The Employment Conundrum. By Dr. Clive Black

August 27, 2020 10:21 am
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Economic historians will have much to ponder when they reflect on 2020. No one could have imagined, as we fretted about the scope for Iran and the USA to engage unpleasantly with each other in January what much greater turmoil there would be ahead.

The economic consequences of the Coronavirus pandemic remain to be seen. Much is pontificated but the only ‘thing’ that seems certain is uncertainty. The disease has caused economic havoc leading to unimagined policy interventions, most notably furloughing, which at its height was supporting nine million workers in the UK plus initiatives for the self-employed.

Such policies have led to a worldwide expansion of the balance sheets of central governments through printing money and a leap upwards in government debt. Quite how such debt will be managed, paid for and paid back is a cause of uncertainty around the globe, the only blessing for the UK is that we are not alone and hence, there has been no run on sterling.

The policy measures to support employment and public services have been met with broad approval, even though everyone knows that there is a lot of ‘mickey-taking’ out there. As summer ends, however, and the schools, hopefully, necessarily, return and the Chancellor’s ‘Eat out to help out’ scheme, again widely applauded, ends, attention turns to the autumn economy. What may this mean for the UK grocers?

After the deep lockdown, which took Q2 UK GDP down by an amazingly bad 20%, the unlocking process has seen recovery of sorts. Signs for July and August are encouraging, actually, many domestic businesses helped by the lack of foreign holidaymaking by the British, but it will be the autumn months that tell the truer tale, when any pent up demand from lockdown has worked through the system and furloughing tapers down.

Predictions of potential unemployment in the UK vary but all make for tough reading with a genuine concern as to what the ending of furlough may mean, especially for those industries directly impacted by what appears notable, potentially structural behaviour change. So, with Teams and Zoom in tow, international business travel and accommodation looks to have gone through a downward shift, as does domestic commuting due to the step up in working from home (in this respect if central government really wants civil servants back in Whitehall then why not order them back)?

The travel and hospitality sectors, therefore, appear vulnerable, which has a notable bearing upon the UK food system, with calories shifting from urban centres and the food & beverage channel to the suburbs and retailing. Additionally, reflecting worries of the potential for a  notable rise in unemployment, the supermarkets are bringing value to the fore of their near-term operational agendas.

“…the online grocery channel… has doubled in size in twenty-three weeks; having taken 23 years to reach c7% participation… is now c15%. Such growth presents a major challenge to the onlineless Germans, who now attack 85% of the market today, rather than the 93% of March 2020.”

Indeed, learning lessons from the past, when collective blindness by the superstore operators let the ‘Germans’ in, base value, case price value, is much more important in this economic cycle as opposed to an over-dependence upon supplier funded promotions. So, whilst rational, we see Tesco UK moving demonstrably in its pricing and rhetoric against Aldi GB, with the other superstore groups working out what pricing they need on lines that matter to shoppers, so narrowing the differentials that existed in the past – ‘lines that matter’ being the key point here, not Swiss chocolate.

More to the point, the pandemic has brought a remarkable shift in the prospects for the online grocery channel, which has doubled in size in twenty-three weeks; having taken 23-years to reach c7% participation, it is now c15%. Such growth presents a major challenge to the onlineless Germans, who now attack 85% of the market today, rather than the 93% of March 2020. That online expansion has also awoke the global behemoth that is Amazon, which has taken more than a tiptoe in its approach to UK online grocery through its tie-up with Morrisons, including putting the full Morrison offer on its main website with no extra delivery charge for Prime customers.

So, as the economy hopefully normalises, the employment data will be very important. Bringing folks off furlough is essential and one senses that by late October, many will be but UK unemployment could still notably rise, albeit whether the rate it hits 7,8,9% as some suggest, remains to be seen. What is clear though is that fear of higher unemployment and all that goes with that, remains a central concern for the UK Government and the Chancellor in particular, and the supermarket bosses too. As such, core value and the core values of what a supermarket stands for, maybe especially important going into Christmas 2020.

