- 28 May 2020
- Managing the Future of Work
Covid-19 Dispatch: Dan O’Connor
Bill Kerr: Welcome to the Managing the Future of Work podcast from Harvard Business School. I’m your host, Bill Kerr. This episode is one of a series of special dispatches on the sweeping effects that Covid-19 is having on society, the economy, and the future of work.
Dan O’Connor is an expert in the commerce sector, working with companies ranging from Procter & Gamble to Coke to Chick-fil-A. Dan’s going to share with us how these organizations are confronting the Covid crisis and the uncertainties that lie ahead. Dan also advises many smaller businesses, and he urges them to not “reenter” the market the same way they left it two months ago. Instead, Dan’s going to tell us about his playbook for businesses to reopen. Welcome, Dan.
Dan O’Connor: Good morning, Bill.
Kerr: Dan, you’ve long studied China’s frontier approach to commerce. They experienced the lockdown first, but then they also began restarting businesses before anyone else. Can you tell us a little bit about how that’s going? And what lessons should we take from their experience?
O’Connor: Yes, Bill. It’s been about four months since China both discovered and began to get their arms around what the virus—what the viral curve—was really going to look like, effectively. They shut down January 23rd. And what we saw was—as everywhere in the world—was a rapid deceleration in consumption that went along with work from home and school from home and the other kinds of practices we’ve seen here. China is a little bit different than markets like the US and Europe. Their GDP, however, was equally and—maybe more severely—impacted. That is, consumption was more severely impacted, as they are very much of an export-oriented economy. But there’s a lot of commonality—the things that we saw in that market on their frontier, in terms of how they approach commerce and what the impacts were. And maybe the most important thing was implications of work from home, school from home, exercise from home—just the at-home impacts. As we saw around the balance of the world, consumption moved quickly to those things that made it easier to be at home and easier to school from home—so downloads of apps and entertainment and gaming, but also merchandise categories that made it easier to work from home, for example. As you saw this transition, the big difficulty—just as it was in every other part of the world—is key categories like leisure, apparel, any kind of travel and transportation, daily transportation was severely, severely curtailed. The distinction in the China market—because there are some significant distinctions—is that we saw them reopen the market in late March. As we sit here in May, there’s data that suggests that as much as 80 percent of consumer-oriented enterprises—retail stores, restaurants, and so on—are open, and most are doing something around 60 or 70 percent of their pre-corona, pre-C-19 sales. There are a number of strategies that companies are pursuing post-virus that we can talk about just in a few minutes. But there’s a very clear pattern that we saw happen with the reopening. While it’s not a perfect corollary—that is, China’s not a perfect corollary to the US—we can actually see very visible weekly evidence that, over the course of the last four or five weeks as they’ve reopened, entire categories of merchandise have moved from declining rapidly to neutral, and in some cases, actually increasing.
Kerr: Okay. So it sounds like, in some categories, there’s even evidence that they’re making up for lost ground.
O’Connor: I think it’s too early to call “making up for lost ground.” We believe, as will play out here, that things such as leisure, luxury, apparel, these are lost sales. People are not waiting for the release to go on a three-week holiday, just because conditions and habits have changed. What we are seeing is that we’re getting significant changes in the rate of reduction in key categories—that is, the rate at which they’re decreasing. Then there are categories where we’re actually seeing slight upticks, but not yet back to, let’s call it, “fourth quarter 2019” volumes. Not yet.
Kerr: Okay. Let’s turn now to the US playbook. As we record this podcast, businesses all across the country are just starting to reopen. You have a provocative piece of advice. You say, “Do not reenter the market the way that you left it.” Tell us a little bit more about what that means and what you would advise companies in order to open up their doors.
