What a fascinating time to be an observer of FMCG.
The speed of strategic evolution is ramping up, and the risks to the investors in the two retail gorillas must be increasing as a result.
15 years ago FMCG retailing in Australia was a two horse race. Coles or Woolies, there seemed to be no other options. While there were other options, independent retailers of varying types, particularly in SA and WA, their profile and strategic relevance was generally lower than a dwarf in a game of basketball. They could be annoying, and occasionally useful, but would never change the outcome of a game.
The net result is that Coles and Woolies concentrated on their short term game, with Woolies winning hands down in the shareholder returns stakes until recently. However, in the process, they lost sight of those who made a difference to their strategic numbers as distinct from their immediate financial ones: Customers.
They used their power to belt suppliers, and ignore customers beyond the land grab to put stores in every place where more than a footy team could congregate.
They ignored the opportunity to innovate beyond optimising what was already there, in other words they ensured innovation could not happen, or at least, ensure they carried absolutely no risk in the process.
The world has evolved since then, and panic has set in.
Woolworths botched Hardware in spades, demonstrating an astonishing lack of strategic insight, closed down Thomas Dux after strategically emasculating it just as it was gaining traction, is closing the Metro stores, and now it has been reported over the weekend, that they are considering selling the petrol retailing business. All that and declaring a $1.2 Billion loss for the 2015-6 year.
Meanwhile Coles has renewed itself, and announced a $1.86 billion profit for the year amongst some large write-downs in other parts of the Westfarmers group, particularly worryingly, Target.
Relative newcomer Aldi has upset the comfortable duopoly by grabbing market share and shopper penetration at a rapid and continuing rate. On top of all that you have alternative and web enabled retailers taking an increasing share of mind and attention that will over time convert to sales share. 15 years ago you could not find a Farmers Market, now they seem to be everywhere, and doing great business, and the net retailers seem to be able to actually deliver, sometimes.
For Woolies and Coles to fight each other, and invader Aldi on price makes no sense at all. The logical outcome of a battle on price is that Aldi will win simply because their business model is aligned to accommodate low margins and the gorillas are not, but if they do win that race to the bottom, the real risk is that they will go broke in the process.
No joy there.
So Woolies and Coles are left with where supermarkets started back in the thirties, delivering value to customers.
What an interesting notion for the gorillas, to be competing on the basis of the total value they deliver to customers, not just on price. They might even have to collaborate in a meaningful way with suppliers, invoking Joy’s Law, named after Sun Microsystems co-founder Bill Joy who noted ‘No matter who you are, most of the smartest people work for someone else’.
Clearly, very few of the smartest people work for the gorillas, although there are some more left in their supplier base. However, those suppliers of any real scale who remain locally owned could together just about fill a phone box.
There is plenty of room in the demand chain left for innovation. The first step is to recognise the necessary change from a retail optimised supply chain that implies screwing suppliers for margin in any way you can dream up, while maximising margins at the checkout, to one that puts the consumer front and centre.
A demand chain.
This change requires recognition that the consumer has a reasonably certain amount of money to spend on groceries and household supplies, and will allocate those dollars in the ways that best suits them and their circumstances. Economists will call this phenomenon ‘Customer demand”. The name of the game then is to share out those consumer dollars in the best way that serves the whole supply chain based on that actual and latent demand.
Plenty of room for collaboration through the chain, enabling innovation and sustainable profitability. You just have to see the competitive game completely differently. I wonder if the gorillas are capable of that sort of strategic renewal or if I should sell my (very few) shares ASAP.