Anji Clarke, landlady of a 150-year-old pub in north London, noticed big changes to her shopping habits after the UK introduced the first coronavirus lockdown in March.

She switched some of her purchases to “the dreaded Amazon”, became a connoisseur of hand sanitisers and disinfectant wipes, and snapped up flour for baking while stuck at home. “We had an enormous number of cream teas . . . it was terrible for our waistlines but very good for morale,” she says.

Some of the world’s largest companies are now trying to figure out what consumers like Ms Clarke will do next. 

Pandemic-related lifestyle changes have led to huge swings in demand this year for consumer goods companies accustomed to only incremental shifts.

Alan Jope, chief executive of Unilever, says most of the categories in which the group operates normally see growth rates of between 2 and 5 per cent. “Now we’re seeing growth rates that range from minus 40 to plus 25 over the last couple of quarters,” he says. “It’s really unprecedented.”

Since the onset of the pandemic cosmetics sales have plunged by a fifth in the UK © Eloisa Lopez/Reuters

The scramble to adapt to these new habits cut into first-half growth at some of these companies. But following the initial adjustment, pandemic trends have favoured big consumer brands that for years had been struggling against the onslaught of nimbler start-ups.

Consumers returned to brands they had known for decades — from Kraft Heinz macaroni cheese to Dettol disinfectant — and retailers opted to work with multinationals that could offer scale and sophisticated supply chain management in the crisis.

The result was an unexpected injection of energy for companies such as Reckitt Benckiser, Unilever and Procter & Gamble. Suddenly, they were reporting their highest growth numbers in years — in Reckitt’s case, in its entire history.

“Big brands are taking market share from the smaller brands in almost every category,” says Warren Ackerman, analyst at Barclays.

The question now is which of the shifts in consumer behaviour will continue beyond the initial phases of the pandemic, including returns to national lockdowns, and whether the multinationals that were all too recently seen as dinosaurs can retain their advantage.

Line chart of Share prices, in $ terms (rebased) showing Consumer goods groups weathered the early problems caused by Covid-19

Cleaning up

As coronavirus spread internationally in February and March, prompting panicked governments to impose lockdowns, consumers began to focus on hygiene.

Sales of hand sanitiser rose at least fivefold in Germany, France, the UK, US, and China in the year to August compared with a year earlier, according to data produced for the Financial Times by Nielsen, despite manufacturers scrambling to keep up with widespread shortages. Consumers piled into detergents, while in the US sales of aerosol disinfectants more than doubled.

Chart showing Fast-moving consumer goods sales growth

With workplaces out of bounds for many, online shopping accelerated and a new, homespun lifestyle began to emerge.

Ms Clarke was not alone in taking up baking: flour sales rose by between 20 and 50 per cent in all countries Nielsen surveyed. The rise in restaurant dining and food-to-go outlets such as Leon was abruptly curtailed. Instead consumers loaded their freezers with prepared meals and cupboards with processed and packaged foods. Sales of Spam, a once-popular brand of canned cooked pork, rocketed. 

Flour sales rose as consumers in lockdown turned to baking © Matt Kemp/AP

“We’re back to the 80s and 90s, with categories that we thought were dead, like frozen food, absolutely on fire,” says Mr Ackerman. “Everyone is trying to work out, ‘Is this the new normal? What percentage of these consumers will stay loyal?’”

With hairdressers closed, sales of home hair dye in the year to date jumped by 10 per cent in the UK and almost 30 per cent in Italy compared with the same period in 2019, according to Nielsen. But householders were less punctilious about other aspects of personal care. Deodorant sales dropped. Cosmetics sales plunged by a fifth in the UK and US and 18 per cent in Italy, cutting into sales at companies like Estée Lauder and Coty.

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This was accompanied by rising appetite for snacks: sales of popcorn and crisps jumped, benefiting companies such as Mondelez. Consumers barred from pubs turned to cocktail making and premium label beverages. In the month to May 16, US retail sales of tequila were up more than 80 per cent.

After lockdowns were supplanted by an uneasy return to public life, consumer behaviour shifted again. Sales of Durex condoms, which had been depressed during lockdowns by a lack of socialising, have rebounded with a double-digit sales rise, according to Reckitt Benckiser, which owns the brand.