 

Dr Clive Black is an Advisor to Coriolis Consulting

 

August 2020

Working from home & the UK food system. By Dr. Clive Black

July 8, 2020 1:25 pm
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We are not totally through this terrible Coronavirus pandemic, indeed whilst the number of cases fall and fatalities, thankfully, ease, few if any think ‘we’ are out of the woods yet. As lockdown eases, to try and protect the economy, and households, it should be said, the risk of higher transmission could rise whilst some look to autumn with concern, when, seemingly, the wider air conditions – cooler and damper – maybe better for the virus to re-emerge.

And with the day in, day out now of the Coronavirus era, behaviours are evermore adjusting.  Whilst the power of the leftfield does not go away; who would have thought that breaking a local lockdown would be the mechanism to expose seemingly gross labour practices in the Leicester apparel industry? This leading to a key customer of sweat shops, Manchester based Boohoo, to have to issue defensive statements of its behaviours, and see its brand equity threatened and share price marked down?

Gradually changing daily routines…

Those collective behaviours are very simple in many ways but maybe having profound implications for the nature and extent of the British food system. Before now Coriolis have written of our concerns for the Food & Beverage (F&B) channel in the UK as a result of the Coronavirus crisis. Indeed, we have spoken of 20%+ contraction in industry capacity, evidenced by recent closures of stores in the Casual Dining segment in particular, e.g. Frankie & Benny’s at Arena Park in Coventry will no longer be the pit stop before a game by the Sky Blues should this dysfunctional club ever play in its home town again.

That reduced capacity can be expected to displace calorie volume to surviving F&B competitors plus the Retail channel too. Indeed, the shift in daily behaviour is a key factor behind the contraction of F&B. So, it is not just the recreational element of F&B that is under-pressure but also that which depends upon the commuter, the office worker, the business lunch and dinner. The key factor behind such pressure is working from home and the new addition to the daily acronyms, WFH; not to be confused with WTF…!

 

WFH is a powerful dynamic for the system

WFH has mushroomed through the lockdown. Business behaviour has been transformed through Microsoft Teams and Zoom, although whether totally secure or not remains to be seen, to the point that executives are thinking about how they do what they do, where they need to be to undertake their work effectively, and, most critically, the amount of time they have to spend commuting to no especial productive effect; in fact quite the contrary.

Coronavirus has been a period of greater decisiveness for business; things that could not change have gone. Ways that were traditional are no longer relevant and for many hundreds of thousands, maybe millions, his means lesser or even no commuting in future. Marks & Spencer has labelled this present time, ‘never the same again’ in its own transformation programme.

“…online shopping has doubled in a little over three months….superstores and neighbourhood food providers, including butchers, have seen a major step up in trade; (and) with their confined stores and ranges, the march of the German discounters has also been impeded.”

The rise of the suburbs

What this all means though is a demonstrable shift in time away from the office, the urban centre with all their coffee shops, cafes and restaurants situated in close juxtaposition to railway stations and office blocks, to the suburbs. It is for this reason in lockdown that online shopping has doubled in a little over three months, that superstores and neighbourhood food providers, including butchers, have seen a major step up in trade; with their confined stores and ranges, the march of the German discounters has also been impeded. Indeed, looking at motor traffic, it is noticeable how much emptier urban centres are, how much busier suburbs have become.

Quite how matters pan out remains to be seen, but the shift to WFH appears to be the start of a semi-structural shift to which the food system will adjust. On the downside, WFH means greater pressure on the F&B segment plus the food-to-go and food-for-now components of the Retail channel in urban centres. For the neighbourhood cafes, restaurants and convenience stores, plus the supermarkets, it is an unexpected boon that is expected to stick in some form on an ongoing basis, even with economic recovery, lower than feared unemployment and challenges to domestic household expenditure; the latter of which still remain a key worry it should be said.

Arise domesitca

The term Coronavirus did not feature as part of our vocabulary at the turn of the year,( except for Dominic Cummings, of course), it had a profound impact upon our lives through the total lockdown. It is likely to have a more enduring influence thereafter, particularly through dramatic change to the British labour process, technology enabled, which is perhaps fundamentally conditioning the food system as billions of calories that were consumed in urban centres, travel hubs and business parks shift to your kitchen, living and dining rooms.

