How big is the Strategic deficit of Australian FMCG retailers?

How big is the Strategic deficit of Australian FMCG retailers?

Strategic deficit is the amount of time, capability, commitment, and energy necessary to bridge the gap from where you may be right now, compared to the most advanced of your current and potential competitors.

A few weeks ago, if asked the question of Australian retailers, particularly the FMCG retail gorillas,  Woolworths and Coles, I would have said several years and more resources than they seem to be prepared to allocate, but more importantly, there is a complete shift in mindset that is required.

Now, if asked the same question, with the news last week of the $US13.8 billion purchase of Whole foods by Amazon, I would suggest the strategic deficit has just doubled, perhaps tripled overnight. Not only has the deficit blown out, but  the rate at which it is accumulating is accelerating given the huge $16 billion investment Amazon made in ‘Technology and Content’ in 2016, the horse has not just bolted, it is over the hill. Not all of that $16 billion will be directly impacting their ability to deliver groceries, but a fair chunk of it will be applicable, and the rest will be learning in other areas that they will be able to leverage over time.

Back in August 2013 when Jeff Bezos bought the Washington Post for $250 million cash, many were asking “What does he know about the newspaper business’?

The Post had been one of the icons of journalistic excellence, one of the true ‘newspapers’, but had crashed into successive losses in the face of digital disruption.

Bezos bought the Post, not for Amazon, but from his own funds, it is a personal investment, and therefore perhaps better even that Amazon itself as a signpost of his commitment and what may come elsewhere.

In this National Public Radio report on progress at the Post, there are some useful signposts that may be applicable to Amazons recent purchase of Whole Foods. However, it can be summarised into a few words:

Technology that makes the customer the absolute focus of every single decision and action is the essential foundation for success.

Now, many of the same people are asking ‘What does Amazon know about the fresh produce retail business?  My response is ‘Wait for the implementation of  Amazons brand of technology directed at the produce consumer, and we will find out”.  I would be pretty sure that Amazon has a range of pretty good ideas to be tested at Whole Foods, that will see the hurdles of home delivery of fresh and frozen food overcome.

I am sure Coles and Woollies will be watching, but so was the newspaper business watching technology eat its lunch for a decade before they had any idea of how to address the challenge, and even now, seem incapable of doing anything about it.

 

How will grocery retailers leverage algorithmic pricing? 

How will grocery retailers leverage algorithmic pricing? 

Economics 101 tells us that price is the point at which supply matches demand, a simple but infinitely variable graph. Throughout history, that equation has reflected the reality of a face to face negotiation, apart from the recent glitch created in the name of efficiency by mass retailing which fixes prices. We all know somewhere in our psyche that price is what someone is prepared to pay at a given point in time for an item.

Look at any housing auction in Sydney at the moment, all sorts of factors are at play that make an auction the best way to determine the ‘right price’ at which to strike a deal. The notion of a fixed price is almost dead in the face of this level of uncertainty about what people are prepared to pay. Uber has disrupted the taxi industry with the same idea. Couple of weeks ago, caught in the rain in mid-afternoon, Taxi’s were an extinct species, so I called up Uber, and needed a second mortgage to pay the Uber-Price, driven up by the time of day, and immediate demand generated by the fact that it was raining cats and dogs.

Price is far more than just  simple intersection on an economists graph.

Chain retailers have semi fixed prices. They have a shelf price, and a set of promotional and deal prices as wide as the imagination and pocket depth of their suppliers who fund the discounts. However, while they are variable, over the shorter time frames they are fixed at some level. This process of centralised control and a physical selling face enables the efficiency of mass merchandising to be leveraged, but loses the flexibility of being able to respond to individual demand at a particular moment in time. .

Imagine the chaos if each store manager could set his/her own prices, then negotiate at the checkout!

