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:


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.

Is the supermarket model being disrupted, and nobody is noticing?

Is the supermarket model being disrupted, and nobody is noticing?

Business models are being disrupted all over the place.

The new centre of business models has become the customer, and the way they perceive and receive value. It was supposed to be this way in the pre-digital days, but really  was not, because the sellers held all the cards. Now however, the power has really reverted to where it should be, to those who drive the value chain by their purchase choices.

AirBnB has become the biggest single retailer of short term lodging on the planet, and they do not own a room, Uber is the biggest taxi service on the planet, and does not own a car, newspapers have been replaced as sources of news. There are many examples, and all are of business models that have arrived in the last few years with a common theme.

They have replaced the linear, sequential business models of the past, where there was always a choke point dependent on physical infrastructure that exerted control, with a model where the physical  infrastructure is simply a logistical resource to be deployed to deliver a service, the real product is information.

Information on availability, product provenance, performance, and many other factors of value to customers, including, you guessed it, price.

It is a two sided model, enabled by technology that is making the logistical control of the infrastructure redundant in the face of consumers having information at their fingertips. The competitive advantage has moved from the physical infrastructure to between the ears of employees and consumers equally.

Employees create and deliver the information that enables consumers to make decisions, which then dictate the physical logistics driven by those decisions.

Meanwhile,  the supermarket  retailer model has not changed  much.

They have huge amounts of capital invested in real estate and physical assets, 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.

They have chased, very successfully, productivity of  the assets, a financial measure of success not a sustainable measure of success with customers. As a result they are losing their customers to discounters, specialist retailers, and various direct models that offer an alternative value proposition.

It seems to me that Woolies have walked away from, or simply not understood this evolution of their business model.

Their Everyday rewards loyalty card was gathering momentum, building a picture of their customer base and their individual behaviour, critical information that would over time deliver a capacity to engage on a highly individualised basis. However, it was clearly costing a bit, so they took the short term route, and reduced the cost to them, and therefore value to their customers, gave it a new name and sat back thinking consumers would not notice.

They did, and nobody came.

Woolworths took a short term financial decision that has apparently bitten them in the bum. A bit like the ones they took that killed off Thomas Dux, and led them to misunderstand the market when they bet the back paddock on Masters. Pretty clearly someone in the top floor of the majestic head office out in the hills, can read a spreadsheet, but probably does not know what goes on inside customers heads when they are contemplating a purchase, and making a choice about the manner in which that purchase will be made.

Perhaps new CEO Brad Banducci will claw back some of the customer centric culture that gave Woolworths the wood on Coles for so long, but he better move quickly, as the momentum has shifted against them, and it will be hard to regain.


Where will the retail gorillas make profits tomorrow?

Where will the retail gorillas make profits tomorrow?

Coles and Woolies are locked in a battle for share of the customers wallets and throats that becomes more complicated every day.

The competitive landscape has changed. The old model of them against each other and independent wholesaler supplied groups, has been spiced up by Aldi, Cosco, and the tide of competitive business models evolving both in store formats such as the convenience small stores around commuter points, farmers markets, and digitally enabled sales.

Those sales I call ‘Beyond Checkout’ cover everything from online ordering with home delivery to the evolution of old fashioned drive thorough pickup.

In my view the battle is a losing one for the gorillas without significant change to their operational culture. Their current business models are based on mass merchandising, not easily made compatible with the personalised service delivery and the  lower volume specialised products now being sought. You need go no further than the disappearance of Thomas Dux for evidence.

Having said that, I see 5 general areas for operational innovation of both the gorillas that would deliver ongoing profits, and sensitise them to the changes happening beyond the walls of their stores.

  1. In store technology deployment.

Deploying some level of the data driven category management control to store level would greatly enhance assortment optimisation, out of stock reduction, and margin maximisation. The assumption of course is that there is staff in the stores with the nous to leverage the information  they are being given.

There is also the juicy thought that stores will be able to connect to consumers in close proximity to stores via their mobile devices geo location capability and make them offers based on their purchase patterns. Then there is the option of instore kiosks harnessing the value of instore video and personalised advertising and promotion, again catalysed by your mobile device.

  1. Leveraging existing asset

Reduction of maintenance and running costs with innovations like rooftop solar power, preventative maintenance programs, improved store security, and stores as the logistic base for home delivery. Home delivery will become more and more important to time constrained consumers, so developing a compelling offer should be high on their agendas. To date the penetration has been poor because the logistics, particularly for fresh and frozen product is really challenging.

  1. Employee productivity improvements.

With better staff training, particularly in produce, customer sensitive opening and closing times, cash register  speeds (the Aldi insistence on prominent bar codes by observation speeds up throughput significantly), much can be achieved. Self-serve checkouts currently rolling out with store renovation programs have clearly been a success with consumers, and offer significant productivity improvements.

  1. Value chain optimisation

The use of collaborative technology  that goes back into supplier production planning and collaborative volume management from the production line to the checkout has been around for years. However, there remains huge opportunities to extract benefits from inventory management for all in the value chain. The barrier is cultural, as the gorillas want all the benefit to come their way, removing the incentive for suppliers to take risks and innovate, except when under the whip.  Collaboration through the value chain can deliver great benefits when done well.

  1. The customer experience,

What is retail about, if not customer experience?

It is here that retailers can differentiate themselves in all sorts of ways.  What they cannot do is demand from head office that customers like them, and prefer their stores over the others. Store choice is a personal thing for consumers, made up of many elements, but creating a store environment where the employees are pleased and proud to be of service is a great start.

Long way to go there.

What the senior management can do is provide the infrastructure that enables that level of personalisation and service to be delivered in stores, and the leadership to create and encourage the customer centric culture that front line employees then deliver.

And a final thought: Is that the light at the end, or a headlight?

E-tailing is a huge threat to the gorillas, and while it involves capital to develop and deploy the technology, it is essentially an individual engagement and transaction. Online gets all the publicity, but still only accounts for around 6% (depending on whose numbers, and which categories you look at) of sales. The gorillas should see E-tailing as their next opportunity area, to be embraced rather than feared.

Remember what happened to the Blockbuster video business? They had the game by the throat, Netflix was just an irritation in the corner, so they ignored them.

Bamm! Blockbuster is gone.

While it is still pretty hard to stream a family roast dinner, the lesson of Blockbuster should not go unheeded by Coles and Woolies.