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Consumer Staples: Covid lessons from abroad are important

Kotak Institutional Equities

Potential ramifications of Covid-19 are tough to predict with any degree of accuracy. Even as it is tough to say how the outbreak curve shapes up in India and what the government response at various points in the curve will be, the fear curve among people will likely be quite similar to what countries with larger outbreaks have already seen. ST impact is likely to be materially negative for retail, QSR and non-essential CPG while being positive for essential CPG. LT impact could be a permanent change in consumer behaviour on a couple of fronts-personal/home hygiene habits and e-commerce adoption.

Key factors-the outbreak curve, government measures and the fear curve

Covid-19's impact on consumer behaviour in the short term (hopefully) will be shaped by three key variables-(i) the outbreak curve-the actual numbers on tests, cases confirmed, cases recovered, deaths, fatality rates, etc., (ii) government measures and advisories-from travel curbs to complete lockdowns, and (iii) the fear curve that will likely be shaped by media in addition to the actual numbers and government measures.

Lessons from China

Panic buying and stockpiling even in phase 1 (virus present but no community outbreak) in select cities. A wider outbreak sees the intensity of stockpiling go up materially. Consumption items that see a surge in demand include (i) home and personal hygiene products, (ii) groceries, (iii) instant food, (iv) infant food, (v) other dry food items, (vi) fresh produce, eggs, etc., (vii) beverages, (viii) powdered milk, cheese, etc., and (ix) spirits and wine.

Online sales surge as people become fearful: Each human interaction in the offline shopping journey is seen as fraught with the risk of getting infected. Online grocers' real challenge is to serve demand. JD.com, for instance, saw a 200%+ y-o-y growth in sales for a few weeks post Covid-19 outbreak in China.

Most other consumption categories come under pressure: Offline retail, travel, tourism, hotels, restaurants, multiplexes, theme parks, cafes, pubs and bars (impacting on-trade liquor consumption), luxury products including jewellery and even semi-discretionary categories like apparel, footwear, cigarettes, etc. come under pressure in the short term. Footfall-dependent retail businesses would likely come under significant stress.

In the foodservices space, QSRs could see some uptick in delivery demand; however-(i) pressure on dine in business could mean overall business declines and (ii) even delivery demand would start declining once the fear curve crosses a certain threshold.