The downside of FMCG retail scale.

The downside of FMCG retail scale.

Woolies and Coles have around 75% of FMCG sales in this country, depending on whose numbers you believe, and which categories are included.

They have huge scale, from the farm gate through the supply chain to the consumers wallets. As a result, their cost of capital is low, as lenders, both cash and equity see the risks as being low. When you add in their ‘trading terms’ as a component of  their cost of capital, as it should be, the numbers would look even better. Pay your suppliers in 90 days, having used your scale to reduce the price to subsistence levels or lower, minus  the deductions for whatever you can dream up, during which time,  the stock has turned over several times.


By contrast, the small suppliers, those few that are left,  are seen as poor risks, which in fact they are being an endangered species. Their costs of capital are high, as are their operating and working capital costs, which leaves little to nothing to be invested in the future of their businesses.

That is why they have mostly disappeared. Their management has been unable to balance the competing demands of low price and increasing operating costs, such that even large seemingly successful businesses became smaller unsuccessful ones to be sold off to whoever had the cash. Consider Goodman Fielder, SPC, Dairy Farmers, National  Foods, CSR, …… need I go on?

The long term problem that this trend delivers is that innovation, the creation of new value for customers, and the lifeblood of retailers comes from the edges, from outside the  status quo. It is usually those smaller, entrepreneurial businesses that get in there and have a go, take a risk, and survive on their vision, wits and determination, that deliver the category makers.

Pity they are almost all gone, and what we have left is a number of ‘traditional’ retailers seeking to optimise their existing operations, while having nothing to fight the well-funded disruptors coming to eat their lunch.

Woolworths emasculating and closing Thomas Dux is the classic case of corporate strategic blindness. Now they have backtracked with the very well thought out new Marrickville Metro store, which is not Woolworths, but the ghost of Thomas Dux back to haunt them. Meanwhile, Amazon is really innovating, taking their pilot Amazon Go store public a couple of weeks ago, in a move that goes well towards defining the store of the future.

The downside of scale is the conservatism and lack of real innovative and strategic vision that comes with a business intent on optimising the current model. If that worked, Olivetti would  still be a significant player in the document creation business, Kodak would still be creating memories,  and Microsoft would still be a near monopoly.

Header credit: apologies to Monty

How does the Amazon innovation formula keep replicating?

How does the Amazon innovation formula keep replicating?

Amazon is an astonishing company for a whole lot of reasons, but there is one that is not front and centre in most conversations I have seen and in which I have been involved. This is the means by which Amazon just keeps on innovating, genuine, disruptive innovations, time after time, at astonishingly small intervals.

Note: This link is to an expanded version of this infographic from


Amazon must have the internal processes that enable it to punch out new businesses, and business models that way a factory stamping machine pumps out widgets.

The biggest impediment to efficiency on a widget machine is the changeover times between widget sizes and internal specifications.

Quick changeover is a hallmark capability sought by manufacturing companies employing Lean thinking, and is a challenging proposition, even in a small, tightly run factory. So how does Amazon achieve it at scale in businesses as complex as it routinely disrupts.

Amazon started by flogging books, or as CEO Jeff Bezos  (apparently) liked to say in the early days, ‘we do not sell books, we make books easy to buy’

The hallmark of a successful lean implementation in a factory is that there are processes that take a prospective order through the whole ‘sales funnel’ to production, delivery, and ongoing relationship building. Lean practitioners call it the ‘Value Stream,’ the set of activities required to deliver value to the customer. These are all done the same way, every time.

The paradox is that this process stability is the foundation of innovation, you need a stable base in order to trial ideas at speed, then scale the ones that work. This is an idea sometimes hard to communicate but as fundamental as it gets to successful innovation and continuous improvement.

Amazon appears to have achieved this at scale, in a service business, typically harder than a manufacturing business to get traction.


Amazon is organised just like a whole collection of independent business units, all cross fertilising, and cross pollinating each other, using (I suspect) what Ray Dalio would term ‘Radical Transparency‘.

