The COVID-19 viral disease has now evolved from a looming threat to a real and present danger for consumers and companies alike. With nearly 120,000 people infected across at least 114 countries as of March 11, the World Health Organization has officially classified the disease as a pandemic.
Bain & Company’s Situational Threat Report Index, which combines official data with our own modeling, is continuing to evaluate COVID-19’s effect on global business, grading it from 0 (a negligible threat) to 10 (severe global recessionary conditions). As of March 12, the index stood at 6, with sustained transmission likely in multiple nations (see Figure 1).
Evaluating the effect of coronavirus on global business
At that level of threat, businesses should be enacting first-level (in a three-tier plan) contingency procedures. This may include deferring nonstrategic investments and activities and adjusting capacity plans, consistent with an imminent recession of modest scale and short duration. Travel across national borders should be carefully monitored or minimized to avoid stranding travelers due to quarantines; substitute in-market staff wherever possible.
In the geographies that have been affected, consumer products companies are feeling intense tension and operational stress. Few business leaders can hope to predict the course of the pandemic with any accuracy. However, consumer products companies need to quickly roll out contingency plans to address the crisis head-on and ensure business continuity, while playing their role in minimizing the spread of the virus.
While the level of disruption will vary across geographies and companies, we have developed the following operational checklist to help consumer products executives assess their exposure and take rapid action, while planning for an uncertain future.
Lessons from China, Italy and other impacted regions
Bain’s leading position in both the Chinese and Italian consumer products industries has armed us to quickly assess the impact on CPGs as the COVID-19 situation unfolds. We’ve identified several features of the crisis that are likely to affect consumer products companies in other countries as the virus expands globally.
Perhaps the biggest factor is a company’s product category. It is now well known that in areas affected by the virus, consumers have hoarded necessities and key pantry and household items (such as disease-prevention products and packaged, shelf-stable food) while reducing consumption of nonessentials (see Figure 2). Based on our observations in China and beyond, four main category archetypes have emerged as the disease has spread:
- Panic-buying of disaster-preparedness categories, such as disinfectants, masks, hand sanitizer, instant meals and medical supplies. There has been a huge spike in demand for these categories, with products rapidly undersupplied across channels―resulting in extremely tight turnover and frequent out-of-stocks.
- Pantry-loading of daily essentials, such as infant food and formula, shelf-stable groceries, daily hygiene products, and bottled water. These products face constrained supply and below-average stock levels.
- Short-term declines in household discretionary products, such as traditional dairy, soft drinks, snack foods, personal care and pet care.
- Intense declines in nonessentials and luxury products, such as cosmetics, luxury beauty and skin care, confectionary, and alcoholic beverages. Demand for these categories has rapidly collapsed, especially in alcoholic beverages, which faces the additional headwind of heavy reliance on on-trade sales (subject to temporary closures and social-distancing measures).
The outbreak caused dramatic shifts in online purchases of consumer goods in China
The impact also varies by distribution channel. The stock-up effect, combined with increased at-home consumption, has been a tailwind for traditional grocery retail channels. Consumer adoption of online channels has also massively accelerated, due to consumers’ desire to stock up while minimizing public exposure and close human contact.
However, the rapid and unexpected rise in demand for online grocery―a relatively nascent channel in many markets―has created logistical challenges for many companies. In the US, for instance, fulfilment players such as Instacart already face limited delivery availability, while Amazon Prime Now’s typical 1- to 2-hour delivery windows have stretched to as long as 24 hours in some areas.
Finally, we have observed a rapid decline in out-of-home channels, with consumers in some areas under mandatory quarantine and others choosing to limit public interaction to prevent transmission of the virus. The significant decline in on-trade sales will not only negatively affect consumer goods companies that heavily depend on out-of-home channels; it will also have serious consequences for their distributors and wholesalers in these channels. Many already face liquidity constraints, with the threat of potential bankruptcies and closures to follow.
For consumer products companies, these spikes and dips in demand have created intense stress and required them to rapidly adapt their strategies for production, transportation and distribution, key account management, and marketing.
