3 foundations that will enable Amazon to disrupt supermarkets.

3 foundations that will enable Amazon to disrupt supermarkets.

Shopping is a physical and sensory experience, humans evolved doing some sort of physical ‘shopping’ even if for most of our history, the similarity of that activity to a trip to the supermarket has been fleeting. Much as we might hate the queues at the checkout, difficult parking, reducing range as the retail gorillas replace our habitual brands with their own house-branded, and increasingly ‘Bandit branded’  (retailer owned ‘brands’ masquerading as proprietary) Sku’s, there is still an emotional and social element to the experience.

It applies even more in more specialist retailers, the more specialist, the greater the degree of sensory engagement necessary.

This is all breaking down, and quickly, as even high fashion, and highly personalised fashion like Shoes Of Prey, which can designed and bought on line.

So what can we expect from Amazon that would justify $US13.6 billion for Whole Foods?

 Virtual supermarket.

Virtual and Augmented Reality is coming at us like a train. Just as shoes of Prey allows you to design your own shoes, Warby Parker  has become a billion dollar company in 6 years by helping you to choose your glasses on line,   Amazon (surprise surprise) is playing with Prime Wardrobe , and Ikea is experimenting with a virtual furniture app.  it seems a short step to using Virtual reality from your couch to ‘walk’ through, select, place and order and schedule delivery from a grocery ‘store’.

Almost a year ago my second son bought a VR set for a few hundred dollars, and when I fiddled with it, thought I had seen the future of market research. Even so recently my imagination did not take me that next small step to an actual ordering and delivery management system, but why not?

Crowd sourced logistics.

The biggest stumbling block to digital grocery growth has been the logistics, both timing and cost. Fresh and frozen produce where timing and cold chain integrity is paramount, requires a different set of logistic standards to shelf stable commodity categories. Shoppers are very price sensitive across homogenised commodity categories of temperature agnostic products, and it does not matter much if they remain on the front step for a while, diametrically opposed on both counts to produce.

Timing of delivery has been particularly problematic in multiple income homes, and building delivery certainty creates considerable cost.

Both have been solved by the sort of technology Uber uses. Pretty simple to have a crowd sourced delivery service where the vehicles just have a refrigerated unit in the boot hooked into a power source in the car, combined with the delivery scheduling Uber has amply demonstrated works.

 Payment security.

Payment security while it should be a problem, as the level of fraud increases rapidly in Australia, from 16.2cents/$1,000 in 2013 to 24.5 cents/$1,000 in 2015, (according to the Australian Payments Clearing association), it seems not to be for most of us. However, It will be very soon. Blockchain technology will remove much of the risk, and in the early stages of development, seems to be ‘fraud-proof’. Amazon has been experimenting extensively with Blockchain , collaborating with many large financial and digital innovators to better facilitate and secure web based financial transactions.

It seems to me that these are the three building blocks Amazon needs to make a huge dent in the traditional supermarket business, struggling to identify the sustainable sources of growth and profitability. Whole Foods is only the stalking horse, as there is a lot of expertise in procuring quality fresh produce in predictable volumes, and Whole Foods is already an expert in this. Amazon will add the Whole Foods expertise onto what they are doing already, and bingo, another disruption coming your way.

 

 

Amazon, Whole Foods and the future of supermarkets in Australia

Amazon, Whole Foods and the future of supermarkets in Australia

Amazon would not have paid $13.8 Billion for Whole foods without a plan. The purchase came as a surprise to most, but it should not have, they have been evolving into bricks and mortar for some time, with books, Amazon Go, The Washington Post,  and a few other dabbles.

Most commentators look at Amazon as a digital retailer, but when you think about it, they are not: they are a Platform that manages supply chains. Those supply chains just happen to end with consumers, rather than a B2B transaction.

Looking at the purchase of Whole Foods through the lens of a supermarket retailer will lead you to wrong conclusions, as you will be looking for the efficiencies that can be squeezed out of the existing model, with a few wrinkles added in.

Wrong lens, wrong model.

Amazon will reinvent the Whole Foods supply chains, and extend them straight to consumers, probably using Blockchain technology. Wal-mart is experimenting with Blockchain in their Pork and Mango supply chains, and I would be astonished if the work Amazon has been doing developing Blockchain technology in finance markets leveraging Amazon web services in collaboration with IBM was not applied very quickly to Whole Foods.