The secret seems twofold:

  • The internal technology that Amazon uses across all its activities, is modular and scaleable.  It is in effect the machine enabling the manufacturing of Amazon widgets. This enables new businesses to be added the way you would add another coloured widget to the sales inventory of a manufacturing business. I suspect the scalability will be the source of the next round of disruptions coming to the fast moving goods retailers.
  • Each part of the business multiplies the customer impact of the ones next door, a ‘flywheel’ effect. Digital technology enables the network or ‘Flywheel’ effect to build momentum. The more eyeballs you have on one side of the network equation, the greater the value to the other side. This effect builds scale very efficiently once you have reached a tipping point, reflecting Metcalf’s law which states that the value of a network increases with the number of nodes in the network.  Amazon has created their own version of Metcalfe’s law amongst their own offerings, one product or service leading to the one next door.

Bezos has achieved something that I think will be studied for decades, and it is clear he is not stopping any time soon. The only thing that appears likely to slow the momentum is regulatory intervention. Amazon has 44% of  on line retail sales in the US, 35% of global cloud services, a market growing at 40% a year,  where AWS is bigger than the next 5 biggest combined. The list goes on. The point is, Amazon is chewing up competition everywhere, yet pays very little tax, $1.4 billion since 2008, while Wal-Mart has paid $64 billion over the same period, so in effect, Wal-mart is subsidising its greatest threat to eat its lunch. Outcomes and numbers like that will have to prod regulators into some sort of action, before Amazon (and to be fair, Facebook and Google are very similar, even more dominating in their markets)  is in a position of power so dominant that regulators cannot stop them.

Amazon, a product of the 21st century is simply outrunning the capacity of the institutions and public mind set of the 20th century by reshaping our world around us, and with our consent by unthinking compliance. They are being joined in this exercise by Google, Facebook,  Alibaba Tencent, and a few other aspirants like Netfliks, to dominate the way we think, behave and work.

Header photo Jeff Bezos circa 1998

Your ‘enemy’ makes you stronger.

Your ‘enemy’ makes you stronger.

Strategy is as much about what you will not do as it is about what you will do, perhaps even more so, as it forces difficult choices.

Equally, the old marketing buzz-word ‘positioning’ which was defined in my university days 45 years ago as ‘how your customers see you’ benefits hugely from the addition of a clear statement of what you are not, what you will  not do, and even calling out the ‘enemy’.

When you define who is your enemy, those who feel the same way as you will find it very hard to do anything but support you, it rallies support to your cause.

This means that you can never create a product for everyone, the more defined you are the better, as you will then have more potential for rallying groups of those who are against what it is you are against.

Where would Mohamed Ali be without Joe Frazier?

Where would Apple be without Microsoft?

Would Neil Armstrong have taken a moon walk in 1969 without the Russians?

Mr. Churchill would have remained a backbencher without Herr  Hitler

Would Coles and Woolworths be the most successful FMCG retailers (as measured by domestic market share) in the world without each other?

In the back streets of Ashfield in Sydney there are two small grocery stores, almost opposite each other, fighting to the death for the last 20 years, and in the process keeping Woolies and Coles at bay, at least in the very local area they service.

Respect your enemy, and learn from them, they make you stronger.

Photo credit MrT HK via Flikr

Is Amazon Go the supermarket of the future?

Is Amazon Go the supermarket of the future?

Amazon has been experimenting since December 2016 with a concept store ‘Amazon Go” in Seattle. It has been a ‘Beta’ store, open only to Amazon employees, as they set about solving the obvious wrinkles in an environment with no cashiers, and no self-serve cashier machines, just a ‘walk in walk out’  App that manages the whole process.

Oh wonder of wonders, no queues!

Amazon Go opened to the public  on Monday this week. The key question is what are they going to do with it?.

It seems to me there are two basic strategic choices:

  • Roll it out via their own stores, an Amazon Go expansion,  and/or via Whole Foods, which gives them an immediate footprint of 470 stores in areas with higher income, and tech savvy consumers
  • Sell the technology to other retailers,  just as they have with Amazon Web Services.

