First-Quarter Analysis of Consumer Brands in the Year So Far

Editor’s note: Adweek worked with Matthew Scott Goldstein, a consultant with a deep knowledge of the media industry, to craft his quarterly newsletter into an Adweek article. Through his findings on various industry earnings calls, he brings you insights about how your favorite brands, agencies, media companies, publishers and tech companies are performing on a quarterly basis. His goal was to go past what the trades were focusing on, which mostly revolved around revenue, and tap into the nitty-gritty data shared on these calls. This iteration focuses on various nonmedia companies in the 2020 first quarter. [kickout id="2"] Nonmedia insights Significant increase in purchases in Q1 may just mean we see a slowdown in Q2 (e.g., toilet paper, 90-day medications, Tylenol, etc.) Stores will evolve to become fulfillment centers, click and pick and more self-checkouts. Self-checkout will go beyond just supermarkets to retailers, etc. Supply chain management is critical—that will be a very popular college degree. Enhanced sanitizing procedures are here to stay. Digital ordering is here to stay, especially order ahead. Malls are dead—acceleration of the future. Additional customer service agents are being hired and will work at home for the foreseeable future. A shift to lower price per ounce offerings as many consumers experience financial constraints. May see upward pressure on prices because manufacturing will be brought back to the U.S., and it’s going to cost more than manufacturing in China. No new stores will be opening and many may be closing. Commercial real estate gets cheaper—hopefully leads to more small businesses opening storefronts. Existing stores probably need smaller footprints. Seeing a pull forward of purchases; purchases made in March/April will not be made in Q2/Q3. Normal travel may be three years out. Forward-looking companies are planning for Q4, Halloween, Christmas, etc. The recovery will be dictated by our customers feeling safe both physically and financially. Some marketers are coming back strong in Q2 with new messages around new products and safety procedures. [kickout id="1"] Nonmedia companies Amazon Whole Foods and ecommerce: We began requiring temperature checks across our operations network. In our Whole Foods stores, we added plexiglass barriers between cashiers and customers, and reserved special hours for senior customers to shop. We temporarily raised wages and overtime premiums, we funded a new Amazon relief fund, and we allowed employees to take unpaid time off at their discretion. To deal with the unprecedented demand, we hired an additional 175,000 new employees, many of whom were displaced from other jobs in the economy. We took steps to dampen demand for nonessential products, including reducing our marketing spend. Our network pivoted to shipping priority products within one to four days and extending promises on nonpriority items. Our independent third-party sellers, most of whom are small- and medium-sized businesses, worked tremendously hard to serve our customers, and we are grateful for their efforts. Third-party sellers continue to see strong growth in our stores, with more than half of our units sold or from third-party sellers. We increased grocery delivery capacity by more than 60%, and expanded in-store pickup at Whole Foods stores from 80 stores to more than 150 stores. And other Amazon teams shifted their focus to directly helping customers and the overall effort to fight the Covid-19 virus. Johnson & Johnson: Tylenol is one of our most iconic and trusted brands by consumers and healthcare professionals for reducing fever, and we have increased production running our Tylenol manufacturing plant 24/7 to maximize supply. We have also refocused our manufacturing lines to make our easiest-to-produce pills, which are the white Tylenol caplets, so we can increase production and throughput. In medical devices, we are experiencing a near-term negative impact and expect this to continue while elective procedures are deferred and hospital resources are redeployed to address patients impacted by this pandemic. We’ve implemented significantly enhanced sanitizing procedures and appropriate distancing to ensure we maintain safe, clean and well-functioning facilities across our manufacturing, distribution centers and research and development sites. We take a long-term strategic view, which means we’re in this for the long haul delivering value to all of our stakeholders. We are utilizing our supply chain delivery in 3D printing expertise to manufacture and distribute the VESper ventilator expansion splitter device, which addresses the acute ventilator shortage during the Covid-19 pandemic and at no cost to healthcare providers. Over-the-counter medicines grew globally almost 26% operationally with about 36% growth in the U.S. and 17% outside the U.S. Covid-19 contributed about 17 points to the global growth. Procter & Gamble: Consumption of hand soaps has obviously increased. Consumers in the U.S. are doing more laundry loads per week and washing more garments after wearing them just once. More loads are being done with unit dose detergents. We’ve seen a spike in demand for Tide antibacterial spray. This care consumption has increased as families eat more