Next to groceries, the category that saw the highest growth in US e-commerce in recent weeks has been baking.
Report from McKinsey and Company
How FMCG can prepare for the “next normal"
As the coronavirus pandemic spreads across the globe, threatening both lives and livelihoods, fast moving consumer-goods manufacturers continue to play an important role: producing essential items we all rely on for our health and well-being.
At the same time, forward-thinking companies have begun to think about the “next normal”—what the world may look like after strong virus-control measures are lifted.
The measures in place are expected to lead to the largest quarterly decline in economic activity since World War II. An unprecedented 40 to 50 percent decline in discretionary spending will translate to a roughly 8 to 13 percent drop in GDP (gross domestic product).
While many companies have withstood the initial economic shock, all will need to prepare for the longer-lasting effects, including an erosion in consumer confidence that will drive recessionary behaviour, concludes McKinsey & Company, a global and reputable consultancy.
McKinsey describe five trends in the consumer and retail landscape that have emerged during the crisis and that will persist in the aftermath.
The questions many are now facing include: What will the next normal look like? And how long will the intervening period of partial restrictions last?
It is increasingly clear that the intervening period will be lengthy. Consumers and retailers will need to adjust to ongoing physical distancing and travel restrictions. Outlets and venues where physical distancing cannot be achieved will be among the last to reopen.
A seismic shift in digital engagement
Physical-distancing rules have increased consumption of online media and significantly accelerated e-commerce, particularly in markets that already had a head start.
In the United Kingdom, for example, where on line’s share of grocery shopping was 7 percent before the crisis, grocers are furiously increasing capacity to meet demand: the three largest grocers have added more than 500,000 new delivery slots—an increase of more than 30 percent
McKinsey expect this channel shift to endure to some extent, especially in countries where retailers had enough pre-existing capability to offer a positive online experience.
Early lessons from China suggest that three to six percentage points of online market share will be “sticky,” driven by older generations newly comfortable with digital channels and by new consumer segments who have overcome barriers to trial.
Also, in the medium term, McKinsey expect shoppers to prefer the “safe” experience of shopping online to the prospect of shopping in crowded stores.
Rise in attention to wellness and hygiene
The wellness trend has endured — and even gained strength — during the outbreak.
“Healthy eating” has remained the highest priority of food shoppers across Europe. Consumers are also investing in at-home exercise: in Germany and the United Kingdom, Amazon’s fitness-equipment sales has spiked.
McKinsey expect this upward trajectory to continue into the next normal. Hygiene will become a core element of wellness.
The speed of the virus’s spread has highlighted the level of connectedness in society—and the associated risk. Brands should consider the implications for their strategy and communications (for instance, reassessing manufacturing processes and packaging, as well as emphasizing health and cleanliness in marketing messages).
The battle to eradicate COVID-19 will be a long one, and FMCG manufacturers will need to prove their safety and trust credentials.
Nesting at home
Staying in is the new going out. Once restrictions are lifted, McKinsey expect consumers to continue spending more time at home, driven by a desire to save money, persistent safety concerns, and a newfound pleasure in nesting.
Through the crisis period, many have invested in upgrading their homes and gardens or bought equipment for new hobbies and routines. Next to groceries, the category that saw the highest growth in US e-commerce in recent weeks has been baking.
Redefinition of purpose
It will be essential for companies to balance existing focus areas with emerging consumer concerns. Sustainability, for instance, continues to be important to consumers in many markets. 60 percent of UK consumers cited it as a top consideration when food shopping.
Yet consumers who have become more price sensitive or more concerned about hygiene may favour single-use packaging?
Two other trends, whose longevity is less clear is de-urbanization and big-brand growth. With cities becoming COVID-19 epicentres, urbanites may move to the suburbs, or cities could see a significant reduction in traffic as people stay local.
Channel shifts – further retailer consolidation
These consumer trends will have channel implications, each of which will have varying impact on different countries and categories.
Most significantly, food-service operators — particularly independents — will experience substantial contraction and consolidation as a result of physical-distancing restrictions and the recessionary environment.
Food-service closures have accounted for 10 to 20 percent grocery growth in Western markets; when the food-service sector reopens, expect a few percentage points to remain in grocery.
McKinsey also expect to see significant retailer consolidation, especially in sectors that were less well capitalized and struggling before the outbreak, such as small US quick-service restaurants.
Amazon and other e-marketplaces were already growing by 25 percent a year from 2013 to 2018 has previously struggled with the supply-chain complexity of fresh food and the economics of delivering FMCG. During the crisis, however, these players are likely to capture a bigger market share of core grocery.
In offline grocery, discounters and other value retailers will benefit from the downturn, as they did in 2009. Major grocers will rationalize their assortments based on learnings during the crisis.
They will also likely invest more in neighbourhood proximity formats: in China, for instance, convenience-store sales were 8 percent higher in March than in January. And grocers will ask FMCG companies for support in making the economics of e-commerce work.
McKinsey concludes:
The consumer trends that are crystallizing during the crisis and will most likely persist—recessionary behaviour, greater digital engagement, attention to wellness and hygiene, nesting, and heightened expectations of corporate purpose—will affect every FMCG.
Those companies that plan and prepare can emerge stronger from the crisis and be well positioned to succeed in the next normal.