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Nigerian Power Woes Cripple Businesses

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Achieving efficient generation and distribution of electricity in Nigeria has over the years remained a sore point and a major threat to growth of the economy. Poor electricity supply has serious consequences for the businesses in the country, with several existing companies struggling to maintain profitability and new players shying away from entering the market. The government has undertaken several measures, including transferring majority of the power infrastructure from government to private hands, however, it has not managed to improve the situation. Ambitious policies and agreements with multinational energy companies might just be the key to solve Nigeria’s energy problems.

Nigeria is considered most abundant in natural reserves and is the largest economy in Sub-Saharan Africa. The country has the potential to generate about 11,000-12,000 MW of electric power from existing plants. Despite this, Nigeria is only able to generate about 4,000 MW on most days, which is less than one-third of what is required to provide for its more than 190 million citizens.

According to a 2014 World Bank survey, about 27% of Nigerian businesses identified electricity as the main hurdle in doing business. Also, IMF estimated per capita electricity production in Nigeria to be less than 25% of that of the Sub-Saharan Africa average. The gap between the electricity generation capacity and demand in the country is a result of poorly maintained electricity generation facilities and very little investment in new power plants as well as an outdated transmission and distribution infrastructure.

Government action or lack thereof

Nigeria’s power sector has suffered from mismanagement and corruption for many years. Since Nigeria’s independence from the British rule in 1960, the government set up a heavily subsidized grid, which was subject to high level of corruption and was never able to generate enough profits to finance new power plants or upgrade the transmission and distribution network to meet the needs of the growing population. In addition to its inability to upgrade, the electricity sector suffers from a huge range of issues, ranging from leakages in power transmission and distribution, to lack of maintenance, to theft and vandalism.

In an effort to combat the country’s energy poverty, the government liberalized the power sector in the early 2001 in hope to attract foreign investments. However, the plan didn’t work as expected. Instead, privatization increased corruption as the political members tried to appoint political allies and family members to head the new distribution companies.

According to a 2018 publication by the Istituto Affari Internazionali, an Italian non-profit think tank, Nigeria has been steadily generating 4,000 MW/h since 2005, with no increase in output over the past decade. This is costing the Nigerian economy a great deal as businesses and industries suffer due to regular power outages. Moreover, as per a 2018 estimate by A2EI (a Berlin-based collaborative R&D platform in the solar off-grid industry), Nigerians spend NGN4.3 billion (US$12 million) annually on small gasoline generators, of which NGN2.9 billion (US$ 8 million) is spent on fuel.

Nigerian Power Woes Cripple Businesses by EOS Intelligence

Nigeria’s energy poverty affecting businesses across industries and sizes

Manufacturing and trading industry

Poor electricity supply is affecting the manufacturing industry in an immense way. A typical Nigerian factory experiences power outage or voltage fluctuations approximately eight to ten times a week, with each power outage lasting about two hours. This adds to the cost of production through lost material, damaged products, and restarting the factory equipment. This makes the manufacturing business unattractive to investors since the overhead costs are high, return is low, and the business environment is largely uncertain.

To combat the power issue, companies depend on diesel generators for power backup, however, this significantly adds to the cost of the product, which in turn affects the competitiveness of the business since whatever is produced in the country is more expensive when compared with production costs in other regions.

In addition to electricity shortage, prices and availability of fuel for operating the generators also impact businesses. While small business generators are powered by price-capped gasoline, the larger generators that power big businesses, apartment complexes, and big homes can only be run on diesel, which in turn is volatile with regards to pricing and supply.

According to a market intelligence firm based in Lagos, SBM Intelligence, diesel is among the top three cost heads for many Nigerian firms. Moreover, with the price of diesel also being volatile, many businesses operate with a constant risk of increasing overhead cost, which may result in reduction in output, downsizing, or even business closure. This was seen in May 2015 when Nigeria was hit by fuel scarcity, which caused many traders and businesses to shut shop as they could not afford diesel for their generators.

One business sector most impacted by Nigeria’s energy poverty is the perishable food sector. Nigeria’s fuel scarcity in 2015, caused the loss of approximately NGN10 million (US$27,000) worth of food items. Similarly, as per members of the Ajeromi Frozen Foods Market Association in Lagos, a severe bout of power outage in March 2016 resulted in the decay (and thereby loss) of frozen food worth NGN20 million (US$55,000) in just five days.

Apart from this, small businesses are also severely impacted by Nigeria’s power shortage. Most small shops cannot afford complete generator back up and therefore suffer with limited working hours and sub-par working conditions. For the ones that can afford a generator, the cost of it is very high, squeezing out profits from their already limited setup. For instance, a small tailor shop with a daily income of about NGN4,000 (US$11) spends close to NGN3,000 (US$8.2) daily on fueling their generator to keep the business going, highlighting the disproportionately high cost of electricity to run a small business in the country.

According to a market intelligence firm based in Lagos, SBM Intelligence, diesel is among the top three cost heads for many Nigerian firms. Moreover, with the price of diesel also being volatile, many businesses operate with a constant risk of increasing overhead cost, which may result in reduction in output, downsizing, or even business closure.

Technology sector

Nigeria’s tech industry accords for approximately 14% of the Nigeria’s GDP in 2019 and is poised to be the next frontier for growth. However, constant power outages have become a serious problem for the booming sector. Most tech companies operate around the clock to provide a 24*7 service to their customers, however, in Nigeria, most app companies operate for only 8-9 hours a day as they cannot sustain generator costs for the entire 24 hours. This impacts the quality of service provided.

As per Chris Oyeniyi, owner of a smartphone app called KariGo, electricity cost (including generator cost) on a monthly basis is about US$800 for the bare minimum number of operating hours. The same electricity bill would be around US$100 if the public power grid was dependable. This hampers growth for tech start-ups, which have to allocate significant amount of their funds towards power supply instead of using them for expanding, both in terms of scale and staff.

In an attempt to overcome this challenge, several technology start-ups prefer to work in co-working spaces that allow them to pool their electricity bills. This concept is becoming very popular in the country, however, despite this, generator costs remain very high to provide around the clock services.

In addition to the high costs, technology firms also operate with a constant risk of losing all their digital work (that is not backed up) or hampering important software updates in case of a sudden blackout.

According to a survey of 93 Nigerian tech start-ups by the Center for Global Development conducted in 2019, 57% of start-ups found power outages to be one of the biggest challenges for their business. Moreover, one-third of the firms surveyed reported losing more than 20% of their sales due to power outages.

Other sectors

Just like the manufacturing and technology sector, most of the other industries are also impacted by irregular power supply and thereby rely on large generators to run their operations. This puts additional cost pressures on the business.

In 2019, Temi Popoola, the West Africa chief executive of investment bank Renaissance Capital, stated that diesel accounts for approximately 20-30% of banks’ operating expenses in Nigeria, which is significantly higher compared with other developing countries.

The telecom sector is also vulnerable to the power outages faced by the country. In 2015, MTN, a telecom giant, stated that it spends approximately NGN8 billion (US$22 million) annually on diesel to keep its network online. This is a huge cost and accounts for about 60% of its operating costs. Due to such heavy operating costs, the company is forced to focus more on sustaining its day-to-day activities rather than investing in any other area such as expanding its network.

The road ahead

Currently there does not seem to be any light at the end of the tunnel for Nigeria’s power woes. With high level of corruption paralyzing the sector and limited amount of new private investment, the sector is in a state of limbo.

Moreover, there are constant disagreements between the Nigerian Bulk Electricity Trading Company (NBET) and the private power generating companies, which further impact electricity supply. Recently, in September 2019, another issue came into the light, when NBET directed all thermal electricity generation companies (GenCos) to pay an administrative charge. To oppose this, the GenCos have threatened to shut down power production and supply and argued that there is no policy directive to that effect by the Nigerian Electricity Regulatory Commission (NERC). The two sides have not managed to reach any consensus as of now. However, such additional charges will further put financial pressure on already struggling GenCos, who have largely failed to improve their generation levels due to lack of capital for maintenance and operation. This will further negatively impact the already dismal grid supply levels.

Nigeria is dealing with another legal dispute over a hydro power project with a proposed capacity of 3,050 MW. In 2003, the Nigerian government awarded the build-operate-transfer (BOT) contract to a local company, Sunrise Power and Transmission Company Limited (SPTCL) and followed it up with signing a general project execution agreement with the company in November 2012. However, simultaneously, the government also awarded the bid to execute the hydro project to a JV between China Gezhouba Group Corporation of China (CGGCC) and China Geo-Engineering Group Corporation (CGGC) in 2006.

Moreover, in 2017, it signed another engineering, procurement and construction (EPC) contract with Sinohhydro Corporation of China, CGGCC and CGGC to form a joint venture but excluded SPTCL from the agreement. Following this SPTCL filed a legal suit against the federal government and its Chinese partners at the International Chamber of Commerce (ICC) in Paris for breaching the contract. The government risks approximately US$2.3 million in fines in this legal tussle. Moreover, the Chinese government refused to provide the required funding for the project (US$5.8 billion) until the legal dispute is settled. Thus, the project is on hold until any legal solution is reached.

However, that being said, the Nigerian government is ambitiously trying to revive the country’s electricity sector. In 2017, the government developed a National Renewable Energy and Energy Efficiency Plan, under which it aims to achieve 30,000 MW electricity by 2030, with renewable energy accounting for 30% of the overall energy mix (9,000 MW). The government plans to adopt ‘The Sustainable Energy for All Action Agenda’ (SE4ALL), which is a UN initiative to support sustainable energy in Africa, with targets of 90% Nigerians having access to electricity by 2030.

To this effect, in May 2019, Central Bank of Nigeria announced the disbursement of NGN120.2 billion (US$330 million) to different distribution companies, power generating companies, service providers, and gas companies in order to improve their liquidity situation. Furthermore, in 2018, the government secured a loan of US$485 million from the World Bank to upgrade the country’s electricity transmission network and infrastructure and is currently in talks about a US$2.5 billion additional loan to uplift the power sector.

The government has also signed a six year power deal with the German energy giant Siemens, with an aim to generate a minimum of 25,000 MW of electricity by 2025. As a part of this deal, Siemens will work alongside the Transmission Company of Nigeria to achieve 7,000 MW and 11,000 MW of reliable power supply by 2021 and 2023, respectively. Thus in addition to building new generation capacity, the government is also focusing on improving supply from the existing grids, which has been stagnant at around 4,000 MW over more than a decade.

Moreover, the country’s energy sector is receiving significant support from international bodies such as PowerAfrica, which is a wing of the United States Agency for International Development (USAID). Over the past few years, PowerAfrica has been assisting the government in agreements on solar projects that help Nigeria in diversifying its energy mix. In 2015, PowerAfrica supported Nigeria’s first private IPP Project (the Azura Edo Project) to reach financial close in 2015. It also assisted it in securing a US$50 million investment by the Overseas Private Investment Corporation (OPIC). The Azura plant (the first project initiated by Azura power) became operational in 2018 with 461 MW capacity. It is the first phase of the 1,500 MW IPP (Independent Power Project) facility that is being developed in Nigeria. In December 2019, Africa50 (a pan-Africa infrastructure investment platform) expressed its plans to invest in the Azura power plant.

Growing private investments, international support, and supportive government policies as well as investment may just lift up the Nigerian electricity sector, which has been in dire need for reform over several decades.

