Decoding Covid-19 Disruptions - Benori Knowledge

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Decoding Covid-19 Disruptions: Impact of the Pandemic on FMCG Sector

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Executive Summary

Impact of Lockdown

Implications on Key

Parameters

Challenges

Way Forward

✓ The demand increased at first due to panic buying of essential items, which was followed by supply chain, distribution and logistics disruptions

✓ The growth of the sector decreased to 3.3% in March 2020 from 6.4% in Jan–Feb 2020

✓ Demand for health, hygiene and essential products increased compared to non-essential items

✓ Customers have largely been shifting to the use of e-commerce platforms for purchases

✓ Sector players are working towards improving their operating models, and the industry expects the essential items market to recover faster than that of non-essential items

✓ Shortage of products, inflated prices, limitations to online delivery are some of the challenges faced by consumers

✓ Maintaining the safety measures, border controls, workforce shortage, disruptions in supply chain are problem areas for retailers and manufacturers

✓ The government majorly needs to work on managing supply chain and facilitating e-commerce deliveries while FMCG players need to revamp their operating, financial and technology models

Drivers and Opportunitie

s

✓ Changed consumer preferences, demand for small players, supply chain transformation and Make in India programme are few of the opportunities that will become market drivers

32020 © Benori Knowledge. All Rights ReservedSource: Deloitte, Market Research Future

What is the Level of Impact on India’s FMCG Sector? (1/3)The FMCG market witnessed high demand due to panic buying, which was followed by supply chain disruptions

▪ Immediately after the lockdown, the demand and consumption of FMCG and household products increased massively owing to panic buying by consumers

▪ As a result of the surge in demand, companies had to increase production

▪ Products such as food, groceries and staples, health and hygiene products including soaps, detergents, hand washes and sanitizers, etc. witnessed massive increase in demand

▪ This was followed by, a considerable slowdown in growth of these products due to disruptions across manufacturing and supply chain (mainly due to workforce shortage)

▪ Further leading to drying up of inventory levels at retailers, which significantly impacted the supply of products to consumers

Impact over the months

Impact on different product types

• Hand sanitizers, hand washes and other health hygiene productshave seen the highest growth. The increasing awareness anddemand for these products is expected to create lucrativeopportunities for related companies till 2022

• Demand for organic and natural ingredient infused food productshas increased at an exponential growth rate

• Demand for non-essential items such as cosmetic products has witnessed a steep downfall

https://www2.deloitte.com/content/dam/Deloitte/in/Documents/consumer-business/in-consumer-impact-of-covid-19-on-consumer-business-in-india-noexp.pdf

https://www.marketresearchfuture.com/covid-19-analysis/covid-19-impact-fmcg-market-9549


Region-wise Growth Rate in India

5.7%4.7%

5.6%

2.6%

4.6% 5.0%

10.4%8.8%

Q4 2019 Q1 2020

North East West South

What is the Level of Impact on India’s FMCG Sector? (2/3)East India was the most impacted due to the pandemic with the highest drop in growth rate

Note: Quarters are basis Jan-Dec Calendar

▪ Rural India contributes 36% to overall FMCG spends and has historically been growing around 3%–5% faster than the urban cities

▪ During Q1 2020, the growth rate of FMCG in rural areas was slightly more than in the metro areas

80% 70%

20% 30%

3PL for FMCG FMCG

Quick Moderately Quick

Post-Pandemic Recovery Speed ▪ Most of the FMCG sector is expected to recover within 6 months post the pandemic

▪ This graph assumes that the lockdown restrictions will be completely lifted by June 30, 2020

3PL: 3rd Party LogisticsQuick: 0–6 monthsModerately Quick: 0–12 months

Source: BloombergQuint, Savills Research

Metro Vs. Rural India FMCG Growth Rate

https://www.bloombergquint.com/business/covid-19-stalls-fmcg-sectors-nascent-recovery-says-nielsen-india

https://pdf.savills.asia/asia-pacific-research/india-research/covid-19-india-front-and-center-production--and-supply-chain.pdf


6.5%

5.3%

3.5%2.6%

Q4 2019 Q1 2020

Value Growth rate

Volume Growth rate

▪ The industry’s value growth is a combination of volume and price-led expansion

▪ The value growth was 6.4% in Jan and Feb 2020; however, it fell to 3.3% in March due to COVID-19

What is the Level of Impact on India’s FMCG Sector? (3/3)The pandemic clobbered the sales of FMCG goods, with major impact on the non-food segment

Source: BloombergQuint Note: Quarters are basis Jan-Dec Calendar

Y-o-Y Growth of FMCG Sector

7.8%

1.8%

Food Segment Non-Food Segment

Segment Wise Value Growth of FMCG in Q1

2020

▪ In Jan and Feb, the value growth of food sector was 8.6%

▪ However, it slashed to 6.2% in March due to COVID-19

https://www.bloombergquint.com/business/covid-19-stalls-fmcg-sectors-nascent-recovery-says-nielsen-india