Supply chain considerations pose perhaps the most significant challenge for consumer products companies in the wake of COVID-19. In China, forced extended holidays, quarantined workers and continued health concerns made supply continuity a serious challenge, especially for companies with major raw materials suppliers based in heavily affected areas. Additionally, smaller suppliers, such as packaging companies, quickly faced cash flow issues that pressured their already lean operations. In some categories, the combination of production constraints and panic-buying pushed supply chains beyond capacity.
For many consumer products companies, the challenges were intensified because of the short-term nature of their contingency plans. Few companies’ plans assumed an event such as the COVID-19 outbreak would last beyond the first quarter of 2020, as lean production and supply chain practices often result in a maximum of three months’ worth of inventory on hand at any given time.
To worsen the picture, restrictions on travel networks created logistical bottlenecks, exacerbating inbound and outbound supply chain challenges. These constraints left some suppliers unable to meet the surge in demand for staple items. The resulting empty shelves fueled more panic-buying, creating a vicious cycle. Since the early days of lockdowns in Italy, there has been a shortage of carriers willing to transport into heavily affected “red zones,” resulting in an inbound supply risk. Warehouses located in such areas have experienced a corresponding outbound supply risk.
Additionally, many third-party distributors and wholesalers have faced the same turnover and inventory challenges as consumer products companies. High-demand product categories proved vulnerable to insufficient supply, while low-demand categories were vulnerable to oversupply, creating cash flow issues.
Relationships between consumer products companies and retailers—who are often at odds over supply issues, demand planning and trade negotiations—have grown even more tense in the wake of the COVID-19 outbreak. Many in-person negotiations have moved to video or voice calls, becoming more transactional as a result.
Additionally, less-rigorous demand planning is a growing concern, as out-of-stocks and overstocks have become increasingly unacceptable for retailers. Standard pricing, promotion and trade spending discussions, which typically comprise the majority of key account manager/retail buyer conversations, are taking a back seat to more basic, survival-mode supply concerns.
Finally, companies have had to shift many of their marketing activities from offline to online to adapt to changes in consumer traffic. In China, most consumer products companies have called off or suspended planned Q1 marketing campaigns with agencies, especially out-of-home and in-store events and activations. We have seen a similar trend in Europe and the US, where most large-group events have been cancelled or postponed.
Consumers’ attention and media consumption is also changing in light of the outbreak, with implications for marketing channels and content. With more people remaining at home, daytime media audiences are growing. News audiences in general are elevated due to the desire to stay connected and up to date on COVID-19 coverage. Given these changes, many brands have begun to adjust their strategies. They are shifting spending to digital ads and to news and health-education platforms. Brands are also adapting their messaging to promote awareness and sensitivity during turbulent times.
Actions for consumer products companies
The global and unpredictable nature of this pandemic means that consumer products companies cannot afford to sit and wait. It is time to react swiftly to this unprecedented shock to business. We encourage planning and responding in three key phases according to the status of the virus in your markets.
- Phase 1. The virus is present but has not yet infected many people. While day-to-day life is mostly normal, consumers are beginning to stock up on essentials and cut discretionary spending. In most countries, Phase 1 is well underway. Consumer products companies playing in essential categories need to rapidly address a surge in demand, while those playing in nonessential categories need to get ready to adjust to weaker demand. This is the time to urgently prepare plans ahead of a possible escalation into the next phase, using the checklist below as a starting point.
- Phase 2. The virus has become prevalent in the market (or in markets where supply originates), with governments taking restrictive actions, such as quarantines, closings of schools and public places, and lockdowns. These actions result in labor shortages and considerable disruptions to supply and demand, as well as operations and logistical flows. This is the current reality for many European and Asian markets.
- Phase 3. Recovery and beyond—the situation progressively returns to a new normal. Competitive positions and relationships with retail customers may have been significantly altered, along with shifts in consumers’ share of wallet and buying repertoires.
We recommend the following checklist as a way of helping leadership teams frame their multiphase response in the short term.
1. Set up and empower an emergency response team
- If you haven’t done so already, immediately set up a cross-functional emergency response team attached to the office of the chief executive, the chief financial officer and the chief risk officer—potentially in a war room that operates virtually, given office closures, social distancing and the global nature of the team. As the situation escalates and requires immediate decision making, this team may wish to agree on a set of principles and processes, and then move to more localized decision making for speed and effectiveness.