In 2017, the Nigerian government developed a National Renewable Energy and Energy Efficiency Plan, under which it aims to achieve 30,000 MW electricity by 2030, with renewable energy accounting for 30% of the overall energy mix (9,000 MW).

EOS Perspective

As per the International Centre for Investigative Reporting (ICIR), the Nigerian government has spent approximately NGN1.164 trillion (US$3.2 billion) on the power sector during 2011-2018 without any significant improvement in energy supply. Poor power supply has been crippling the country for many decades now.

Large businesses, especially in the technology sector, could help boost the economy but like any other business, they require electricity to run successfully. Nigeria lacks the basic business environment at the moment. Moreover, ongoing issues with the private generation players further hamper the sectors growth and performance.

Recently, the government has made several moves in the right direction (especially with regards to investment in renewable energy sources), but it is too early to comment if they could solve Nigeria’s decades-long energy problem. Moreover, the real issue is not about investment levels or government policies, but about the implementation of these initiatives. As seen previously at the time of privatization of the sector, the government failed to uplift the sector as it was plagued by corruption, favoritism, and bureaucracy.

Similarly, the government adopted a policy in 2010 called Vision 20:20, wherein it aimed to be featured in the top 20 economies globally by 2020. Within the power sector, Vision 20:20 aimed to increase generation capacity to 20,000 MW by 2015 and 35,000 MW by 2020. However, it failed to make significant investments or incentivize private players to invest in the sector and failed miserably in its goals. If the same is repeated now, the result will not be very different.

The government’s plans can only be implemented if there is substantial transformation of the entire sector, with the private sector participating equally in the upliftment. The government needs to provide significant financial incentives for new power projects and must also restructure the distribution companies to improve liquidity. Lastly it must counter the corruption and bureaucracy seeped into the sector and ensure that generating companies receive complete and timely cost-reflective tariff from the government. While these measures are difficult to achieve, they are the only way the sector can see any respite in the coming years.

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Iran’s Tourism Industry Sprouts despite US Sanctions

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For several years, the US sanctions on Iran continued to have a detrimental impact on the economic growth of the country, with tourism sector being severely affected throughout the period under sanctions. The 2016 sanctions removal brought many visible changes to the development of the country, with hopes for tourism industry to benefit from the potential influx of travelers and new opportunities for the industry players.

Iran’s tourism was severely affected by the US sanctions

Iran was in a quivering state for more than 35 years owing to the never-ending political tensions with the USA post the 1979 Iranian Revolution. This led to no formal diplomatic relationships between the countries since 1980, and considerable sanctions imposed on Iran over the years. The impact of these sanctions was visible through a range of profound economic problems such as inflation, unemployment, poverty, and underdevelopment of virtually all industries in the country.

One sector that faced severe repercussions of the sanctions was Iran’s tourism industry. A negative image of the country was reinforced by the mainstream media as a flag-burning, west-hating nation, a fact that caused a major dent to Iran’s tourism industry. Adding to it, lack of resources to tackle this negative discourse had further left Iran in an international isolation over all these years. Despite being rich in culture, natural history and landscapes, a country with such an image could not persuade foreign tourists to visit.

Moreover, the US sanctions drastically affected Iran’s economy, which resulted in lack of proper resources to establish a well-equipped transportation sector, including airlines, trains, and buses, which in turn led to Iran becoming even less attractive to tourists. In addition, lack of proper hospitality infrastructure such as hotels, restaurants, roads, etc., further negatively impacted international tourists’ interest in Iran. Adding to it, the US sanctions also created greater tensions between Iran and the USA which led the US government to issue a travel advisory over all these years, which restricted its citizens to travel to Iran due to safety risks, such as getting kidnapped or arbitrary arrest and detention in the country. Thus, this resulted in almost no tourist from the western countries visiting Iran.

Iran’s tourism sector did witness a very modest growth over the years, largely thanks to pilgrimage tourism visiting the shrines and originating mostly from regional countries such as Iraq, Azerbaijan, and Turkey.

According to The World Bank data, the number of international tourists’ arrivals in Iran fluctuated, increasing from 2.7 million in 2006 to just 4.9 million visitors in 2014. Iran’s tourism industry was suffering particularly badly not only from the lack of arrivals of American tourists, but generally more affluent, well-spending tourists from western hemisphere, who were universally deterred by sanctions, poor state of the tourism infrastructure, as well as the negative image of the country created by international media.

According to official figures by Iran’s Culture Heritage Organization, during the sanctions period, tourism sector contributed around 2.0% to the country’s GDP (an average of US$7.5 billion in a year), leading to sluggish infrastructural development throughout that period. Iranian tourism sector’s hopes for change and better growth started budding when Iran signed a nuclear deal with six countries in July 2015, an event that led to the US sanctions being finally lifted.

The nuclear deal came as a ray of hope

Even before the US government removed the sanctions, the country started witnessing a slight increase in the number of foreign visitors. This was thanks to the nuclear deal signed between Iran and a group of six countries (the permanent members of the United Nations Security Council – Russia, France, UK, USA, and China, plus Germany) and the EU in July 2015. The deal included Iran’s commitment to restricting its nuclear activities, agreeing to keep check on the uranium stockpile, among other agreements.

The deal immediately mellowed down Iran’s negative image and released a positive message of lowered risks associated with visiting the country. This gave a slight boost to the tourism sector with a moderate growth of 4.5% with 5.2 million foreign tourists visiting the country in 2015, the highest arrivals number till date.

Another upward push on the growth trajectory came the following year, when the US government removed sanctions from Iran in January 2016, as part of the nuclear deal. This was expected to have a major impact on tourism sector as it offered hope for much needed economic stimulation, along with investments and development in the economy, and tourism sector in particular.

Iran’s Tourism Industry Sprouts despite US Sanctions by EOS Intelligence

Post lifting of sanctions, tourism sector rejoiced with developments

The nuclear deal and removal of sanctions brought growth to the tourism sector, owing to removal of restrictions on imports of financial and transportation-related services. As a result, some European airlines, such as British Airways and Lufthansa, resumed direct flights to the country. As visa requirements were increasingly relaxed, tourists from western countries started to arrive. This in turn slowly raised the demand for accommodation leading to skyrocketing prices of hotel rooms. These changes finally generated higher income for local businesses such as hotels, restaurants, tourist guides, local transportation providers, and other players in the market. Iranians excitedly welcomed foreign tourists, including the Americans, along with the positive outlook for the sector’s growth.

The Iranian government, following the sanctions removal, initiated efforts to attract foreign investments with a clear agenda of reducing Iran’s oil dependency and boost the country’s economy, by betting on increasing revenues from tourism sector.

The initiatives included the launch of a scheme called “100 Hotels, 100 Businesses” that outlined 174 projects to be introduced to investors interested in hotel construction. This is was an ambitious scheme led by the Iranian government focusing on bringing the hotel industry of the country back on track. This scheme aimed at attracting investments for the construction of 100 hotels across 31 provinces with priority given to most popular regions such as Tehran, Kashan, or Mashhad. Also, through this scheme, the government focused on initiating joint ventures with foreign companies, benefiting both the government and foreign investors.

The government also announced other major plans for the development of tourism industry. These included creating regulations to facilitate investment, creating brands of hotels and restaurants, promoting new types of tourism such as sports, climate, and industrial tourism, developing knowledge-based human resources, creating a comprehensive system of standards, balancing inbound and outbound tourism by improving political relations, and creating a system for the protection and restoration of historical and natural sites.

The Iranian government further assured about the transfer of capital and profits overseas as per the foreign investment law of the country and full protection for the investors against any non-commercial risks such war or border conflict, confiscation or corruption, etc.

The government also started working on changing the image of the country and its tourism industry in the eyes of potential foreign visitors. One major change to this was to allow increased access to the internet, e.g. over social media, for the local players, which gave the restrained westerners a far greater insight into the country without the filters added from the mainstream media.

These efforts undertaken by the Iranian government were welcomed by several foreign investors, as they brought a sense of encouragement and stability to prospects of investing in the country.

This soon led to emergence of international hotel chains, the first being Novotel (296 rooms) and Ibis (196 rooms) hotels by the French hospitality company Accor which came to Tehran already in 2015. The company’s chief executive Mr. Bazin, at the launch of the venture, was optimistic in bringing up the chain of budget hotels such as Ibis and mid and upmarket hotels such as Novotel, Sofitel, and Pullman in 20 cities of Iran, but with no particular timeline given. Another hotel that came up in 2017 was Spanish Melia in Caspian Sea in 2017, built in partnership of Melia and its Iranian partners in Tehran, where the Iranians invested more than US$250 million while the management is taken over by Melia. The hotel includes 319 luxurious rooms, two residential towers, a sports center, and other services in an area of 18,000 square meters. Similarly, the Abu Dhabi’s Rotana Management Corporation planned to open four hotels in Iran’s major cities, Tehran and Mashhad, two in each. One of the hotels (a five-star hotel with 275 rooms and suites in Mashhad) was built within one year in 2017.

Overall, investments in the tourism sector started growing at a moderate level post the removal of US sanctions. According to World Tourism and Travel Council (WTTC) data on the capital investments in Iran’s tourism sector, 2016 witnessed an investment of US$2.75 billion contributing 3.25% of all investments in the country, as compared to the investment of US$2.63 billion in 2015. Since then, capital investments have been growing and are estimated to reach US$3.75 billion in 2028 with a share of 4.86% of all investments.

As a result of increased investments and rise in tourism sector, the GDP of the country also witnessed a slight growth. According to WTTC data, tourism industry’s share in the country’s GDP increased to 7.1% in 2015 contributing US$26.04 billion, up from 6.5% (US$24.38 billion) in 2014. However, it stabilized in the following years (6.8% in 2016, 6.4% in 2017, and 6.5% in 2018), with expected contribution to GDP of 6.52% amounting to US$35.39 billion by 2028. With developments in the tourism sector, the ministry of tourism is hoping to host nearly 20 million tourists per year by 2025.

But as the country started seeing benefits of the sanctions removal, with its improved economy thanks to rise in export and import, infrastructural developments, increase of foreign investments from 2016 to mid-2018, and boost in tourism sector and many other industries, the US government shocked the country by re-imposing sanctions in August 2018. The re-imposition was a consequence of the USA withdrawing its participation from the nuclear deal in May 2018 over political differences. This brought a blow to the Iranian economy with restrictions over imports and exports, thus again leaving Iran in economic struggle due to recession through shrinking oil exports.

EOS Perspective

The economic trembles coming from crude oil export ban led the Iranian government to increase its focus on tourism industry to offset the lost revenues. While American tourists are again restricted to travel to Iran, the country is still witnessing an increased influx of tourists from other regions, including the Middle East and Asia, a fact that cushions the impact of re-imposed sanctions.

Although a blessing in disguise for Iran, one of major reasons for the rise in tourism despite the US sanctions was the almost threefold fall of Iranian currency against US dollar which made travelling to Iran a low-cost affair for many foreign tourists, especially in comparison to other Middle Eastern destinations. This has contributed to the foreign tourists’ influx especially from the western countries – tourists with budget constraints as well as tourist arriving for medical tourism purposes. At the same time, the fall in rial value against the US dollar increased travel expenses for Iranians going overseas. This has constrained the outbound tourism, resulting in a decrease of 6.5% during 2018 (March 21- June 21 of Iranian Calendar).