What are the Implications in the Medium and Long Term?Though the FMCG sector recovered quickly and stably, it has certain implications which will restructure the way market works

Source: E&Y, Economic Times

• While closing of the out-of-home channel in the short term has resulted in slowed market for non-essential items, market for products that are essential, affordable and have higher online penetration are expected to recover faster in the long term

• Health and economic concerns will reduce consumer confidence leading to trade down and preference shift to local/cheaper private labels from bigger brands

• Addition of elderly and rural customers to the digital market platform while the rural consumers will continue to survive on essentials

• Change in operating model of the retailers due to changed consumer preferences on a permanent basis. This includes cost management, store portfolio evaluations and building omni-channels. It also calls for having a cross-functional swift response team to handle any disruptions

• Shift towards healthy lifestyle and products as health and immunity have become priority for many

https://www.ey.com/en_in/consumer-products-retail/moving-towards-a-resilient-retail-sector-post-covid-19

https://economictimes.indiatimes.com/industry/cons-products/fmcg/covid-19-near-term-outlook-for-fmcg-sector-extremely-uncertain-says-hul/articleshow/76230162.cms?from=mdr


What are the Key Challenges?The sudden lockdown has thrown a variety of challenges for everyone from the government to consumer

Source: Deloitte , Economic Times, E&Y, Benori Study

Consumer

Shortage of various essential items due to panic buying by other customers

Certain stores flocked with people are putting the consumers at a higher risk of catching the virus

Online delivery is not available in all regions due to increased border controls

Shortage of products has led to inflated pricing for certain products

Manufacturer Retailer Government

Workforce shortage due to migration and lockdown

Closure of stores and a lesser demand for non-essentials goods have led to excess stock in inventory

Supply chain disruption due to restrictions in the movement of goods has made it difficult for the manufacturers to meet the demand

Dependence on China for certain items has restricted manufacturing/packaging for some product items

OFFLINE

Maintenance of proper hygiene by regularly cleaning and sanitizing shelfs

Ensure that the customers maintain safe social distancing standards

ONLINE

Increased online demand disrupted the unready retailers leading to coordination issues between online and offline teams

Delivery restriction in most areas due to border controls

Quick response such as funds, trainings, etc. to be provided in order to ensure smooth functioning of the supply chain

Ensure that everyone follows strict regulatory measures when they go out to buy essential products

Ensure the supply of essentials in all areas

Requirement of funds increased for urgent needs as well as for direct money transfers to laborers

https://www2.deloitte.com/global/en/pages/about-deloitte/articles/covid-19/covid-19--impact-on-food---beverage-consumer-products-companies.html

https://economictimes.indiatimes.com/industry/cons-products/fmcg/fmcg-cos-say-supply-of-products-to-ease-in-one-week-though-shortage-of-labour-remains/articleshow/74913232.cms?from=mdr

https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/consumer-products-retail/moving-towards-a-resilient-retail-sector-post-covid-19.pdf?download


How Have the Regulatory Authorities Responded?Different steps have been taken up and stimulus have been declared by the central and state governments in order to lessen the impact of COVID-19 and maintain a balance in the FMCG sector

Source: Deloitte

In order to help the financially weaker sections of the population, state governments have provided DBT to accounts

Direct Benefit Transfer (DBT)

The central government has announced relief packages, which provide working capital support, loan restructuring and credit terms alteration benefits

Relief Package

In order to increase liquidity in the market and increase the spending power of consumers, a cut down of repo rate by 75 basis points has been announced by RBI

Repo Rate Cut Down

https://www2.deloitte.com/global/en/pages/about-deloitte/articles/covid-19/covid-19--impact-on-food---beverage-consumer-products-companies.html

92020 © Benori Knowledge. All Rights ReservedSource: Deloitte

• Concession in Tax Rates- The demand for certain categories such as daily use items, sanitation, medical and healthcare products could be increased by rationalization of GST rates and reductions and concessions in tax rates

What is the Way Forward? (1/2)Government intervention is of major importance to minimize the impact on the consumer industry

• Offering Unified Solutions- Due to closure of malls, supermarkets and restaurants, large food service providers have been majorly impacted. Uniting them with smaller and local players to supply their products directly to the consumers will ensure revenue generation, inventory circulation and better product availability for consumers

• Encouraging Contactless E-commerce Delivery- Encouraging and facilitating players who are following contact-less pickup and delivery models may also result in greater employment in the logistics and distribution departments for e-commerce players and retailers

• Maintaining Supply Chain- Ensure minimal disruption in supply chain and distribution of products to avoid mass shortage of essential products and commodities which might result in panic

• Incentivizing Logistics and Delivery- Providing monetary and health assistance to the logistic and delivery fleet can boost their morale. It can also help in increasing the number of delivery fleet

• Boosting Non-urban Consumption- Direct transfer of wages to workers in the non-urban areas and ensuring digital infrastructure to enable online purchases and delivery

