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Consumer products industry outlook

Volume 7, Spring 2021

From retailers and restaurants to fashion, food and beverage companies, this year more than ever means that consumer products companies will need to anticipate preferences, adapt to labor challenges, use digital to transform business and look for ways to cut costs.

Key takeaways from the spring 2021 consumer products industry outlook

  • Food and beverage producers, processors and distributors still struggle to maintain labor as new stimulus is released.
  • Direct-to-consumer has put additional strain on the relationship between retailers and brands as strong brands are changing their distribution strategies.
  • People will once again return to on-premises dining in the spring and summer of 2021 and, coupled with the third stimulus payments, this will allow for a strong second quarter in the restaurant sector.
  • Consumer demand for home furnishings continues and can only be constrained by import bottlenecks.
  • Cosmetic businesses should leverage customer data through retail partnerships, social media and their own direct-to-consumer platforms to monitor trends.
  • Concerns over the use of forced labor in China’s Xinjiang cotton producing region continue to loom over the fashion and apparel world.

RETAIL

The way-too-early holiday outlook

It’s not typical to hear discussion surrounding the holiday retail season in the second quarter of the calendar year. That said, 2021 is not a typical year. As the U.S. vaccination efforts scale up with more supply available, and warmer weather takes people outdoors more frequently in the summer, it’s very likely that the health situation at the end of the calendar year will be better than it’s been since the first positive coronavirus test was reported in early 2020. If so, that means that there will likely be very little restriction on retail and restaurants. In addition, consumers were largely deprived last year of the social aspects of the holiday season they’ve become so accustomed to; there will be pent-up demand for holiday revelry. Improvements in the overall employment market and economy should also be factored in.  Indeed, the stars may just be lining up for one of the strongest holiday seasons in years for the retail sector.

Behind the scenes, most retailers are well on their way to planning for the holiday season in the second quarter.

Behind the scenes, most retailers are well on their way to planning for the holiday season in the second quarter. However, the way in which retailers go about planning for this season will be unlike any other. The questions are still the same. What will consumers want? How and where will they want to shop and make purchases? What’s the right price? The curveball this year is that changes to consumer habits that evolved during the pandemic will linger long after and add many different dynamics to these same age-old questions. Retailers will need to act sooner than ever to get the right answers.

Retail foot traffic returns

With more than 18.8% of the U.S. population vaccinated as of April, according to the Centers for Disease Control, the extent to which customers return to brick and mortar stores is now becoming a central question for retailers affected by state restrictions and general pandemic fears. In particular, mall-based retailers are among those that were most affected during the pandemic. Many anchor retailers declared bankruptcy or announced larger store closings, including Neiman Marcus, JCPenney’s and Macy’s. The loss of these anchors, which have traditionally brought shoppers into the mall, also has had an impact on boutique retailers hoping to capitalize on foot traffic.

In an effort to make use of the space that they kept during times of slower customer traffic, retailers turned many of their stores into distribution centers focusing staff on the delivery process to fulfill online and curbside orders. As we emerge from the pandemic, retailers are now faced with finding the balance between serving customers in stores as well as through other sales channels in light of changes to preferences that developed during 2020.

Part of that challenge is that the expected increase in foot traffic has the potential to put strain on locations and staff that are now attempting to both engage customers in stores, while also fulfilling online orders. In addition, retailers need to determine how these changes affect their product mix. For retailers looking to find the right balance, survey data from Coresight Research might help. Their recurring weekly survey questions indicated that consumers have tended to buy their essential items in stores, while more discretionary items were purchased online. Those retailers selling either category will likely have to change their operating models in different ways to align with the preferences of their respective customers. Those that carry both essential and discretionary items will need to consider what products they offer through each channel. 

Many retailers have already made changes to their operating models in response to the acceleration and growth of e-commerce in 2020. Companies that pivoted quickly to different delivery methods including BOPIS (buy online and pick up in store), curbside and home delivery, saw their investments quickly returned in the form of revenue that helped maintain market share and cash flow during challenging times.