The weakening of the currency was just one of the reasons that contributed to the slight growth in the Iran’s tourism sector, despite the US sanctions. The country continued to communicate its selling points and positive image to foreign audiences. Iran has been working on reinforcing its position as destination of religious pilgrimages, place with improved infrastructure, natural landscape, and cultural history. Through these messages on social media, the country seems to have attracted various sorts of tourists, from leisure travelers to artists to businessmen and more, resulting in growth of the industry.

According to deputy minister of the Cultural Heritage, Handicrafts and Tourism of Iran, the number of tourists’ arrivals increased by 24% during the first seven months of 2019 (starting from March 21 as per Iranian Calendar) compared to the same period previous year. In terms of tourists’ arrivals numbers, between March 2018 to March 2019, Iran witnessed 7.8 million foreign tourists visiting the country as compared to 4.7 million tourists from March 2017 to March 2018.

Encouraged by the growth in the sector, Iranian government undertook further initiatives to ensure the inflow of foreign visitors continues (and increases). In August 2019, a functionalized center was established in Cultural Heritage, Handicrafts and Tourism Organization, with a task to make decisions on reducing the negative impact of the US sanctions on tourism industry.

Following the US State Department’s warning (issued in May 2018) against travelling to Iran, citing it being an unsafe travel destination, the risk of fall of other western tourists’ arrivals increased. The Iranian government, to compensate for the fall, focused more on attracting tourists from regional countries. For instance, visa fees for Iraqi tourists (accounting for 24% of inbound tourists in 2018) were removed, while visas for Omanis were waived off.

Iran is also looking for tourists in more remote markets, especially in countries that are known to frequently stand against the USA in the international area. China is one such market which Iran is hoping to attract leisure tourism from by allowing visa-free entry of the Chinese nationals into Iran as of July 2019. Iran has an ambitious plan to increase the number of Chinese visitors from just over 50,000 in 2018 to 2 million in 2020.

Furthermore, in order to encourage foreign tourists to visit Iran, the Iranian government decided not to stamp their passports to help them avoid issues with subsequent attempts to travel to the USA. Additionally, the government is also trying to spur medical tourism by developing health tourism hubs, especially in Shiraz with a vision to increase the tourists travel for medical purposes as well.

These measures have been quite successful in promoting Iranian tourism growth, even though the American and other western visitors have (to some extent) been replaced with arrivals from the Middle Eastern and Asian countries. However, looking at the current situation of unrest, with the killing of Iranian general Qassem Soleimani in January 2020 by US military, and Iran responding to this with missile attacks on the US military troops in Iraq less than a week later, the conflict between the two countries is nowhere near its end. This political unrest, if continues, has a potential to again severely affect Iran’s tourism industry, as the country will be unable to grow the sector without reliance on western visitors. Tourists’ sentiments are tightly linked to political climate; therefore, it can be expected that only improved relations with the USA, and through this a better image, will allow Iran to truly develop its tourism industry and its economic situation in general.

Influencer Marketing Redefining the Fashion and Beauty Industry
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Influencer Marketing Redefining the Fashion and Beauty Industry

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Social media users are increasingly reliant on and influenced by what they see online, particularly, when it comes to marketing done by fashion and beauty brands. Social media provides immense marketing opportunities to the fashion and beauty industry by allowing them to closely interact with customers and influence their buying decisions like never before. To tap such opportunities, about 78% of global fashion brands incorporated social influencers in their marketing strategy in 2017, according to a survey conducted by Launchmetrics. Influencers are slowly becoming an integral part of marketing campaigns for fashion and beauty brands – for high-end brands such as Becca Cosmetics and Yves Saint Laurent, as well as affordable brands such as Maybelline, for whom influencers have been pivotal in driving sales.

Why beauty and fashion brands are adopting influencer marketing?

In the past, to launch new collections or promote products, fashion/beauty brands invested heavily in celebrities and television models gracing magazine covers, billboard and television advertisements, among others. These efforts were effective but as technology progresses, fresh marketing tactics are born. While most of the traditional forms of advertising are still being used, brands have started to realize how laborious it is to employ traditional methods in promoting products, hence, majority of brands are going digital and starting to work with influencers.

How influential is influencer marketing?

Undoubtedly, influencer marketing is one of the fastest growing digital marketing tools, providing unparalleled access to real-time word-of-mouth targeting. For marketers, today’s social media influencers are yesterday’s celebrities and socialites, only with a more persuasive voice and greater power to reach audiences.

Beauty and fashion industry has understood the power of influencer marketing quite well. Cosmetics brands such as Smashbox have completely abandoned the use of traditional print media for advertising while luxury cosmetics companies such as Estee Lauder have significantly reduced spending on traditional media to focus on digital.

Fashion and cosmetics brands are using various types of influencer campaigns to promote products, foster brand awareness, and boost sales. For example, Maybelline (an American cosmetics company) in China used the influence of beauty bloggers and 50 celebrity influencers to do a 20-minute livestream video for a newly launched lipstick in 2016, which led to sales of 10,000 lipsticks in two hours.

On the other hand, Olay (an American skincare company) introduced a skincare campaign, Olay 28-day Challenge, which urged influencers to document their four-week experience of using company’s products while updating their followers simultaneously across various social media platforms. Influencers also gave away free samples and offered discounts to followers to encourage them to buy the products to join the skincare challenge. In 2018, the campaign was able to increase engagement rate by 20% and there was a significant increase in Google searches for the brand name.

There is no end to innovative social media campaigns that brands are launching. For example, in 2018, H&M (A Swedish clothing retail company) engaged in conversation with consumers on Instagram to come up with new designs for its brand Nyden, which is targeted at millennials. H&M worked with nine influencers, who used Instagram stories’ polling feature to understand followers’ preferences for certain designs, such as using zippers versus buttons, among others. Over a period of two weeks, the polls attracted more than 425,000 viewers and generated 35,000 votes.

For brands such as Fashion Nova (an American fast fashion retail company), with 14 million Instagram followers and ranked as the most Googled fashion brand of 2018, marketing through Instagram has been pivotal in its rapid ascent in the fashion industry. Fashion Nova is known for betting big on Instagram and use of celebrity influencers – as of December 2018, the company had worked with 3,000 influencers on Instagram. Using celebrity influencers, it claims to have generated sales up to US$ 50,000 per post and selling out a whole collection of clothing line within 82 minutes. With about 20 to 30 posts per day on Instagram, Fashion Nova knows how to keep its audience engaged and generate brand awareness.

What challenges are obstructing growth?

Influencer fatigue

Influencer marketing is not as impeccable as it sounds to be. With more and more businesses adopting influencer marketing, threat of influencer fatigue increases, which could result in disengaged audiences and reduced impact. According to a study conducted by Bazaarvoice in 2018, about 47% respondents claimed to be fatigued with repetitive influencer posts on Instagram.

Promotional content is already beginning to clutter consumer’s news feeds. With beauty and fashion influencers recommending every other product that enters the market, audiences will eventually lose trust in them, feel disengaged and overwhelmed. Consumers, after some time, are bound to get tired of having their buying behavior manipulated. Just like people started using ad-blockers when websites became loaded with advertisements, there’s a probability that they may also turn away from beauty/fashion influencers.

Absence of standard metrics/parameters to determine success of campaigns

There is uncertainty regarding what constitutes a successful influencer marketing campaign and how to calculate ROI on marketing spend. Beauty and fashion companies are unable to accurately calculate profitability of influencer campaigns. According to a study published by Celebrity Intelligence in 2018, 46% of respondents (from the beauty industry) faced challenge in evaluating ROI of an influencer collaboration.

Driving purchases is not always the key objective of influencer marketing, rather it focuses on softer goals like growing brand awareness or boosting engagement, which makes ROI far more complex to determine.

Influencer marketing does not guarantee results in terms of sales, brand reach, or number of clicks. No standard metrics have been set for the industry to measure success, instead brands end up speculating whether the campaign was successful or not. Some beauty and fashion companies monitor the comments or number of likes on the posts, while others determine views on videos or track campaign hashtags, all of which are not very effective methodologies.

Fraudulent practices

Much like other industries, beauty and fashion market has also fallen prey to influencer frauds. According a report published Points North Group in 2018, cosmetics/skincare companies suffered losses due to fraudulent engagement – 46% of Raw Sugar Living’s influencer marketing budget was squandered on fake followers, Clarins lost 45% of its budget on influencer frauds, while L’occitane blew 24% of its budget, among various others. Such deceitful practices have taken a toll on marketers, who invest in influencers to drive brand awareness and sales, but their campaigns fail to reach the actual target audience.

Another inauthentic social media activity plaguing the beauty and fashion industry is staging fake promotional posts by aspiring influencers. Companies want to see promotional abilities and references of past campaigns of influencers before hiring them to do paid sponsored posts. Hence, aspiring influencers, particularly from the beauty and fashion industry, have started to publish posts with brand hashtags and captioning it in a manner such that it seems to be a promotional or sponsored content. While this leads to free publicity for brands but most of them complain that this also results in inferior quality sponsored content posted without approval, which could harm brand’s reputation.

Influencer Marketing Redefining the Fashion and Beauty Industry by EOS Intelligence

EOS Perspective

If there is any market that qualifies to be an early adopter of influencer marketing, it is the beauty and fashion industry. It is an extremely dynamic industry and to stand out from competitors, brands need to constantly evolve, be creative, and promote products extensively – all of which is easily achieved through influencer marketing.

Equipped with social media savviness, influencers have the power to eloquently persuade consumers to make purchases. There is no limit to the creativity that they bring to the table – fashion/beauty influencers design compelling marketing campaigns for the brands by reviewing products, conducting polls and contests, offering huge giveaways, sharing their experiences of using products through videos or photographs, attending events organized by brands and promoting such events, among various other tactics.

Is influencer marketing here to stay?

There is no doubt that influencer marketing is becoming the mainstay of beauty and fashion industry, far from a passing fad. The personal nature of influencer campaigns is one of the reasons why it is proving to be effective for the beauty and fashion industry. According to a survey conducted by Celebrity Intelligence in 2018, 98% of beauty companies believed that influencer marketing is effective for the industry while 68% thought beauty segment has a natural affinity with influencers. Even though difficult to calculate, surveys have determined that influencer campaigns could also provide high ROIs – for every US$1 spent on influencer marketing, brands received average ROI of US$10.7 in 2017. Fashion and beauty brands have gauged the power of social media and know that with the right influencer endorsing to the right community/audience, it can translate into clicks, conversions, and actual sales.

Find out more about drivers and challenges in influencer marketing adoption here

For fashion and beauty brands, influencer marketing has become a multi-million-dollar investment, with considerable portions of their budgets dedicated to influencers. For example, Estee Lauder (a US-based cosmetics company), in 2019, revealed that 75% of its marketing budget will be spent on digital marketing, particularly on influencers, while Shiseido (Japanese multinational personal care company) increased its influencer marketing budget by 50% in 2019. On the other hand, in February 2019, Benefit Cosmetics (a US-based cosmetics company) formed an in-house dedicated influencer agency in the UK to streamline influencer marketing operations and manage influencer relationships. In the future, it plans to expand the in-house influencer agency to other locations as well.

Undoubtedly, influencer marketing has dramatically changed the fashion and beauty industry, by allowing real people to narrate a brand story, demonstrate product, and provide honest and credible product reviews. In order to make it a sustainable marketing strategy, measures are being taken to overcome some of the existing challenges. In pursuit to engage with authentic influencers, beauty brands are adopting more sophisticated, data-led approach to selection process. According to Celebrity Intelligence survey, in 2018, about 67% of beauty brands identified social media analytics (including audience insights and engagement metrics) useful to choose authentic and suitable content creators.