- Give the team direct access to key executives and empower it to make cross-functional recommendations based on a rapid assessment of risks in critical areas related to workforce, supply, inventory and consumer sentiment.
- Outline clear daily responsibilities for the team in three areas: managing internal and external communications; tracking, reviewing and adjusting the emergency response; and reporting internal key performance indicators.
- Where relevant, set up local emergency response teams (e.g., by region, country, business unit, manufacturing facility, distribution center or function).
- Give at least one person the full-time job of scanning relevant information on the spread of the virus, its impact on consumer demand, retailer reactions and actions by other consumer products companies.
2. Protect people as the utmost priority
A consumer products company’s core obligation is to protect the health and safety of its employees, customers, suppliers and other partners. The emergency response team needs to recommend and communicate the necessary actions, internally and externally, aligning everyone behind a coordinated plan. Specifically, companies should:
- Communicate with local authorities and quickly transmit their recommendations across the organization to ensure compliance with the latest guidance.
- Reiterate the importance of workers staying home if they feel ill, potentially screening or sending home individuals as necessary.
- Implement requirements for frequent handwashing and sanitization of surfaces.
- Equip employees with any sanitary or personal protection equipment (disinfecting wipes, masks, gloves, etc.) necessary to do their job safely. This is especially critical for manufacturing personnel (to avoid contamination of products) and for sales teams, who may be particularly exposed due to customer or store visits.
- Split colocated teams to work across two or more different office locations if infection rapidly spreads in a single location.
- Quickly identify and nominate backup options for business-critical executives or function leaders. If one person is infected, the other person can step in to backfill.
- Consider implementing a “red and blue team” approach to certain business-critical functions. This involves splitting core functions into two teams that go into the office on alternating days, are segregated within the office or work from home. If someone gets sick on the red team, the blue team can still function while the other remains quarantined.
- Cancel gatherings of 20 people or more that are not operationally critical.
- Identify high-risk employees and consider options for alternate work arrangements.
- Prepare for work-from-home requirements, ensuring technology solutions are in place for employees to work from remote locations.
- Reduce or eliminate nonessential travel. This means moving to video or conference calls for employees who visit customers (e.g., key account managers) and for salesforces if store visits are not required.
- Follow official advice on deep cleaning the most-used areas across all facilities, such as elevators, meeting rooms and bathrooms, as well as air purifiers, air conditioners and HVAC ducts.
- Potentially close cafeterias and canteens, and stop providing shared food and refreshments.
- Regulate or minimize office visits from third parties.
3. Review and adjust your production plan and inventory management
- Define contingency plans to secure continuity of supply. Ensure availability of factory and warehouse personnel for daily work, while enacting safety protocols at plants and taking precautionary measures to protect employee health.
- Determine your supply chain’s weakest links in terms of resiliency—workforce, raw materials, packaging, warehouse space, health/sanitary supplies, access to transportation—and address them in order of priority.
- Quickly adjust production plans based on your:
- Product category exposure. Scale up for categories in high demand; slow down for categories seeing or anticipating a temporary decline. Simplify your range to limit production to the best-selling “hero” SKUs and pack sizes, so that lines can run uninterrupted and have a better chance of keeping up with demand.
- Channel mix (distribution) exposure. Accelerate production of SKUs and formats required for channels facing surging demand (online, hypermarkets, supermarkets, warehouse clubs, etc.). Decelerate production for products where there is strong exposure to out-of-home channels, shifting mix to products and packages suited for at-home consumption.
- Look into diversification of manufacturing as a risk arbitrage measure. Split production across countries, plants and teams, ensuring that, in cases of rapid outbreak/transmission, business-critical tasks are uninterrupted. Embrace flexible production and business continuity measures more broadly to avoid the worst-case scenario that a prolonged quarantine results in total production stoppage. This could even involve forward deployment of inventory, along with temporary production facilities or warehouses required to facilitate such plans.
- If you need spare capacity, use your broader manufacturing ecosystem, including comanufacturers. Ensure that third-party manufacturers adopt the same enhanced sanitary precautions as your operations.
