From temporary to transformative From temporary to transformative

By Nicola Longfield, Global DA Consumer & Retail Lead; Mitchell Collett, Director Deal Advisory, KPMG in the UK

Reaction, Resilience, Recovery, New Reality. Whatever your choice of terminology, the COVID-19 pandemic will be multi-phased. With the timing and severity of restrictions varying by geography, multiple phases are occurring simultaneously in different locations. It is increasingly clear that the world has changed over the last two months. Disaggregating which of these changes are temporary and which are transformative is key to preparing for future success.

At the beginning of the pandemic, many consumers responded by stockpiling non-perishable items. IRI data shows that growth for the frozen food category peaked at 48 percent in Italy, 63 percent in France and 93 percent in the US in mid to late March. For some FMCGs (fast moving consumer goods companies), this made the first quarter of 2020 abnormally strong. However, data from UK grocery retailer Sainsbury showed that pantry loading may have been relatively short-lived with fortnightly grocery growth peaking at 39 percent in mid-March followed by slightly negative growth in mid to late April. Similarly, Ocado indicated that the mix of fresh and chilled versus ambient products has already begun to normalize.

While pantry loading may have ended – for now at least – at home consumption has taken a significant step forward with most consumers spending more time at home. Although this is likely to at least partially reverse as restrictions lift, it may never revert to prior levels as consumers become accustomed to new ways of working and socializing. This presents a once in a generation opportunity for FMCG companies, and the food segment in particular, to target a new set of consumer behaviors and consumption occasions. Consider whether your portfolio of assets is fit for this new reality. Use M&A to reposition it where appropriate.

The flip side of this is that out-of-home consumption has been heavily impacted by the pandemic. Coca-Cola European Partners indicated that away from home consumption was down 45-85 percent in the five weeks to 17 April in COVID-19 impacted geographies. Similarly, Heineken indicated that on-trade volume was -50 percent in Spain and -75 percent in Italy during March.

Another area of notable softness has been impulse purchases. Nestle’s confectionary business declined 4.2 percent in 1Q with the company flagging reduced impulse buying. While these more discretionary categories are likely to benefit from countries progressively loosening current restrictions, it is likely that the broader macroeconomic impact of the pandemic dampens the recovery.

The timing of consumers being able to return to the on-trade, making impulse purchases and beginning to travel will clearly vary by geography. However, with social distancing measures likely to remain in place and with consumers likely to remain cautious the path to recovery is likely to be very gradual and this may result in permanent changes in the way we socialise and use our free time.

It is unsurprising that discretionary consumer spending has been weak. Perhaps more surprising has been some of the segments that have behaved like discretionary categories under the current conditions. In France and Spain, cosmetics sales decreased 80 percent in mid-March and L’Oreal estimated that cosmetics sales globally decreased 8 percent in 1Q20. Unsurprisingly, people who stay at home more spend less time and money on their appearance. With consumers likely to work and socialize at home more going forward a lower level of spending on personal care may become a more permanent consumer behaviour.

As retailers and producers grapple with multiple supply chain challenges, there is growing evidence that range contraction is being implemented. For example, in a recent trading statement Ocado indicated that by suspending bottled water sales, it was able to reach an additional 6,000 households. Similarly, Sainsbury indicated that it had limited product ranges to prioritize essential items.

Narrower ranges are likely to disproportionately impact smaller, niche brands and as a consequence larger, better known brands may benefit. While Heineken’s overall volume declined 14.0 percent in March the Heineken brand itself only declined 2.4 percent. Similarly, Kraft Heinz highlighted strong growth for categories such as macaroni cheese and sauces. Perhaps in these uncertain times consumers are reverting to the brands they know best and trust most.

The COVID-19 pandemic has resulted in a step forward for several longer-term structural trends and consumer behaviors. Perhaps most obviously, there has been a meaningful increase in e-commerce penetration for most categories and most geographies. Similarly, the underlying trend towards health and wellness focussed products has continued. For example, Nielsen data shows that in the US plant-based meat alternatives accelerated to 265 percent growth in the 8-week period to 18 April, outperforming fresh meat by 226 percentage points. Finally, we believe consumers, corporates and investors alike may have continued to develop a focus on ESG (environmental, social and governance) factors. For example, a Mintel survey indicated that 25 percent of US consumers see caring for the environment as a higher priority since COVID-19, while 67 percent indicate no change in priority. In addition, an S&P survey of ETFs showed that 70 percent of funds which use ESG as part of stock selection have outperformed the S&P 500 up to 9 April. We remain mindful that what consumers say they prefer and what they spend their money on can differ. We also recognize that an underlying preference for more sustainable products may be tempered by consumers becoming increasingly value focussed as economic headwinds build.

As the path to the post COVID-19 world becomes clearer, this creates an opportunity for much needed portfolio reviews and targeted M&A. Specifically, large, well-capitalized businesses have an opportunity to provide support for smaller, more vulnerable peers in ways that is likely to be mutually beneficial. This may require creative and more flexible deal structures to ensure alignment of opportunity and outcome. Ultimately, any investment decision must rely on an accurate viewpoint of how COVID-19 will change consumer behaviors in the new reality. It is imperative to take steps now to separate the temporary from the transformational.