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.


Is Amazon about to hunt the Aussie retail gorillas?

Is Amazon about to hunt the Aussie retail gorillas?

Amazon has bought Whole Foods in a deal worth $13.7 Billion, around $18 billion Australian. The gorilla of the digital retail troupe has invested in an old fashioned, albeit trendy, bricks and mortar retailer.

This Whole Foods purchase makes it very clear that Amazon is setting out to be a significant player in grocery, and you would be brave to bet against Jeff Bezos.

In the US, listed retailers shares took a real dump, while here, Woollies and Coles shares dropped a bit on the announcement of the purchase, but seem to have largely recovered. Perhaps this is because share punters considered the considerable time frame of an impact by Amazon on the profitability of  Woollies and Coles, and the shorter term ‘Aldi effect’ is already priced in.

Amazon sells some grocery staples, and is experimenting with delivery options, including the Amazon Go store in Seattle, but this is a step further. What does this purchase gives them, beyond the small market share estimated at 1.7% ?

  • A footprint they would have found hard to replicate from scratch in a reasonable time,
  • A well known and liked brand that fits comfortably with the heavy users of their on-line services,
  • 20 years of experience in the creating of fresh supply chains from farm to the consumers plate.

I suspect this last one, not mentioned by the financial analysis that has happened in the last few days,  would have been a significant factor in the considerations. Being able to put Amazons tech capabilities alongside that experience could just be the game changer that grocery  home delivery  has been looking for.

Add this purchase to Amazon’s other activities and extensive list of experiments like Amazon Go, and you have the dynamic pricing capability of  Amazon being deployed into the centralised and rigid pricing system that drives the supermarket model.

Isn’t this what taxis used to look like?

In Australia Amazon are pretty well known to be recruiting, and they will not be doing that without some sort of  plan. Retail of any colour requires trade-offs between speed, variety, convenience and price. Home delivery has ‘taken off’ according to some pundits who have a horse in the race, but still has no more than 3 – 5% market share, depending on whose numbers you use. Whatever share it may be, it is heavily skewed towards shelf stable commodities.

These numbers do not seem to have dented the enthusiasm of Coles and Woolworths for store expansions. Their business model serves the last retail step better than  any home delivery has to date, albeit becoming a bit frayed at the edges. The combination of order size, delivery density, and labour and freight infrastructure costs has been toxic for home delivery to date.

Of particular concern to both sides of the equation are the perishable lines, fresh and frozen,  now a significant part of any households consumption. The cold chain requires very close management, and there is no room for error.   At some point I guess someone will ‘Uber’ it by enlisting the crowd in some way to pick up and deliver a packed order at a specific times for a small fee.

Perhaps history will repeat itself.

As a very small boy I remember Mum shopping at a small store in Avalon beach. There was one man in the shop who served from behind the counter, and pretty much knew what Mum bought, so assembled an order from memory as she walked into the store. These days the ranges of SKU’s has exploded, but that can be fixed with a data base on your phone and perhaps the supermarkets of the future will go the way of other capital intensive infrastructure and decentralise.

Amazon has picked on the retailer who does fresh best in the US. In Australia, there may be a couple of options for  them to do the same thing. I wonder if the Harris family is prepared to sell out this time?

Online also misses the impulse sale, the one made as you wait in the queue, although Amazon has a pretty good handle on the personal preferences of their customers. My wife of 35 years ‘never knows’ what to buy me for Xmas and birthdays, but Amazon sends me invitations to buy stuff several times a week, some of which I would genuinely like. The irony of that!

The challenge of traditional retail is the very high fixed costs involved. Retailers seek to convert as much of those fixed costs to variable ones so at least  they can match their costs to activity to some extent. They do this by casualising the workforce, and deploying technology. In contrast, the on line retailers have way lower fixed costs, but their variable costs in the order construction and delivery are much higher.

Even that may not be the major hurdle faced by the established retailers. That hurdle is the capacity Amazon brings to the table for innovation, at high speed. While Woolies and Coles are contemplating a new store layout to trial somewhere, Amazon has trialled, optimised and dumped or implemented several iterations of the best ideas they have at any one time.

Retailers seem to me to have thought that merging their legacy operations with some level of ‘digital transformation’ is something they can do over an extended period, with all the risk modelling that has evolved to supp0rt their existing business model. However, that assumption now seems to have gone out the window.

I do  not know the percentage of revenue that Coles or Woolies spends on anything genuinely new, but suspect it will go nowhere even in sight of the 11.8 % Amazon spends on ‘technology and content’ on their revenue of $135billion.  The major part of that massive amount will not be directed at FMCG, but the lessons will be directly applicable.