Another ongoing challenge is to accurately determine success of campaigns, which some companies (including lifestyle and cosmetics brands such as Daniel Wellington, L’Oréal, and Olay) are tackling by providing influencers with a unique URL or a discount code, which followers can use and brands can easily track conversions. If the campaign does not entail discounts, various metrics can be used to evaluate ROI such as traffic driven, social reach, social media impressions, engagement rate, cost per impression, and cost per engagement, among others.

Nonetheless, opportunities that influencer marketing provides for the beauty and fashion industry outweigh all downsides. While brands have achieved success with sponsored posts and brand hashtags on social media, there is still a lot more for them to explore and innovate through influencer marketing.

Influencer Marketing A Powerful Marketing Tool on the Rise
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Influencer Marketing: A Powerful Marketing Tool on the Rise

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Influencer marketing, until fairly recently a new marketing tool, is now on the frontier of becoming a mainstream marketing channel. The real, relatable, and reaction-stimulating content created by influencers, distinguishes this form of marketing from traditional marketing channels. Influencer marketing offers effective means for brands to communicate and engage with customers on social media, a fact that is driving its popularity. Laden with potential to drive sales and grow brand awareness, the influencer marketing market is likely to reach US$22.3 billion by 2024. However, certain challenges do exist in the market, and if not addressed, they can potentially hinder market growth.

Influencer marketing started shaping up around 2005 with mere video blogs on YouTube, but quickly grew in prominence as marketers took notice of its potential. Growing at a CAGR of 28% between 2019 and 2024, the industry is becoming a marketing mainstay for brands across various markets. This is driven by the fact that influencers generate a sense of proximity with their audiences, which helps in molding their shopping behavior under discrete suggestions and recommendations.

What is driving adoption of influencer marketing?

Consumers, especially millennials, are embracing a different approach to making purchasing decisions. Consumers are relying on Instagram models, Twitter personalities, and YouTube influencers to seek recommendations or to understand which brand or product is trending in the market. This has resulted in brands endorsing products through various social media channels using influencers.

Moreover, it is a proven fact that word-of-mouth marketing leads to twice as high sales as paid advertising, and influencer marketing is nothing but a form of word-of-mouth marketing. Studies also suggest that shoppers purchasing product through word-of-mouth have a 37% higher retention rate, another reason why brands want to reach their consumers through influencer marketing.

Additionally, the way that we consume media has changed. Social media boom is slowly driving consumers away from traditional forms of advertising and marketing. More than ever, social channels are becoming means to start a conversation with consumers and build direct relationships with them. With traditional advertising being sidelined by consumers (about 65% of people skip ads posted during or before online videos), influencer marketing has become an integral channel to connect with them.

How have influencers assisted companies to increase sales and grow brand awareness?

Engaging with influencers is proving to be an effective way of getting a sale, hence, brands are investing considerable budgets in influencer marketing. Brands are partnering with influencers to launch various types of innovative campaigns, with primary focus on increasing brand awareness (84%), reaching new audience (71%), and generating sales (64%), according to a survey conducted by Mediakix in 2019.

For example, YouFoodz, an Australian food chain, used Instagram to promote the launch of its 2017 winter menu. It collaborated with 81 influencers, who posted 162 Instagram stories and 176 pieces of content, which reached 1.5 million Instagram users. The campaign was a huge success, generating 70,000 direct engagements and over 500,000 impressions (number of times particular content is displayed, regardless of if it was clicked or not).

Relying on influencer marketing, Bigelow Tea (an America tea manufacturer) was able to showcase healthy aspects of drinking tea and promote its product to a large audience. Influencers incorporated Bigelow tea into their content in various ways. Culinary influencers developed different recipes to use tea in innovative ways, while craft bloggers turned packaging into DIY arts, for example, creating flower pots from the tea packaging. The campaign led to more than 44 million impressions and increased sales by 18.5%.

Further, M&M (a product of US-based confectionary and food company, Mar Incorporated) launched an innovative campaign in 2016 to let audience decide its new peanut flavor (a choice between Honey Nut, Chili Nut, and Coffee Nut) by running a mini-election. It partnered with a television personality and a team of influencers to encourage people to try the flavors and cast their votes. Finally, coffee nut flavor was selected, and the campaign generated 269 million impressions, 216 influencer posts, 14.4 million social engagements, and more than 1 million votes.

Is influencer marketing cost effective?

Influencer marketing has proven to be quite budget friendly, allowing large brands and small start-ups to launch compelling marketing campaigns. Traditional forms of advertising campaigns, through television commercials, magazines and newspaper ads, etc., require substantial investment.

On the other hand, influencer marketing is cost effective and simpler to execute. Companies with limited budget can engage with micro (comprising 1,000-5,000 followers) or nano (comprising less than 1,000 followers) influencers and still achieve remarkable results without spending a fortune.

In fact, according to a study conducted by Takumi, micro and nano influencers can generate high engagement rates – influencer with up to 1,000 followers could generate about 9.7% engagement rate, while influencers with 1,000-4,000 followers could provide 4.5% engagement rate. Micro and nano influencers tend to build strong trust and authenticity, and are relatable to their audience, which enhances their ability to engage an audience. According to a study conducted by Experticity, 82% of consumers have higher probability of listening to suggestions provided by micro influencers than those provided by influencers with large number of followers.

Moreover, surveys have determined that influencer marketing could yield a decent average ROI of US$ 5.20 for every dollar spent, which makes it an appealing option for marketers.

What challenges are hindering growth?

Lack of stringent regulations leading to poor compliance with guidelines

Current regulations and guidelines pertaining to influencer endorsements are not stringent or comprehensive, leading to malpractices. In the USA, the FTC (Federal Trade Commission) requires influencers to provide disclosure in case of sponsored content, however, no fines are applied for violations. As a result, most influencers do not adhere to the endorsement regulations, either due to lack of knowledge or in fear of losing followers. In 2018, out of 800 Instagram accounts from UK, USA, and Canada, only 25% fully complied with local regulations pertaining to sponsored content, according to a study released by Inkifi.

Such misleading conduct on influencer’s part could raise questions on their authenticity and lead to mistrust among their followers, who demand transparency. Moreover, large corporations such as Unilever (a consumer goods company) have strictly refused to work with influencers who indulge in fraudulent activities. Influencers are at risk of losing trust of their followers as well as of companies if they continue to indulge in misleading activities.

Fraudulent engagement

Typically, brands use the number of followers on an influencer’s account to estimate campaign results in terms of ROI, engagement rate, brand awareness, earned media value, among others. To seem more appropriate or popular, some influencers purchase their followers using bots – software designed to automatically like, comment, and share posts, increase views on videos, and inflate number of followers on accounts. Influencers have also started to fake their engagements by joining a community of real users to trade likes and comments. Despite these followers being real people, they are not likely to be interested in influencer’s content. Consequently, brands fail to meet the desired campaign result or reach the target audience.

In 2019, fraudulent activities were estimated to cost brands US$1.3 billion, about 23% of allocated budget for influencer marketing. Fraudulent practices are inhibiting market growth, as brands are increasingly becoming cautious of investing in influencer marketing – as of January 2019, about 53% of brands stated that fraudulent impressions were obstacles to increasing digital advertisement budgets.

Influencer Marketing A Powerful Marketing Tool on the Rise by EOS Intelligence

EOS Perspective

Influencers are no longer an extra asset to marketing campaigns instead they have become a critical element of storytelling and building direct relationship between brands and customers. Influencers have positioned themselves as authentic gurus rather than simple advertisers, with 92% of consumers making purchasing decision based on influencers’ posts in 2018. Their relentless savviness to promote brands is what keeps audiences engaged and brands coming back for more.

Nonetheless, challenges do persist but the industry is continuously evolving and coming up with solutions. Measures are being taken against inauthentic engagements. Platforms such as Instagram have started to strictly regulate fraudulent activity and began to threaten offenders with fraud penalties, account suspension, and brand reputation damage. Companies have also become mindful and vigilant while engaging with influencers and started to thoroughly vet them to check for fake followers or use of bot to increase followers. On the legal side, a New York Attorney General has stated that selling fake followers on social media will be considered as an illegal activity in the state.

Further, in November 2019, FTC launched guidelines for sponsored content under ‘Disclosures 101 for Social Media Influencers’ that encompasses when and how influencers should disclose their engagement with brands, regardless of whether or not it includes payment. FTC has not made any major changes in the guidelines but the new guide is more user-friendly with abridged language, and photos and videos illustrating the correct way to endorse products on social media.

Find out how influencer marketing is reshaping fashion and beauty industry here

According to the guidelines, when partnering with brands, disclosure is mandatory when there’s a financial, employment, personal, or family relationship with a brand. Disclosure language should be simple and clear, and the disclosure should be hard to miss (for example, disclosures on Instagram are required to be placed at the beginning of the post’s description and before the ‘more’ button). FTC’s aim is to foster transparency in sponsored content by placing more liability on brands and influencers to explicitly reveal their relationship while recommending products.

Influencer marketing has well-established itself in the advertising industry and is moving towards becoming a mainstream marketing channel, and such measures taken by regulatory authorities, social media platforms such as Instagram, as well as the brands will further strengthen its position as a marketing channel. In future, not only will influencer marketing continue to grow in popularity, but is also likely to become a more purposeful and effective way to communicate and engage with audiences. Allured by endless opportunities, brands will continue to collaborate with influencers and the industry is poised to grow.

Global Economy Bound to Suffer from Coronavirus Fever
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Global Economy Bound to Suffer from Coronavirus Fever

Global economy has slowed down in response to coronavirus. Factories in China and many parts of Europe have been forced to halt production temporarily as some of the largest manufacturing hubs in the world battle with the virus. While the heaviest impact of the virus has been (so far) observed in China, global economy too is impacted as most industries’ global supply chains are highly dependent on China for small components and cheaper production rates.

China is considered to be the manufacturing and exporting hub of the world. Lower labor costs and advanced production capabilities make manufacturing in China attractive to international businesses. World Bank estimated China’s GDP in 2018 to be US$13.6 trillion, making it the second largest economy after the USA (US$20.58 trillion). Since 1952, China’s economy has grown 450 fold as compared with the growth rate of the USA economy. International trade and investment have been the primary reason for the economic growth of the country. This shows China’s strong position in the world and indicates that any disturbances in the country’s businesses could have a global effect.

On New Years’ Eve 2019, an outbreak of a virus known as coronavirus (COVID-19) was reported in Wuhan, China to the WHO. Coronavirus is known to cause respiratory illness that ranges from cough and cold to critical infections. As the virus spreads fast and has a relatively high mortality rate, the Chinese government responded by quarantining Wuhan city and its nearby areas on January 23, 2020. However, this did not contain the situation. In January 2020, WHO designated coronavirus a “public health emergency of international concern” (PHEIC), indicating that measures need to be taken to contain the outbreak. On March 11, 2020, WHO called coronavirus a pandemic with the outbreak spreading across about 164 countries, infecting more than 190,000 people and claiming 7,800+ lives (as of March 18, 2020).

Coronavirus threatening businesses in China and beyond

Businesses globally (and especially in China) are feeling the impact of coronavirus. Workers are stuck in their homes due to the outbreak. Factories and work places remain dormant or are running slower than usual. Also, the effects of coronavirus are spreading across the globe. Initially, all factory shutdowns happened in China, however, the ripple effects of the outbreak can now be seen in other parts of the world as well, especially Italy.