O’Connor: Yeah. I think that obviously there’s a couple of curves that are going to impact how consumers ... Consumers are about, as you well know, about 70 percent of the US GDP. In most developed markets in the world, that’s around 70 percent. About a third of that is actually spent in retail stores or online, buying consumer goods. The balance of it is things like education, fees, and insurance, and so on, things that are not in store. But the point is, is that if you look at the retail-related merchandise and the things that are really impacting consumers, CEOs have pretty uniformly agreed in our research that there are some important commonalities in their strategies as we move forward. While we have not come out of the viral curve—and we certainly haven’t entered the curve where vaccinations are available—consumers will, at some point, begin to return to work, return to schools. As they do that, I think that all CEOs are trying to position their business, one, to win in the short term, and then, two, to emerge out of this in the 2021 timeframe with significant changes in their go-to-consumer, go-to-market strategy. So things like the positioning of your brands; the messaging of the brands; important, very important points around price points, what the price points are; how you’re going to deliver value—consumers are very focused on value right now; outlet choice, where they’re going to buy—on and offline. I think we all know that online purchases have been winning share at a very disproportionate rate, while store-based retailers are decreasing. Secondly, we can see that proximate stores—stores that are smaller and closer—are often winning significantly. They’re rebounding and growing in a way that we did not see pre-virus. Again, this is in categories that are considered essential, and again, supporting this part of our life that we’re trying to focus on now, called “at home.” So as we think about the US playbook, the short term is focus on at-home, focus on safety, focus on standardization, focus on transparency, focus on supply disruptions—which we can chat about in just a few minutes—and make sure that your product’s available in the outlets at the price point that the consumer expects.
Kerr: It sounds from your comments that the perceptions and the branding is as important as the actual safety and the visible displays that are in stores.
O’Connor: No question that, in the context of digital commerce, the keywords that consumers are focusing in on today—the key messaging that consumers are focusing in on—are very different than the words they were focusing in on four months ago. So as a marketer, consumers are looking for messages that relate to immunity, that relate to family, that relate to comfort. They are looking for different messaging and a little bit less around, at this moment, a little bit less around straight-out “Fly to here. Go here.” Their lives have been simplified too much. So messaging has to get back to these core basics. Interestingly, Bill, it is super interesting to watch as consumers settle into categories that have been very difficult in the last 30 years—one of which, for example, is flour. F-L-O-U-R. The significance of this is, consumers are returning to very traditional food preparation. It’s not that they don’t want take-out, it’s not that they don’t want delivery, because that’s happening, too. But it is super interesting to watch which key categories consumers are engaging with again—and how.
Kerr: Another thing that we are talking a lot about—and a lot of people are trying to forecast for the future—is whether this is going to be a V-shaped recovery, whether it’s going to have relapses and multiple cycles. How are businesses preparing? And what’s your advice around buffer stocks and being prepared for whether in the late fall, or perhaps even earlier, we have a second phase?
O’Connor: It was well said by one of my colleagues the other day who runs a large restaurant chain, which is, “We’re not sure there’s going to be a post-corona era.” This particular virus and derivatives may be with us forever. This may be the new norm. That’s the scenario that we’re planning on. We’re planning on, how do you build demand in an environment where, at least in the short term, this particular strain is going to dominate the way that consumers behave? So as the number of new cases, as the viral curve runs through—this viral curve—runs through its cycle, and a vaccine, perhaps, becomes available next March, potentially—I think most people are sort of looking toward that timeframe—it’s just without a doubt that we will see some kind of recurrence. The delicate movement of bringing a declining viral curve—and what it takes to make that happen—and introducing an increasing number of chances of contact as people perhaps return to work, as you well know, Bill, this has got to be, politically and every other way, the most difficult decision to make, series of decisions to make: when to open up, how to open up. But no matter how we do it, there’s going to be—in most of the companies that I am working with, talking with—they are planning on a November to March—in the Northern hemisphere, let me say—are planning on a November to March recurrence next year.
Kerr: Okay. You mentioned a little bit earlier, demand, and I would like to come back to that consumer demand. A lot of our conversations have been about actually getting the physical doors of the stores to open. But we also need consumers to visit and spend their money. What do you see as the future for the demand side? And is it going to be as robust and reemerge? What has to happen to really get consumption on the demand side back up to where it was?
O’Connor: Bill, there’s several ways to come at that question. First, let me just describe what I think will be the competitive environment when we come out of this. Digital is a big winner. Delivery is a big winner. Opening price points and value-based retailing is a winner. Consumers, especially older consumers, are being particularly careful about where they go, the hours that they go. The real business question is, when will we move away from spending—reduced spending as it is—but the spending that we have today that’s focused on at-home? And how will we grow that to include away-from-home categories? If you think about what that means is, just in your daily commute, fuel sales, electricity in your office, all of these things we’re seeing huge deflation in, because demand has been reduced so significantly. So what I’m watching for is the movement in the away-from-home and the at-business kind of office supplies—these categories where the consumption goes way back up once people return to school and to the workforce. Then it’s a question of, at what price point people are buying and at what location they’re buying that merchandise, whether it’s on or offline. My prediction is that the future is much more about digital interactions, more contactless, as you well know, with localized inventories that will reposition many stores as a local distribution center. And both of those things tied to delivery networks, such as Uber and Lyft and others, that are not just hauling people, so to speak, but they’re learning how to deliver food and other related products. So these are just some of the changes that I think we’ll see as we begin to come out.
