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Creating Clarity in COVID-19 for the Australian Market

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On 12th March 2020 life in Australia changed as we knew it, as the country started to go into official lockdown with events being cancelled, entertainment venues, and sports grounds closing and businesses changing to work from home, effectively shutting down entire industries. COVID-19 has put consumer goods manufacturers into unknown waters on a global scale. It has caused changes in consumer buying behaviour, with bulk buying, the resurgence of the weekly shop, and an increase in online shopping. Basket sizes have increased as fewer shopping trips per week were undertaken in the interests of safety. There has been a significant increase in home-based consumption and bulk buying, leading to many supply chain and stock issues.

retail revenues fell 17.3% between March & April, while supermarket and grocery store sales increased 22.4% in March.

The Australian Bureau of Statistics (ABS) states that retail revenues fell 17.3% between March & April, while supermarket and grocery store sales increased 22.4% in March, with sales of alcohol and home office supplies also strong. Part of the grocery growth can be attributed to price inflation. ABS found consumer prices increased 0.3% over the first quarter of 2020, pushing annual price rises up by 2.2%, which is a five-and-a-half year high. Surging prices in vegetables and other fresh food prices were the most common, due to drought and bushfire supply disruptions.

Beef, lamb, and cereals also reported steep price increases over the quarter (3.5%, 2.8% and 1.2% respectively). In addition, the number of jobs in Australia fell by 7.5% between March 14 and April 18. In April, 594,300 Australians lost their jobs, and another estimated 227,700 jobs were lost in May. This led to queues outside Centrelink offices across the country the day after lockdown was announced, as people registered for benefits. The retail trade sector is one of the biggest employers in Australia and was already under significant stress before the pandemic, with brands like Colette, Jeanswest, and G-Star Raw all entering administration in 2020. Many retailers were forced to stand down thousands of employees due to the coronavirus restrictions (ABC News: abc.net.au).

Source: The Australian News, www.theaustralian.com.au

Many of our customers are concerned about how they will be able to accurately forecast given this year has seen such volatile demand. Resetting expectations will be required. Traditional forecasting models will not be accurate for at least the next 6 -12 months. Our recommendation is that companies rebase forecasts using the 2008 recession period as a benchmark. They should ignore the 5 months of lockdown (March – July) and take the previous 12 months as the base aligned to the 12 months prior to the 2008 recession, what happened in 2009 is the index that can be used to forecast the next 12 months.

• The last 12 months (prior to March 2020) COGs to retailer X were $200m
• The 12 months in 2008 COGs to retailer X were $120m
• The 12 months in 2009 COGs to retailer X were $100m giving at index of 83
• Prediction for the next 12 months COGs to retailer X using an index of 83 is $166m

Individual product categories will need to look carefully at their market situation. In 2008 economic anxiety drove behaviour whereas today’s anxiety is health and safety meaning certain categories will benefit from increased demand. For example, sanitisers, antibacterial cleaning products, soap, and trusted cleaning product brands, in addition, long life foods (tinned/frozen) will supplement less accessible fresh produce. The eco brands may suffer as being perceived to be less effective.  

As a result of Covid-19, it is estimated that unemployment levels could be as high as 10% in Australia. This is likely to drive supermarkets into a price war. This will focus retail minds on price and value propositions. Retailers thrive and survive through competition. During Covid-19, purchasing limits were put in place on many grocery items to prevent panic, leading to antisocial behaviours and chaos. 

Some regional Australian families were exempt from the purchasing limits, as Woolworths announced they would triple the number of restricted items people can purchase if they live more than 100 kilometers away from their closest store. Grocery retailers across the country also introduced exclusive opening hours for the elderly and people with a disability. 

As a result of Covid-19, it is estimated that unemployment levels could be as high as 10% in Australia.

The Australian Competition and Consumer Commission (ACCC) also granted interim authorisation to ensure grocery retailers like Coles, Woolworths, Aldi, and IGA work together to ensure customers have “reliable and fair access to groceries” during the Covid-19 pandemic. However, the competitive environment will return and when it does retailers will have to re-evaluate their strategies. Here are some thoughts as to how they might do so: 

1.

Consumers will show a preference for brands (and retailers) who demonstrate greater care. This will be from simple hygiene through to handling and packaging. Consumer goods manufacturers and retailers that demonstrate overt safety consciousness will be rewarded by customer loyalty.

2.

The move to online means that retailers will have greater flexibility to change price and promotion on the run. How they do this protecting the orders in the pipeline will be important, but at the same time managed badly it will become chaotic and confusing.

3.

Grocery retailers considering increasing their cut-off point for amending an order (e.g. from 24 hours to 48 hours). In effect this gives them greater opportunity to stock plan; when this is linked to the fact that orders are actively encouraged to be placed weeks in advance there is a dramatic change to the supply chain logistic. All of these combines to give greater predictability of demand and replenishment. Basket values should increase and with them, profitability, as fixed costs fall per basket.

Creating Clarity

Source: KPMG Australia

Retailers will find they are facing a significant challenge as their stores, supply lines, range policies and customer propositions all need to be adapted. We believe that online offers a significant solution and will enable retailers to: 

• Offer customers a regular resupply of essential products to assist with domestic storage space pressure
• Use it to encourage and consolidate customer loyalty
• Emphasise customer safety and health protection benefits
• Encouraging customers to book fixed weekly slots will retain a) loyalty, b) supply and c) facilitate demand & stock planning

Exceedra is the largest pure play consumer goods solution provider. Our singular focus, broad solutions offering, and partnership culture equip our customers with smarter sales and distribution capabilities that improve agility, optimize efficiency, and enable better decisions in order to increase profitability.

You can keep up to date with what Exceedra & AFS Technologies are working on by following us on LinkedIn.

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