Automotive industry

Global automobile manufacturers, such as General Motors, Volkswagen, Toyota, Daimler, Renault, Honda, Hyundai, and Ford Motors, who have invested heavily in China (for instance, Ford Motor joined ventured with China’s state-owned Chongqing Changan Automobile Company, Ltd., one of China’s biggest auto manufacturers) have shut down their factories and production units in the country. According to a London-based global information provider IHS Markit, Chinese auto industry is likely to lose approximately 1.7 million units of production till March 2020, since Wuhan and the rest of Hubei province, where the outbreak originated, account for 9% of total Chinese auto production. While the factories are reopening slowly (at least outside the Wuhan city) and production is expected to ramp up again, it all depends on how well the outbreak is contained. If the situation drags on for few months, the auto manufacturers might face significant losses which in turn may result in limited supply and price hikes.

American, European, and Japanese automobile manufacturers, among others, are heavily dependent on components supplied from China. Low production of car parts and components in China are resulting in supply shortages for the automakers globally. UN estimates that China shipped close to US$35 billion worth of auto parts in 2018. Also, according to the US Commerce Department’s International Trade Administration, about US$20 billion of Chinese parts were exported to the USA alone in 2018. A large percentage of parts are used in assembly lines that are used to build cars while remaining are supplied to retail stores. Supply chain is crucial in a connected global economy.

Coronavirus outbreak poses a risk to the global automotive supply chain.

South Korea’s Hyundai held off operations at its Ulsan complex in Korea due to lack of parts that were supposed to be imported from China. The plant manufactures 1.4 million vehicles annually and the shutdown has cost approximately US$500 million within just five days of shutting down. However, Hyundai is not the only such case. Nissan’s plant in Kyushu, Japan adjusted its production due to shortage of Chinese parts. French automaker Renault also suspended its production at a plant in Busan, South Korea due to similar reasons. Fiat Chrysler predicts the company’s European plant could be at risk of shutting down due to lack of supply of Chinese parts.

However, very recently, automobile factories in China have started reopening as the virus is slowly getting contained in the region. While Volkswagen has slowly started producing in all its locations in China, Nissan has managed to restart three of its five plants in the country.

That being said, auto factories are facing shutdowns across the world as coronavirus becomes a pandemic. Ford Chrysler has temporarily shut down four of its plants in Italy as the country becomes the second largest affected nation after China.

Automobile supply chains are highly integrated and complex, and require significant investments as well as a long term commitment from automobile manufacturers. A sudden shift in suppliers is not easy. The virus is spreading uncontrollably across Europe now and if France and Germany are forced to follow Italy’s footsteps of shutting down factories to contain its spread, this will spell doom for the auto sector as the two countries are home to some of the biggest automobile manufacturers in the world.

Technology industry

China is the largest manufacturer of phones, television sets, and computers. Much of the consumer technologies from smartphones to LED televisions are manufactured in China. One of the important sectors in the technology industry is smartphones.

The outbreak of coronavirus is bad news for the technology sector, especially at the verge of the 5G technology roll-out. Consumers were eagerly waiting for smartphone launches supporting 5G but with the outbreak, the demand for smartphones has seen a decline. According to the China Academy of Information and Communications Technology, overall smartphone shipments in China fell 37% year over year in January 2020.

Foxconn, which is a China-based manufacturing partner of Apple, has iPhone assembling plants in Zhengzhou and Shenzhen. These plants, which make up a large part for the Apple’s global iPhone assembly line, are currently facing a shortage of workers that will ultimately affect the production levels of iPhone in these factories. According to Reuters, only 10% of workers resumed work after the Lunar New Year holiday in China. As per TrendForce, a Taiwanese technology forecasting firm, Apple’s iPhone production is expected to drop by 10% in the first quarter of 2020.

Moreover, Apple closed down all its retail stores and corporate offices in the first week of February 2020 in China in response to the outbreak. On March 13, 2020, it reopened all of its stores in China as the outbreak seems to be under control. However, while Apple seems to recover from the outbreak in China, it is equally affected by store shutdowns in other parts of the world (especially Europe). On March 11, Apple announced that all stores in Italy will be closed until further notice. Italy has been hit by the virus hard after China. The Italian government imposed a nationwide lockdown on the first week of March 2020.

On the other hand other multinational smartphone giants such as LG, Sony Mobile, Oppo, Motorola, Nokia, and many others have delayed their smartphone launches in the first quarter of 2020 due to the outbreak.

The coronavirus outbreak is more likely to be a disaster for smartphone manufacturers relying on China.

Other sectors such as LCD panels for TVs, laptops, and computer monitors are mostly manufactured in China. According to IHS Markit, there are five LCD factories located in the city of Wuhan and the capacity at these factories is likely to be affected due to the quarantine placed by the Chinese government. This is likely to force Chinese manufacturers to raise prices to deal with the shortage.

According to Upload VR, an American virtual reality-focused technology and media company, Facebook has stopped taking new orders for the standalone VR headset and also said the coronavirus will impact production of its Oculus Quest headset.

Shipping industry

In addition to these sectors, the new coronavirus has also hit shipping industry hard. All shipping segments from container lines to oil tanks have been affected by trade restrictions and factory shutdowns in China and other countries. Shipyards have been deserted and vessels are idle awaiting services since the outbreak.

According to a February 2020 survey conducted by Shanghai International Shipping Institute, a Beijing based think-tank, capacity utilization at major Chinese ports has been 20%-50% lower than normal and one-third of the storage facilities were more than 90% full since goods are not moving out. Terminal operations have also been slow since the outbreak in China. The outbreak is costing container shipping lines US$350 million per week, as per Sea-Intelligence, a Danish maritime data specialist.

According to Sea-Intelligence, by February 2020, 21 sailings between China and America and 10 sailings in the Asia-Europe trade loop had been cancelled since the outbreak. In terms of containers, these cancellations encompass 198,500 containers for the China-America route and 151,500 boxes for the Asia-Europe route.

Moreover, shutting down of factories in China has resulted in a manufacturing slowdown, which in turn is expected to impact the Asian shipping markets. European and American trade is also getting affected as the virus spreads to those continents. US retailers depend heavily on imports from China but the outbreak has caused the shipping volumes to diminish over the first quarter.

The USA is already in the middle of a trade war with China that has put a dent in the imports from China. National Retail Federation (world’s largest retail trade association) and Hackett Associates (US based consultancy and research firm) projects imported container volumes at US seaports is likely to be down by 9.5% in March 2020 from 2019. The outbreak is heavily impacting the supply chains globally and if factory shutdowns continue the impact is more likely to be grave.

Read our other Perspectives on US-China tensions: Sino-US Trade War to Cause Ripple Effect of Implications in Auto Industry and Decoding the USA-China 5G War

Other businesses

In addition to the auto, technology, and shipping industries, other sectors are also feeling the heat from the outbreak. Under Armour, an American sports clothing and accessories manufacturer, estimated that its revenues are likely to decline by US$50-60 million in 2020 owing to the outbreak.

Disney’s theme parks in California, Shanghai, Tokyo, and Hong Kong have been shut down due to the outbreak and this is expected to reduce its operating income by more than US$175 million by second quarter 2020.

Further, IMAX, a Canadian film company, has postponed the release of five films in January 2020, due to the outbreak.

Several fast food chains have been temporarily shut down across China and Italy, however, most of them have opened or are in the process of reopening in China as the outbreak is slowly coming under control there. While the global fast food and retail players have limited exposure in China, they are suffering huge losses in Europe, especially Italy. The restaurant sector is severely impacted there, where all restaurants, fast food chains, and bars have been shut down temporarily till April 3 in an attempt to contain the outbreak.

Another significantly affected industry is the American semiconductor industry as it is heavily connected to the Chinese market. Intel’s (a US-based semiconductor company) Chinese customers account for approximately US$20 billion in revenue in 2019. Another American multinational semiconductor and telecommunications equipment company, Qualcomm draws approximately 47% of its revenue from China sales annually. The outbreak is making its way through various industries and global manufacturers could now see how much they have become dependent on China. Although the virus seems to be getting under control as days pass, the businesses are not yet fully operational. Losses could ramp up if the virus is not contained soon.

Global Economy Bound to Suffer from Coronavirus Fever by EOS Intelligence

 

Housebound consumers dealing with coronavirus

Since the virus outbreak, people across many countries are increasingly housebound. Road traffic in China, Italy, Iran, and other severely affected countries has been minimized and public places have been isolated. People are scared to go out and mostly remain at home. This has led local businesses such as shopping malls, restaurants, cinemas, and department stores to witness a considerable slowdown, while in some countries being forced to shut down.

TV viewing and mobile internet consumption on various apps have increased after the outbreak. According to QuestMobile, a research and consultancy firm, daily time spent with mobile internet rose from 6.1 hours in early January 2020 to 6.8 hours during Lunar New Year (February 2020).

While retail outlets and other businesses are slower, people have turned to ordering products online. JD.com, a Chinese online retailer, reported that its online grocery sales grew 215% (year on year) to 15,000 tons between late January and early February 2020. Further, DingTalk, a communication platform developed by Alibaba in 2014, was recorded as the most downloaded app in China in early February 2020.

EOS Perspective

International businesses depend heavily on Chinese factories to make their products, from auto parts to computer and smartphone accessories. The country has emerged as an important part in the global supply chain, manufacturing components required by companies globally. The coronavirus outbreak has shaken the Chinese economy and global supply chains, which in turn has hurt the global economy, the extent of which is to be seen in the months to come. Oxford Economics, a global forecasting and analysis firm, projected China’s economic growth to slip down to 5.6% in 2020 from 6.1% in 2019, which might in turn reduce the global economic growth by 0.2% to an annual rate of 2.3%.

A similar kind of outbreak was seen in China in late 2002 and 2003, with SARS (Severe Acute Respiratory Syndrome) virus. China was just coming out of recession in 2003 and joined the World Trade Organization, attaining entrance to global markets with its low cost labor and production of cheaper goods. The Chinese market was at its infancy at that time. As per 2004 estimates by economists Jong-Wha Lee and Warwick J. McKibbin, SARS had cost the global economy a total of about US$40 billion. After SARS, China suffered several months of economic retrenchment.

The impact of coronavirus on Chinese as well as global economy seems to be much higher than the impact of SARS, since COVID-19 has spread globally, while China has also grown to be the hub for manufacturing parts for almost every industry since the SARS outbreak. In 2003, China accounted for only 4% of the global GDP, whereas in 2020, its share in the global GDP is close to 17%.

Currently, the key challenge for businesses would be to deal with and recover from the outbreak. On the one hand, they need to protect their workers safety and abide by their respective governments’ regulations, and on other hand they need to safeguard their operations under a strained supply chain and shrunken demand.

In the current landscape, many businesses in China have reopened operations but the outbreak is rapidly spreading to other parts of the world (especially Europe and the USA), where it is impacting several business as well as everyday lives. The best thing for manufacturing companies in this scenario is to re-evaluate their inventory levels vs revised demand levels (which may differ from industry to industry), and consider a short-term re-strategizing of their global supply chains to ensure that raw materials/components or their alternates are available and accessible – bearing in mind their existing production capability with less workers and customer needs during this pandemic period.

