre of the store and avoiding the perimeter.
He added: “The behaviours we noticed early in this is even when people are shopping, they’re avoiding the perimeter, not always getting into the health and beauty section where a predominant number of our products are, and that has some impact to foot traffic in the aisle and then obviously purchasing behaviour.”
Simply Good Foods bolstered its product offering with the acquisition last year of a peer in the health snacks category, Quest Nutrition, which has also performed well on e-commerce, along with the dietary brand Atkins Nutritionals.
Scalzo noted how online retailer Amazon is Quest’s largest customer, accounting for 15% of its business.
He continued: “Our e-commerce businesses spiked and have stayed strong since the crisis started, so we saw a significant uptick in our Quest business. They saw a significant spike in the business on Amazon across all their products, and it’s continued to be strong, again on top of 60% growth on our Atkins business online. We spiked above that after the restrictions started to take place.”
To cope with the upsurge in orders, and to shield the company from any further adverse shocks, Simply Good Foods is building up inventories, which typically stand at five to six weeks of stock for about 35 of its top SKUs.
“We’ve started moving our inventory position closer to eight weeks, and we’ll be continuing to monitor that and continuing to move that up,” Scalzo said. “In some instances, we’ll go to 10 weeks of inventory just to give ourselves some safety stock in the event of a spike in demand from a retail standpoint. We’re able to get that because we’ve been in communication very early on in the process – we were able to get that available capacity pretty easily.”
But with the added inventories, chief financial officer Todd Cunfer said there will be an inevitable impact on the balance sheet, in the short term of about US$10-15m on cash flow. “I’d like to think by the end of the fiscal year, we can wind a good chunk of that down, but obviously it depends on how the Covid-19 situation plays out over the next few months,” he added.
With the shift over to e-commerce shopping, the company is also adjusting its marketing strategy, with a predictable decline in investment.
Scalzo explained: “As you think about consumers sheltering in home and the influence of marketing pressure, you really start challenging how much marketing dollars you should be spending and how truly effective they are, so we’ll be looking at our marketing investment levels.
“I totally expect us to see a fall-off in return on investment, and I would expect us to pull back on marketing, actually keeping some powder dry for when people are out and about again.”
Simply Good Foods uses co-manufacturing partners and Scalzo was questioned by one analyst on how supply is holding up under the crisis, not just for finished products but for base ingredients too.
The CEO countered: “We’ve been in communication for over five weeks with these suppliers to understand what their plans are coming into the situation, and we’re very confident in the robustness of our co-manufacturing, our third-party logistics provider, and our ingredient suppliers. So far, there have been no impacts in their facilities, in production, and our ability to meet demand.
“I have complete confidence in their preparedness, in the robustness of the supply chain, and our ability to flow goods, ingredients to co-manufacturers, to our third-party warehouse, and to customers smoothly. It’s been our top priority, we were on it very early, and so far our supply chain has responded wonderfully to this situation.”