Kerr: Dan, we’re recording this in early or mid-May. Yesterday, I think, Uber made a bid for Grubhub. So do you see a lot of consolidation as a consequence of Covid? And how could that affect the scenarios for retail commerce?
O’Connor: I think we all have to remember that there’s nothing more profitable than selling a product in a big-box store, where you have very consolidated pallet-level deliveries, trailer loads. That’s the lowest-touch, most-profitable point of distribution. E-commerce is a lower … that is, when it’s sold—pick, pack, and ship—we’re picking, packing, and shipping [inaudible at 15:30] to consumers. You’re introducing new labor, new handling, new shipping costs, and the costs go down. Now we’re entering a third level of competition, which is, it’s not just online discovery, online order, but it’s online delivery. If we look to China as the standard for this, what’s really happening in the world, with China’s leadership, is that they’ve developed retail networks that are designed for a pick, pack, and ship in 30 minutes ... or excuse me, in eight minutes … on about 8,000 or 9,000 items, commonly bought items, with 22 minutes to deliver. That delivery cost is embedded in the retail cost. So what’s happened is, we’ve begun to move large parts of revenue into the delivery networks. Sometimes these are owned by the retailers, sometimes they’re owned by third parties. Third-party networks, such as Grubhub and Uber Eats and others, have scaled around the world. There are so many good examples. They started off in one country, continentalized, and then, of course, we see lots of them crossing borders. The common denominator to these companies is, they can be running very, very large networks. A good friend of ours in China, for example, he’s running a network where, at any moment, he has 4 million deliveries going on. However, he needs to double or triple that number of deliveries to get profitable. So these platforms, these delivery platforms, live on scale. So they’re not unlike Facebook. They’re not unlike these other platforms that we saw go before us. The economics are in scaling the traffic on the platform and then optimizing the take rates. The take rates are optimized and the platform is optimized when you consolidate volume of a couple of different players. What that does to retailers, however, is it may limit choice. It may limit availability. So this ship has not fully sailed. I suspect this merger will happen. But what we really believe will happen long term is, most markets will end up as the package-delivery market the US has, where you’ve got UPS, the US post office, and FedEx. We think food delivery and other types of delivery will shake out into ... that is, this last-mile delivery … will shake out into something that looks very similar.
Kerr: Okay. You study supply chains from their very beginning all the way through to this last mile that you just described. Let’s look back further up the supply chain. Some of these seem to be stripped bare. Others appear to have so much slack that we’re dumping milk down the drains. What are you seeing here, and what are you advising companies about with respect to their upstream supply chains?
O’Connor: Yeah. Interesting. So in the food companies, obviously, and then in the companies that are adjacent to that, there’s been both supply and demand shocks. Let’s start with the demand shocks. So if you were a large-scale food-service wholesaler, distributor, on the order of a Sysco, for example, US food service, and all of a sudden customers that represent 50 percent of your typical distribution centers’ volume are closed, they are out of business, your distribution facility is still holding one, two, three weeks’ worth of inventory between what’s on a truck, what’s in the distribution facility, and what’s on route to you. While you can alter that, you may end up with lots of inventory that’s not in the right place for the consumer to connect to it. It’s not in the right form for the consumer to buy it. Food service is a very different kind of product and package. At the same time, consumers, the dollar value, what consumers were buying at restaurants has shifted into supermarkets. That is, the cost of goods or sales lost in restaurants largely is the dollar value of sales gained in stores that sell primarily for food prepared at home, food not eaten on-premise—that is, in a restaurant or for immediate consumption. So the point of this statement really is, as we look at this dislocation in demand, because we have this demand shock, we have inventory in the wrong place. We have more people in stores looking for basic supplies, food supplies, core categories that they want to eat. Some of that’s being impacted by pantry loading, but really it’s because they used to eat 55 percent of their food away from home. So getting that supply chain rebalanced—and this is a very difficult thing to do, particularly when you don’t have a picture in mind of when this might return. So these dislocations, I believe, I think they’re more temporary than permanent. And it’s largely this imbalance, because the route to the consumer has so dramatically changed in many categories. Second point, Bill, there is no question that the longer-term, mid- to longer-term, implications of the virus on the workforce—that is, in the food supply chain—is also a consideration. I think you’ve seen the data that says even today, in beef and pork and so on, that we’re running at about 75, 65, 70 percent of our normal production—that is, the number of cattle and so on that are being brought in and processed is going down dramatically, simply because of illness and then these new rules—appropriate rules, I’ll add—around distancing and so on. This is going to take a while to work itself through. I believe large-scale producers are going to introduce much more automation—that is, automating manual tasks, for example, in many forms, in many parts of the food supply chain, as a way to both speed up and have more flexibility around where their products are sold in the future.
