As foot traffic continues to plummet in the wake of COVID-19 social-distancing mandates — by almost 75% at some restaurants and nearly 35% at grocery stores, according to PwC analysis — consumer packaged goods (CPG) companies are wondering how to respond to the storm in the short term, and how to reshape themselves for the long-term changes in the landscape.
Manufacturers with robust direct store delivery (DSD) capabilities should manage a high fixed-cost structure and rapidly shift gears from growth and profitability to liquidity and focused resources redeployment.
Meanwhile, there are increased pressures on the health of small and midsize customers, their suppliers and the distribution channels serving them. Consumers, who are coping with an uncertain market environment and increasingly tighter budgets, are triggering dramatic changes across channel preferences, as well as category and product selection and mix, and they’re gravitating to e-commerce.
To understand where to effectively focus their strategies, some companies are relying on tech-enabled services to help them understand potential business impacts and gauge their company's readiness to respond and make informed decisions. PwC worked with a major CPG player in North America to create a 24-month scenario that estimated a 20% volume drop and -30% customer outlet impact, with a recovery period over the next 24 months. This type of analysis can help generate the alignment and consensus needed for better planning and decision-making.
Companies with robust DSD capabilities are having to rethink and pivot their route-to-market capabilities.
The starting point should be a clear understanding of what customers and suppliers are facing, including possible cash-flow problems at small and midsize entities.
The two fundamental issues are:
- Operational implications
Consumer demand is in flux, with significant shifts across categories and channels, and product and mix preferences. Supply chains are being upended, as distributors reduce available SKUs, and consumers shift to app-based order fulfillment. Current DSD models may be unable to meet customers’ pressing needs.
- Financial impacts
Employee furloughs have become a necessity to help preserve cash liquidity. Meanwhile, customers are unable to pay their bills, and bad debt reserves are on the rise. Customer and supplier risk of bankruptcy is increasing, while inventory and point-of-service equipment remain stranded. Economic relief options include government and private lenders.
The impact of the pandemic may require companies to be vigilant about assessing their situation granularly, by location and by customer. Once that assessment is complete, the path forward can become clearer. Adapt your operations with a three-pronged approach.
- Generate digital growth
Companies can extend their digital capabilities to engage their consumer base more effectively by identifying micro-areas where the impact of change has been the sharpest. Developing a segmented view of the customer base can help identify tailored value propositions for customers, with a view to enhance order management, customer development and, gradually, prospecting. For instance, analytics can help segment customers based on their local demand patterns: High-priority accounts can be offered digital or phone-based ordering to replace in-person orders, and customers who are likely to rebound quickly can be offered dedicated support resources.
- Double down on the store
Health and safety are now front and center for consumers. In response, DSD players will likely define and deploy new standards, practices, and equipment for hygiene and sanitization — to help reassure shoppers, field associates and retailers. Meanwhile, the digital shelf (where a company’s products are displayed online) is taking on new importance as shoppers migrate online. More flexible and agile routes to market, along with a refocused cost-to-serve model, will help support better execution of commercial strategies. Companies can, for example, leverage gig economy platforms to scale up merchandising, and industry audit teams meanwhile, can begin to rely on digital compliance, so having the right tools in place will matter.
- Deliver value
New business partnership models are being created as alternate routes to market, and other third-party roles are likely evolving. Warehousing capacity is likely to increase in the coming months. Companies should partner with third-party providers to help manage and deploy their inventory, especially for chilled or frozen products that require extra care. They should develop close business partnerships with restaurant delivery intermediaries — whose importance has been underscored in the current crisis and will continue throughout the recovery — to help promote and move their product. Plan for digital payment, as the current crisis has accelerated adoption.
As retailers focus on ever-smaller consumer segments to better target their offerings, DSD players should do the same: It’s time to get to know your customers all over again. More profitable, less risky customers should take precedence. Start with an intimate understanding of your costs centers to build a precision cost-to-serve (CTS) model. That will allow scenario planning to help adjust service levels as needed. Ultimately, you can find the right service level for each outlet. When operations don’t meet profit goals, you’ll know where to make changes.
A key point to understand is that it’s not too early to plan for recovery and beyond. Assess your current risks now so you can reprioritize. How can you use equipment in the field differently? How can you advance a more touchless approach? Help your customers to navigate this crisis so you’re seen as a valued business partner.
During a recent natural disaster, one of our clients helped its customers, while its competitors decided that was too risky. Not only did our client continue to supply products, but this company also offered generators to help its customers power their stores. The ongoing connection, forged in a time of need, ultimately helped our client become the market leader.
Tech powers the recovery
Technology — particularly real-time data and analytics — can help DSD players emerge stronger during the recovery and beyond. To help deliver value to new and existing customers, these companies should act quickly and decisively to do the following:
- Alter service offerings as consumers increasingly move online.
Provide robust service offerings to help meet online customer demand. Use micro-segmentation (see seven categories below) to engage more directly and effectively with consumers by helping expanding direct-to-consumer (D2C) offerings. Reshape production and planning to scale up, shrink or shift capacities to help avoid warehouse shortages. - Effective micro-segmentation: 7 data categories
- Manage demand via analytics.
DSD companies were caught off guard by the large channel shifts in demand. It’s time to prepare for the fluidity in consumer buying patterns by deploying analytics to help track and manage product demand with flexible routes to market (RTM). Adjust your supply chain when you recognize shifts in the occasions and locations that can drive consumption. - Redefine channel partners.
While traditionally accustomed to fewer, more clearly defined channels that are distinct from one another, CPG companies now should manage the complexity of overlapping physical and digital channels. These days, physical stores are often doubling as fulfillment centers for online orders, requiring DSD players to rethink how they track and manage product demand. - Rethink operations.
Evolving consumer priorities are likely to last well beyond the current crisis, necessitating a change in routes to market. The pandemic has underscored the need to respond with agility. DSD companies should evaluate channel priorities to help uncover new channels or provide multi-channel outlet offerings. New business partnerships can enable shared RTMs, thus diversifying operating model risk.
To emerge stronger during the recovery and beyond, DSD players should act now to keep up with ongoing changes in consumer behavior. What started as a response to the crisis might permanently shape consumer’s buying patterns.