- Stay close to raw material suppliers, vigilantly watching for increasing lead times. Implement contingency plans for alternative raw materials/input sourcing (or excess sourcing in advance of production) should raw material production facilities grind to a halt. Assess production and supply not just for first-level suppliers but also second- or third-tier suppliers—your suppliers’ suppliers—to the extent possible. Complications with these lower-order suppliers often catch leadership teams unprepared.
- Increase stock levels for items with the highest demand, and move inventory as close to the market as possible, as quickly as possible.
- Monitor stock levels and fulfilment closely. Temporarily halt algorithms (such as automatic replenishment) that are unsuited to current demand patterns.
4. Turbocharge logistics flexibility
- Work with authorities to understand potential lockdown areas and how you will be able to deliver in those areas.
- Revisit your transport and delivery plan with a focus on getting stock as close to stores as possible. You may need to switch tactics completely, by delivering directly to stores vs. distribution centers, for example.
- Free up freight capacity by stopping planned deliveries of nonessential categories and aggressively enforcing minimum order quantities for freight. If short on capacity, work with retailers to see if near-term backhaul or customer pickup opportunities are available.
- Work with your logistics providers, or even your competitors, to leverage joint capacity, including exploring third-party on-demand logistics providers or less-than-truckload (LTL) flexible distribution options.
- Try to use different logistics providers for different warehouses and distribution centers, as segmenting transport flows helps mitigate the risk of transmission.
- Ensure that external logistics partners (such as delivery fleets) adhere to elevated hygiene standards, and sanitize trucks and vans as needed.
- Be agile with logistics. Consider moving inventory around your own network or out of customer warehouses if needed elsewhere.
5. Stay close to customers while adjusting to demand
- In critical channels, make your account managers available for real-time, spontaneous customer conversations. Customers will expect a new level of closeness and more frequent communication.
- Shift the focus of key account management from traditional buying negotiations to ensuring the continuity of supply. For the most critical categories and customers, this could mean making temporary compromises, such as loosening accounts receivable terms. For retailers, this could mean adjusting to short-term measures, such as lifting on-time, in-full fines.
- Work within agile, multifunctional teams (virtually, if in-person colocation becomes impossible) to quickly resolve pain points and bottlenecks and offer creative, resourceful solutions to clients. For example, swiftly transmit customer order information to S&OP to adjust production plans. Brainstorm with the logistics team to come up with alternative delivery mechanisms for customer distribution centers in affected areas. Agree with the manufacturing team to produce larger batches of specific SKUs to increase product availability.
- Accelerate online retail. Categories moving online during the outbreak are likely to move there for the long term. This means shifting toward pack sizes that are fit-for-purpose for online sales. For some brands, this will be a turning point to fully embrace online channels. Others will go one step further and consider auto-replenishment features.
- Within online retail, keep a close eye on third-party sellers that may capitalize on the health crisis by reselling your goods at inflated prices. Leverage your strong customer relationships to curtail such price gouging as swiftly as possible.
- In certain categories, focus on larger pack types or bulk buying to adjust to purchase patterns.
- Control pricing and promotions. Reset promotion levels at typical category averages to avoid burning up budgets unnecessarily. For sensitive product categories such as disinfectant, medical supplies and hand sanitizer, consider ceasing promotional activity. (In certain countries, the prices for these items are fixed by the government.)
- Repurpose time and energy that you might have spent on pricing/promotion conversations to broader supply-focused topics. Doing what it takes to help often-vulnerable retailers succeed and maintain stock during the crisis can pay dividends in future customer relationships.
- Stay close to on-trade customers and wholesalers particularly, as they are likely suffering. Consumer goods companies serving the on-trade channel face a tricky situation. They need to balance conservative credit policies aimed at minimizing future losses with a policy of extending a lifeline to the out-of-home customers and distributors that may face bad debt fallouts in the near future. This is an opportunity to closely examine your customer network and determine which relationships to preserve in a worst-case scenario. Similarly, recognize that mom-and-pop shops may also be at risk, given cash flow shortages.