 

Dr Clive Black

Senior Advisor to Coriolis Consulting

 

July 2020

Food & Beverage faces an uncertain future. By Dr Clive Black

June 7, 2020 5:49 pm
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The global food system has been subject to an enormous external shock through a broad based closure as a result of the Coronavirus crisis. Whilst the institutional component of the industry remains active – hospitals, military establishments and prisons – the vast bulk of the commercial Food & Beverage (F&B) sector has been closed down. With unlocking starting to come through, how might the commercial environment change?

Lockdown boost Retail

Well, the knee-jerk reaction to this question is quite a lot, with numerous moving parts likely to conditions the prospects for a channel that until the Coronavirus crisis emerged accounted for approaching 35-40% of all the calories consumed in the UK. We estimated that ratio fell to about 10-15% upon full lockdown, maybe presenting sitting at 15-20% presently as elements of the channel unlocks, for example, motorway service stations and drive-thru Quick Service Restaurants (QSRs),

Whilst the re-emergence of the take-away sub-channel is welcome, there remain major problems for the sit down F&B segment to cope with in respect of both prevailing social distancing guidance and the greater caution that we feel the vulnerable and a sizeable risk averse population may wish to expose their lungs to in the future. That risk averse community could be very considerable, noting the number of folks wearing face masks and eschewing close contact.

Trading in a socially distanced world?

The problem of social distancing means that many establishments – cafes, public houses and restaurants – are likely to remain closed for some weeks yet, so continuing to pressurise the finances, particularly of the sole proprietor and small family business. What is more, once permitted to re-open, then the sales densities that will ensue are likely to be notably lower; the experience of JD Witherspoon, in particular, could be particularly noteworthy in this respect, where one wonders if drinking whilst standing will be permitted as opposed to sit down and table service only?

In addition to lower sales densities, the sector must also face into higher operating costs from more frequent cleaning regimes to the provision of hand santiser, not a low cost commodity it should be said, through to face masks, gloves and protective screens. Lower sales densities and higher costs are rarely a plus for the economic characteristics of an industry.

A sector to be rationalised… 

One also has to wonder just what size the F&B channel will be in a year or two; it is hard not to believe that it will be significantly rationalised from the quiet disappearance of individual outlets to over-sized and over-leveraged chains coming to terms with new realities. I have noted that both the Carluccios and the Casual Dining Group will emerge smaller than when they went into administration; more is set to follow.

If the sector has to wait until an effective vaccine for COVID-19 is available before it can realistically expect to return to anything like pre-Coronavirus crisis trading intensities, then the nature and extent of the industry is likely to be all the more challenged. In the meantime, a channel that is highly effective and exceptionally efficient will need to explore new ways of doing things and different organisational compositions to survive and thrive in the evolving but smaller market.

“One also has to wonder just what size the F&B channel will be in a year or two; it is hard not to believe that it will be significantly rationalised from the quiet disappearance of individual outlets to over-sized and over-leveraged chains coming to terms with new realities.”

Big brands will be fine

Big names in the channel, from Greggs on the high street through to Costa (Coca-Cola) and Burger King, can be expected to survive and be effective in the restricted markets and the ensuing economic downturn, so gaining market share; big brands have emerged through this crisis more relevant in most consumer markets. What may be lost, however, is a myriad of arguably more distinctive, authentic, individual and ultimately entrepreneurial entities, where through no fault of their own, their commercial legs have been taken away.

Can price rises accommodate?

In a rationalised market, with higher costs and lower sales densities, it is not unreasonable to anticipate scope for higher prices in F&B. Whilst so, whilst necessary in many cases, Retail is expected to remain competitive, as the superstores learn the lessons of the past when it comes to competing with the German discounters, whilst post-furlough one has to worry about the levels of employment, consumer confidence and so the capability and appetite for many households to engage in discretionary consumer expenditure.

The move to the suburbs

More broadly, lockdown is transforming Britain’s labour process, with millions of folks now working from home. Whilst many will, hundreds of thousands, maybe a million or more, folks will not be commuting to town and city centres again, so leading to a shift in calories not only form F&B to Retail but from urban centres to the suburbs. Doing so, will benefit some F&B chains, but the district supermarket is more likely to gain, as to online retailing.