MIDDLE MARKET INSIGHT

Companies that pivoted quickly to different delivery methods including BOPIS (buy online and pick up in store), curbside and home delivery, saw their investments quickly returned in the form of revenue that helped maintain market share and cash flow during challenging times.

At the same time, building out these new sales channels brought with them increased costs for labor, technology and deliveries, and these cut into margins. Customers expect to pay the same for an item whether they purchase that item online for delivery or purchase that item in a store. Costco’s Chief Financial Officer, Richard A. Galanti, highlighted this challenge in their Q1 2021 earnings call when asked about customers’ use of Instacart. He indicated, “One of the challenges right now is a lot of the buy online and pick up in store traditional retail promotions are the same price as what you come in and buy it for. So somebody's paying for the picking it up and storing it and waiting for you to pick it up.”  

In response, many retailers have been forced to carefully consider which items are available online in order to ensure the right product mix as well as to protect margins. Those retailers that can tackle this challenge will be the earliest winners in 2021.

Direct-to-consumer sales

Retailers were not the only ones that saw an opportunity to engage with customers through e-commerce in 2020. Changes to consumer habits also brought about the acceleration of existing consumer products companies exploring direct-to-consumer (DTC) sales. Strong brands saw an opportunity to increase their market share and gather additional insights from their customers by engaging with them directly online. The DTC movement has put additional strain on the relationship between retailers and brands as strong brands are changing their distribution strategy. Nike is a prime example. The brand recently dropped DSW, Urban Outfitters and Macy’s as retail partners. Nike’s CFO, Matthew Friend, highlighted that Nike will “also prioritized available product supply to NIKE Direct and our strategic partners” during their Q3 2021 earnings call.

Nike’s decision is likely a factor of its recent success. In their Q3 FY2021 earnings call Nike reported that direct sales were $11.9 billion through the first nine months, up 22%, and represented 40% of total brand revenue. Friend also emphasized Nike Direct on the earnings call on March 18, 2021, and how it has become a core part of their approach. Nike is experiencing a “strategic shift to increasingly direct and personalized connections with consumers as a way to unlock strategic and financial opportunity for Nike.” The increase in interaction with customers has increased the data and insight available to them. Friend went on to highlight how Nike is using data to increase revenue through the channel. “We [Nike] expect Datalogue to amplify our speed in analyzing consumer data and inform products marketing, and service recommendations, ultimately increasing member buying frequency, basket size and member retention rates.”

It’s clear that the DTC strategy is more than just new sales and improved margins; it’s also another opportunity to gather invaluable data to inform smarter decisions as retailers continue on their digital journey.

MIDDLE MARKET INSIGHT

It’s clear that the DTC strategy is more than just new sales and improved margins; it’s also another opportunity to gather invaluable data to inform smarter decisions as retailers continue on their digital journey.

RESTAURANT

As we continue to beat back the pandemic, people will once again return to on-premises dining in the spring and summer of 2021. This, coupled with the third stimulus payments hitting bank accounts, will allow for a strong second quarter in the restaurant sector.

The first stimulus payments began reaching consumers in April of 2020. Almost immediately the restaurant sector saw a sharp increase in sales in May, indicating that consumers were willing to spend at least some of their stimulus payments on old comforts. There are three factors that should result in a similar spike to restaurant sales this spring: increasing consumer confidence in the subsiding pandemic, the third stimulus payment and warming temperatures across most of the country.  

However, while seated diners are likely to increase, the restaurant sales channel mix is not likely to completely return to its pre-pandemic state. New habits formed during the pandemic will make focus on and investment in digital strategy a critical initiative for restaurants across nearly all segments. What’s interesting is that there’s been a consistent downward trend in capital expenditures in the restaurant sector since early 2017 and the average as a percent of sales has been below 6% for the last two years. This trend should change.

