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ALCO BEVERAGES:  COVID RELATED RISKS AND OPPORTUNITIES

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ALCO BEVERAGES:  COVID RELATED RISKS AND OPPORTUNITIES
By: Dr. Sanjiv Agarwal
November 11, 2020
All Articles by: Dr. Sanjiv Agarwal       View Profile
  • Contents

Covid -19 has changed the dynamics of business risks. The pandemic has spread at an alarming rate, infecting millions of lives across the globe and bringing economic activity to a near standstill as countries imposed stringent restrictions to contain the spread of the virus. It is expected that necessary measures to reduce the contagion and protect lives will take a short-term toll on the economic activity but it can be considered as an investment in long-term human and economic health.

Global macroeconomic slowdown driven by the pandemic and the recession is likely to result in a reduction in disposable income of consumers and slowdown in the alco-beverage industry. This may adversely impact the industry revenues and profitability.

Many companies have already undertaken a number of preventive measures to ensure safety of its employees in the offices / manufacturing units which include work from home, alternate working days for employees, flexible working hours, use of face masks and hand gloves for employees, social distancing, virtual meetings. Hand sanitizers are placed at the entry/exit points in offices as well as other units. Regular sanitization and disinfection of all touch-points at the units, offices and stores is a new rule.

To fight the pandemic, many companies have implemented employee health and safety policy which is in line with health authorities’ guidelines.  During the lock down period, IMFL operations suffered due to suspended operations but manufacturing of ENA continued with production of sanitizers. On a positive note, companies have been focusing on cash management resulting in an easy working capital scenario.

Covid times call for re-visiting the business strategies and companies ought to adopt a new product approach, not only to sustain and survive but also to grow in short as well as long term. Business strategies would include prudent risk management with more effective operational controls and risk mitigation.

The severe disruption on demand caused by the pandemic has created a large cash flow gap for the economy and industry. The severity of the impact is dependent on the level of indebtedness of individual firms and their working capital requirements. As our economy attempts to find a balance between steps taken to mitigate the health risk and economic risks, an all out attempt is need to prevent liquidity collapse and intensifying health interventions.

The deep and long recession triggered by the pandemic is likely to have a longer term impact through lower investment, an erosion of human capital through loss of employment and displacement, and weakening of global trade and supply chain linkages.

On production side distillers have suffered with long lock downs and temporary local restrictions coupled with acute manpower shortage due to migration of workers. However, migration of labours after the outbreak of COVID-19, will lead to higher rural consumption.

On product lines, companies may look at some non-alcoholic products to have uninterrupted and less regulated sales happening. On a drop in volumes –both production and sales, companies are not working on full or optimum capacities which has resulted in lesser depreciation based on single or double shift operations resulting in lesser non-cash item in the form of depreciation. This has also impacted profitability. Post Covid, once the situation improves, it is hoped that normalcy would be regained. Both, top line and bottom lines will surely get impacted in Covid era and current FY 2020-21 is likely to be severely and adversely hit.

The retail outlets have been badly affected, due to continued closure for some, i.e., bars, pubs and the like and restrictions on operational timings for others.  Another adverse sale affecting reason has been imposition of Covid related taxes / cesses which have negatively impacted the alco-beverage industry including the beer market. As a result, volumes have substantially declined. However, companies also to look forward business to opportunities from outlets like pubs, bars etc as these are yet to reopen after lock down.

New business models in terms of home deliveries and take-aways are a welcome move in

Covid times. This offers both types of opportunities – creating a direct business vertical or having tie-ups with market players in e-commerce. Infact, there can be different models for different states or market segments. Long term prospects are certainly there to explore.

With lower sales and incomes, companies may have to resort to cost rationalization methods and this may have to be undertaken as a long term measure. This would include sales promotion, entertainment, other discretionary spends etc. Since how markets are going to evolve post Covid is uncertain, companies may have to keep on changing their cost-marketing strategies.

Companies may have to resort to measures which may, inter alia, include strengthening of the brand portfolio, market repositioning, understanding market sentiment and consumer behavior, use of digital tools - both at work place and for marketing, cost cutting and lean operations as well as organizational framework.

With strong brand portfolio and the robust balance sheets of major players, it is expected that companies will be able to navigate through the current turmoil and circumstances, which of course is not a permanent one and expected to come out more stronger in times to come.

In Covid times, while competitive environment may not change much, operational efficiency will undergo a change. Those who are able to adopt to new business challenges will sustain the crises.

 

By: Dr. Sanjiv Agarwal - November 11, 2020

 

 

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