Conclusions

Coronavirus is a very unfair virus for the British F&B industry, one that is going to be an undoubted threshold in the channel’s history. It looks new and more challenging times are ahead, times when the right culture, an attention to detail and the capability to effectively execute change are vital. These are the traits that Coriolis focuses upon, day in, day out.

 

Dr Clive Black

Senior Advisor

Corilois Consulting

 

June 2020.

The UK food system – Coronavirus’ legacies. By Dr. Clive Black

May 4, 2020 2:47 pm
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The World has been severely jolted by Coronavirus. Bio-security has come to the fore like a science fiction novel. In the space of five month this invisible bug has taken a firm hold. For the food industry Coronavirus is likely to leave a quite indelible mark, which will be a notable threshold in the industry’s history.

The hidden curriculum 

The official and unofficial behavioural change from Coronavirus is startling. Who would have thought that virtually the whole of the British Isles and Continental Europe could be kept house bound with incredibly low levels of non-compliance! That compliance to official guidance and the messages therein may have considerable implications for how society, and so the UK food system, emerges from the Coronavirus crisis.

Alongside very high compliance it appears that anxiety towards post-lockdown is high as the UK Government explores its strategy and communications for the next phase of the crisis. Indeed, those clamouring for an exit strategy – the BBC, the Opposition parties and elements of commerce – may be hushed somewhat when they see an Ipsos poll suggesting that c60% of Britain’s are anxious about relaxing lockdown whilst Opinium in The Guardian cite such levels of concern at over 80% with less than 10% of the poll happy to see pubs re-open.

Structural change for HORECA

Such attitudes are crucial to the prospects of the UK food system. Prior to lockdown about 35-40% of calories consumed in the UK emanated from the food & beverage (F&B) or HORECA (hotels, restaurants & catering) sector. Since lockdown such out of the home calorific intake has retrenched largely to the institutional market of care homes, hospitals and prisons, so maybe 10%+. Accordingly, the retail trade has benefited from the switchover, more of which a little later.

How unlocking goes in the UK is going to be key for the HORECA sector and three big challenges are ahead; a) social distancing for workers in often galley kitchen conditions, b) social distancing for customers and c) the propensity for the customer base to consider the return to the bar, cafe, coffee shop or restaurant, never mind night club or football stadium?

As such, it feels like it will be sometime before the British will be consuming c37.5% of its calorific intake outside the home, which implies considerable operational and structural change for F&B providers, many of which were far from financially robust prior to lockdown, their supply chain and the landlords that owned their property.

“The one clear area of the grocery trade to benefit from the behavioural changes driven by Coronavirus is online. It took over twenty-three years for the industry to reach an online grocery participation of seven per cent. Through a little more than eight weeks, Sainsbury’s has recorded c15% participation, driven by larger basket sizes (c50%) and a doubling of capacity.”

Re-born supermarkets

Those switched calories from F&B are expected, as alluded to above, to switch to the retail segment, which is good news for supermarkets and their supply chains. Whilst this is so, there are also notable moving parts within these components of the food system too.

Coronavirus has been a boon to large and small stores alike and also the online grocery channel. The squeeze in retail is the food-to-go and food-for-now segments, and here the challenges could also be structural. Coronavirus has led to a structural change in home-working, facilitated by technological change, that is likely to see a notable reduction in commuting.

It is also likely that business travel will be structurally lower in future years as executives eschew the aeroplane whilst technology, again, has reduced the need for marginal and nice to have journeys. Airports, bus stations and railway hubs are likely to see lower footfall with more home-working, which will weigh down on the impulse food market.

Nervousness about being in crowds and home working is, therefore, likely to result in a switch from calories consumed in urban centres to the suburbs, so boosting neighbourhood stores like the Co-op, Londis, McColl’s and SPAR. Equally, with social distancing in-tow, basket shopping, which has been a key feature of the UK grocery market in recent years, maybe partially, perhaps notably, offset by trolley shopping; the latter of which bolsters the relevance once again of superstores (albeit hypermarkets with their large non-food areas may still be a little skew-whiff from a magnetic perspective) – the functional benefits of the large and suburban stores means that the German discounters are not quite at the heart of lockdown retailing albeit they are not going away.

