How coronavirus is affecting the FMCG sector - Inside FMCG

How coronavirus is affecting the FMCG sector

The coronavirus outbreak has severely impacted China’s foodservice and on-trade channels and could have serious consequences for Australia’s food industry, Rabobank warned on Tuesday, but the gravity of its impact on Australia’s agricultural sector will be limited in the short term.

In a recent report, Rabobank said the outbreak has affected and closed many foodservice outlets and caused less Aussies to dine out.

“Given what we have seen on the ground, along with news received from major chains – for example, the closure of stores by Starbucks, Haidilao, McDonald’s, and Yum China – potential revenue losses for both retail and foodservice for the Chinese New Year week could range from 20 per cent to 80 per cent,” Rabobank said.

The retail industry has already lost between US$31 billion to US$124 billion. The report said that the sooner the virus is contained the faster the industry can make a turn around. If the outbreak lasts beyond March, there will be the more severe consequences on the food and agri supply chain.

Australian-based head of Rabobank Food & Agribusiness Research, Tim Hunt said coronavirus will “almost certainly” have a larger impact on food and beverage industries than the global SARS (Severe Acute Respiratory Syndrome) epidemic in 2003.

Hunt said the coronavirus has spread faster than SARS and with Australia’s “much larger exposure to China” that is the biggest difference between current events and SARS.

“If we go back to 2002 just before the SARS crisis, Australia sent eight per cent of its [agricultural] exports to China,” Hunt said.

Australia sends 28 per cent of its food and agricultural exports to China.

“Add to that, the stronger links that have been developed between Australia and China in terms of exports, tourism, education and investment, we have a very different environment in which we might see the potential impacts of coronavirus this time compared to SARS in 2003,” said Hunt.

He said the first round of impact is already being felt by food and agriculture businesses that are relying heavily on the food service channel in China, particularly perishable goods.

“For example, rock lobster shipments to China have all but ceased in the last couple of weeks. while chilled meat shipments for food service are also a risk category given a lot of hot pot restaurants are closed at the moment,” Hunt explained.

Wine sales are also likely to decline while Chinese consumption of meat, dairy and grains is unlikely to fall in the short-term. Hunt said if the virus continues further, its second-round impacts –“likely to hit our F&A industries” – would come into play.

“Hopefully we won’t get to ‘round two’, but if we do, incomes may fall in China and we may eventually see less growth in sales of premium food and beverages as that wealth effect starts to kick in. And this may start to go beyond just food service sales and logistical disruptions to potentially impacting consumption in general of meat, dairy, grains and seafood,” Hunt said.

The currency exchange rate could be an “important stabiliser” for Australian agricultural exporters if coronavirus reaches the second round effect. The Australian dollar will likely depreciate drastically due to the market’s slowing economic growth and rising risk concerns. He said this could “somewhat offset” any decline in global commodity prices expressed in local currency terms.

“But the most important development will be when we see a slowdown in the rate of infection. SARS took around three and a half months for the infection to start slowing but after that, it didn’t take long for infections to cap a few weeks later. While we have no idea how this virus will behave compared to SARS, there won’t be any easing of restrictions until it does,” added Hunt.

He emphasised on the importance of monitoring the virus as it spreads to other countries including Indonesia, Vietnam and other Southeast Asian countries, because if it spreads “we will start to see the same set of impacts in a second very large set of export markets for Australia”.

Rock Lobster will be most exposed sector as 95 per cent of sales go to China. In WA, sales have ceased for now.

Red Meat will likely have short-term disruption due to logistics and reduced eating out by Chinese consumers. The shortage of meat caused by the African Swine Fever is expected to see ongoing strong demand from China once the short-term impacts of coronavirus are overcome.

In Grains limited impacts may surface initially and during a second round phase. While Dairy has a limited first round impact since most are shipped and have a longer shelf life. Cheese consumption could be impacted as its mainly used in restaurants.

In horticulture, the cherry industry has luckily air freighted most of its crop to China before the coronavirus hit. In the next two to three months, its main threat to export fruit and vegetable crops will be more on the logistics side with demand from Chinese consumers for quality imported fresh produce.

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