Category management evolved as a means to maximise the revenues and margins from a fixed retail space. It is a numbers driven game of great sophistication requiring deep pockets, analytical resources and scale to play effectively. It nevertheless relies on fixed prices, varied over a week or so, and across varieties, brands and shelf placement, but nevertheless, fixed.

On line retailers by contrast are able to vary prices not just day to day, but minute to minute, and increasingly person to person.  It is the digital equivalent to haggling, each party setting out to maximise the return they get from the transaction, by using the whole gamut of trading and negotiation tools.

Amazon is the master, their algorithmically driven pricing is hugely sensitive to hundreds, probably thousands of factors from the weather to your browsing and purchase history, and the time of day.

How would a bricks and mortar retailer combine the margin maximisation flexibility of algorithm driven pricing with the physical constraints of a retail space?

It is a logical question, one that has prompted a lot of thought by a lot of smart people, and mostly the answer is that you can’t.

However, do not tell Amazon who are always prepared, indeed, live by disruption. Their experiment in Seattle with Amazon Go may not succeed in the short term, but the logic of managing price by algorithm to maximise returns will not go away, and Amazon is a long view retailer, unencumbered by demanding quarterly driven stock markets. I do not think  this will be the end of the Australian retail duopoly any time soon, there is still plenty of areas for  them to continue to squeeze the lemon to make profits, but it is certainly a portent of things to come.

 

 

 

 

Where now for the two big supermarket retailers?

Where now for the two big supermarket retailers?

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.

 

 

Is ‘Proprietary Housebrand’ an oxymoron?

Is ‘Proprietary Housebrand’ an oxymoron?

Is this range of McWilliams wines a housebrand or not?

it is exclusive to Dan Murpy’s, so ‘yes’, but it is a proprietary brand, so ‘no’. At the very least, the trading terms conversations would have been interesting.

It is also claimed to be an ‘Innovation’ which redefines my understanding of what that word means. Housebrands do not innovate, they copy, some may say act as a parasite on the innovation activities of proprietary brands.  Product innovation is one of the two key competitive options (the other being the opportunity to now connect with their consumers digitally) available to FMCG suppliers by which they can differentiate their products from their housebrand competition. Supermarket chains have done well squeezing costs out of their supply chains with process innovation, usually to the cost of their suppliers, incapable to this point to be effective with product innovation.

Exclusivity has always been a demand of retailers, difficult in Australia with just the two of them having such overwhelming dominance, but in unbranded categories like produce, they have successfully developed strongly preferential supply arrangements. But wine? one of the most brand sensitive categories around?

From  Woolies owned Dan Murphy’s I got the above offer the other day for an exclusive to Dans branded McWilliams Bagtown range, from the Griffith area. All the hyperbolic language and story telling that goes with the wine category, but an exclusive range to Dans. it seems Woolies have started something I have not seen before in Australia that has the potential for wider use. For years in Hong Kong, you dealt with one or the other of the two major FMCG retailers, but not both. Problem here with that strategy is that there are only 24 million of us, and widely scattered so the twisted economics and trading term requirements surrounding proprietary branded retail chain distribution have simply not allowed a similar development here. Till now?

The McWilliams sales manager will be having an interesting conversation with the Liquorland buyer the next time he visits, although it is reasonable to expect he will get a phone call, and probably lose either some distribution or a promotional slot, or something that reflects that McWilliams have crossed a line, and Liquorland will not be left out.

As an aside, the Dan Murphy’s 90 point label badge borders on the dodgy. You can expect a 90 point wine (Silver medal) judged at one of the major shows to be pretty good, warranting a place in any cellar. The wine in this case might be OK, but it has not been judged by anyone outside Dans staff, and they are unlikely to tell the boss that his choice sucked. Griffith is not known for its cabernet, the climate is all wrong for the grape variety, and the few I have tried were well short of 90 points. Hopefully this one is an exception.

Are supermarket customers a means to an end, or the end?

Are supermarket customers a means to an end, or the end?