Kerr: Maybe that can bring us to our final question, Dan. You spend a lot of time specifically with the leadership, the CEO, board of directors, and so forth of these organizations. How do you think those particular jobs—the leadership side and the governance side of companies—is going to change in the year and the beyond that lies ahead?
O’Connor: It’s been very interesting as we’ve worked with, counseled, and participated in these deliberations. No question that, from the assisted-living facility companies that we work with to the food companies to retail enterprises, at the board/CEO level, there’s a lot of commonality, I think, in those that came out of this so far pretty well. The first one was, first and foremost, is the winners—“winners,” if that’s the appropriate term—the people that seem to have done best so far have had incredible internal communication as well as external communication. While the external communication at the beginning of this was a little bit of a blueprint, every company was sending you an email, what I learned to admire quickly was the quality of the internal communications. What CEOs learned quickly was that their associates really responded to hearing from the leadership—the leadership sort of giving the unvarnished point of view on what their understanding is of the virus, what their understanding is of a solution, and what the company was going to do in the short term. Secondly, this communication has—again, it’s just so clear that these companies have continued. So we see these webcasts and video meetings and “ask me anything” meetings—or AMA meetings—that are just super interesting in how they unfold. But the second point that I’d want to say beyond communication is there was a level of transparency in everything that they did. So as they collected data, as they collected insights, they got an understanding where their cash was, where their customers were. They got their teams working in a very transparent way. We have a couple of large companies we’ve worked with, Bill, where the most-senior leadership were reporting back to the CEO on daily tasks, daily tasks. As this unfolded, it turned into weekly tasks. So EVPs, SVPs were being charged, not with long-term initiatives, they were being focused on very specific things to get done Monday, Tuesday, Wednesday. Daily, weekly tasks. Then as the crisis unfolded, those moved in a very organized way back to a more monthly—we are not yet at a quarterly basis, but you really see the communication and the intensity of the effort focused today. Thirdly, everybody quickly got their arms around where their customers were and what the status was of their, in a sense, their balance sheet, and then their P&L. On their balance sheet, of course, there was just lots of interest in cash first. The effort there is obviously from a governance point of view. Thankfully, the government has—at least in the case of the US and other governments around the world—have provided some financing—a conversation for another day. The last point I’d like to close out on is this: is that these CEOs and boards were faced with some really, really difficult decisions. Many of them related to people, innovation, and other really high-level and important agenda items for the board and the executives. The decision to furlough employees, the decision to separate from employees was—and I experienced this with my friends and people that I counsel—it was very, very difficult. But making those bold, tough decisions in the end was the right decision. Sixty or 70 percent of employees and a part of our most recent series of workforce reductions—now on unemployment, people who are unemployed—are furloughed. What we’re really hoping for is that as time goes on, we’re going to figure a way to feather those people back into the organization. But this ability to make these very tough decisions was what we saw really separate the character of the real winner, in terms of a great leader. And as we sit here today, the really important part of this today now is to learn how to run a smaller enterprise. We have companies that we’ve spoken to in the last week that have gone from … their current forecasts have been reduced from 20 billion to 15 billion, from 15 billion to 13 billion. Significant reductions in volume. How you restructure and realign your assets—that is, your capital and your talent—around the demands that are required is now really the focus of lots of the executives and the boards that we talk about.
Kerr: Well, that’s some tough work that lies ahead. Dan, thanks so much for joining us today. We all see the changes at the surface level and what’s happening in commerce and the stores that we’re visiting and Amazon coming to our doorstep every day. But we appreciate you taking us behind the scenes to show us all the more-intricate operations that are underway. Thanks.
O’Connor: Thank you, Bill.
Kerr: Thank you for listening to this special episode of the Managing the Future of Work podcast. To find out more about our project on the future of work and for more information on the coronavirus’s impact, visit our website at hbs.edu/managing-the-future-of-work and sign up for our newsletter.