August 27, 2020

Production almost back to pre-Covid levels

Supplier ollage (credits: Studio Dagdagaz/Stock; Barilla; Paul Talbot; screenshot Carrefour)
Volume over variety: Was the motto for some food and fmcg suppliers during the height of the coronavirus crisis
Martial comparisons are generally best avoided. But, as in wartime, the coronavirus has brought out the best and the worst in people. We have had to endure black marketers selling protective masks and even basic foodstuffs at exorbitant prices, unprovoked attacks on vulnerable shop staff, and disinformation from the White House.

Yet the crisis has also brought forth many unsung heroes. Selfless hospital staff serve their fellowman to the point of exhaustion. Others have volunteered to be human guinea-pigs in the search for a vaccine. Simple, hard-working people with their own families to care for have still found the time to shop for the old.

Meanwhile the young are generally as feckless as they have ever been since time immemorial. They persist in 'hanging out' unmasked at super-spreader events. Marketers and sociologists have long tried to define them with such terms as Generation Y, Generation Z or The Millennials. Perhaps we should simply call them the Covid-19 Generation.

The young would not perhaps be so bright and gay if they inhabited a world of rationing with long queues for such basic commodities as pasta, water, milk or toilet paper. The fact that they don't is due to the tremendous speed and flexibility with which suppliers have met unprecedented spikes in demand...

This has certainly been good for brand image, but it was often achieved by radically reducing overall offers in order to concentrate on the manufacture of just one product. So what have been the effects of this dislocation on production lines and corporate profitability?

Up and running again

First the good news: Nearly all the manufacturers we approached state that their production lines are virtually back to normal. Procter & Gamble Germany confirmed this for its cleaning and hygiene brands. Nestlé Germany, which normally offers a total range of 5,600 products, but concentrated on the production of tins of ravioli, deep-frozen pizzas, babyfood and water etc. at the peak of the crisis, has now almost returned to pre-Covid status.

One major exception would seem to be Reckitt Benckiser whom we presume are still striving to meet extreme global demand for disinfectants such as Dettol, Lysol or Sagrotan. Only a few weeks ago, CEO Laxman Narasimhan told our newspaper:

"We ran our factories with a simplified set-up in order to concentrate on the top products. We also simplified our portfolio. In China, for example, we cut down the number of Stock Keeping Units we make by 80 per cent. By these means we produced thirteen times the amount of hand sanitizer that we did last year. But we still haven't been able to meet all the demand."

Nifty adaptation

It is interesting to learn how manufacturers managed to adapt so quickly. An indication is given by tissue and toilet paper maker Essity: "We postponed all non-essential maintenance work and simplified our assortment by, for instance, not making all packet sizes." The marketer of brands such as Zewa, Danke and Tempo as well as numerous private label lines says that normal production resumed in June.

Not all brands streamlined production to meet demand, however. The German subsidiary of Italian pasta maker Barilla told us: "We decided not to limit our standard assortment despite an exorbitant increase in demand. This was because we wanted to continue providing consumers with the variety they want."

German soft drinks and juice maker Eckes-Granini, faced both with higher demand and a shift in sales from gastronomy to retailing, has also continued to offer its full brand palette. The same applies to German oatmeal producer Peter Kölln GmbH although Product Development and Brand PR manager Anne-Dore Knaack admits that "we were not always able to effect all deliveries on time due to extremely high demand".

Companies are obviously much more reticent when it comes to revealing whether there has been a positive or a negative effect on their bottom line. Those who experienced a sudden surge in demand for their higher-margin products are now happy campers. Whereas those who had to stop or reduce the manufacture of high-margin brands in order to concentrate on specific low-margin products must doubly curse Covid-19.

Cost pressures

All are obviously faced with increased costs. A by no means exhaustive list of these would include extra hygiene and protection equipment, the recalibration of factory lines, tied capital during logistics impasses, investment in further IT capacity for home office workers etc. etc. Even big guys like Nestlé have felt the strain. In a recent interview with our newspaper (available to readers on request), CFO Steffen Kindler talked about "a significant hit on gross profit".

It is surely therefore right that the German government has given financial support to parts of the food and fmcg industry after designating them as systemically relevant. It is doubtful, however, whether any state aid will carry all the tabs. Barilla, for instance, has already gone on the offensive and, while referring to "significant investment" and "massive cost pressures", has hinted that "an efficiency drive" and what it calls "price adaptation" will be initiated.

Retail red necks

The position is certainly understandable when one remembers that some retail 'partners' even seem inclined to invoke pre-Covid non-delivery compensation clauses at the very peak of the epidemic when supply lines had virtually broken down nationwide. "Suppliers' extra costs receive no consideration from retailers who merely refer to their own," the Confederation of the German Food Industry (BVE) claims.

This leads Dr. Mirko Warschun, senior partner at management consultancy A.T. Kearney, to remind suppliers that retailers have already announced that they expect a contribution to their own costs. He also warns that consumers will become increasingly price-conscious particularly as regards basic commodities over the recessionary times ahead. "Thus it won't be enough simply to return to normal production," says Warschun. He therefore advises suppliers to "prioritise cost-cutting in logistics, staff, raw materials purchasing, and packaging".

So it looks like grim days ahead for the industry. On the other hand, the exemplary way suppliers managed the Covid-19 crisis leaves one with considerable confidence in the sheer competence of those who manage our supply chain.

It is what Dr Christian Verschueren, Director-General of retail and wholesale association EuroCommerce, calls "a formidable achievement". Food for thought, chaps?


Read in German: 'Zurück im Normalbetrieb' by Mike Dawson on page 14 of Lebensmittel Zeitung, no. 35, 29.08.2020


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1 Comment (Write a comment)

  1. Tim
    Created 27 August, 2020 21:22 | Permanent link

    Pecking order

    ... "suppliers' extra costs receive no consideration from retailers who merely refer to their own,"

    “...remind suppliers that retailers have already announced that they expect a contribution to their own costs.”

    “... advises suppliers to "prioritise cost-cutting in logistics, staff, raw materials purchasing and packaging".

    “So it looks like grim days ahead for the industry. On the other hand, the exemplary way suppliers managed the Covid-19 crisis leaves one with considerable confidence in the sheer competence of those who manage our supply chain“

    A tale of a pecking order that cannot survive Covid-19. Simply to foist financial pressure on suppliers because of retailers' place in the hierarchy needs the latter to wake up and smell the coffee. The supplier corporates will have the financial muscle to push back against bullying (for that is what it is). Alas, retailers and SME suppliers are in for a fight -- towards closure?

    Where do retailers sit in the financial firmament? They too are in a pecking order under pressure from the pre-Covid mindset of financialisation of assets -- debt, rents on non-performing estates etc. Simply demanding contribution to costs in the current climate will aid no one's business.

    A dog-eat-dog attitude reaches its fulfilment when there is only one dog left standing. That will fulfil no one's commercial goals. The time now is to work together, as you say, for the whole supply chain to be exemplary.

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