- Green Growth
- Your Consultant
|Julien Brun Managing partner CEL Consulting|
Chinese supply of goods stopped abruptly or were significantly delayed. Available inventories dried up quickly and shortages began to happen all over the planet. Everybody outside of China was urging to find alternative production and/or transport capacity to serve customers’ orders.
In a recent survey conducted by CEL Consulting at the end of March, 83 per cent of companies in the physical value chain (retailers, transport, traders, manufacturers) in Vietnam had suffered from supply issues over the past two months. Nearly half (47 per cent) had issues specifically with Chinese supplies and a large majority of what came missing were raw materials.
Delays started to accumulate and even though some would eventually find a new supplier, planes slowly got forced to the ground and import/export flows were slowed down due to the lack of manpower to run operations on the floor.
From the perspective of early April, things have drastically changed. The pandemic is affecting nearly every country regardless of the level of development. Nearly one million people are officially infected, with almost 100,000 new cases every day.
Over three billion people are undergoing a lockdown or social distancing, and consumption has almost frozen in the Europe and the United States, or significantly dropped in most markets.
In Vietnam, the demand clearly surged in some categories, such as packaged food, dairy, and in personal care. Shop baskets got significantly more full as people started to visit markets and stores less frequently.
This surge in demand on specific items looked like more of a “just in case” purchase decision, and not a healthy increase of consumption. It is obvious that some lucky companies in specific sub-sectors are still trying to cope with much bigger orders than what they can deliver. But this rush on basic consumer commodities – toilet paper being a global symbol now – had skewed our perception.
Most companies in other sectors were initially in a wait-and-see mode, hoping for China to recover and hope for a quick recovery. Two months later, the sky is darker for these businesses. Currently, the reality is that the actual demand (volume of order) is at a low. Sales in beverages, fashion, electronics, vehicles, agriculture, furniture, footwear, and many other categories have vanished both locally and globally, and the consumer is missing out.
As we speak, in Vietnam and elsewhere, manufacturers and retailers’ current sales volumes are too low to absorb fixed costs, leaving thousands of businesses with negative margins and thin reserves of cash. Export-dependent companies are seeing orders cancelled every day, particularly from the EU and the US. As a consequence, the global transport sector is also being affected and freight forwarders in Vietnam are seeing their volume drop by up to 70 per cent.
A number of small- and medium-sized enterprises (SMEs) have already declared bankruptcy and for others the impact on human resources, the main adjustment variable, is being felt strongly and unemployment is threatening multiple industries.
Further pressure is also made on rents as retailers’ cash erodes and the real estate and construction sectors are under stress. Government measures are expected to release such immediate tension as the end of the crisis is still yet not clearly visible.
As we stand today, we are put in front of a hard yet simple reality: despite recent noise around digital transformation, consumers and workers remain at the heart of the modern economy. Lock them up and things start to shake.
As people spend more time at home, household spend has both reduced and shifted. Consumers are generally more cautious spending given the lack of visibility on the mid-long term future. Business-to-consumer product companies are generally selling less of their goods.
CEL Consulting found that companies operating in retail, distribution, and logistics services (excluding e-commerce and last mile delivery) report a loss of revenue against the target of 25 per cent in 2020’s first quarter and don’t expect to recover this loss this year.
But as confinement becomes a more pressing reality, urban consumers seek convenient and safe shopping alternatives for their daily family needs. E-commerce and home delivery services have become central to this evolution. It allows people to get what they need and want but also helps small businesses and restaurants to maintain a certain activity as their physical outlet is closed to the public.
Figures are still not officially published in Vietnam, but Lazada reported a 300 per cent increase in the number of orders in Singapore and Grab delivery surged by 200 per cent in Bangkok. We can assume that comparable growth is being seen in the main cities in Vietnam.
So overall, a large amount of volumes have shifted from offline to online distribution channels and last mile delivery companies are barely able to cope with the surge of delivery orders. One of the main challenges that this shift creates in the domestic distribution is the ability to transfer goods over long distances, for example between north and south Vietnam as airfreight and rail transport are constrained. Long haul trucks become scarce and lack of transport capacity generate delays and extra disruptions.