Woolworths has delivered in spades to shareholders in the last 20 years, but the rot had set in a decade ago.  The seeds of the rot were assisted in my view by a lack of credible competition, and management losing touch with the subtle changes happening in consumer attitudes and behaviour that added together began making a noticeable performance difference 5 or 6 of years ago.

Can it be reversed, we will know in another 3-5 years.

New CEO Brad Banducci appears to be making sweeping changes at Woolies, ditching his fancy CEO office for a workstation sends a string messages, stronger yet is the message to his troops that it is not just desired that they get into the stores, it is mandatory.

Getting the executive decision makers close to the retail action……..what a novel idea!

Former Executive chairman Paul Simons who pulled Woolies out of the gutter in the late 80’s after returning from a gig as MD of trail-blazer discounter Franklins, was famous for turning  up unannounced in stores, checking the minor details of the way the store was operating and presented to consumers, talking to floor staff, and espousing frugality as a great virtue. He must have been dismayed at the way Woolies followed Coles into an extravagant head office, seeing it as a sign of executives isolating themselves from the interaction with  customers in stores, where retail success is won or lost.

In the 80’s the Morrisons chain, then  concentrated in the North of England before they expanded south, was a leader in produce merchandise. Their stores were the best I had seen to that point anywhere in the world. In a store one  day near Leeds during a visit to the UK, complementing the manager on the display during a conversation where I was sucking his brains, he pointed to an elderly gent in a brown cargdigan carefully stacking apples on a shelf, ‘that is the reason’ he said, “Mr Morrison turns up in a different store every day, so everyone is on their best game‘. I introduced myself, complementing him on his stores, I recall he said ‘did  not matter what happened elsewhere, it was the little things in the stores that made the difference’.

I never forgot that conversation, it reminded me at the time of the words of Paul Simons, and of Reg Clairs the real architect of “Fresh Food people” who I came to know very well after he retired from Woolworths.

It seems Brad Banducci heard it also.

You would think Woolies would have learnt from their experiences, plenty of opportunity to so.

They took over Dick Smith, and stuffed it up by ‘corporatising’ and in the process removing the things that made it successful. They watched the challenges and mistakes of BBC hardware in the early days of big box hardware, as Bunnings set the pace, then a decade later deciding to take on Bunnings with an inferior customer offer from a position of significant financial, branding and logistical weakness. Meanwhile, they had made a great start with Thomas Dux modelling Harris Farm, but again throwing out the things that delivered the early success in favour of more of the same from Woolies head office, arriving at the current place where Dux is being closed down.

Mass market retailing is a schizophrenic occupation.

On one hand, it is the advantages of scale that that deliver profitability, but at the retail selling face it remains a highly personal business. Get the balance wrong in either direction, and the financial results will follow. Allowing the financials to drive decision making  inevitably results on the focus being taken off the customers, and they will react accordingly.

7 thoughts on FMCG brand building by small suppliers

7 thoughts on FMCG brand building by small suppliers

Competing in FMCG against the duopoly, rapidly becoming the ‘Triopoly’ as Aldi makes share inroads is not easy, never was. However, the optimist in me sees opportunities that few are leveraging, so set in ‘process concrete’ is the status quo.

The driver of the great change can be summed up in one word:

Digital.

It is the enabler of all the changes that are occurring before our eyes if we choose to see them, and the change has just started. Following is a list of the things I see evolving

Two way conversations with consumers.

Brands can now have a direct and two way dialogue with consumers. Digital technology is the enabler of a personalised dialogue across a variety of platforms and subjects. This new found ability has the promise of breaking the iron grip the retailers have over packaged goods sales. The flip side is that there are so many people and brands competing for the limited attention of consumers that it is increasingly hard to break through, and we marketers are kidding ourselves if we believe that consumers are as engaged, indeed, passionate about our brands as we are. The reality is FMCG brands are more a comfortable habit that removes another decision from our lives than something that consumers are waiting to hear from. Pewdiepie has well over 43.3 million Youtube subscribers, the largest number, and few over 35 have heard of them, a couple of blokes who make cheap satirical videos of gaming. Coca Cola, one of the leviathan of branded packaged goods, spends hundreds of $millions around the world on  digital content creation and distribution, has been one of the biggest brand advertisers for the last 50 years, and currently has (as of today April 15 2016) has 759,411 subscribers. If Coke cannot do it, why should you think you can? Are you the new Pewdiepie?