6. Adapt your marketing tactics and messaging
- Adapt touchpoints to reflect the rapid shifts in the consumer landscape. Focus your efforts on online and digital media, as opposed to out-of-home and physical media. Curtail in-person and on-trade activations and events, shifting to avenues that may be less traditional but are spiking in importance due to changing consumer behavior—gaming, education networks and health channels, for example.
- Deemphasize non-mission-critical marketing spending and activities. This will help free up the budget for mission-critical activities and for short-term improvements to cash and working capital.
- Adapt content and messaging to be timely, relevant and appropriate in the context of the pandemic. Broader health and safety messages—even if you do not play within the space—can signal a commitment to consumers. Cancel campaigns that could be found tone-deaf in the face of the crisis, harming brand equity.
- Be nimble with online marketing spending, and emphasize close collaboration among marketing, supply chain and key account management functions to avoid advertising with low (or no) ROI. For example, avoid promoting products on Amazon that are sold-out on the site. Clorox is a notable early example of a US company pulling back on advertising in line with product supply.
7. Keep an eye on cash flow, capital and M&A
During times of crisis, it is critical to closely manage working capital and evaluate capital spending to cut or delay nonessential or nonstrategic projects. This is relevant for all consumer products companies, as a squeeze effect is possible across the board.
For example, players in spiking categories will see a short-term impact on costs as they build workforce redundancy to ensure continued operations, accelerate production and increase logistical flows. However, they may not be paid by customers as quickly as they release funds. Players in decelerating categories or with exposure to declining channels will rapidly face decreasing demand, along with difficulties receiving payment from customers that face a cash crunch.
A variety of working capital enhancements are possible, such as measures to accelerate cash conversion—increasing inventory turns through markdowns on slow movers, for example. If necessary, companies can also reduce their overhead costs by cancelling training that is not operationally critical and paring marketing spending in relevant areas.
M&A deals likely will be disrupted. In some cases, opportunities may change. Work with your M&A team and investment bankers/deal team to develop contingency plans for pushed-out deal close dates and changing valuations. At the same time, keep an eye out for promising targets that could emerge scarred in the post-outbreak market.
Stay close to the board and other stakeholders to decide under which circumstances larger cost-reduction efforts would be required, given the broader economic climate.
8. Communicate and collaborate
Consumer products companies play a vital role in supporting society through crises such as the COVID-19 outbreak. It is essential that senior executives maintain open lines of communication with the authorities in their markets. That means staying up to speed on the latest government thinking about curbing panic-buying and shortages, or about potential lockdown areas that could be the next to face logistical constraints. These efforts can create goodwill when products are available against the odds. However, the reputational harm can be severe if companies do not follow the precautions and health guidelines recommended by the authorities.
All employees—from the most senior to the most junior—want to hear important internal news from their leaders first, rather than through hearsay. Communication designed to reassure the workforce on safety should deal in specifics rather than generalities, highlighting concrete measures taken to protect personnel. Employees want to feel that the company empathizes with the personal cost of the pandemic.
9. Look beyond business
Brands can play an important humanitarian role in this unprecedented situation, and they may need to look beyond their business to openly display empathy to those who are suffering. Short-term marketing messages that emphasize commitment to helping aid the crisis are necessary but not sufficient; brands should also act and respond in powerful ways.
The simplest and most common action is donating to hospitals and medical institutions. A number of brands in China have already taken this step. For example, multinational luxury group LVMH announced in late January that it would donate nearly $2.3 million to the Chinese Red Cross Foundation to help address a shortage of medical supplies. Similar donations came from brands such as Kering, L’Oréal and Estée Lauder. In Italy, grocer Esselunga donated €2.5 million to Italian hospitals and offered free online delivery for customers over age 65, the most at-risk segment of the population.
Brands can go one step further by leveraging their resources and capabilities to provide tangible disaster support and relief. For more than 30 years, Anheuser-Busch has provided emergency drinking water as part of disaster relief efforts—over 80 million cans of water in the US alone. The company pauses production of beer and switches to production of emergency drinking water when disasters require relief efforts. Consumer goods companies can be a highly visible, branded face of the crisis response; a positive contribution can create deep loyalty and brand equity over the long term.