As people start to be accustomed to more systematic online purchase and home deliveries, it is likely that this becomes a habit and it is likely that the post crisis situation will still benefit the e-commerce and delivery sector while the offline retail sector will slowly recover. This is certainly a fundamental new trend in the consumer goods industry that we have to keep in mind.
The crisis will also further accelerate the e-government initiative allowing the population to fulfil administrative duties online and thus avoiding long physical queues. Once the crisis ends, it is likely that the implementation of digital solutions for consumers and citizens will spur drastically.
As the global demand crisis deepens, we start seeing economies with promising results in their fight against mass contagion, namely South Korea, Taiwan, Japan, and China. However now, it appears that the EU will still face lockdown at least until June-July to, in the best-case scenario, recover slowly over the second half of the year.
On the other side, the US has been hesitant in taking clear containment measures and the pandemic is spreading faster and faster every day in the American population. First estimates predict hundreds of thousands of deaths in the US only. It is now pretty clear that the US will be under massive tension for the next two quarters at least.
The stock markets are erratic, and despite a massive injection of cash from the Fed to support the real economy, experts and economists seriously worry about a global economic crisis. Regardless how fast other nations tend to recover, if the US is affected, the global economy will face severe challenges in the months to come. Currently, American consumers are already reducing expenditures in shoes, phones, appliances, clothes, cars, and tools, most of which are made in Asia and for a large portion in Vietnam.
Practically today, orders are being cancelled from the grocery store in Spain to the red wine trader in the US, from the fashion brand in Italy to the garment manufacturer in Vietnam, from the retail chain in the US to the shoes factory in India, from trader of coffee in the UK to the farmer cooperative in Ethiopia. And despite remaining disruption in the supply of goods globally, we are now entering into a consumer demand crisis.
More than ever, for companies, cash is king – without cash, the story ends. And to survive with very tight demand volume decision-makers have already initiated rationalising their product portfolio, developing complete new services for their remaining customers, conducting massive promotion campaigns, and cutting unessential costs.
The CEL Consulting survey shows that 80 per cent of businesses have already or are considering launching special promotion programmes to ensure a minimum of sales, and 60 per cent of them have already made changes in their product range.
We are in a phase where companies need to innovate and realign themselves with new demand volumes, patterns, and trends. A Darwinist effect that will let on the side the businesses that were not able to adapt fast enough.
Even if it’s early to predict how the world will be post-pandemic, our global economy and global supply chains will certainly have to evolve significantly. A few trends start to emerge:
* Online ordering becomes a more common habit of consumers and the prevalence of e-commerce channels in the long run should be confirmed, including for the grocery category;
* Mature markets will develop autonomy with localised and renationalised supply chains and thus reduce their dependency to export markets. Free trade agreements may be challenged. Consumers will put higher preference to local products versus imported ones, also for environmental reasons;
* Consumers will increase expectation for transparency leading to tighter control on the origin of goods and compliance to hygienic standards. More quality controls will be required earlier in the chains;
* SMEs in the chain would have suffered a lot or even disappeared, leaving holes in the chains and forcing companies to find other, more resilient partners;
* Faster deployment of digital solutions to allow better visibility on business performance and more interconnected value chain partners; and
* Further acceleration of outsourced services such as logistics and manufacturing for companies to lighten their asset base and become more agile against uncertainty.
Regardless of our level of anxiety or optimism, it is important to remind ourselves that the weakest among us are going to suffer most. People living on daily wages in the streets of Lagos, Alger, Manila, Hanoi, and Santiago, for example, are the most exposed to very hard times to come. As businesspeople, we may be worried, but we are still comfortable.
We still can feed our beloved ones, and we still can enjoy quality time with our families. That is not a detail these days, and one must remember that some will need more support than others to cope collectively with this dire period to come. Solidarity is what we have left to emerge stronger together once the tsunami has passed.