Other lockdown trends such as Zoom parties were gratefully abandoned. “All the online socialising hasn’t stuck as much when there are fewer restrictions,” says Andrew Geoghegan, global head of consumer planning at Diageo, the world’s largest distiller.

But amid fresh waves of the virus, new restrictions and struggling economies, consumer behaviour has remained unpredictable.

“It’s not about the normalisation of behaviours — actually what we’re looking at is behaviours in flux, and we’re not actually sure what will stick in the long term,” says Mr Geoghegan. “The ability to pivot quickly will become more of a competitive advantage.”

The challengers

At the start of the year big consumer brands were trying to emerge from a bleak period. Average annual growth rates at the largest consumer goods groups, which stood at 4.6 per cent in 2007-2012, dropped to 0.8 per cent in 2013-19, according to the consultancy Bain. That helped to push operating profit growth down from 6.1 per cent to 2.6 per cent.

chart showing growth in consumer packaged goods companies

A slowdown in demand from emerging markets had cut into one source of expansion. But another threat was competition from start-ups that seized the opportunity to market products online, outside traditional retail and media channels, and to connect with younger consumers.

Halo Top low-sugar and low-fat ice cream launched in 2012 and went on to become a best-selling brand in the US © Carlo Allegri/Reuters

According to Elio Leoni Sceti, a board member at Kraft Heinz and the world’s largest brewer Anheuser-Busch InBev, younger buyers “care about their role as consumers, and how the brands they choose represent them in their own personal, independent views of life. Big brands did not get what was going on.

“So they lost a bunch of consumers, who chose new, smaller brands that were born with the same values system,” he says. “Then the big guys bought [the small brands] out, chewed up the bones and spit them out. It was not a very healthy way of allowing the system to progress.”

Dollar Shave Club, a subscription razor service founded in 2011 and acquired by Unilever five years later for $1bn, was one example. Another was Halo Top low-sugar and low-fat ice cream, which seized market share from brands like Ben & Jerry’s and Häagen-Dazs. Glossier offered a new sales model in skincare and beauty; craft brewers and distilleries stole a march on larger rivals in alcoholic drinks. These brands pitched themselves as greener, healthier, more local or more authentic — and less “corporate”.

The consumer start-up boom impressed Mr Leoni Sceti. Two years ago he set up The Craftory, an investment group backing consumer goods companies “driven by strong progressive causes”, including groups making plant-based foods, gender-neutral underwear and eco laundry pods.

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The pandemic has created winners and losers, with online retail making big gains © Paul Ellis/AFP/Getty

The challengers arrived at a moment when big players had fallen in love with cost-cutting. The model espoused by Brazilian private equity group 3G, which backs Kraft Heinz and was instrumental in forming AB InBev, included zero-based budgeting, in which every cost must be justified anew in each budget period. Rivals were rattled, especially after Kraft Heinz attempted a hostile takeover of Unilever. Both Unilever and Nestlé set ambitious margin targets, Nestlé for the first time in its history.

But the fashion for stripping internal resources left large parts of the sector ill-equipped to fight the upstarts. 

“For basically a 10-year period, there was a changing of the guard,” says Mr Ackerman. “The small brands were more nimble, closer to the consumer, while the big guys were more focused on margin, and not enough on reinvesting to drive growth.

“The empire has been striking back a little bit — there is a new generation of chief executives, who are more focused on top-line growth and more digital-savvy, less worried about profit and margins. In the last two years we have started to see the tide turning, but Covid has been a catalyst to extend it further.”

The fresh approach included speeding up product development; Nestlé, for example, says it can now bring new items to market in six months. This year “trusted brands” have regained ground from “new specialist brands entering the marketplace”, says Nestlé chief executive Mark Schneider.

“The story over the past five years or so has been one of lots of focused companies in various categories getting to the market with new, innovative offerings,” he says. “But there’s been a slowing down of some of that launch activity. And consumer preference has skewed to brands that they trust and that they know.” 