I may  not be around to see this all finally play out, but I know for sure that grocery retailing will  not look anything like it does now when my baby granddaughter is buying for her family.


How to wield Occam’s Razor to build robust strategy.

How to wield Occam’s Razor to build robust strategy.

In its simplest form, ‘Occums Razor‘ is code for seeking the simplest explanation possible that fits all the facts. In Einstein’s words: “Everything should be made as simple as possible, but not simpler

Development of Strategy is usually made overly complicated by all sorts of factors that should not really play a role, mostly to do with the status quo, sunk costs, emotional assessments of risk and reward, and the distortions our own psychology makes on what we see and understand.

Strategy is all about making choices about what you will do, and what you will not do, but it is not about the detail of how it will be done, and should always be based as far as possible on facts. Where facts are unavailable or ambiguous, as in new and fast developing markets, there is no substitute for experience and wisdom born of domain knowledge.

No strategy conversation should be immune to discussion of what others may do. You can choose what you do, but you cannot choose what others may do, independently, or perhaps as a result of what you do. This is game theory, and is important in developing your strategy, as no initiative is implemented in a vacuum. In its pure form, game theory is a mathematical set of relationships, used extensively in economic modelling, but in life responses are rarely just logical and predictable, which is why economic modelling is so often seen to be wide of the mark with the benefit of hindsight.

In building strategy, there is a third tool that is extremely useful, but most often ignored: Options theory. This emerged out of work done modelling financial markets, specifically derivative products  in an effort to price them to maximise returns, and is now standard practise. In its simplest form, it means that you never take an action until you absolutely have to in order to move to the next step. In the vernacular, it is ‘keeping your options open’ a term we would all have used extensively without necessarily thinking about the implications.

To avoid too much unproductive complication, you can ‘Occum’ scenarios that have elements of both game theory and options theory in your strategy deliberations.

How do you make this mumbo Jumbo work for you?

  • Use Occum’s razor to remove all the extraneous factors that are simply not significant to the outcomes. Break everything down into its simplest form. Einstein achieved this monumentally with E=MC2.
  • Consider the implications of game theory. ‘When we do this… they will do that’. A word of warning here, it is very easy to see this in a tactical manner, and that would be the wrong thing to do, as it will give you an incomplete big picture.
  • Apply Options theory to the steps you are modelling, considering the latest point at which you have to make a decision that determines the direction of later ones.

Do all three together in a collaborative and data rich series of conversations and you will emerge with a robust strategy, at least one that can be articulated simply, and implemented in logical sequence with known performance measures.


2017 Internet trends report by Mary Meeker at KPCB

2017 Internet trends report by Mary Meeker at KPCB

Since 2001 Kleiner Perkins Caulfield & Byers has released a report on the technical and behavioural trends driving the internet, compiled by Mary Meeker. It has become the bible of everyone associated in any way with the net as a generator of revenue and value.

The 2017 report was released at the annual Code conference on May 31.

The amount of work required to assemble this bible must be humongous, then it is given away as a contribution to the development of the industry where KPCP operates.

It is to my mind one of the greatest pieces of content marketing we will ever see.

Making any attempt to summarise the powerpoint summary of the report would be disingenuous, I recommend you flick through the slides, all 355 of them in the report and consider the implications for your business.



The most important lesson from writing 1,500 blog posts

The most important lesson from writing 1,500 blog posts

This is the 1,500th post on the StrategyAudit site, and the journey has been a surprising one.

I am  not a writer, I stumbled into blogging as a way to market my services as a consultant.

However, it has become way more than that.

Writing a blog, particularly when the commitment is 3 posts a week, is about self-discovery.

When I started I never realised how much I did not know, but was curious to find out.

Writing has humbled me, as I struggle to form views on topics, and then articulate them in ways that convey the meaning as I intend.

That sentence is full of traps, all of which I run into regularly.

It is also why some themes keep on cropping up, I see or hear something that adds to the understanding I have, it puts a different spin on something that leads to a different outcome in differing contexts, asks a question in a different way.

Writing also removes the requirement that people be mind-readers.

No longer do they have to interpret body language and gestures, or  read between the lines of a  mangled verbal explanation, and generally guess what it is I am getting at.

Writing forces improved communication, and clarity of thought and conclusion. It forces the distinction between correlation and causality, and demands a sufficiently deep analysis of problems to expose the root causes rather than just seeing the symptoms.

Writing also exposes mercilessly any failings of logic and common sense.