Engagement and awareness is earned.

In the ‘old days’ awareness was paid for by media advertising, the bloke with the fattest wallet won. Those days are well and truly over. As noted, Coke spends a fortune, but the level of engagement is not in the ballpark of someone who earns it by being relevant and interesting to a niche market, albeit now  being a niche that is more like a crevasse.

Availability of behavioural data.

Scan data that all grocery retailers now collect offers a huge depth and variety of data related to purchasing behaviour. Time of day, makeup of the basket, price sensitivity and elasticity,  competitive impacts, and much more. When combined with the loyalty card data giving demographic and individual behavioural data, this is a deep and rich marketing resource. Increasingly this data will be combined with so called ‘big data’ scraped’ from social platforms, and real time geo location data, we will be deluged with offers exquisitely tailored to us.

Consumer feedback feeds NPD & C.

Market research has always been a vital component of product development and commercialisation, irrespective if the development is an evolution of a pack design or a category creating innovation. The research was flimsy at best, and the investments needed to bring new products to market where the failure rate has always been closer to 99% than 90%, significant. That also has changed. We are now able to test new products in newly available digital channels and collect data almost in real time, using it to inform ongoing development.

Point of sale.

Point of sale has always been important. I am old enough to remember excitement around a sales meeting induced by a fancy new shelf wobbler! The opportunities at POS for things as diverse as MVS code driven interaction, interactive video, as well as the more usual promotional stunts are considerable.

Be a publisher.

The supermarket business  model is under considerable stress,  and the number of suppliers has become way smaller, and they seem to be starting to realise you cannot buy a brand, you have to earn it. In the old days, if you  had enough money, you could almost buy a brand, as there were just a few TV & radio stations, and a few newspapers and magazines, all owned by a few people. Nobody else had the means to communicate beyond one to one.

Then along came the big bad internet and blew it all away. Now anyone can publish, and if they are good enough, reach and interact with their consumers.

Focus on your strategy, not theirs.

If your strategy centres on building a brand, do not waste your time and resources working with a retailer that does not have proprietary branding as part of their strategy. A former client took on a contract to pack for Aldi. The margin was very slim, but the volumes significant , so the contract appeared to be a good way of covering overheads to enable brand building activity elsewhere. As it evolved, the management and operational demands of meeting the Aldi orders overwhelmed the operational capacity of my client, consuming all their resources, and preventing any of the proprietary development it was supposed to enable. This comment applies equally to the two gorillas as it does to Aldi. Allowing your strategic implementation to be driven by the volume power of a single or even small number of customers will have a sticky end.

The supermarkets have huge amounts of capital invested in their existing business model, physical assets, efficient supply chains, and high volumes delivering dollar margins. It has made them  really successful, so the tendency is naturally to do more of the same, just try and do it a bit better. Even Coles in its worst days before the Westfarmers purchase was doing OK by world retailing standards, and Woollies was killing it.

 

The world had changed, the retailer model has not changed as much.

Now supermarkets are open 7 days, often 24 hours, and with a bit of organisation  shopping is slowly evolving back into a partially social event, replacing the mass convenience. Just look at the number of farmers markets now open! Mass market is no longer the panacea of the masses, they want more. Value is  no longer measured purely by price and availability, the brand is about to make a comeback.

Never has the opportunity been greater for agile and committed medium sized businesses to engage with the group of potential customers who care about what they do, and build a brand that delivers longevity.