The pandemic has, of course, produced winners and losers. Cosmetics brands are struggling, as are those companies that sell food and drinks to restaurants and canteens: Danone this month outlined plans to overhaul its management after revenues fell more than expected in the third quarter; sales of its yoghurts and bottled water through restaurants and cafeterias have been especially hit. Drinks makers are wrestling to make up for the loss of sales through bars and airports. Investors have taken fright at AB InBev over its level of debt, sending its shares down 39 per cent since the start of the year.

But the turmoil has also provided an opportunity. Ditching unloved product lines has become fashionable after panic buying prompted retailers to simplify their stock purchases. Mondelez is discontinuing a quarter of its product lines. Companies are also offloading unwanted divisions in a year when investors’ expectations are in flux. Nestlé is selling its languishing North American water business, while Danone is reviewing both product lines and brands.

Before the pandemic big consumer brands were losing customers to start-ups who seized the opportunity to market their products online © Andrew Harrer/Bloomberg

Disruptive times

Those companies that have started to regain the advantage are now seeking to hold on to it. The surges in hygiene and processed foods have provided a windfall, while investors have turned to consumer goods stocks as other sectors were hard hit by the crisis.

But there are concerns that these gains merely mask underlying issues. Only just over half of brands at Unilever, for example, are gaining market share, a figure that has remained flat for three years, according to James Edwardes-Jones, analyst at RBC Capital Markets. He adds: “For all that Unilever believes it is doing right, its market share seems recalcitrant.”

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Companies face fresh challenges including shoring up supply lines and learning how to launch products when physical retailers, bars and events — which all help to promote them — are severely curtailed.

But a key question for the multinationals, which normally plan strategically three years ahead, is how durable Covid-related behaviour changes will prove. Another is whether prior trends, like a push by wealthier consumers to buy sustainable and local products, will continue.

Owain Service, a behavioural scientist who has advised the UK government and consumer goods groups, says the long-term response by consumers is not clear.

“You could argue that we’ve now been in a new world for a sufficiently long period of time that the way we clean surfaces, wash our hands or respond to cues in our environment has changed,” he says. “But the other way of looking at it would be to say that if we end up abruptly going back, post-vaccine, into old ways of working, suddenly everybody goes back into offices, that itself will be a kind of disruption of these new habits.”

Kris Licht, chief customer officer at Reckitt Benckiser, says the company is learning from the 2003 Sars outbreak, which paved the way in southern China and Hong Kong for new habits from online shopping to face-mask wearing. 

UK consumers have piled into hygiene products such as hand sanitiser and detergents, while in the US sales of aerosol disinfectants more than doubled © Justin Tallis/AFP/Getty

“How do we plan for our long-term supply forecasts? We’re keen to make sure we can stay in stock and we are making long-term plans to do so — we are considering the lessons from Sars,” he says. “We believe Covid will have a much more profound impact — it’s much more pervasive, more invasive . . . Our belief is there will be a ‘before’ and an ‘after’.” 

Companies are tailoring products to a deepening wealth gap. “Looking at past crises, we knew it was most likely that the top end and bottom end [of the market] were likely to be seeing good demand,” says Nestle’s Mr Schneider. Cheaper products are in higher demand from cash-strapped consumers. That has been exacerbated as mass job losses affected low-paid sectors such as hospitality and retail, while richer consumers found themselves with spare cash that they would normally have spent on holidays or restaurant meals. 

Most manufacturers believe consumers will continue to place a premium on health, and are investing in over-the-counter medications and supplements. But Reckitt Benckiser has identified one counter-effect from pandemic prevention measures — a weaker cold and flu season, cutting into medicine sales, as social distancing measures dampen infectious diseases other than coronavirus. Reckitt also predicts a more far-reaching change: lower birth rates, which it says will affect baby formula sales.

Some consultancies predict lasting changes beyond health and hygiene. Accenture forecasts a “decade of the home”. Carla Buzasi, chief executive of trend forecaster WGSN, says: “There are big opportunities for the CPGs [consumer packaged goods companies] of this world, but they do have to realise that fundamentally our working patterns have changed.”

As for Ms Clarke, her behaviour continues to shift. The landlady has cut down on baking products and banned herself from buying biscuits.

“I’ll probably spend more money on cleaning stuff and less on processed food,” she says. “I’m just hoping there won’t be as much clotted cream bought as during lockdown.”

Via Financial Times