meals at home and are more concerned about the hygiene of their dishes, glasses and silverware. More meals at home means more surface cleaning, often with a preference for a disposable cleaning solution versus a funky sponge, dingy cloth or suspect mop, leading to increased consumption of Bounty Swiffer and Mr. Clean. March was a true test for our product supply planning and logistics organization, which they passed with flying colors. We set records for the volume of product produced and shipped. Our largest five North American plants produced and shipped 22% more cases in March than the average of the prior 12 months. Work is underway to produce critically needed nonmedical face masks. We’re already up and running in China and the U.S. and we currently have teams working to solve additional capacity in every region of the world and will quickly begin production in those areas in coming weeks. When fully operational, we expect to be producing more than 10 million masks per month. We’ve leveraged P&G R&D, engineering and manufacturing capability to quickly produce face shields in Boston and Cincinnati, which are currently being used in hospitals and Covid-19 testing centers. We’re using our marketing and communications expertise to encourage consumers to support public health measures to help flatten the curve and slow the spread of the virus. Top line results this quarter obviously benefited from consumer pantry loading in preparation for in-home quarantining. We’re planning for pantry inventory levels to eventually return to normal.The second topic is recession. We’re assuming it’s already here and will be here for some period of time. While we are not immune, our current strategy puts us on better footing than prior downturns to weather economic headwinds. Our portfolio is now focused on daily use items where performance drives brand choice. We have much less exposure to discretionary items than we had during the last downturn. We’ve increased the superiority of our offerings, simultaneously increasing their value. The Hershey Company: Currently, all of our manufacturing plants remain open and we continue to operate our supply chain with limited disruption. As the situation began to unfold, we built inventory in both raw materials and finished goods to mitigate risks and to help us to continue meeting demand. In addition to our three retail stores which have closed, there are several other parts of our business that are seeing an outsized impact, including our food service business and our travel retail business, both of which are seeing channel decline of 75-80%. Grocery and snacks businesses in particular saw increases in both household penetration and basket size. Hershey syrup, baking chips and cocoa all grew approximately 30% during March, and trends have remained strong as families are spending more time together at home baking. Our Skinny Pop and Pirate’s Booty businesses grew approximately 20% and gained share. Seen a shift to lower price per ounce offerings as many consumers experience financial constraints. As a result, Skinny Pop and Pirate’s Booty have experienced share declines and softening performance over the past three to four weeks. Ecommerce growth has accelerated meaningfully, as many of you would expect and have likely observed yourselves, the number of consumers purchasing groceries online has increased significantly over the past several years. Our research indicates that 45% of consumers have used one or more online grocery options in the past four weeks, 23 points of them which use these services for the first time. We are evaluating our media plan and adjusting both levels of support, messaging and channel when appropriate. For example, we’ve adjusted our S’mores copy to emphasize family consumption at home versus larger community and friend gatherings. We have taken savings from events like NCAA March Madness and Olympics and reallocated some to digital and our Reese’s Lover promotion this summer, while leveraging some of that to cover incremental Covid-19 manufacturing and selling costs. We are proactively planning for Halloween and partnering with our retailers to be prepared for a strong recovery, while also making smart choices to mitigate risk if consumer behavior remains impacted. This includes optimizing our portfolio and price point mix and activation timing, as well as amplifying our ecommerce plan. Bed Bath & Beyond: All four of our ecommerce fulfillment centers are currently operating. And by the end of this week, we will have converted approximately 25% of our Bed Bath & Beyond and buybuy Baby stores in the U.S. and Canada into regional fulfillment centers to use our bath inventory resources to assign orders locally and deliver quickly. With these conversions, we expanded our fulfillment capacity significantly. The regional fulfillment stores have doubled the capacity of our entire fulfillment network. This kind of strategic action and innovation has allowed us to quickly implement curbside pickup, which was launched April 1 at buybuy Baby. In the first full week alone, we completed more than 11,000 curbside orders. Also this week, we are rolling out Buy Online Pick Up In Store at our Baby stores. The Bed Bath & Beyond digital business is seeing net sales growth of more than 90% for the month of April to date. As