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Impact of Lockdown on the FMCG Industry: Disruption in supply chain and labour force

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The pandemic and the ongoing 21-day has already had a big implication on global trade and commerce as countries have banned imports and exports and even shut down production of non-essential commodities.

Impact of Lockdown on the FMCG Industry: Disruption in supply chain and labour force

India has already taken plenty of robust steps to ensure that coronavirus doesn’t cripple its economy like it has done to some other countries across the world. The coronavirus lockdown has forced companies to step out of their comfort zones, as manpower shortage and shutting down of stores has brought the traditional distribution mechanism to a grinding halt.

People too have been fearful as the existing uncertainty about the essentials has contributed to a drop in levels in ‘stock-in-trade’ due to potential supply chain disruptions. Some impact has already been felt with deliveries of specific products have been delayed. The coming two-to-three weeks would be a testing ground on how supply chains are able to keep pace with the temporary rise in consumption.

According to KPMG’s latest report, the lockdown market size of retail and consumer industry is US$ 950 billion (2018-2019) but with the coronavirus pandemic and the lockdown have brought economic activity to a standstill and could impact investment, consumption and external trade – the three major contributors to GDP.

The current and potential impact on the sector is as following:

Price Variation of Key Raw Materials – Raw material supplies could be a challenge due to the disrupted supply chains. As the guidelines have not been communicated to the local and state government authorities, the logistics department of every company suffers. This results in the shortage of raw materials which may further leads to increase in the price.

Production Shutdown – Production for certain category of goods including the non-essential ones would be a major challenge with demand unlikely to pick up immediately. Industry experts assume that the non-essential food retailers are expected to report 80-100 percent reduction in sales due to the lockdown.Even retailers of essential items are facing losses as they are not allowed to sell non-essential items, which usually have higher margins.

Cash Flow Constrains – The Indian retail industry has more than 15 million retailers. Around 85 percent of the retail costs are fixed costs, which is putting retailers under severe financial stress.The cash inflow of the industry has come to a standstill, while the fixed operating costs remain intact.Seeing the present scenario, it looks like the cash rotation would slow down for all categories barring food and retail as these will be less impacted. Government and Banks must come up with some measures in order to help companies.

Reduced Labour Force – With the fear of corona virus, migrant labour has moved back to their home town which has resulted in huge shortage of manpower even for essential goods manufacturers. This has not only impacted the production side but delivery of raw materials and finished products also suffered due to non-availability of truck drivers and delivery person. Moreover, retail industry will be impacted due to this pandemic, according to a survey conducted by the Retailers Association of India (RAI), the retail industry is staring at huge layoffs due to the corona virus-induced lockdown and smaller retailers are likely to be affected the most.

Affecting Movement of Essential Goods – Online grocery retailers & essential goods manufacturer said their delivery executives were stopped by police personnel across states like Punjab, Delhi, Uttar Pradesh, Himachal Pradesh and Haryana during the curfew announced by PM Narendra Modi. This was done despite the ministry of consumer affairs issuing a notification allowing these players to operate. Many FMCG companies feel that this is happening as the state level enforcement agencies are not on the same page as central government on e-commerce deliveries as well as supply of essential commodities.

Going forward, we could expect companies to explore newer distribution channels focus on ‘direct to consumer’ route. Further, the ability to predict and manage demand will be a game changer. In this environment, shoring up the customer relationship while focussing on the bottom-line will be key. Both FMCG and retail companies should reinvent their existing supply chain and distribution models post the lockdown.