With the rapid spread of the virus, it seems that the outbreak is likely to cause considerable damage to the global economy (both in terms of production levels as well as psychological reaction on stock markets), at least in the short term, i.e. next 6 months. However, many experts believe that the situation should soon start coming under control at a global level. For instance, some experts at Goldman Sachs, one of the world’s largest financial services companies, believe that while this pandemic will bring the lowest growth rate of the global GDP in the last 30 years (expected at 2% in 2020), it does not pose any systematic risks to the world’s financial system (as was the case during the 2008 economic crisis).

Having said that, it is difficult to estimate what real impact the coronavirus will have on the global economy yet, and if opinions such as Goldman Sachs’ are just a way to downplay the situation to keep the investors calm. It is more likely to depend on how long the virus continues to spread and linger and how effectively do governments around the world are able to contain it.

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The EU Green Deal – Good on Paper but Is That Enough?

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The EU, which has always been ahead of the curve in tackling climate change and ensuring emission control, has rolled out a new EU Green Deal in December 2019. The Green Deal is the most ambitious environmental policy devised by the EU and encompasses several targets and policy measures that will require a complete overhaul in how business across sectors is currently done in the region.

In the beginning of December 2019, European Commission President, Ursula von der Leyen, unveiled a suite of policies known as the EU New Green Deal and called it Europe’s ‘man on the moon moment’. EU’s Green Deal is aimed at decarbonizing the economy and encompasses a host of policy measures including a plan to ensure EU reaches net-zero emissions by 2050.

To this effect, it has also increased its carbon emission reduction targets from 40% to 55% for 2030. This is the ubiquitous goal for the Commission and all its measures and policies are to be aligned to achieve this objective. Thus, the EU Commission is expected to review and align laws and regulations, such as the Renewable Energy Directive, Energy Efficiency Directive, and Emissions Trading Directive among many others, over the next couple of years to ensure that they are tuned to support the ambitious climate goals. Moreover, taxation will also be aligned with climate objectives to ensure effectiveness.

Policy measures

In order to achieve this objective of carbon neutrality, the EU Commission is focusing on energy efficiency since the production and use of energy across the EU states accounts for 75% of EU’s greenhouse gas emissions. The EU member states are revising their energy and climate plans to ensure higher dependence on renewable sources (especially offshore wind energy production) and phasing out coal and gas-based energy. Moreover, the Commission has also guided member states to review and update their energy infrastructure to ensure the use of innovative and energy-efficient technologies such as smart grids and hydrogen networks.

The Commission is also working towards adopting a new EU industrial strategy along with a new circular economy action plan. The plan will focus on decarbonizing and modernizing several energy-intensive industries, such as steel, chemicals, and cement. It will also include a ‘sustainable product policy’ that will prioritize reducing and reusing materials before recycling them. Moreover, while the circular economy action plan will be applied across all sectors, it will be most relevant for resource-intensive sectors such as textiles, construction, electronics, and plastics.

The plan will focus on fostering new business models that drive sustainable use of resources, set regulations and minimum standards to prevent environmentally harmful products from being sold in EU markets, as well as set a regulatory framework to ensure that all packaging in the EU is reusable or recyclable in an economically viable manner by 2030. In addition to this, the Commission aims at achieving ‘clean steelmaking’ by 2030 by using hydrogen for the process and introduce new legislation by 2020 to ensure that all batteries are reusable and recyclable.

Understanding that construction, use, and renovation of buildings account for a significant part (about 40%) of energy consumed in the EU, the Commission aims at improving energy efficiency in this sector by focusing on more frequent renovations. A quicker renovation rate helps improve the energy performance of buildings and is effective in lowering energy bills and reducing energy poverty. Currently, the annual renovation rate of buildings in the EU states ranges between 0.4% and 1.2%. However, the Commission is looking to at least double the renovation rate to reach its energy efficiency and climate objectives.

In addition to this, the Commission is also working towards curbing carbon emissions from transportation, which accounts for about 25% of EU’s total greenhouse gas emissions. In order to achieve carbon neutrality by 2050, the current transport emission levels would be needed to be cut down by about 90%. To attain this, the Commission has planned for significant investment in boosting electric vehicles and plans to deploy 1 million public recharging stations across the EU states by 2025. Moreover, in July 2021, the Commission plans to revise the legislation on CO2 emission performance standards for cars and vans to achieve its target of zero-emission mobility by 2025.

With regards to commercial transport, the EU Commission aims at pushing automated and digitized multimodal transport. It aims at shifting 75% of inland freight currently carried by road to rail and inland waterways. Moreover, it aims at deploying smart traffic management systems and sustainable mobility services that will facilitate a reduction in congestion and pollution.

The EU Green Deal – Good on Paper but Is That Enough by EOS Intelligence

The Commission also plans to align agriculture and food production with its climate goals. To this effect, the Commission is expected to present a ‘Farm to Fork’ strategy in spring 2020, which aims to introduce and strengthen policies in the agriculture and fisheries space so that they are well equipped to tackle climate change and preserve biodiversity. As per the Commission’s new proposal, 40% of the agricultural policy’s budget and 30% of the maritime fisheries fund within the EU 2021-2027 budget will contribute to climate action and objectives. In addition to this, the ‘Farm to Fork’ strategy aims at significantly reducing the use of chemical pesticides, fertilizers, and antibiotics and in turn increase the area under organic farming.

In addition to agriculture, the EU Commission also aims at preserving and restoring biodiversity. To this effect, the Commission will present a new ‘Biodiversity Strategy’ by March 2020, which will be shared at the UN Biodiversity Summit to be held in China in October 2020. The biodiversity strategy is expected to be brought to action in 2021 and will cover measures aimed to address the key drivers of biodiversity loss such as soil and water pollution. The policy will also encompass a new EU forest strategy that will focus on afforestation, forest preservation, and restoration, which in turn will increase CO2 absorption and aid EU’s ambitious climate goals.

Lastly, the EU Commission plans to reach a ‘pollution-free environment’ by 2050. For this purpose, it plans to review and revise measures that monitor pollution from large industrial installations. Moreover, to ensure a toxic-free environment, the Commission will present a sustainable chemicals strategy that will protect the environment (and citizens) against hazardous chemicals and encourage innovation for the development of safe and sustainable alternatives.

Global trade

The EU’s Green Deal is ambitious, with measures in place to achieve this goal. However, the economic bloc cannot realize this goal in isolation. To get other countries to act on climate change and also prevent the influx of cheaper imports from countries that do not have similar strict policies on carbon emissions, the EU plans to propose a border adjustment carbon tax. This carbon tax is expected to be introduced by 2021 with an initial focus on industries such as steel, cement, and aluminum. The tax may hamper imports from the USA and China as well as smaller countries that cannot afford such climate-based policy measures. However, there is still some ambiguity regarding the tax as it may breach WTO rules, which require equal treatment for similar products, whether domestic or international.

Investment

To achieve this arduous goal, the EU will require a significant amount of additional investment. For starters, the Commission will require additional investment of about EUR260 billion (~US$288 billion) per annum only to achieve the 2030 goal (of reducing carbon emissions by 55%). This is about 1.5% of the EU’s 2018 GDP. Thus it is safe to assume that the investment required for achieving zero emissions by 2050 will be much higher.

The magnitude of the investment requirement will call for participation from both the public and private sector. To achieve this, the commission will present a Sustainable Europe Investment Plan, which will help meet the additional funding needs. The Plan will provide dedicated financing to support sustainable projects in addition to building a proposal for an improved regulatory framework. The commission has also proposed to dedicate at least 25% of the EU’s long-term budget towards achieving climate-based objectives. Moreover, the European Investment Bank (EIB), which has about EUR550 billion funds in its balance sheet, has also pledged to increase its lending towards green projects, thereby becoming a climate bank of sorts. While EIB is already in the process to phase out financing fossil fuel dependent projects by 2021, the bank aims for 50% of its financing to go towards green projects by 2025 (up from 28% in 2019).

In order to ensure an easy and fair transition to climate neutrality, the Commission plans to mobilize a EUR100 billion fund to help regions most dependent on fossil fuels or carbon-intensive sectors. The fund, also called the ‘Just Transition Mechanism’ fund will be funded from the EU’s regional policy budget as well as the EIB. The fund will be used primarily to support and protect citizens most vulnerable to the transition by providing access to re-skilling programs, technical assistance, jobs in new sectors, or energy-efficient housing.

Moreover, the Horizon Europe research and innovation program will also contribute to the Green Deal. As per a new agreement between the EU members in May 2019, 35% of the EUR 100 billion (US$110 billion) research budget for 2021-2027 will be used for funding clean tech and climate-related projects.

With regards to the private sector participating in this green transition, the commission will present a Green Financing Strategy in Q3 2020, which is expected to incentivize the private sector to invest in sustainable and green projects.

To this effect the Commission has created a classification system that for the first time defines what is considered as ‘green projects’ or ‘sustainable economic activities’. This classification is also termed as the ‘green list’ or ‘taxonomy’. This will help redirect private and public capital to projects that are actually sustainable and in turn help the transition to climate neutrality and prohibit ‘greenwashing’, i.e. the practice of marketing financial products as ‘green’ or ‘sustainable’ when actually they do not meet basic environmental standards.

Moreover, it will be made mandatory for companies and financial institutions to provide full disclosure on their climate and environmental impact to clearly lay out how their portfolio stands with regards to the set taxonomy criteria. This is expected to not only increase the transparency of the financial markets but also steer more private investments towards financing an economy that is aligned towards a green transition.

 

The Taxonomy Criteria

The EU Commission set out a basic framework to define what can be termed as a sustainable economic activity. It sets out six environmental objectives and four requirements that need to be complied with in order to make it to the green list.

Six objectives are as follows:

1.       Climate change mitigation

2.       Climate change adaptation

3.       Sustainable use and protection of water and marine resources

4.       Transition to a circular economy

5.       Pollution prevention and control

6.       Protection and restoration of biodiversity and ecosystems

 

Four requirements that need to be met to qualify are as follows:

1.       Must provide a substantial contribution to at least one of the six environmental objectives

2.       Must not provide ‘any significant harm’ to any of the other environmental objectives

3.       Must have compliance with robust and science-based technical screening criteria

4.       Must have compliance with minimum social and governance safeguards

While this provides a general framework, detailed rules and thresholds along with a list of sustainable economic activities will be assessed and developed based on recommendations from a ‘Technical Expert Group on Sustainable Finance’, which is advising the European Commission on this matter.

 EOS Perspective

The Green Deal makes EU the world’s largest economic bloc to adopt such ambitious measures that aim to cease or offset all emissions created by them by mid-century. As per climate scientists, this is necessary to ensure that global temperatures do not rise by more than 1.5-2˚C above the 1990 levels.

While these goals sound promising, they are rarely achieved because they are usually not binding. However, in this case the commission announced that the net-zero emission target would be made legally binding. While that does make achieving the Green Deal objectives more promising, many experts still remain skeptical about the bloc’s capability to achieve it. This is given the fact that the EU has failed to meet 29 (out of 35) environmental and climate targets for 2020. These include energy savings, air, water, and soil pollution, etc.

Moreover, the plan can only be achieved if the EU Council, Commission, and the Parliament, come together and work in tandem and in a timely manner and also work individually with member states to ensure guidelines are converted into actions. For instance, currently CO2 are taxed at different levels across member states (EUR 112 (US$123) per ton in Sweden, EUR 45 (US$50) per ton in France and tax-exempt in Germany). To get all member states to agree at a common point and have a pan-EU strategy is a difficult task. Thus, while the EU has devised an all-encompassing strategy and dedicated significant funds to the same, results will only materialize if there is inclusive and credible implementation of the plans.