Steps required from the government

https://www2.deloitte.com/content/dam/Deloitte/in/Documents/consumer-business/in-consumer-impact-of-covid-19-on-consumer-business-in-india-noexp.pdf


What is the Way Forward? (2/2)The FMCG companies need to reassess and renew their assets and capabilities in order to deal with the impact of pandemic

SUPPLY CHAIN FINANCE TECHNOLOGY

▪ Analyze both B2B and B2C supply chain disruption

▪ Establish end-to-end coordination control and secure logistics capacity to mitigate value chain risks

▪ Production shift to other geographies

▪ Manage key supply categories to maintain volume

▪ Model, forecast and balance demand

▪ Leverage third party logistics (3PL) and manufacturing

▪ Forecast financial and operational performance

▪ Analyze cash conversion cycle, optimize payment terms and assess cash collection risks

▪ Build business continuity scenario modeling tools for an enhanced risk management

▪ Continuous market scanning for any M&A opportunities

▪ Execute cost optimization opportunities

▪ Develop digital marketplace and direct to consumer capabilities

▪ Develop digital model to assess supply chains and a unified operating model

▪ Introduce new ways of digital working and upskill the staff to save costs

▪ Drive deeper consumer insights through investment in modern insights and analytics platform

Source: Accenture

Steps required from FMCG industry players

https://www.accenture.com/_acnmedia/PDF-121/Accenture-COVID-19-Consumer-Goods-Rapid-Response.pdf


What are the Key Drivers and Trends?The impact of the pandemic has resulted in restructuring the market, paving way for new demand drivers and trends

Source: Business Standard, Business Standard, Savills Research, Business Today

Trends arising due to COVID-19 led driversCOVID-19 scenario led growth drivers

Awareness and demand for healthy and organic food products, and hygienic products such as sanitizers

FMCG companies to do tie-ups with last mile delivery partners

Increased use of automation and technology in warehouse management and distribution

Shifting from lean supply chain to ideal inventory levels and maintaining optimum stock volume. This has also resulted in increased warehouse space requirement for players dealing in essential products

Increased use of e-commerce platforms which is currently constrained due to safety, logistics and border controls

Increased use of alternative distribution channels: inland waterways, ports and railways

Make in India programme and reduced corporate tax

Special insurance covers are being provided to the frontline workers involved in supply and distribution by leading FMCG companies like Nestle India, Godrej and Dabur

In order to reboot the supply chain, companies are working with the government for prioritizing key SKUs (stock keeping units), making agile planning cycles and creating flexible alternatives

An increasing demand for home and hygiene products has made FMCG companies enhance their capabilities of these products

Large players such as HUL are also repurposing their core brands, re-planning their innovations and adjusting to consumers buying behavior

Such players are also re-working and tailoring their brand communication in order to stay consumer relevant

Large players see the sharpening of urban-rural divide in demand pattern of FMCG products. The consumption of low-priced affordable packs or popular price products to go up in non-metro markets after supply chains and accessibility of product improves

https://www.business-standard.com/article/companies/near-term-outlook-for-fmcg-sector-extremely-uncertain-says-hul-120060600407_1.html

https://www.business-standard.com/article/economy-policy/lockdown-4-0-rural-markets-to-sharpen-focus-on-value-items-in-fmcg-sector-120052500017_1.html

https://pdf.savills.asia/asia-pacific-research/india-research/covid-19-india-front-and-center-production--and-supply-chain.pdf

https://www.businesstoday.in/current/corporate/coronavirus-fmcg-companies-roll-out-special-insurance-cover-for-frontline-workforce/story/402196.html


What are the Key Opportunities?Changes in consumer preferences, increasing demand for smaller brands and local products, and the need for manufacturing units to be closer to consumers will lead to new opportunities in the FMCG sector

Source: Economic Times, Accenture

➢Consumers are showing a permanent shift towards products which are healthier, environment friendly, and locally sourced and made

➢This could lead to emergence of new FMCG products

➢The current scenario has made manufacturers realize the importance of setting up manufacturing closer to the consumers

➢This will lead to changes in the supply chain in the coming years and will be a vital future strategic differentiator for the industry players

➢Panic buying combined with movement restrictions have led to increased demand for products from local and smaller brands, which had limited market shares earlier

Increased Demand for Smaller brands

Supply Chain Transformation

New Products due to Changed Consumer

Preferences

Make in India Programme

➢The extended international border controls will push the country towards manufacturing raw materials and packaging materials inside the country

➢This will reduce the dependence on other countries and will create market for local players, pushing the Make in India Programme

https://economictimes.indiatimes.com/industry/cons-products/fmcg/smaller-fmcg-brands-gain-share-during-corona-virus-panic-buying-lock-down/articleshow/75251968.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

https://www.accenture.com/_acnmedia/PDF-121/Accenture-COVID-19-Consumer-Goods-Rapid-Response.pdf

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