Five takeaways on how Covid-19 affected food and agribusiness in Q2

The economic costs associated with combating Covid-19 continued to mount in the second quarter of the year for food and agribusiness companies.  The IMF estimates that global GDP will contract by – 4.9%[1] in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast and is much worse than the 2008/2009 financial crisis. Only last January 2020 global GDP was forecast to expand by + 3.3%[2] in 2020. The agribusiness and food industry reputation for resilience has been severely tested, as evidenced by industry updates compiled by Farrelly & Mitchell in Q1. Globalised trade routes have been negatively affected as consumers continue to purchase trusted brands and increase at-home consumption.  Similar to an umbrella in a storm, it protects you from the rain but after a while as the wind gets stronger and the weather more unpredictable, it is harder to remain dry. After Q1 2020, companies began to anticipate how the COVID-19 pandemic would play out and impact their future projections. Now that interim reports for Q2 have been released, our analysts surveyed recent trading updates and quarterly returns to see how agri-food companies have fared in the first half of the year. The 5 takeaway themes include:

  1. Unexpected direct costs continue to decrease net income projections. Financial forecasts made by companies at the end of 2019 did not take into account a global pandemic, never mind an increase in direct costs for PPE equipment and alterations that have to be made during the supply chain process.  In Nestle’s 2020 half year results report for 2020, they stated “In the first half, COVID-19 related costs were CHF 290 million, including expenses for bonuses paid to frontline workers, employee safety protocols, donations and other staff and customer allowances. In addition, the Group absorbed costs of CHF 120 million related to staff and facilities made idle due to lockdown measures”.
  2. Strong retail performance towers over the food service sector. Even though initial stockpiling increased sales for a lot of food and agribusiness companies, consumers are now conscious that stockpiling over a period of uncertainty isn’t sustainable. Trusted household brands are continuing to benefit however, as at-home consumption continues to surge, and lockdown procedures continue to affect the food service industry. Capacity in restaurants, bars and hotels has been restricted to a percentage of what it once was, resulting in a decrease in food orders which in turn, negatively effects the supplier.
  1. Out-of-home channel closures effect big name brands. Big brands continue to perform well in markets they have dominated. However as firms try and benefit from globalisation by infiltrating other markets and regions, sales have declined as some out-of-home trade channels have closed due to COVID-19. Consumers are buying their own trusted brands within these markets, reflecting a high exposure to on-the-go consumption and impulse buying.  Danone stated in their recent 2020 half year results that “sales decreased by -5.7% in the second quarter on a like-for-like basis, hit by the expansion of the COVID-19 pandemic into new regions most notably Latin America, the reversal of pantry loading behaviors observed in the first quarter and the full impact of out-of-home closure in the quarter.”
  1. E-commerce acts as a lifeline for many brands. Lockdown procedures began to ease in the second quarter of the year, yet consumers were still aware of cross contamination. This may explain why many people continued to buy the majority of goods online. In Tesco PLC’s most recent trading update, they stated “Growth was most marked in online with sales up 48.5% for the quarter as a whole and the rate of growth increasing to nearly 100% by the end of May.”  
  1. Few have the courage to provide guidance while others remain in the shadows. Our analysts surveyed Q1 trading results for eighteen food and agribusiness companies and found that eleven companies had withdrawn their forecasted outlook for 2020 while others downgraded their guidance and some remained the same as you can see below. After studying the Q2 results, we found that four companies had upgraded their guidance while the majority referred to their 2020 outlook as being withdrawn due to the uncertainty around COVID-19

How can you adapt and grow your business despite coronavirus? Contact our agribusiness team. [1] Baseline scenario–which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound [2] January 2020 WEO Update

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