In addition to this, there is also some criticism of the policy at a global level, with some nations indicating that it has more to do with protectionism rather than climate goals, owing to its policy on border adjustment carbon tax. Since the EU has more measures and flexibility to cut emissions in its own region, it creates an unfair disadvantage for its trade partners (some of who are still in the developing stage and cannot afford such measures). Moreover, given the technical and political complexities of the carbon tax (with regards to WTO and other trade treaties), it is unlikely that it will be implemented before 2024, which is when the current President Ursula von der Leyen’s term gets over. This will further make its implementation dicey.

However, all being said, the EU Green Deal is a policy in the right direction. With the blueprints being laid down, now it all depends on the implementation. While few measures may be difficult to achieve, there is a lot of unanimous backing for green finance. An increasing number of investors is moving away from ‘brown’ assets towards climate-friendly investments. Irrespective of the outcome or success of the Green Deal, green investments are definitely the future. Thus companies, both within the EU as well as globally, must look at innovating their processes as well as products/services to align them with climate goals to lure both public and private funding in the long run.

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Is Sustainability Just Another Buzzword in Food Packaging Industry?

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Sustainable food packaging has recently received an increased attention within the food & beverage sector. Most players try to make sure not to miss any chance of communicating their concern over plastic waste to the general public, showcasing their initiatives taken to curb the waste. Are such initiatives taken out of actual concern or are they just a move to position the brands right in the ‘environmentally-concerned’ market?

It is assumed that packaging is considered sustainable, if it meets three criteria of sustainability. First, it should be economically viable for the consumers as well as the manufacturers. Second, it should be socially acceptable in terms of ease of use, transporting, sorting, and storing. Most importantly, third, the packaging must be eco-friendly through the use of materials that are responsibly-sourced and reusable/recyclable, to reduce the environmental impact of the packaging.

Change fueled by multiple triggers                 

Food and beverage (F&B) and related packaging industry players have been under a growing pressure to be more transparent and to introduce changes to the way food products are packaged. Considering that a significant share of non-sustainable, non-biodegradable waste, especially plastic, comes from food industry, improving the packaging and transitioning to more eco-friendly solutions is becoming imperative, rather than optional, for increasing number of F&B companies.

At the same time, the pressure to reduce waste and protect the environment from non-biodegradable substances is creating new opportunities for the packaging materials producers and for F&B companies with regards to more relevant brand positioning in this highly competitive industry.

While a lot has been changing in the packaging sphere under the heat from environmentalists and legal requirements introduced by regulators, the role of an aware consumer exerting pressure through product scrutiny and shopping choices should not be underestimated in this process.

According to a report published in April 2019 by Globalwebindex, a market research company, there has been a rise in the number of consumers globally who are willing to pay more for eco-friendly/sustainable products (including their packaging), from 49% in 2011 to 57% in 2018. Consumer awareness is growing fast thanks to governments’ initiatives, educational media, and activists’ social media efforts, all of which have triggered an increased sense of responsibility amongst many consumers, who start to understand the importance of switching to eco-friendly and sustainable packaging.

Increasingly, consumer awareness is going beyond just passive understanding and translates into actions which have a real power to change F&B sector’s approach to food packaging. Consumers vote with their spending dollars and exert pressure by switching their loyalty to other brands, both of which approaches appear to be quite effective. According to the same survey by Globalwebindex, 61% of consumers are likely to switch from their currently-used brands to more environmentally-friendly ones if the latter score better on the environmental friendliness front. This shows that F&B companies really do need to re-think their product and packaging choices and start putting money and effort in sustainable solutions, if not from real concern over the environment, then for retaining consumer trust and maintaining brand values.

Big F&B brands appear to show initiative

The increased scrutiny over F&B companies’ packaging choices has already started bringing some results. Several major players are looking to invest in transforming their packaging materials to sustainable ones. Despite the challenges in bringing innovations into packaging materials and designs, and altering their supply chain, several F&B players are claiming to strive for their sustainability goals. Some claims may surely be genuine but some could possibly be a strategy to get the ‘sustainable company’ tag to stand out from the competition in the F&B industry.

Understandably, players are very vocal about their initiatives targeted at improving their eco-friendly standing to appeal to the environmentally-concerned consumers. F&B brands such as Coca-Cola, PepsiCo, Unilever, Nestle, to name a few, have already announced time-bound plans to revolutionize their packaging models.

For example, in January 2018, the beverage giant Coca-Cola announced a goal to collect and recycle the equivalent of every bottle it sells globally by 2030. The company with its bottling partners started an initiative with a plan called “World Without Waste” that is focused on entire packaging cycle from designing and manufacturing of bottles to their recycling. For the execution of this plan, the company plans to educate the public on what, how, and where to recycle, teaming up with local communities, NGOs, industry peers, and consumers. Furthermore, under the plan of “World Without Waste”, the company aspires to create packaging from at least 50% recycled materials by 2030 and continue pursuing the goal to make all consumer packaging 100% recyclable by 2025.

Is Sustainability Just Another Buzzword in Food Packaging Industry? by EOS Intelligence

In addition to this, in October 2019, Coca-Cola European Partners (CCEP), the largest independent Coca-Cola bottler, announced it would switch the carriers on its multipacks from shrink wrap to paperboard to reduce packaging waste. The company claims that with this switch it will remove about 4,000 metric tons of single-use plastic per year from its current supply chain. The paperboard packaging is planned to be certified from either the Forest Stewardship Council (FSC) or the Program for the Endorsement of Forest Certification (PEFC). Similarly, in January 2019, Coca-Cola packaging partner, Coca-Cola Amatil Australia, announced to cease the distribution of single-use plastic straws and stirrers, and distribute biodegradable Forest Stewardship Council accredited recyclable paper straws.

According to a report by Packaging Gateway, Coca-Cola claims to have made 88% of the consumer packaging recyclable, while its packaging used 30% of recycled material by the end of 2018. Also, about 58% of the equivalent of bottles and cans introduced by the company into the developed markets were refilled, collected, or recycled during 2018. Overall, the company’s recover and recycle rate was said to be 56% in 2018 as compared to 59% during 2017 or 61% in 2014. This proves that with growing sales, Coca-Cola’s efforts might not make as much impact as the company would want the public to think.

Nevertheless, the company is undertaking further initiatives to improve its environmental score. It committed to invest US$15 million in Circulate Capital, an investment management firm dedicated to incubating and financing companies and infrastructure that work upon curbing the plastic waste thrown into the oceans. Further plans of the company include increasing the use of recycled plastic in Australia by 2020.

In another example, PepsiCo also talks about becoming an environment-friendly company, announcing to use 25% of recycled content in its plastic packaging by 2025. In order to meet its target, in September 2018, the company announced its participation in the World Economic Forum’s Global Plastic Action Partnership (GPAP). The partnership focuses on stakeholders located in coastal economies, such as those in Southeast Asia, and its purpose is to help businesses, communities, and local governments redesign waste management to create circular models that include collecting waste and recycling or composting it to reduce waste streams to the oceans or landfills.

PepsiCo also announced other targets for improved sustainability to be achieved by 2025. These include to re-design all of its packaging to be recyclable, compostable, or biodegradable, to reduce virgin plastic content by 35% across its beverage portfolio, and to amp up investment to increase recycling rates in key markets.

Apart from individual targets, another initiative was also launched in October 2019 jointly by a few beverage players. As reported by a publishing firm, William Reed, three beverage companies, Coca-Cola, PepsiCo, and Keurig Dr Pepper, announced their partnership with World Wildlife Fund, The Recycling Partnership, and Closed Loop Partners under the “Every Bottle Back” initiative. This initiative, starting in late 2020, will include investment of US$100 million and will focus on sorting, processing, and collecting discarded plastic bottles in four US regions. The initiative also targets to educate consumers that PET bottles are 100% recyclable, easily remade into new plastic, bottles, shirts, shoes, coats, park benches, and playground equipment, by introducing pack label messaging.

Smaller players are emerging with packaging innovations

The pressure to embrace sustainable packaging is even greater for smaller and mid-size F&B companies, if they want to stay relevant to the customers, grasp their attention, and grow own market share. Smaller players in the industry seem to understand this and have proven to be more agile in introducing new products that focus on organic ingredients with sustainable packaging, while challenging big brands’ prices.

For example, in March 2016, Alter Eco Foods, a San Francisco-based chocolate-centric, healthy indulgence, and sustainability-oriented food brand, launched the first stand-up pouch made from renewable plant-based materials, designed for storing quinoa grain. This innovative pouch named “Gone 4 Good”, is not meant to be recycled but to be thrown in a composting bin where it will disintegrate within three to six months. Made from eucalyptus and breech trees for the exterior and compostable resin called “Matter-Bi” for the interior, the pouch has several green certifications. Apart from this, in early 2019, the company also transitioned its chocolate truffles packaging from non-recyclable plastic pouch to a recyclable paper box and claims to be looking for solutions to replace its current plastic Coconut Cluster pouch, since it is yet not recyclable or compostable. The company is determined to make all its products packed in 100% recyclable or compostable packaging by December 2020.

Another player, B.O.S.S. Food, a Texas-based nutrition bar company, started selling its premium nutrition bars in compostable wrappers made by TIPA (an Israel-based compostable packaging company) in 2017, focusing on ensuring the products’ packaging is environmentally safe. TIPA’s packaging is a bio-based blend with all the properties of normal plastic but is certified for both home and industrial composting through OK Compost mark by the TUV institute. The packaging also complies with food contact regulations in Europe and the USA.

Similarly, a UK-based beverage company named Earlybirds launched a 100% plant-based packaging for its breakfast drinks – bottles and lids made from sustainable sugarcane, over the span of two months of September and October 2019. The launch made the packaging 100% compostable as per EU biodegradability standards. The company’s advertisements claim that, under the right conditions, the bottle will breakdown in twelve weeks and it can be thrown in food waste bin and then composted at an industrial composter, reducing it back to soil. The company is the first in the UK to launch sustainable packaging for beverages.

These are just a few of several smaller F&B companies, which are focusing on bringing new packaging solutions to improve their rating as environment-friendly companies in the eyes of consumers. The initiatives are worth the effort, even though players face quite a few challenges in embracing sustainable packaging over traditional packaging.

Such challenges include higher costs, choosing the right material for packaging that must comply with the standards of environmental safety, as well sustaining the quality of the food product. It is estimated that the companies are required to spend nearly 25% more on the sustainable packaging than on the traditional packaging. This higher cost is attributed to major shifts in supply chain, including (but not limited to) procuring the raw material for packaging to collecting the used packaging for recycling. Another major factor contributing to higher costs of sustainable packaging is the R&D expenses that must be borne by the companies. The solutions still require a lot of research, as there are still very few commonly-used technologies and packaging products, thus a lot of players need to invent them. The companies need to invest considerable sums in developing an environment-friendly packaging material that is viable for their food product to sustain throughout the supply chain as well as shelf life, and (equally importantly) has the aesthetic appeal to grab the consumer’s attention.

