Retail certainty in an uncertain time

The COVID-19 pandemic is unprecedented in the recent days cataclysm. Countries from all over the world found themselves in a wholly new and, in most cases, unexpected situations. It applies to not just governments and businesses but also consumers.

The retail sector has been shaken by the dramatic change that forced some retailers to close their outlets, others to shift to e-commerce, while other businesses are facing drastic demand surge. When consumer behavior is rapidly changing, the right retailers’ response is essential, and their future might be at stake.

In this post, we are focusing on an entirely online grocery store in Bulgaria that faced nearly twice as much demand in the first weeks of the COVID-19 emergency. To obtain an in-depth understanding of the situation, we have to have in mind that there are two groups of impact factors:

  • The behavior of the merchant himself – pricing policy, promotional offers, advertising campaigns, seasonal discounts, and more.
  • Environment conditions – government restrictions, income volatility, weather, holidays and social events, etc.

Let’s put a focus on the factors impacting the consumer demand alteration triggered by the COVID-19 pandemic. One major is the increased consumption of food and consumer goods because the population majority spends more time at home. On top of this, the global pandemic outbreak makes consumers reluctant to purchase luxury goods. We shouldn’t miss the consumers’ propensity to stock up or stockpile due to general panic and insecurity. Also, limited social life leads to a consumption decrease of related product categories.

COVID-19 creates series of challenges for retail businesses like consumers’ panic behavior, the suppliers unable to meet rapidly changing demand, the need for a drastic increase in customer delivery capacity, as well as ability for warehousing expansion.

Such a situation brings several threats to retailers. There is stress among the category buyers and procurement officers, which might make them biased in their decision making leading to orders for the wrong amount of goods. On the other hand, it is unclear whether the new consumption patterns would be sustainable, and if abrupt demand changes will affect all FMCG categories. The assumption that after the end of the quarantine measures, the intensity and the structure of consumer demand will somewhat return to their previous levels or the online retail business will face permanent change in consumer habits.

A4Everyone’s solutions optimize costs and increase business efficiency through automated supply-demand decision management that is tailor-made for wholesalers and retailers. During the crisis development, the solution brings more certainty in the decision-making process, which is extremely important to be based on data rather than emotions (figures below). Machine Learning (ML) and Artificial Intelligence (AI) algorithms make this possible.

With automation abilities, a data modeling algorithm can self-train rapidly, hence adapting to a rapid change of consumer behavior. It can be applied not just to exponentially growing businesses, but also to those experiencing sales declines. Moreover, this happens without human intervention. Furthermore, within a short time, algorithms may extract trends from already changing consumer demand and forecast them in the future, enabling retailers to analyze the product portfolio promptly to spot both potential problems and opportunities.

AI handles very well this kind of force majeure, and this is evident by the data some of our customers generate. ML algorithms not just cope with the unexpected spike in consumption, but they are forecasting accurately enough to minimize the risk of producing unacceptable quantities of stock shortage or waste generation.

The online grocery store marked a more than 90% increase in the consumption of fruits and vegetables alone in March compared to February 2020, with a reported waste of 0.98% compared to 2.08% a month earlier.

In the Meat and Fish category, the sales surge for the same period is 103%, the waste of goods was 1.27% or nearly twice as less than in February when this number was 2.46%. What’s more – in March 2020, the online grocery store reported the lowest waste in this particular category during the past six months.

In a fast-changing environment like this, the management of more than 16000 SKUs relies not only on the prediction algorithms but as well on so-called “business rules”. They contain the specifics, restrictions, and goals of a particular retail business. For example, larger buffers for essential SKUs and smaller buffers for complementary/non-essential goods. The likelihood of supply chain disruptions must be taken into account just like storage space, which might get limited in a situation like this. Properly working automated solutions require minimal to no correction, except in the case of factors they do not observe, such as turbulences in the supply chain.

How does COVID-19 change consumer demand?

Let’s get back our focus on food and consumer goods, esp. e-commerce. In March, compared to February 2020, there is an 83% total sales surge. Basic needs products like flour and spices, for example, are growing much more – 174%. An increase of 148% was made by the stews product category (beans, lentils, rice). Canned food (meat, fish, vegetables) in March 2020 outsold February by 144%. The dynamics in these categories reflect consumers’ desire to stock up on food, especially at the onset of restrictions.

There is also a significant increase in online sales of the Cosmetics product category, with a surge of 160%. Hands cosmetics products outperform every item in the group with 288% growth. There is also a noticeable sales increase in mouthwash, deodorants, condoms, and lubricants. It can be said here that the COVID-19 pandemic enables consumers to pay more attention not only to themselves but also to the people around them.

Almost all types of meat and meat products are selling significantly more except duck and veal. This fact displays a clear tendency to prepare and consume food at home. The figures for online sales of milk and dairy products such as cheese, yellow cheese, cream, etc.

At least by the end of March 2020, consumers are reluctant to give up pleasures like ice cream (194%), chocolate (120%) wine (82%) and hard alcohol (brandy – 193%; vodka – 136%; whiskey and bourbon – 47,5%) whose sales are also growing. The transition from living out to living in is forcing sales of filter kettles and water gallons.

The performance of products related to social life is moving in the opposite direction. We see sales declines in burger and donut sales, as well as holiday and party-related products like disposable plates and glasses. The same applies to energy drinks, whose monthly consumption decreases by 32.7%.

It is important to emphasize that the purchase of premium and luxury goods does not increase with the pace of the mass-market products. This consumer behavior indicates, if not a decrease in income, strong expectations in such direction.

What are the COVID-19 retail lessons?

First is the significance of the development of the online channels. In mature markets, internet sales have long generated higher growth than in physical stores. Retailers who have invested in an online presence suffer less than those who were not. On top of this, some of the entirely online-based retailers are generating substantial gains, especially those with their own logistics network.

The multichannel trading strategy utilization – the physical stores and online presence combination, as well as maximizing the synergy benefits – will be a priority in the new post-COVID-19 retail business reality. The benefits of supply-demand management automation result in improved revenue growth and cost optimization substantially.

“Every crisis is an opportunity in disguise” is a cliché indeed, but it is an opportunity for the retailers to ask some critical questions and to seek their answers.

  • How fast do we adapt to a rapidly changing environment?
  • How to get the most of digital platforms?
  • How can we help consumers reach us better and quicker?
  • How do we partner with those who guarantee the fastest delivery from production to the customer?
  • How do we rethink existing assets and look beyond the traditional framework within which a company is placed?

The answers to all these questions might be critical for the future development of retailers. However, what will be the actual retail lessons from COVID-19 will be considered in a future publication as we accumulate data on the change in consumer and retailers’ behavior.

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