However, not everyone is following the trend. Chipotle has been known for its focus on the digital side of the business. A quick search for the word “digital” in their Q4 2020 earnings transcript returns 32 uses, and they’re putting their money where their mouth is. Unlike the rest of the industry, Chipotle had a capital expenditure to sales ratio of nearly 8% in Q4 2020 and was well above the industry average for the entire year.

A strong digital platform is not only a necessity to maintain customers with new and evolving habits; it’s also an opportunity for growth.

It also appears that a strong digital platform is not only a necessity to maintain customers with new and evolving habits; it’s also an opportunity for growth. In the Chipotle Q4 2020 earnings call, Brian Niccol, chair and CEO, noted that in markets where they are starting to open their dining rooms, it’s been additive to their overall business and has not cannibalized digital sales. In fact, he estimates they’re hanging on to 80% to 85% of their digital business, even as dining rooms re-open.

Restaurants in all sectors will need to rethink their digital strategy in preparation for what should be a significant opportunity to capture pent up demand in the second half of 2021 and especially during the holiday season.

FASHION, BEAUTY AND HOME

Home furnishings demand can only be contained by supply

The consumer demand for home furnishings has maintained even after the initial COVID-19 acceleration that took place in 2020. Even as new home sales slowed in 2021 due to weather and higher home prices, consumers still continued to outfit their homes for their evolving lifestyles. Through the first two months of 2021, personal consumption of home furnishing products is up 16% from the prior year, and underlying sentiment data suggests there are no signs of slowing down. Through the end of 2020, the National Association of Home Builders future remodeling market conditions index, which tracks builders’ view of conditions based on committed work, proposals and backlog, is 20% higher than the prior year, while the index that specifically tracks work committed over the next three months is at an all-time high. Likewise, consumers indicated their appetite for major appliance purchases continues to increase with the Conference Board’s consumer confidence reading for consumers’ plans for major appliance purchases reaching a 12-month high.

MIDDLE MARKET INSIGHT

While consumer demand will provide strong tailwinds in 2021, supply chains are struggling to keep up with the surge.

While consumer demand will provide strong tailwinds in 2021, supply chains are struggling to keep up with the surge. Even before the COVID-19 pandemic upended the global supply chain, notorious long lead times plagued the furniture and home furnishings industry. Entering 2021, production and imports have slowed with global supply chain bottlenecks and outbreaks forcing manufacturing facilities to close in the United States. Furniture is the top containerized import at the port of Los Angeles which continues to be plagued by backups. The result is a backlog of nearly 400,000 seaborne containers were imported to the United States in February 2021, an increase of more than 100,000 containers from the previous year, according to IHS Markit. The disruption will be felt by businesses and consumers. Inventories remain below prior year levels despite the demand surge and imports are beginning to lose pace with overall demand.  Wholesalers are taking note and acknowledged that supply chain was a common theme among Q1 2021 earnings calls. The CEO of La-Z Boy Inc., for example, predicted lead times would reach an “unprecedented five to nine months depending on the category.”

Beauty and personal care sales are strong but changed

Despite the demand fallout at the onset of the pandemic, overall beauty spending in 2020 slightly outpaced prior year rising to $672 billion from $668 billion in 2019 and continues to grow in 2021. Beauty and personal care purchases made up a larger portion of overall household spending, largely benefitting from the shift from service spending to goods-based spending amid lock down and social distancing orders across the United States. However, the reliance of the beauty and personal sector was not uniform across all categories. Facial cosmetic sales were down 24.5% for the 52-week period ended Feb. 21, 2021, according to IRI data. Losses in the cosmetics categories were made up for by stronger performances in personal and skin care items. New self-care routines and purchases played the part of affordable luxuries during the pandemic and recession. Purchases remained strong even in areas of the country where mobility increased over the summer showing that these sticky habits positioned these categories for long-term strength. In the coming months, cosmetic businesses should leverage customer data through retail partnerships, social media and their own direct-to-consumer platforms to monitor which trends may have staying power and which will change as consumer habits evolve.