But despite being smaller in size and having to deal with challenges, companies such as Alter Eco, B.O.S.S. Food, or Earlybirds have been investing extensively in R&D, a fact that resulted in several of them coming out with better and innovative packaging solutions. In fact, at times, smaller scale of operations works to these players’ advantage, as they do not have the constraint of having to convert the existing large-scale traditional packaging lines to ones suited to deliver new format or feature of packaging. Therefore, many efforts undertaken by smaller players seem to be converted into tangible solutions and launched more quickly and easily, also giving the companies a great marketing advantage over large F&B brands.

EOS Perspective

With the rise in awareness about plastic waste and environment safety among consumers, along with regulations formulated by governments across many countries to curb plastic waste, it has become paramount for F&B companies to enter the path of sustainability. At the same time, sustainability is becoming an important element of many companies’ marketing strategy to get ahead of the competition (or, increasingly, not to stay behind other players). The latter reason alone makes it no longer a matter of choice for F&B companies whether to keep assuring the public about efforts undertaken towards improving own sustainability rating across the supply chain.

Certainly, it is doubtful whether all these F&B companies are capable of actually achieving the claimed sustainability. On the one hand, there is a doubt if the scale of their efforts is relevant enough to bring about an actual change and not remain just a PR tool. On the other hand, the doubts seem to be really justified considering the challenges associated with achieving true sustainability goals.

The challenges range across many aspects. These include the complexity of the required changes in the supply chain, which involve both radical and incremental change, from manufacturers to users, owing to alterations in packaging materials and designs.

Another major challenge is the higher cost associated with changing the packaging materials from plastics to renewable or compostable materials. This starts with the development of the right product’s packaging material to ensure stable and long shelf life, and safe transportation with minimal waste, all of which is particularly challenging when dealing with food products. The costs and complexity of the task is further increased by the responsibility of creating an infrastructure for recycling of the packaging materials and taking the onus of collecting and recycling the packaging of own products, if not directly then through well-planned network of third-party entities.

Considering the complexity of these challenges and the high cost of going up the sustainability ladder, many F&B companies are likely to not be able (or to not want to) work towards full sustainability across their supply chain. In the midst of the growing pressure to meet the sustainability criterion, it is possible that some of the players might quietly opt for less sustainable solutions or stick to only those changes that are most visible to the consumer’s eye.

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Luxury Brands Become Collateral Damage of Hong Kong-China Conflict

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Talk to any top executive at Gucci, Prada, Tiffany (or any luxury brand for that matter) and they will tell you the importance of Hong Kong as a market in their business. For years, Hong Kong has ranked among the top five luxury hubs and accounted for about 5-10% of the estimated US$285 billion luxury goods market. However, the recent pro-democratic protests in Hong Kong against China have left luxury brands grappling, with many undergoing store closures. With the situation seeming to worsen by the minute, luxury brands must act fast and with prudence to limit their losses, formulate strategies, and identify other regions that may help them offset loss of revenues from Hong Kong.

Hong Kong has been one of the top destinations for luxury brands with several leading brands operating multiple stores in this small area encompassing 427 square miles and housing a population of 7.5 million. Hong Kong achieved this cult status due to a large number of visitors from mainland China (as well as other Asian countries) who travel to Hong Kong to shop. This is due to Hong Kong’s tax-free policy and an assurance that the products purchased are genuine (unlike in China where stores are distrusted).

Most of the leading luxury retailers derive a significant portion of their sales from Hong Kong. Richemont Group (which owns brands such as Cartier, Chloe, Dunhill, Jaeger-LeCoultre, Montblanc, Panerai, Piaget, and Roger Dubuis, among many other) derives about 11% of its global sales from Hong Kong, while Burberry derives about 8-9% of its global sales from the territory. Brands such as LVMH and Prada attain about 6% of their global sales from Hong Kong. Despite having one of the highest real estate costs, brands have always been bullish about Hong Kong, opening multiple stores and stocking their best and most recent collections.

Recent protests impact luxury retail sales

However, since mid-2019, Hong Kong’s retail market has taken a big hit. What started as a protest over an extradition law has translated into a full-fledged pro-democracy movement challenging China’s grip over Hong Kong and has brought the latter to a standstill.

Along with a large fall in visitors from China, several other countries have issued travel warnings against Hong Kong. Visitor numbers declined by 39% in August 2019 (compared with August 2018), with visitors from China falling more than 42% during the same period. In addition to fewer tourists, the local population is also avoiding malls and other public places owing to the ongoing protects. In fact, about 30 shopping malls shut down across Hong Kong in October due to violent protests. These closures have come around the peak festive time (the Golden Week holiday) and have continued to remain closed during the otherwise well-performing Thanksgiving week.

This has converted one of retail’s best performing markets into one of the poorest. Brands such as Burberry, Hermes, Prada, and Tiffany have been forced to shut down few of their stores in Hong Kong. The sales of premium goods, such as jewelry, watches, and other high-value items plunged by nearly 50% in August 2019, when compared year-on-year.

This has converted one of retail’s best performing markets into one of the poorest. Brands such as Burberry, Hermes, Prada, and Tiffany have been forced to shut down few of their stores in Hong Kong. The sales of premium goods, such as jewelry, watches, and other high-value items plunged by nearly 50% in August 2019, when compared year-on-year.

Brands are estimated to suffer a 30-60% quarterly drop in sales in Q3 2019 and considering how the protests are widening and worsening, the sales are expected to drop further in Q4. For instance, as per UK-based financial services firm, Jefferies, Burberry’s sales from Hong Kong are expected to fall by about GBP100 million (US$131.6 million) in 2019. While the brand is expected to offset half of the loss from growing sales in other regions, the remaining loss will be incurred by the luxury retailer.

Given the steep fall in sales and high real estate cost, brands are now revaluating their presence in Hong Kong. In October 2019, Prada announced its plan to shut down one of its flagship stores in Causeway Bay. The company used to pay HK$9 million (US$1.2 million) monthly rent for the 15,000 square feet store and could not justify the high costs anymore. While a few brands are shutting down stores, few others, such as Burberry, are talking to their landlords about rent reduction to cope with the gloomy sales in the short run.

The impact on luxury sales may not be just short term in Hong Kong. Several brands are re-strategizing their approach towards Hong Kong, especially with regards to the Chinese customer. Chinese customers are increasingly going for shopping trips to Japan and South Korea instead of Hong Kong.

Moreover, the Chinese government is also encouraging customers to shop in mainland China by reducing taxes and thereby narrowing the price gap between China and overseas. In 2018, the Chinese government reduced import taxes on luxury goods and followed it with a cut in value-added tax in April 2019. Post this, several brands such as Gucci and Hermes reduced their prices by about 3% in China. This might show that several brands are trying to offset their losses in Hong Kong by targeting the Chinese consumer in their home country.

Brands are also shifting their marketing investments from Hong Kong towards the mainland. Hermes and LV have been extremely bullish about the Chinese market and have opened new stores in the region. Hermes opened its 26th store in China in 2019 and has been expanding its e-commerce presence in China since launching it in 2018.

Luxury Brands Become Collateral Damage of Hong Kong-China Conflict by EOS Intelligence

Brands are extra careful about their design and communication

In addition to focusing on reaching the Chinese customers (in their home market as well as new travel destinations), brands are also being extra cautious about not supporting Hong Kong in the conflict. China has been prompt at bringing brands to task if and when they identified Hong Kong as an independent country in any of their designs or brand communication.

Brands such as Givenchy, LVMH, Versace, and Coach have publically apologized to the Chinese nationals for their clothing designs that labeled Hong Kong as a separate country (from China). Moreover, they removed all such designs from their collections, globally, to ensure they remain in good books of the Chinese customers.

The Chinese have also been very sensitive about any support or sympathy shown to Hong Kong with regards to the conflict. For instance, Tiffany received significant backlash for one of its print ads, which showed a female model covering her right eye with her hand. The Chinese saw this as a sympathetic shout out to the Hong Kong protester who was shot in the eye in August 2019. While Tiffany clarified that the campaign was not a political statement and was conceptualized and shot much before the incident, they eventually removed the image from all digital and social media platforms.

Although not directly related to luxury brands, in October 2019, the Chinese government sanctioned the NBA for a pro-Hong Kong tweet by Daryl Morey, who is the GM of Houston Rockets team. The NBA and Tiffany cases show China’s lack of tolerance towards any pro-Hong Kong message by any brand or organization and thereby brands must ensure that they distance themselves from any pro-Hong Kong sentiment (real or perceived).

Thus it is quite possible that Hong Kong market may lose its luster for luxury goods for good, especially if the Chinese customers stray elsewhere for their shopping. In that case Hong Kong market will only remain relevant for its own residents, which may not justify more than 2-3 stores for a brand in the city.

Thus it is quite possible that Hong Kong market may lose its luster for luxury goods for good, especially if the Chinese customers stray elsewhere for their shopping. In that case Hong Kong market will only remain relevant for its own residents, which may not justify more than 2-3 stores for a brand in the city.

Most brands are currently following a wait and watch strategy, where they are not sending large amounts of their inventory to Hong Kong as has always been the case. They have temporarily shut down shops and given unpaid leaves to their employees. They will wait and gauge if the Chinese consumers do return to Hong Kong when the situation settles and decide the future course accordingly. In case the Chinese customer takes a fancy to other shopping destinations (such as Japan) or start shopping domestically, Hong Kong may lose its position as the luxury hub of Asia.

Opportunities that may arise

In case the Hong Kong conflict has any permanent impact on luxury sales in the region, brands will have to go back to the drawing board to ensure a strong position in Asia. In addition to identifying and developing new shopping hubs for the Chinese customers, brands will also have to alter their strategy and approach to retain Hong Kong’s resident customers. Hong Kong’s resident customers are also avid shoppers but they are more price sensitive in comparison with their Chinese counterparts.

Targeting solely the local residents may also widen the scope of e-commerce in luxury retail sales. Unlike most other markets, e-commerce has not been a major driver of sales in Hong Kong. This is due to the fact that a large number of shoppers are travelers and therefore prefer to make their purchases from retail stores. Moreover, the presence of multiple stores within a small area further reduced the need for e-commerce.

However, if brands plan to reduce their footprint in Hong Kong (only to cater to local residents), they may look at shutting down few stores and promoting e-commerce sales. Hong Kong residents are also more likely to purchase from online multi-brand aggregators (such as Farfetch and Net-a-Porter) that offer deals and discounts. Thus working with such aggregators to promote their brands may also be a good avenue for luxury retailers.

A growing focus and investment towards developing the e-commerce part of the business may also result in growing demand and thereby investments in the mobile payment technologies (which are used for easy payments for purchases) in Hong Kong. While this technology never really took off in Hong Kong as it did in China, this may help in providing the push that it needed.

EOS Perspective

While it is yet to be determined if the ongoing conflict will have a permanent effect on Hong Kong’s position as a prime shopping destination, it is safe to say that the situation will remain unfavorable for the next few months. While some brands such as Prada are already shutting down stores permanently and limiting their exposure in Hong Kong, others such as Burberry are a little more optimistic and want to wait before taking any such decision. This is due to the fact that Hong Kong previously faced a similar situation in 2014, when the umbrella revolution disrupted sales. However, sales bounced back shortly after and Hong Kong continued to be one of the most important luxury markets.

That being said, current protests have become much more intense than anything Hong Kong has endured before and do hold the ability to permanently contract Hong Kong’s role as a leading travel and shopping destination. This may force brands to rethink their strategy for the region with increased focus on e-commerce. This in turn could create opportunities for Hong Kong’s e-commerce and its ancillary markets.

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