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Managing effects of increased demand and stockpiling during coronavirus

How is coronavirus influencing the retail industry?
The coronavirus outbreak has spread its influence far beyond the healthcare industry to financial markets, tourism, manufacturing, and even entertainment. It impacts individuals' routine and businesses no matter the size. Among the industries affected the most is grocery retail. We are working closely with our clients to help them adapt to a new normal and would like to share our observations and recommendations in this article.

Stockpiling

One of the immediate consumer responses to the pandemic outbreak and uncertainty that followed is increased demand. Many grocers worldwide have already experienced customers emptying shelves in an attempt to stock up for better or for worse: stockpiling. Demand fluctuations vary from country to country but the general trend can still be observed. Demand for fresh and ultra-fresh items such as vegetables, bread and meat increased slightly and safety stocks were mostly sufficient to balance the increase. On the contrary, items with long shelf life such as pasta, cereals, and canned food were the first to be in short supply: demand for some categories increased tenfold leaving retailers empty-shelved. To minimize the negative impact of the coronavirus outbreak on their supply chains, retailers need to act fast.
Demand surges caused by the coronavirus is an anomaly that demand forecasting systems cannot deal with autonomously. It is up to the planning department to evaluate the risk of overstock and the risk of out-of-stocks and adjust the forecast to minimize losses.
Even smart prediction algorithms need to be retrained to take into account occurring demand spikes. The prediction model behind DSLab demand forecasting solution is updated daily to fit the "new normal" and provide a reliable forecast during demand uncertainty.

While countries where stockpiling hit the hardest state that food production will not be disrupted, retailers can still experience short-term inventory shortages due to panic-buying. To avoid it, demand planners need to reconsider their allocation policies. Analyzing the volume of spare cash and storage space consumers have at their disposal, retailers can better forecast new demand spikes at certain stores and allocate stocks to locations that need them most.

Growth of online retail

Online grocery stores and delivery services thrive as consumers opt to stay at home during the outbreak. As a response, some grocers increase the minimum order value and delivery times, others expand their courier network.
While both strategies -- demand management and network extension -- are feasible, we recommend focusing on long-term effects rather than immediate gains.
Nothing increases customer loyalty as a timely delivered high-quality food and a feeling that you are cared for during such stressing times.

Structural changes in retail

While stockpiling and growth of the online grocery sector are immediate effects that preoccupy retailers at the moment, there are more influencing structural changes to come. How the trend will change in a three-months time, in a year? What can be done today to prepare for the upcoming changes? These are the questions no forecasting algorithm can answer, regardless of how "smart" it is.
Combining technical and retail expertise, we work closely with our clients to develop possible future scenarios. We try to answer such questions as how local and global supply chains will be affected? how other industries will be influenced? what changes await transportation, tourism, entertainment, and HoReCa -- industries that influence retail the most? how will remote work change customer behavior and preferences?
For example:

  • If global supply chains are affected by transportation disruption, retailers should consider alternative sources for imported goods.
  • With more and more governments calling up their citizens to stay at home, increased demand for children's goods may be observed in a year's time.
  • Customers newly acquired during coronavirus may stick with online grocery stores and delivery services putting more pressure on traditional retail when the outbreak is over.

Considering these changes and preparing for them today will save retailers nerve and money in the future.

Back to baseline forecasts

When the storm passes, retailers need to switch to "business as usual" at the earliest. Unfortunately, forecasting systems and prediction algorithms cannot forecast the tipping point: it is up to retail experts to define when the trend changes. When demand starts to decrease, planners need to get back to the baseline forecasts making respective amendments to the forecasting systems. Experts also need to bear in mind that the increased demand we observe today is cannibalization of future sales. When the impact of coronavirus eases, consumers will focus on the elimination of stocks in their freezers and cupboards, minimizing new purchases.
If the tipping point is not forecasted accurately enough and future demand is overestimated, retailers face the risk of excessive inventory for months to come.
There is no universal recipe for dealing with the effect of the pandemic outbreak. However, a thorough analysis of both immediate effects and long-lasting consequences backed up with modern forecasting tools will help retailers to develop strategies to survive these challenging times.
Alexey Shaternikov
CEO and Chief data scientist at DSLab

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