Five ways COVID-19 is impacting the food industry

The COVID-19 pandemic is a significant human tragedy with over 2.5 million lives lost so far. In addition, and very much secondary to that immense loss, the economic costs continue to mount. The IMF estimates that global GDP contracted by – 3.5% (-4.9% in advanced economies) in 2020. Last January 2020 global GDP was forecast to expand by + 3.3% in 2020. But what does it say about the impact on food industry dynamics?

Employment remains well below pre-pandemic levels and the labour market has become more polarised with low-income workers, youth, and women being harder hit. The United States, for example, has 9 million fewer employed people than in February 2020.

The theory that irrespective of economic circumstances people must eat and drink, affording the agribusiness and food industries a degree of protection during economic showdowns, has been proven correct during this economic slowdown. However, what and where people eat, and drink has provided the most interesting aspect for the sector.

Dynamic changes to consumer behaviour due to impact on food industry

The last 12 months have seen major changes in the daily lives of consumers across the globe, with purchasing and consumption behaviours significantly disrupted, leading to a much more dynamic marketplace. At-home consumption has been elevated, as consumers adapted to changes in daily routines and work practices. The foodservice channel has been significantly impacted due to restrictions on operations and consumer mobility, leading to increased demand for online and delivery.

To understand how companies have been affected by the COVID-19 pandemic and their expectations of the impacts on their businesses’ prospects our analysts surveyed recent trading updates and annual reports of some bellwether agri-food companies.

The takeaway themes include

  • COVID 19 has had a positive effect on sales for the most part. 65% of the companies our analysts reviewed saw an increase in sales during the year as consumers increased at-home food consumption because of the pandemic. Retail sales for all companies soared as most of the world was forced to stay at home due to the spread of the virus. For most companies, this growth in retail more than offset much lower foodservice sales.
  • Those focused on foodservice continue to be the hardest hit. For some, however, increased retail sales have not been sufficient to compensate for food service losses and the longer business restrictions remain in place, more and more of their customers – restaurants, bars and cafes – will face an existential threat. European markets seem most at risk currently as most countries are continuing with their national lockdowns due to an increase in cases in the winter months.
  • Cost of Sales has increased dramatically in the last year. For many the full benefit of increased revenues has not flowed to net profit as extra supply chain, facility modification and personnel costs have eaten into their top-line gains. In Tyson Foods, Inc financial results announcement the company noted: “During fiscal 2020, we incurred direct incremental expenses related to COVID-19 totalling approximately $540 million, which primarily included team member costs associated with worker availability and production facility downtime, and direct costs for personal protective equipment, production facility sanitisation, COVID-19 testing, donations, product downgrades, rendered product, professional fees and thank you bonuses to frontline team members. We expect to continue to incur significantly increased operating costs related to worker health and safety measures, which have had, and will likely continue to have, a negative impact on our results of operations and financial condition.’’ While expenses in some areas have increased, there is evidence of a decline in other, previously conventional expenses. Selling, general and administrative expenses have declined for most companies largely due to a reduction in advertising and promotional expenses, a significant impact on food industry culture.
  • Location of the market is now more important than ever. The difference in how countries have reacted and been affected by the market has been quite different. Currently, much of Europe remains under lockdown while other places such as the Middle East and North America have less restrictions in place. As a result, food service continues to be more negatively affected in Europe than in other areas, with retail sales higher in Europe for the same reason.
  • The future is not as clear as some observers predict. It is possible that the wide availability of government-approved COVID-19 vaccines by mid-calendar 2021 may allow governments to gradually ease broad social restrictions in their respective jurisdictions, which would likely have a favourable impact on the foodservice industry. However, as we have already seen from the disruptions posed by new variants in the past few months there is no certainty with this virus. As a result of the uncertainty, some companies have adapted by allocating more resources to increase retail sales at the expense of foodservice and on the go foods. With more people expected to continue working from home post-pandemic, it’s likely more and more resources will be allocated The increased demand in E-commerce should also continue at a fast pace as companies allocate more and more resources to that channel.
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