A gratifying number of people have read, commented and shared my various musings over the 1,500 posts, but the  one who has benefited most is me.

So, thank you for being a part of the process, and spending your valuable time engaging with me on the journey of discovery.

A particular thanks to those who have been my clients, as most of the writing has come from you in one way or another, combined with the collected wisdom now at our fingertips, should we take the time and make the effort to sort it all out from the self-interested crap and cat photos that infest the web.

Finally, at the core of why I do this is the basic observation that if I give you a widget, I do not  have it any more, but if I give you an idea, we both have it.

We have a way to go yet.


How many baristas do we need to drive growth?

How many baristas do we need to drive growth?

Coffee shops seem to be the harbinger of our growth patterns, they are popping up everywhere, staffed by baristas (has that become a profession?) with cutting edge hairstyles and tattoos. They all add to the GDP numbers in some tiny way, but are they all we need?

When you look at economic history, sustainable growth always comes from manufacturing, not services. Ok, some comes from agriculture, as we all need to eat, and I guess someone has to grow, transport and roast the coffee, but it pales into insignificance beside the society changing impacts of manufacturing.

When growth happens, it is as a result of manufacturing, and the changes that manufacturing drive.

Look at the culture changing manufacturing innovations of the past: The printing press,  steam engine, and the first wave of automation in the 70’s.

Now we are moving inexorably into the next wave, of  Virtual Reality, Machine learning, advanced robotics, additive manufacturing, and the changes will be profound.

In the past, we have always looked for productivity by building scale. In a manufacturing operation, the more you make of any one item, the longer the runs, the lower the marginal costs.

However, we are now approaching the point where we can create the next big change, shape the major technologies emerging.

Manufacturing robots that can be programmed to do the tasks that are not just the repetitive tasks they currently do, but the robots will start to learn, it is happening now

The next step is not just better smart products, but customised specialist products that combine the abilities of robots and additive manufacturing  to immediately create the products that you need.

The outcomes are that factories will move back closer to markets, they will be smaller more flexible and reduce the time frames of the chain, the products will be much cleaner and better for the environment, and will create growth in areas hard to imagine as I sit here in the middle of 2017

This does not happen by rote, we need to teach the new stuff at the universities and stop strangling TAFE, and importantly we need to teach these kids how to think critically and analytically so they have the intellectual tools to adapt, and we need to engage with the changes to ensure they are accommodated within our economies

The new manufacturing revolution will drive manufacturing and  consumption back to the smaller regions. China will become as expensive as Australia in 10 years, and the trade patterns will follow and I suspect  will accelerate regionally with lower barriers and shorter transit times,  rather than being international

We are reaching the point where increasingly challenging manual tasks can be taken by robots. This delivers a potentially huge productivity increase, but it also delivers one of the key questions of the 21st century: what happens to those displaced? Particularly skilled workers in their middle and later lives when retraining might sound nice, but has proven to be a mirage despite  the billions thrown at it.

However, there is a confluence of hardware and software happening at Moore’s law speed. The take-off will vary by sector and by economy, logically it will occur first in high cost developed nations and filter down

This will lead to a productivity surge, further reducing the disparity of costs between economies, leading to a change in the ‘offshoring’ that has occurred. It will no longer  be better to outsource  to China, outsource it to the bloke down the road, where when  necessary you can get our hands around his throat, and/or collaborate in a meaningful way that is very hard across borders, languages and cultures.

So how do you prepare for this?

Understand and be engaged with the developments occurring in your and adjacent domains globally. This is a big call, but putting aside some time for the reading and understanding of the relevant material by authorities and the those on the leading edge can make it a highly productive expenditure of that most valuable resource.

Normally I dislike the term benchmarking, as it leads to copying processes and programs that worked for others, but by the time you have implemented, usually less than 100% effectively, the trend setters have moved on so you are always playing catch up. However, in the case of keeping current, recognising the things the leaders are doing is pretty important, and modelling the best bits that suit  you can be very worthwhile.

Prepare your stakeholders, particularly the employees for the  changes to come. There  is nothing  so unsettling as uncertainty itself so my advice is to communicate extensively, encourage feedback and comment as well as input to the conversations.

Prepare the organisation for the changes that will evolve in the business models and supporting areas such as capital and human capability development.

As a final note, those that will survive do not have the luxury of time. The  average life of enterprises is shortening annually, it is really a commercial Darwinian process, and incumbents who are not willing or able to adapt quickly will go the way of ‘Lonesome George,’ the last of the Pinta island sub species of Galapagos turtles that dies almost on camera with David Attenborough.