Businesses need to take stock (of) whether their product/service falls in the essential or discretionary category, understand how consumer behaviour would have changed, and, importantly, gear up for cost control and increased operational efficiency.
Like it or not, COVID-19 is going to have a significant impact on the Indian business landscape. Unfortunately, businesses have been facing rough winds, one after another, in a steady stream. First, it was the demonetisation, then GST. Then real estate and auto sector slowed down. The banking crisis followed. And now, the COVID-19 induced lockout and its corollary – an inevitable stock market tanking.K.E Raghunathan, former president of All India Manufacturers’ Organisation (AIMO), summed up the COVID-19 situation in grim terms, saying "more livelihoods would be lost than lives due to COVID-19." Rather than speculate on how things will emerge post the lockout, let's look at how businesses can react to the changed economic outlook, consumer behavioural changes and supply chain disruption. There are certainly ways and means businesses can prepare themselves for better cost control and operational efficiency. It's not all that bleak out there.
Vitamin or painkiller, necessity or discretionary?
Is your business a vitamin or a painkiller? This is a question which most venture capitalists ask when you pitch for funding. But now, more than at any time in the past, the economic gloom will make consumers ponder this question before they make every single purchase. Is it a necessity or discretionary? Not all product and services occupy the same level of importance in the consumer's psyche. Moreover, the lockdown would have taught consumer new behaviours like home cooking, in-house entertainment, online learning, need for cash reserves, and lots more. Also, such a massive event will have the effect of changing consumer behaviour permanently. Businesses need to figure out how consumers slot their products and service, and respond accordingly. This requires reframing, especially for discretionary categories. Rather than let consumers reframe it the way they feel, businesses should proactively do it and pre-empt them with their marketing and communication plans.
One globally accepted behavioural change is about consumers trading up and trading down in an economically strained environment. Unlike classical economic theory, which will predict consumer downtrading, it has never happened so linear. There is enough evidence of discretionary businesses repositioning themselves for better relevance. Let's look at some learnings from the US market, which was hit by recession in 2008. Starbucks reframed itself as simple pleasure and joy in a gloomy climate, a major distiller, which has a number of premium brands in its portfolio, witnessed a change in its demand channel - on-premises consumption declined, but off-premises consumption increased. People started drinking at home to be cost-effective. Using these lenses, we can draw up scenarios for possible changes in behaviour.
Let's consider this exercise. The lockout would have taught new behaviours like in-house cooking, entertainment and exercise, Zoom meetings, digital learning, more time on devices and mobile, and the need to save more. Also, it's highly unlikely that some of these new learnings will get dropped anytime in the near future. Post the lockout, what reframing will movie halls, malls, home cooking kits, restaurants, premium FMCG products, fine dining restaurants, digital learning, co-working space, automobiles need to do? Does this open up the need for smaller SKUs, new scaled down offerings, reframing of offering on the consumers mind, dialling up of value by premium brands? Businesses need to understand the new consumer realities, which will play out in the market, and calibrate their operations accordingly. Next, we will look at how businesses need to calibrate to the new normal.
New normal for business operations - cost control and operational efficiency
It is during crisis like this that fundamental truths, like 'cash is king', get reinforced. Everyone would have read about financial stress; one of the largest retailers in India experienced because of an overleveraged balance sheet. The business was expanding rapidly without any thought on operational efficiency, while other retailers like D-Mart became hallmarks for operational efficiency. Incidents like this will make businesses realise the need for cost control, increased operational efficiency and, importantly, sweating capex investment. Let's see how cost control will play out.
Focus on the core, and scaling back on non-essential investment
Businesses need to classify their spends: stop, delay, continue and accelerate. Long term projects have a high possibility of being shelved. But this environment will also be accelerating spends in some new areas, such a digital channel for sales, looking beyond the core customers to adjacent segments (adjacencies) and markets to sculpt new revenue streams, etc.
Remember, if you are a vendor selling products or services, the buyer will apply the same lenses, as earlier discussed, of essential versus discretionary.
Digital acceleration and birth of new business models
Digital holds excellent potential for substantial cost and revenue leverage. Consumers will be more open for subscription service, in-home entertainment, cooking, and workouts. Also, the strain on cash flow presents an opportunity to offer products as a service, especially for high capex businesses. Businesses will look to grow, but in an asset-light way.
Fixed to variable cost conversion, payment for outcomes
Businesses will be keen to convert some of their high cost fixed overheads into variable cost and start incorporating outcome-based/skin-in-the-game metrics. Engagements could take the form of low fixed fee and higher multiples for success. Also, there could be a rise in project-oriented and consulting style engagement.
Rationalising marketing cost
In a gloomy economic environment, marketing and advertising budgets evaporate into thin air, and this is a hard reality we need to live with. This has been proven with the correlation between GDP growth rates and ad spend. Businesses will look for smarter and cost-effective media options like mobile marketing and switch precious budgets from non-converting sources to micro demand moments. The need for joint go-to-market, non-competing/complementary partnerships, sharing of the customer bases is only going to rise.
(The author is a principal at Innomantra, a Digital Transformation, Innovation and Intellectual Property consultancy. He is and ex-planner from ad agencies Ogilvy, Wunderman Thompson and DDB Mudra.)