Lessons From Italy: the Impact of COVID-19 on the Food and Beverage Industry Valuation

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Lessons From Italy: the Impact of COVID-19 on the Food and Beverage Industry

Lessons From Italy: the Impact of COVID-19 on the Food and Beverage Industry

From pasta to canned food, a boom in orders for Italian food and beverage companies has driven investments in new technology and digital transformation. What can other countries learn from this?

The lockdown, which after more than four months is now beginning to loosen its grip, has brought many doubts, fears, and inconveniences. The economy is in crisis, Gross Domestic Product (GDP) is falling, but there is a sector that has benefited—food and beverage. In contrast to the general trend, the turnover of the food and beverage sector grew by 3.1% in Italy and 3.5% globally, which together with agriculture has combined during the emergency to ensure the supply of food and beverage to the population.

Data from Italian National Institute of Statistics tells us that the food and beverage industry has accelerated production to respond to the growing demand of end consumers, who have returned to the kitchen and are forced to eat at home due to the health emergency. In March, Italian domestic demand for pasta grew 25% compared to February and foreign sales increased by 40%. Large retailers are driving growth, and e-commerce has also seen significant increases as evidenced by Amazon orders in Italy   which have gone through the roof  since February.

The surge in demand along with many other effects of COVID-19 are driving important changes in the food and beverage supply chain and in the way food and beverage processing plants are designed and run.  A number of food and beverage companies in Italy are increasing their production capacity and investing in new automation equipment to allow for more flexible production and to keep up with potential demand variation during the coming years.

At the same time, to ensure the well-being of employees, companies have implemented a series of extraordinary measures that reinforce the already stringent hygiene and safety rules required by Italian law.

Some companies in the food and beverage sector have implemented changes to their procedures. For example, allowing entry into the production area only to employees - all equipped with a mask - and only after checking body temperatures. Suppliers and shippers must stop outside the gates and, after being identified, must follow the same health procedures as employees. Reorganization of production areas to ensure social distancing   is observed and rooms are subjected to periodic sanitation by specialized external operators .

Other companies are going even further and are considering redesigning their factory production systems. This would include implementing fully automated production lines or production cells isolated to ensure the necessary spacing between workers and easy sanitization. In the first case, the answer to the crisis is an automation strategy that aims to reduce the impact of the human factor in production processes by resorting to robotics, which ensures the necessary safety social distancing. In the second case, the answer is centered on the reorganization of the production system in a set of focused sub-factories (production cells), connected only by flows of materials. The sub-factories are dedicated to a specific part of the production process which leads to more easily managed sanitation and worker separation. 

Automation can help solve some of these problems and is gaining traction, particularly in food and beverage packaging, storage, and distribution operations. Thanks to the rapid advancement of artificial intelligence technologies, automation provides repeatability and improved efficiency. For example, the use of  Automated Storage and Retrieval Systems (AS/RS) is becoming increasingly common as food processors seek to improve efficiency through their supply chain networks. AS/RS can be used for a wide variety of food and beverage products both in rooms and in refrigerated spaces. As demand for fresh food and beverage increases, distribution and storage facilities need to be closer to consumer markets.

Building up resilience

In light of the experience gained over recent years, by supporting companies during the adoption of the Italian government’s Industry 4.0 plan for technological and digital transformation, companies have been engaging Duff & Phelps to support them in this phase of transition toward new production systems. Duff & Phelps is currently working with a number of companies on projects to improve their resilience. Projects include:

Industry 4.0

Previously aimed at improving productivity, Industry 4.0 is now focusing on production systems oriented towards resilience and flexibility. For example, digitalization and robotization of the supply chain aims to improve efficiency in production processes and business intelligence helps businesses intercept supply chain bottlenecks and manage scenario analysis in order to anticipate early signals of demand variations. Internet of Things (IoT) systems can help monitor infrastructures, buildings, and work activities in order to prevent safety problems for workers and production units, avoid waste, and monitor efficiency through the use of sensors. Among the many applications, the monitoring and management of energy consumption is the most requested, because it allows a rapid reduction of costs without impacting productivity and customer offerings.