Path to recovery
At moments of such strain, it can be hard to keep up with all the immediate challenges, let alone maintain focus on the medium and long term. Yet leadership teams in consumer products know that they cannot afford to lose sight of their broader goals during the turbulence created by COVID-19. They need to plan for the eventual recovery: Phase 3 of our approach.
In Phase 3, you’ll prepare to welcome back your staff and gradually return to precrisis posture, though it will take some time to return to business as usual. Companies should continue to prioritize creating a healthy workplace environment. Share the actions you’ve taken to ensure ongoing safety and hygiene, and work with your suppliers and distributors to put in place additional measures. Learn from this shock to make your business more resilient following future external shocks, such as economic downturns, terrorist attacks and natural disasters.
You’ll gradually wind down resources and teams dedicated to managing the crisis, but only after conducting a post-mortem on lessons learned. Then, codify your approach for the next similar crisis and ensure that an emergency response team can be activated quickly.
Recovery also means resetting and restarting the plan for 2020 with new objectives, budgets, forecasts and operational plans. Beyond that, companies will need to refresh their three-year plan, with a particular focus on key actions:
- Review customer and market data to highlight areas where the company gained or lost market share during the crisis. The review should also cover how the company’s highest-value customers weathered the crisis, identifying priority actions to nurture those relationships.
- Rebalance stock levels to adjust to postcrisis demand.
- Develop commercial revitalization plans to reactivate demand.
- Update your M&A/target partnership list, looking both up and down the value chain for opportunities. Be ready to move quickly if opportunities present themselves.
- Implement continuous cost improvement, especially in categories that are not recovering as anticipated.
Looking further out, companies can use this moment as a catalyst to build longer-term capabilities—not only as a stress test to prepare for future crises, but also to serve customer and consumer needs more effectively and efficiently.
Double down on ensuring a resilient supply chain, from identifying alternative or additional sources of supply to implementing technology that allows for flexible capacity planning. Deploy more automation, more production nodes and more distributed inventory—all of which will require more investment.
Build a control tower to monitor your end-to-end supply chain. A control tower is a decision-making platform for a real-time, integrated and omniscient supply chain, providing end-to-end visibility and predictive/prescriptive analytics. It allows for increased efficiency without the need to implement widespread structural changes in the near term. In the longer term, it can provide critical visibility into options for structural adjustments to create step-change impact.
Accelerate your embrace of “new retail.” This can be a turning point for brands to activate and flex commercial muscles to become omnichannel leaders. That requires following consumers as they migrate to new touchpoints and fully delivering “anywhere, anytime” availability. Explore the full potential of digital and everything it entails, including product, marketing and route-to-market levers.
Evaluate overall route-to-market models, potentially experimenting with fewer layers of distributors in favor of a more nimble ecosystem. Closely reexamine your customer and distributor network to prioritize must-win relationships and identify potential gaps to fill.
Emphasize and build digital capabilities, from e-commerce to marketing to new ways of working. Revisiting company operating model norms in light of “smart” ways of working—including virtual meetings, more flexible work-from-home practices, and tech-enabled key account management and sales activities—could lead to lower travel expenses.
The current crisis is having a significant impact on consumer products companies, with multiple second-order effects that are still emerging. A focused and coordinated response to COVID-19 should now be at the top of the agenda for every consumer products CEO, as the global CPG industry will be living with its consequences for months or even years.
The specific operational changes demanded are vast, encompassing urgent and sweeping matters of supply continuity, distribution and logistics, evolving customer relationships, and more. The outbreak also underscores the importance of preparation, rapid response, continual learning, adaptation and communication in contingency planning. Above all, the safety of employees, customers and business partners is, and will remain, the highest priority.
In these difficult times, employees, customers, the investor community and other critical stakeholders will be carefully watching the industry’s response. This is a defining leadership moment. Embrace the challenge, take decisive actions that put people first, show empathy, overcommunicate and empower the team around you.
Joëlle de Montgolfier is the global practice senior director for Bain & Company’s Retail and Consumer Products practices. Leah Johns is the Consumer Products practice manager for Europe, the Middle East and Africa. Luke Secosky is the senior consultant for the Consumer Products practice in the Americas. Duilio Matrullo is a partner with the Consumer Products practice. The authors are based in Paris, Lisbon, Chicago and Milan, respectively.