the quarantine phase of this pandemic has taken hold, we are seeing consumer purchasing demand focus on categories such as water filtration, air purifiers, vaporizers and humidifiers and kitchen electric cleaning, and coffee mates. We’ll also continue to review our store footprint, as we have nearly 250 leases that are up for renewal in 2020 alone, which gives us added financial flexibility. I believe that Bed Bath & Beyond will emerge from this even stronger. For the first two weeks of April, the fiscal quarter-to-date overall decline in our total net sales was around 42%, primarily due to the additional temporary store closures. However, net sales from our digital channels have further strengthened with year-over-year growth of more than 35%. Due to the level of market uncertainty, we will not provide further financial guidance for fiscal year 2020 at this time. Rite Aid: We saw a significant increase in revenues during the month of March with same-store frontend sales increasing by 33%. These increases were impacted by demand for general cleaning products, sanitizers, wipes, paper products and OTC items. The demand has moderated in the first few weeks of April. Same-store for script counts are 8.3% for the month of March driven by the acceleration of 90 days fills of maintenance prescriptions. We view this as a timing item and expect this phenomenon to have a negative impact on script trends in April and May. The benefit that we have seen from increased sales has been largely offset by investments made related Covid-19 including pay adjustments for store and distribution center hourly associates, bonuses for store managers and pharmacists, increased charges to clean stores and other expense increases in related to our increased volume such as supply costs and credit and debit card fees. Regarding supply chain, our current supply for the majority of our branded and generic drugs is good. However, we’ve seen increased demand for certain generic products such as inhalers and hydroxychloroquine and are closely monitoring the supply of these and other generic products. We’ve had issues in restocking of our front-end products with heavy demand similar to others in the industry. We’re working diligently with our supplier partners to get back inside. We’ve seen an increase in mail order prescriptions and drug utilization which has a favorable impact on the business. We have expanded self-checkouts at the 260 stores with plans for an additional 400 locations in FY 2021. At this time, the company does not have enough information about the ultimate impact of Covid-19 on fiscal 2021 results to justify changing the fiscal 2021 guidance. It is important to note that the impacts of Covid-19 on our business are fluid and difficult to predict and these estimates could materially change. Chipotle: Supply chain partners who have been dedicated to keeping our restaurants stocked with gloves, hand sanitizer, masks, and other necessary items to keep our employees, food, and customers safe. Only about 100 restaurants are fully closed at this time. These are mainly inside malls and shopping centers. Sales dropped 30% as we entered April and then improved again over the past week with comps adjusted for Easter in the down high teens range. The beginning of April, in-store ordering is down around 75%, while delivery is up about 150% and order ahead is up nearly 120%, highlighting the importance of our digital platform and setting us up for a bright future as digital sales tend to be sticky. Digital is currently accounting for nearly 70% of sales. Rewards program, which now has more than 11.5 million enrolled members. Over the past month, daily sign-ups spike nearly fourfold, which is another sign that our digital platform is gaining traction. We are pleased to report that 65% of newly enrolled rewards members are new to the Chipotle brand, up from 51% pre-Covid-19. Forty-nine stores under construction. However, we have begun to see construction delays and therefore, have preemptively delayed groundbreaking on the majority of projects in April. Shake Shack: Shack Track will result in interior and exterior pickup windows or new pickup areas to improve flow and encourage digital preorder. We’ve been studying current Shack layouts and future Shack designs in order to identify where this model can be quickly added. It may take time in many forms, but all toward the goal of continuing to build the community gathering places the world needs, while adding a level of convenience, safety, distance and frictionless pickup to meet the needs of our guests. Shake Shack brand was in an incredibly strong poison as additional real estate and development opportunities became available. We’ll be ready to capture the whitespace ahead, what could be a forever change to the retail and restaurant environment. On the subject of new Shack development, during this Covid-19 crisis, we have paused all design and construction of new Shacks. We’re committed to getting back on track for those development plans and the execution of our broader growth strategy as quickly as possible and our teams are employed to do so when the time is right. Overall, most recent fiscal week, ending last Wednesday, the 29th of April, same-Shack sales were down 45% compared to the same period last year and total Shack