MEDPUSH

By: McKinsey

The COVID-19 pandemic is first and foremost a human tragedy, but it has also had a significant impact on the global economy. In the Middle East and Africa (MEA), extensive lockdowns have led to changing consumer attitudes and a shift to online channels for activities such as shopping, meeting, and learning. People are also spending less, which reflects more cautious attitudes and direct hits to income.

During lockdown, consumers across the Gulf Cooperation Council, South Africa, and Turkey focused their online spending on groceries, personal-care products, and household supplies. Sales in discretionary categories, such as apparel, footwear, and travel, fell sharply. Similarly, the restaurant industry suffered.

The priority for businesses in the next normal must be to manage the immediate impacts of the crisis on consumer demand. Depending on their position, that may mean ramping up digital solutions, leveraging third-party platforms, and using social media to continue conversations with their customers. Over the medium term, companies must make strategic decisions on e-commerce, taking into account their current capabilities, the trajectory of customer demand, and factors such as supply-chain capacity and flexibility.

We see three key ways forward:

Sustain. Players with an online presence seeing a rapid increase in demand (for example, those associated with grocery and essential products) should sustain their activities through steps such as optimizing baskets and rationalizing product ranges to enable consistent delivery.

Adapt. Players with an online presence seeing a rapid decline in demand (for example, those associated with discretionary-spending categories, including apparel, footwear, and luxury products) should adapt by becoming more flexible, optimizing digital offerings, and ramping up marketing.

Build. Players lacking an online presence must make no-regret moves, such as embracing social-media marketing. They should also find ways to sell online, through either third-party platforms or their own bespoke offerings.

In all scenarios, speed is of the essence. If companies in the MEA region can act decisively on digital initiatives, they will offset the impacts of the crisis, recapture lost sales, and be ready to grow in the next normal.

The cautious consumer

In Turkey, around 58 percent of consumers say they must be “very careful” on spending, and 56 percent are “actively cutting back,” according to a recent McKinsey survey across the region.¹ In Egypt, around two-thirds of consumers have seen a recent decline in income. Some 61 percent of consumers in Saudi Arabia believe their personal or household finances will take a hit for at least two months.

Consumers in the MEA region are unsure when the COVID-19 crisis will end but believe that it will take at least four months for life to return to precrisis norms. Consumers in Nigeria, Saudi Arabia, and the United Arab Emirates are more optimistic than their peers in France, Spain, and Turkey that their economies will rebound within two to three months (Exhibit 1). That is the result of a higher starting point: consumers in Saudi Arabia and the United Arab Emirates were relatively upbeat about their economies at the start of 2020.

Still, relative optimism does not translate into spending, apart from on essentials. Sales in discretionary categories, such as apparel, footwear, and travel, have fallen sharply. Similarly, the restaurant industry has been heavily hit, with 56 to 72 percent of survey respondents saying they will reduce spending at restaurants in the next normal (Exhibit 2).

Online shopping: A permanent trend?

The MEA region has been relatively slow to adopt e-commerce, but the COVID-19 pandemic has brought a step change in behaviors. Consumers across the Gulf Cooperation Council, South Africa, and Turkey have done a lot more shopping online during the pandemic than before, amid higher demand for groceries, personal care, and household supplies (Exhibit 3). In fact, consumers in Saudi Arabia and the United Arab Emirates have seen among the highest rates of “new or increased” users in online deliveries (restaurant products and groceries) and communications (videoconferencing and remote learning).

Exhibit 3

As the e-commerce landscape evolves, brands must be prepared to tailor their strategies to new patterns of customer demand, working out how to develop their propositions to achieve maximum impact and build sales fast. For brands yet to engage with digital solutions, the crisis should act as a clarion call. The time to act is now.