In the coming months, cosmetic businesses should leverage customer data through retail partnerships, social media and their own direct-to-consumer platforms to monitor which trends may have staying power and which will change as consumer habits evolve.

The high cost of inexpensive Chinese cotton

Concerns over the use of forced labor in China’s Xinjiang cotton producing region continue to loom over the fashion and apparel world. Sanctions imposed by governments from important consumer regions such as Great Britain, the European Union and the United States have forced many businesses in the sector to devote resources to improving transparency into their supply chain and to limit their exposure to cotton produced in the region. Increasingly, socially conscious consumers and investors have pushed for high profile brands to make statements condemning the use of cotton produced in the region and provide more information about the depth of their supply chains. Apparel companies that have made such statements, such as Burberry, H&M and Nike, have risked alienating the Chinese consumer base that is looked at as a critical area of growth. These brands have faced consumer boycotts, retaliation from the Chinese government and removal from critical Chinese e-commerce platforms. 

Even brands that can successfully navigate a complicated consumer and geopolitical landscape are still forced to deal with an underlying sourcing issue. Apparel production has long-standing roots in China and Xinjiang in particular, regions that remain a source of low cost, high-quality cotton. Even as the COVID-19 pandemic and tariffs imposed during the trade war between the United States and China pushed production elsewhere, Chinese cotton remains a critical part of the apparel trade globally. Despite Vietnam overtaking China as the largest exporter of cotton apparel products to the United States in 2020, the appeal of low cost, high-quality Chinese cotton is hard to ignore for apparel brands. Middle market apparel businesses, who utilize smaller supply chain networks, may be more exposed as they may not have the resources to pivot away from the low-cost options and have less leverage to ask for transparency into supply chains. 

Digital luxury is here to stay

Luxury consumer products companies are poised for a strong rebound after consumers pulled back spending due to economic uncertainty and lack of mobility in 2020.

Luxury consumer products companies are poised for a strong rebound after consumers pulled back spending due to economic uncertainty and lack of mobility in 2020. The impact of the virus is radically changing the key growth drivers in the sector. The most important is the luxury consumer’s accelerated comfort with e-commerce shopping experiences. Prior to the pandemic, consumers and businesses found it difficult to recreate the highly curated luxury buying experience in the digital environment. Even as lockdown restrictions ease and consumer mobility slowly increases, the digital experience luxury brands offer will play an important role in their growth. Chinese consumers may have provided a model in 2020 as digital sales remained constant even as stores reopened in many parts of the country.  Consumers were still drawn to innovative online shopping concepts like virtual fashion shows and shopping events, virtual shopping assistants and online tutorials.

For many luxury brands, navigating a new balance of power will be paramount for success going forward.  While many of the large luxury brands will have direct access to consumers through their own direct to-consumer sites, middle market businesses will have to navigate through an increasingly complex network of online and physical market places and platforms. Third-party platforms geared toward the millennial consumer have played a large role in the shift to e-commerce, with sites like Farfetch, Mr. Porter and Yoox curating collections that allow consumers to engage with smaller brands, in addition to Amazon’s deeper foray into a luxury apparel offering. Technology also provides new innovations to allow consumers to have access to products that may have been out of their reach, such as the rise in second-hand market places. Luxury apparel companies that understand how these platforms can be leveraged to drive brand value and consumer engagement across platforms will stand out in the new luxury landscape. 

FOOD AND BEVERAGE

As we have come through a year of the pandemic, food and beverage companies are taking stock of what worked, what could be improved and where to go from here. Many middle market companies in the food and beverage ecosystem actually performed quite well and now are reviewing their data to decipher what increase in revenue is sustainable and what rising costs are on the horizon. Staying current with consumer preferences, adapting to labor challenges and cutting costs are key to staying successful as the economy begins to open.