Online moves to the right

The one clear area of the grocery trade to benefit from the behavioural changes driven by Coronavirus is online. It took over twenty-three years for the industry to reach an online grocery participation of seven per cent. Through a little more than eight weeks, Sainsbury’s has recorded c15% participation, driven by larger basket sizes (c50%) and a doubling of capacity.

For the elderly, switched onto digital through necessity by family & friends, and the vulnerable, now prioritised by the supermarkets, the online channel is new and here to stay. Hence, there would appear to be a shift to the right for food and non-food channel participation, maybe from c7% to 10%+. The supermarkets are likely to harness this growth given the capacity constraints experienced at Ocado, with its more rigid centralised business model.

Chrissy Hynds of Pretenders’ fame proclaimed that ‘somethings change, some stay the same’ and this feels apt with respect to Coronavirus and the UK food system. Post-lockdown many folks will shrug the bug off and go about life with gay abandon. However, and here’s the change, many will not. For the F&B sector and its supply chain this is a structural challenge that is likely to reduce the run-rate of growth, which was approximately twice that of retail for some years, and so demand and therefore supply.

For retail there is likely to be some beneficial switching, which will increase ongoing demand in an industry where supply is growing very modestly – circa 1% per annum – but with considerable moving parts in the form of lesser food-to-go and basket shopping over neighbourhoods and trolleys. The clear ‘winner’ channel wise is online, which is going to go through a gear.

Costs, cash and focus…

Time will, of course, tell us what the real legacies of the Coronavirus crisis will be. For business, the nature, duration and extent of UK Government support is going to be important to the failure rate in F&B and so the emerging structures that the distorted market economy produces. For retail, it has been rejuvenated, a key sector with key workers, central to feeding the nation and preventing social breakdown, on which we gained glimpses in unedifying stockpiling in March.

One senses that very tight cost control and cash management are going to be centre of attention for operators in the British food system here on. Maximising the potential of operations at the coal face is where Coriolis excels. As the freeze thaws I wish to you all well in these truly unprecedented times.

 

Dr Clive Black 

Senior Advisor to Coriolis Consulting 

 

May 2020

A Long & Dark Shadow. by Dr. Clive Black

April 13, 2020 9:40 am
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The news is very harrowing. The news is incredible. The equivalent of a small village each day in the United Kingdom (UK) is in effect being lost to a virus few, if any, had heard of six months ago; a  biological entity that, if we believe perceived wisdom, mutated from bats for human consumption bought in wet markets in and around Wuhan. A failure of the food system, a bio-security malfunction, is literally causing global grief.

‘Coronavirus’ is the word of 2020. It may turn out to be the word of this third decade of the twenty-first century. It will take some weeks and months to know whether or not the UK will be emerging from the dramatic lockdown policy of the Government and in what state. In the meantime we must hope and pray that the fatalities level off and fall back as soon as possible and that a mix of mass-testing plus the race to treat and vaccinate truly means that this virus is beaten down.

Pride in public servants

In the meantime, our NHS has been a triumph, once again. The bravery, commitment and kindness of its front-line workers is something that may just need to be re-appraised by society – that thing that Prime Minister Boris Johnson suggests exists in stark contradiction of the conservative thought-leader of days gone by, Margaret Thatcher – Government and taxpayers. Social care workers may also need to be reassessed at a societal level too, folks who also have shown immense courage in looking after the basic needs of the elderly and vulnerable day in, day out, often in this crisis with little or no viral protection.

It is easy to criticise the Government for policy and outcomes through this crisis. Some, like the BBC, have all to often been mouth pieces for the noisy self-publicists with few solutions to palpable problems. Whilst so, constructive criticism has its place and it is clear that some public bodies and servants have struggled with this crisis, even taking into account the incredible speed and magnitude of developments.

