Companies will have to reassess their working capital management and business models as well as optimise inventories, to cater to emerging consumer demand patterns
As the effects of Covid-19 continue to affect global economies, emerging markets, in particular, are facing a severe shock as risk aversion triggers unprecedented capital outflows, tightened financing conditions, and pressured currencies.
The pandemic has inflicted a temporary but material shock to the consumer goods industry worldwide.
Among longer-term risks, associated tourism spending has been adversely affected by ongoing disruption to international travel; this includes negative effects on travel retail channels, leisure activities, and the personal luxury goods sector, prompting a strategic revision to more localised supply chains, which could add costs and exacerbate trade conflicts.
The shift in consumer preference will become more noticeable over the next few quarters, as economies around the world begin reopening, albeit with new safety measures in place.
Resilience will drive Covid-19 recovery
The recovery efforts from the fallout of the Covid-19 pandemic provides an opportunity for the EMEA region to make progressive changes that will ensure sustainable development and a more resilient economy.
Companies are typically responding by changing their capital allocations, reducing shareholder distributions, and suspending expansionary investments and M&A.
Looking at their internal operations, consumer goods companies are revising supply chains and working capital management, reducing the number of stock-keeping units (SKUs), and renegotiating lease terms with landlords of the retail network.
In the GCC region, the Covid-19 pandemic, in addition to weaker oil prices of the past few years and sluggish non-oil economy, have led to lower purchasing power.
We expect GDP growth contractions for the GCC countries, fuelled by lower consumer confidence due to job losses and reduced disposable incomes, plus increasing geopolitical risks would reduce retail sales.
S&P expects pressures including a sluggish regional economy that doesn’t encourage spending, the potential of the number of expatriate residents leaving the region and lack of tourists due to global travel restrictions. Besides, the growth of e-commerce, exacerbated by the pandemic, poses a threat to brick-and-mortar retail.
Even mall landlords are getting involved by addressing this challenge by strengthening their online platforms, investing in last-mile deliveries, thereby delivering an omnichannel shopping experience for its customers.
In the revival phase, we believe that large brands will likely become even bigger thanks to their resilience and consumer appetite for familiar, better-known brands.
Moreover, the overall premiumisation trend will likely suffer a temporary setback as consumers trade down. Companies with global brands, diversified portfolios at different price points, and a simpler supply chain are likely to prove to be more resilient.
Additionally, we expect them to gain market share in this volatile environment. In such a scenario, cost management and cash preservation initiatives will be key to maintaining credit quality.
Towards sustainable consumerism
ESG considerations are increasingly being incorporated into an organization’s framework and companies that carry strong brand equity will continue to have a competitive advantage. There has been a marked shift in consumer preferences towards health and wellness, with a greater focus on food constituents and ingredients, resulting in an increased demand for plant based and organic products.
Consumers’ focus on health and wellness has been an important industry driver in the past and this trend is expected to continue after the Covid-19 pandemic. The demand for safe and healthy packaged food and beverages is particularly pronounced and it has also put health and wellness at the center stage for many consumers.
We consider environmental and social risks to be average from a credit perspective compared to other industries, and evenly balanced in the branded, non-durable consumer goods industry.
Environmental and social concerns include the supply chain – particularly regarding raw materials from agriculture and livestock, water usage, plastic and packaging, and waste treatment. Within the agribusiness industry, environmental risk factors are more important, particularly for weather-related volatility and disease outbreaks.
We note that governance has featured more heavily in recent rating actions of certain emerging market companies in the agribusiness sector.
Looking ahead, consumer resonance toward a more local and sustainable base of suppliers is imminent.
In addition, companies will have to reassess their working capital management and business models in addition to optimising inventories, to cater to emerging consumer demand patterns.
Gulf Business. July 22, 2020