The state of food and beverage

In the last 12 months the CPI rose 1.7% largely driven by higher food prices at an increase of 3.6%. All food items experienced gains for the 12 months ended February 2021 with protein products having some of the highest gains: beef and veal up 6.5%, pork up 5.2% and poultry up 4.8%. Food at home has increased 3.5% year over year at the end of February and food away from home recovered the most in several years at a gain of 3.7%.

The Producer Price Index also increased 2.8% and according to the U.S. Bureau of Labor Statistics, it was the biggest gain since October of 2018. The consumer food index gained 2.4% with beef and veal coming in at 15.9%. Also notable: food for export rose 16.9% amid vaccine distribution and the recovery of economies around the globe.

Protein habits

There is a great deal of excitement around all things plant-based as consumers prefer more natural ingredients and continue to be concerned about the environment. Many new consumers tried plant-based protein products early on in the pandemic as shelves were empty due to supply chain disruptions.  However, according to a recent study by data and marketing tech company, Numerator, plant-based meat alternatives may not be catching on as quickly as anticipated. They developed a COVID Buyer Habit Index that compares the purchasing habits of new buyers in a particular category during March and April of 2020 to new buyers in the same period of the prior year to monitor repeat buying habits. New buyers were less likely to continue to purchase meat alternatives with only about 7% of consumers habitually purchasing these products. Conversely, seafood purchases were at an all-time high with 78% of seafood buyers forming a new habit. According to IRI data, fresh and frozen seafood purchases increased 25% year over year as of December 2020, exceeding their consumer packaged goods counterparts whose sales grew 6% year over year for the same period. It is anticipated that this trend will continue well into 2021 as the cooking-from-home preference remains strong.

According to IRI, 89% of American households prepared meals at home at the height of the pandemic in April of 2020. By December of 2020 that percentage only fell to 84%. In addition to increases in seafood purchases, 43% of U.S. consumers are buying more meat than before the pandemic according to IRI data because of continued cooking from home. Furthermore, according to the Food Industry Association’s research released March 23, 2021, 94% of Americans purchased meat because it provides high-quality protein. Specifically with pork, robust domestic demand continues to show increases in hog prices. According to the USDA, North America is responsible for just under 50% of all pork exports globally. China is one of the largest importers as they have been trying to rebuild their own stocks that were hurt with African swine fever in 2020. Pork prices will remain elevated as exports remain steady and restaurants and food service begin to recover. While innovation continues in the plant-based alternative industry, it has yet to disturb the growth of traditional protein products.

MIDDLE MARKET INSIGHT

Food and beverage producers, processors and distributors still struggle to maintain labor as new stimulus is released.

Food and beverage producers, processors and distributors still struggle to maintain labor as new stimulus is released. While the gig economy was negatively affected by the pandemic, the gig economy mindset still exists and it is difficult to find entry-level workers that want to work in the warehouse for the long term. As the population ages, many workers are exiting the workforce as well. According to the United Nations, the number of countries with over 20% of the population aged 65 or above is estimated to rise from 15 countries in 2020 to 44 countries by 2030. Also, in the January 2021 results of the RSM US Middle Market Business Index, 44% of executives are planning on hiring more workers; more than half the executives expect to increase compensation over the next six months. Labor wage rate growth for food manufacturers has lagged that of other industries; however, increased scrutiny around safety, retraining and other labor forces may require food manufacturers to increase compensation to bring workers back to production floors.

There has been some positive progress in addressing the labor shortage of agricultural workers.  Potential legislation introduced at the end of March of 2021 would help provide a more stable workforce for growers and better protection for laborers in the Farm Workforce Modernization Act. The bill has the support of the United Fresh Produce Association and the New York Farm Bureau. According to advocates of the bill, if enacted this legislation would provide certified farmworkers and their families with an opportunity to earn legal immigration status. Through improvements in wages and working conditions, farmworkers would better able to help farmers meet year-round labor needs. This would result in a more stable farm labor force, and greater food safety and security to the benefit of employers, workers and consumers.


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