Amazons success (I predict) with Whole Foods  will be enabled by their efficient systems, great technology, engaged workforce and all the other stuff parroted around, but the real reason is far more strategic.

In the ‘old world,’  whether it referred to supermarkets, newspapers, personal transport, or accommodation, success came with the control of supply, which required capital to be in the game. In the digital world, success comes from the control of demand.

Amazon has demonstrated its mastery of demand management, and has demonstrated that this mastery can be leveraged backwards into the physical world, as they deliver a huge range of goods from their warehouses.

The mission statement on Amazons site states:  “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”  No mention I can see of digital, or technology, just customers!

By any measure, Bricks and mortar is on the slide, but on-line sales still amounts to a small proportion of retail. Just what the percentage is depends on whose numbers, and what they classify as retail, but it is less than 10%, 8.3% according to this study but will be more based on the huge number of filings for bankruptcy current in the US. According to this 2017 Nielsen study, online sales of FMCG accounts for 8% of dollars.

 

 

The split sales between on line and in store is very wide across different categories, but the growth of 80% in digital while off a modest base, is a statistic that should scare the pants off Coles, Woolworths, and other ‘traditional supermarkets around the world. Sainsburys in the UK has suffered in the share price stakes as their profitability has slipped, while they seem to have done a pretty good job with home delivery, and digital generally. Amazon could buy them from cash flow. Just a thought!

 

What will the digital/bricks & mortar split be in 20 years?

Will the current 90/10 reverse itself?

Perhaps not, but 50/50 would not seem to be outrageous when you think of the developments in Virtual reality emerging, where you will be able to visit your supermarket from the convenience of your couch at home.

The future is in personalisation, we all seem to accept that. However, the existing supermarket business model is intent on homogenising the experience in the pursuit of low costs.

Do you see a paradox emerging in this? Retailers are doing exactly what consumers do not want, at least outside commodity categories, as is evident in the foregoing graph.

I think  the era of big box retail is coming to an end, and in its place will be experiential retail. Alibaba, the Chinese version of the combination of Amazon and Ebay has stayed away from owning anything beyond the platform that enables connection and sales, but that is also changing. There are now 13 Hema supermarkets around Shanghai, delivering a step towards experiential retail, and using technology to drive then enable the transactions.

If I was running Coles, I would be experimenting with ‘MasterChef’  sections in some stores. Have a chef, cooking the fresh produce in  the stores, simple recipes that shoppers can see in use, and certainly purchase pre packed bundles that have all  the ingredients along with prep notes. Similarly in the Coles owned Bunnings I would have workshops teaching ‘do it yourselfers’ how to use the tools and materials, running classes that use them to make something. Customers  can then buy the tools, blueprints and product packs to make a work bench, toys for the kids, or whatever they wish. In Bunnings currently, if you want to be stocked, you need to have merchandisers that fill the shelves. The next logical stage is to have branded sub stores, where there is only branded product on sale, and with an ‘advisor’ paid by the supplier, on hand.

A shop within a shop if you like, which is not a new idea, department stores have had fashion brands running sections in their stores for years. Experiential retail.

The supermarkets are going in the opposite direction, commoditising everything in the name of efficiency.

The industry has consolidated and consolidated, fewer brands, retail options, and producers. Perhaps there is a tipping point, and we are just passing it.

The consumer is increasingly looking for natural, local, assured provenance, and  environmentally sustainable product, all mixed in with a new shape of ‘value’ less dominated by price than has been in the past. Communicating and delivering these attributes are the foundations of branding, and the delivery of ‘value’ to a purchaser.

Woolworths will live to regret the closure of Thomas Dux. It started so well. Their in store  ‘Foodies’ were a hit in the stores I visited, but the weight of the Woolworths machine drowned them. Bring it back I say, it may be your saviour, or try and buy Harris Farm again before Amazon come in and offer the Harris family enough to retire in gilded luxury to Monaco.

I like Ray Kurzweil’s observation that ‘The future comes very slowly, then all at once’.

This is classically the emergence of AI and combined with the Gartner Hype cycle makes a compelling case. Gartner’s 2016 Hype cycle has several technologies that relate to and are integral to the development of all the AI and VR stuff being hyped. Amazon has the grunt to bring all this to the table and disrupt the comfortable supermarket duopoly that exists in Australasia.

If nothing else, it will be fascinating to watch

 

Header photo credit: Eli Christman via Flikr.

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.