In the main patience and support remain the order of the day though as testing regimes, protective equipment, ventilators and the search for the vaccine emerge; we should perhaps reflect that a lot has been achieved in a short period of time and the delivery side of matters now seems to be coming through, to the credit of all involved.

 

Applause for the British food system

Another band of heroes in the midst of the crisis is the UK’s food retail system, which has moved mountains, literally in volume terms, to serve the public, to feed the nation as the Government decreed. In this respect, appreciation also needs to be expressed for its front-end workers, exposing the welfare of themselves and their families to the public day in, day out.

The speed with which the supermarkets raised distributive capacity and introduced protective policies and structures, such as check-out screens, has been amazing. Nielsen recorded a c45% increase in trade in the week to the spring solstice; a quite amazing achievement for events no one knew of a month earlier (especially for an industry running at a prior growth rate of c1%).

The grocery supply chain has also proved a wonder in meeting the demands of a worried public first craving household medicines and loo roll before moving onto lines across the store, noting the considerable step-up in demand for frozen over chilled foodstuffs in particular. Production programmes have been rationalised as the manufacturers have focused upon output and unit efficiency.

“Another band of heroes in the midst of the crisis is the UK’s food retail system, which has moved mountains ……. to serve the public. ….appreciation also needs to be expressed for its front-end workers, exposing the welfare of themselves and their families ………day in, day out. “

A thought for F&B

Whilst the grocery retail segment has risen to the challenge of the step up in demand, the domestic food & beverage (F&B) segment has massively contracted. From supplying 35-40% of the calories consumed in the UK, the F&B segment has disintegrated down to the institutional element of the market, so hospitals, homes and prisons, which is maybe 10-15% of national intake.

So, whilst the supermarkets have been seeking to safely accommodate a step up in the demand for calories to be consumed at home, the F&B trade is in crisis. Indeed, with the days brightening, the industry is going to lose out, more or less, on the second biggest family gathering event and so food consumption peak of the year, with the near cancellation of Easter; literally millions of chocolate eggs are searching for an expedient home at this time whilst the freezers will also be full of lamb’s legs.

Accordingly, chains like Greggs have closed their 2000+ stores, many thousands are being furloughed through the Government’s amazing news support mechanisms, whilst those businesses that can are exploring liquidity support; somewhat unedifying though are the likes of JD Wetherspoon, which is seeking not to pay its suppliers in stark contrast to Morrisons, which is paying its small suppliers immediately. The scale of the Government support is eye-watering, but so very much appreciated and necessary at this time.

 

A seismic economic jolt

The cost to business and the wider economy of the Coronavirus crisis is, of course, quite enormous. In fact we cannot imagine the length and depth of the shadow that the Coronavirus shut down means for the British economy. There will be a collapse in Q2 Gross Domestic Product (GDP), something record making, and that hit may last for sometime still. Whilst the new Chancellor of the Exchequer is justifiably acclaimed with much praise for his many helpful and imaginative policy actions, it remains the case that Coronavirus is going to cause enormous collateral damage to the economy, including, perhaps most particularly, F&B.

Many businesses, like households, live from week to week, and so the steps already announced by Government and the retail banks are unlikely to prevent much collapse with corresponding distress thereafter. Accordingly, one has to hope that policy can be grand and flexible enough, incorporating the major banks and other lenders, to show enough patience, forbearance and care to also nurse the British F&B sector, and the wider economy through this crisis.

The numbers involved in stabilising the economy redefine telephone directories. The consequences of the crisis for Government finances, future business activity, welfare support and taxation are at this time simply mind blowing. However, just weeks into the Johnson political era a virus from inland China is perhaps going to characterise his parliament. Let us hope that on the other side of the crisis that the lessons are learnt and the economy can show commendable ‘bouncebackability’.

When that time comes, Coriolis Consulting, with its structured, focused and pragmatic approach to meeting business’ operating challenges, will be more relevant than ever in assisting food businesses on how to be best prepared to face into the challenges and opportunities posed by the market.

In the meantime, I simply wish everyone and their families safety and wellness at this difficult time.

 

Dr Clive Black

Senior Advisor to Coriolis Consulting

 

April 2020