Business Continuity

During lockdown, food and beverage transportation has demonstrated that in certain situations getting product to end destinations can be a serious challenge. Indeed, many food and beverage product suppliers rely on highly complex international supply chains, often passing through several countries on the way to consumers’ plates. Business interruption caused by lockdown has led companies to address the problems arising from a global supply chain as they have learned that it is important to invest in relationships with suppliers and customers because their loyalty and resilience are crucial to ensure business continuity. There are different solutions to improve resilience, including working with a redundant pool of suppliers and having a differentiated product mix that includes products which do not require a long supply chain. Moreover, it is possible to limit the effect of the business interruption related to income reduction by using insurance coverage.

In fact, when, as a consequence of direct material damage, the ordinary business activity of a company is partly or entirely disrupted, the “indirect damage” will materialize in a number of possible ways. These include; income loss caused by a reduction in sales, while fixed overhead costs (indirect costs, e.g., rent, administration, taxes) remain the same; an increase in operating costs or of the expenses necessary to avoid or dampen the effects of the business interruption; a loss in terms of brand image; and missed business opportunities.

We are working with companies to assist them in the determination of the compensation period (number of months) as well as of the amount to be insured in two ways:

  • Analysis of the production process , of the level of specificity of the assets, and of the interrelations among the various plants of the company, in order to establish the length of time required for a full recovery of the business activity
  • Reclassification of the financial statements of the company concerned, to find fixed costs in order to calculate the loss in gross margin that can be insured. 

Asset Management

If a business is in lockdown and employees are working from home, there are still corporate financial reports to file. Assets have to be accounted for, taxes must be paid and insurance coverage must be provided. Unfortunately, many companies don’t pay close enough attention to their fixed-asset inventory. They still have to think about how much they’re paying in insurance costs or property taxes on technology systems, office equipment, plants and machinery. The lockdown has forced some companies to find a way to manage their assets.

Effective asset management is a mission-critical task for any company looking to avoid overpayment of taxes and insurance costs on ghost assets, reduce the total cost of ownership and comply with the latest regulatory mandates. Through our consultancy,  clients can achieve an effective asset management system in a short amount of  time without diverting precious resources from their core businesses. In fact, our team can not only conduct a physical inventory of the assets and their accounting reconciliation, but also draw up a procedure to update the fixed asset register over time.

Protect Value

Another way to increase resilience is to protect fixed assets through insurance policies. Effective protection that, in the event of an accident, safeguards the insured from potential disputes over the adequacy and accuracy of asset values declared in the policy. In Italy, “insurance with declaration of value” policies are widely used. These require a valuation of the assets to indicate the correct value to be insured.

In “Direct Damage” insurance policies, the declaration of the value to be insured is required by  the insured party. If the value declared is  just a portion of the correct value that should be insured, the pay-off will be reduced by the same proportion (Proportional Rule). It is therefore evident that the insured party undertakes a great responsibility in autonomously determining the value of the sum insured, Cost of Reproduction New (CRN  ). The purpose of the “insurance with declaration of value” is to transfer this responsibility to a professional third party.

Maximize Value

In times of uncertainty, attention must be paid to the best ways to maximize the value of corporate assets. It might be a good idea to consider alternative uses of fixed assets and possibly get rid of those not strictly functional to core activities. For example, selling some assets and then leasing them back is one way to generate liquidity. The use of rental fleets and the storage at third parties’ locations could also be considered. This approach constitutes a strategy for cash flow management aimed at promoting greater flexibility, although perhaps less efficiency. One important thing is to know is how much fixed assets are worth and to this end it is possible to rely on independent valuations as important decision-making tools in any financial operation.

Over the last 30 plus years, Duff & Phelps has performed valuations for the most important players in the food and beverage sector. This is particularly useful today when market volatility is high, as valuations have to account for uncertainty and reflect knowledge of the sector in which a company operates.

Be prepared

The crisis triggered by the current pandemic is a great threat, but at the same time it presents a great opportunity to innovate. Nobody knows what the world will look like after the pandemic, but those businesses that have used the downtime wisely by embracing innovation will emerge stronger in the future.

 

Sources
1.ISTAT Italian National Institute of Statistics

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