sales were down 34%. McDonald’s: Looking at comparable sales, we expect the second quarter as a whole to be significantly worse than what we experienced for the full month of March. Global comp sales were down 22% in the month of March. In the second half of March, comp sales were down roughly 70% as several markets like France, Italy, Spain and the U.K. temporarily closed all restaurants, and other markets like Australia, Canada and Germany had drive-thru delivery and takeaway only for limited hours and menus. Comp sales have continued to be down about 70% through April in this segment as many of the fully closed markets are now just beginning to reopen. Turning to the U.S., comp sales were negative 13% for the month of March. Beginning in mid-March and continuing through mid April, U.S. comp sales were consistently down about 25%. However, we have begun to see some improvement in the last couple of weeks. We expect April comp sales to be down about 20%. Also over the last several weeks, the U.S. has experienced a significant increase in average check across all channels. This is due to an increase in party size as well as the evolving consumer behavior with daily routines interrupted and fewer transactions at the breakfast day part. As consumers shifted from in-person ordering to drive-thru and delivery channels, drive-thru now accounts for nearly 90% of sales in the U.S. Starbucks: Moving to the U.S.: Today approximately 50% of our company operated stores and 46% of our licensed stores in the U.S. are temporarily closed. To date in April, comparable sales growth for U.S. company operated stores that are open is averaging approximately minus 25% or indexing at 75% of prior year levels. However, as we have not yet entered the recovery phase in the U.S. For the month of April, comparable store sales in China were down approximately 35%, marking strong improvement from a weekly low of minus 90% in mid-February. So when we open starting next week, we’re going to open with modifications. And those modifications will be drive-thru stores. We will amplify delivery. We will have the Mobile Order & Pay channels open, and then the addition of a new concept, the entryway handoff. We will only have roughly 30 stores that will be open and in those 30 stores, there will be no seating. So we are making sure that we provide a safe environment for our customers and for our partners. And we will monitor what happens as shelter-in is lifted in certain regions and areas and then begin to reopen the cafe stores. You’ll see later in the summer, we’ll also add curbside access to our stores.Also remember that we have really turned off any marketing in this time. And so our customers are used to us introducing spring beverage in addition to speaking to them on a one-to-one basis through our digital relationships. And we’ve not acknowledged our birthday presentations to our customers. We’ve not introduced Happy Hour, nor have we done our Double-Star Days. So, I would say that we’re operating in an abnormal position in terms of how we communicate to our customers. Now, coming out of the gate, we’re doing a lot of new things with marketing. We’ll have digital media. We’ll have TV. We’ll have paid social owned earned media. That all begins early next week. We’re also creating new e-mail contacts to each one of our members. So those 30 million that we can reach, we will do that in the next week. And the most important thing is to let them know that we are open. Delta Airlines: Unprecedented situation where demand for near-term air travel dropped to almost zero in a matter of weeks. We’re taking steps to help our employees and customers practice social distancing including blocking middle seats. Right now 37,000 employees (more than one third of our workforce) have elected to take voluntary, unpaid leaves ranging from 30 days to one year. This is helping reduce our daily cash burn, which started at $100 million per day in March down to $50 million a day starting in May. Safety will no longer be limited to flight safety but personal safety as well. On Monday, April 20, we received $2.7 billion of the $5.4 billion that’s expected over the next few months. $3.8 billion of this is direct aid with $1.6 billion in a low-interest unsecured 10-year loan. The path to recovery is uncertain and will likely be choppy and while we all wish we could predict the pace of the recovery, the truth is our recovery will be dictated by our customers feeling safe both physically and financially to begin to travel at scale. Given the combined effects of the pandemic and associated financial impact on the global economy, we believe that it could be up to three years before we see a sustainable recovery, and to succeed throughout that environment we will likely need to resize our business in the near term to protect it in the long term. While the resizing business over the short term is painful, it will also be an opportunity to accelerate strategies to streamline our company, simplify our fleet and reduce our fixed cost base in ways not possible in the past.

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First-Quarter Analysis of Consumer Brands in the Year So Far

From Procter & Gamble to Starbucks

Matthew Scott Goldstein

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Matthew Scott Goldstein