Strategies for e-commerce acceleration

Our research suggests that a one-size-fits all approach to e-commerce is unlikely to be optimal in the MEA region. Instead, individual brands must weigh their priorities, based on the level and probable trajectory of customer demand and factors such as supply-chain capacity and flexibility. As companies consider their options, the impacts of the COVID-19 crisis on demand and online activity are likely to dictate the terms of discussions. However, we see companies falling into three archetypes: players with an online presence seeing a rapid increase in demand, players with an online presence seeing a rapid decline in demand, and players lacking an online presence.

Regardless of archetype, five main capability areas are key to building a successful e-commerce business (Exhibit 4):

• assortment and merchandising
• design and technology development
• operations, logistics, and customer support
• marketing
• talent, operating model, and change management

Exhibit 4

The effort that each player should allocate to each of the capabilities will vary depending on the archetype it falls into. For example, operational scale-up will be a priority for grocery players in the first archetype to ensure that they can meet excess demand. The first imperative for apparel, fashion, and luxury brands, on the other hand, will be to recover from the crisis, focusing their efforts on acquiring traffic and improving on-site conversion. Those companies may then use e-commerce as a launching pad to boost revenues as the economic rebound gathers pace.

Companies with an online presence seeing a rapid increase in demand: Sustain

Retailers seeing the biggest jumps in demand during the COVID-19 crisis include grocers, household stores, and pharmacies, reflecting the fact that people are spending more time at home and are focusing on staying healthy. The imperative for those companies now is to future-proof their business models by boosting online capabilities. In grocery retail, that means ensuring sufficient capacity to cater to higher volumes and maintaining high levels of service and consumer satisfaction. For companies focused on sustaining, a renewed e-commerce strategy comprises the following actions across the five capability areas:

Assortment and merchandising. In periods of high demand, companies should focus on ensuring critical-product availability. To that end, they can benefit from streamlining product ranges, working with suppliers to do so (for example, via off-cycle orders). In the short term, it makes sense to reduce assortments and simplify processes. Some retailers have created preselected baskets and imposed order limits. For example, a company created four different food baskets, while another offered baskets focused on staples. Those initiatives led to as much as three times the uplift in basket size and like-for-like revenue gains of 2 to 3 percent.

Design and technology development. Retailers’ e-commerce sites need to handle increased traffic and order placement. Their decision makers should put in place analytics to ensure that they can keep track and make informed decisions. Such analytics may include system alerts for key metrics and real-time dashboards. Many retailers have partnerships with third parties to help them scale technology rapidly, taking in front-end activities, marketing, DevOps tooling, and back-end integration.

Operations, logistics, and customer support. As orders increase online, brands must ensure sufficient delivery and fulfillment capacity. Nondiscretionary items are likely to come under the most pressure. Stores may need to adjust delivery and replenishment frequencies, tap new suppliers, extend delivery windows, and expand click-and-collect tools. Those actions may require more overnight in-store capacity, enhanced logistics (potentially through partnerships), and modifications to warehousing facilities. Transparency on key performance indicators is critical: orders delivered on time and in full should be the focus. Some companies have used on-demand cab aggregators and last-mile-service companies to ensure that they have the capacity and flexibility to meet demand. Others have increased replenishment frequency and introduced new timetables (for example, catering for night-time deliveries).

Marketing. Given higher-than-usual traffic and conversions, the focus should be on aligning marketing spend with the evolving situation (for example, improved communication with customers in relation to delivery times and better coordination with operations to align orders with increasing capacity).

Talent, operating model, and change management. Companies should identify and implement no-regret moves to ensure safety across online and business activities. Those moves may include updating travel, safety, workday, sick-leave, and compensation policies. In addition, resources should be assigned in operations to address new capacity requirements and to ensure that employees are trained.

Retailers that get an early grip on those issues should be able to make the necessary adjustments over four to five weeks. During that time, they must set up task forces, develop plans and road maps, adapt fulfillment and last-mile capacity, and tailor marketing and merchandising. At the end of the process, brands should find that their commercial and operational decisions are better aligned, meaning that they are able to control their activities flexibly in line with shifts in demand.