Of course, they are also able to do both. Amazon is perhaps the most agile large enterprise the world has ever seen, able to manage multiple lines of concurrent innovation that would choke every other business.

For what it is worth, my bet is that Amazon will progressively roll out the technology into selected Whole Foods stores, the ones surrounded by higher urban densities, in what will be a ‘mass beta’ of the technology, then sell the technology to others as they have done with AWS. This would enable them to capture a slice of the installation costs as well as ongoing software subscription revenue and a percentage of sales.

A goldmine amidst a disrupted retail business model and consumer experience. Not since the first Piggly Wiggly supermarket was opened in 1916 have we seen the potential for retail disruption on such a scale, and at such speed as I suspect we will see.

I do not know what is happening in the executive suites of Coles and Woolies, but if they are not deeply concerned about their current business model in the face of this coming Amazon tsunami, they are truly short sighted.  My instinct is that the strategic deficit of Coles and Woolies is just too wide to be easily bridged by the tactical stuff they have both used with varying success for the last 30 years. It is not as if they are alone, major retailers worldwide will be in trouble, Tesco, Wal-mart, Carrefore,  and all the rest will be on life support with them without radical change. I suspect the only one capable of that scale of change is Wal-Mart, run by a Kiwi expat Greg Foran, who missed out on the top job at Woolies a few years ago.

I have previously suggested that Amazon might reach out to Harris Farm as a way to build a footprint in Australian retail, by leveraging the lessons that will emerge from Whole Foods. This now seems even more likely than it was 6 months ago when Whole Foods was acquired.

Amazon is going gorilla hunting.




How do you measure the scalability of your business?

How do you measure the scalability of your business?

Almost every business I know  seeks to grow, as there is a recognition that growth brings benefits beyond simply the size of revenues and profits. It  brings credibility, attracts good employees, enables negotiation from a stronger position, and much more.

It seems to me that there are four macro measures that can be applied, each with a few key sub measures that can be used as appropriate.


This is a term I use to describe a combination of factors vital to the health of every business.

  • Customer retention rates. How much customer ‘churn’ do you get, how long is the average ‘ ‘lifetime’ of a customer, and what is the subsequent lifetime value of a customer. Associated with customer retention is the cost of customer acquisition. At some point, investment in further customer retention will start to deliver diminished returns. It is therefore sensible to have a parallel process in place that delivers a steady flow of new customers coming in to replace those that do move on, and build the spread of customers and the penetration of your preferred markets.
  • Share of Wallet. Regular readers will be aware of my attraction to this measure. In effect, how much of a customers purchases that you could service, do you actually attract. Calculation becomes an important strategic exercise as it forces you to consider which types of business you can and want to service, which markets you are able to compete in effectively, and the relative power of your value proposition in any market segment.



How likely are your customers to refer you to others? When an existing customer values the services you provide sufficiently to recommend you to their own networks, that is marketing gold. One of the formal measures that has gained a lot of traction is the Net Promoter Score. This is a very binary system, which has its merits, but I like to see some qualitative evidence as well, gained by customer stories, feedback, and various answers to the question ‘where did you hear about us’?

How likely are those in your value chain to recommend you, these referrals are as useful and relevant as those from your customers, as they have a commercial relationship with you, and are in a great position to judge.


The simple word ‘Margin’ can have different meanings to different people, particularly accountants, but in its simplest form, is the profitability divided by revenue. However, you do not bank percentages, just dollars, so you also need to consider the absolute amounts of money that can be made from a market. Generally the higher the margin, the better, but generally, higher margins attract competition, so over time margins become eroded. The key is  to make the margins sustainable, which requires appropriate strategic investments to be made.  Measurement  of margin can take many forms:

  • Customer margins can be measured both individually and by group, depending on the nature of the business.
  • Product margins similarly can be measured by product and product group.
  • Both the customer and product margins can then be further measured by geography, market segment, and any other sensible parameter. The absence of margin management is a sign of poor or at least lacking management, and the mixing of marginal costs, particularly in the case of a manufacturing business, with overheads is a significant drain on management ability to make informed price and cost management decisions.


Effective financial management captures all investments of cash irrespective of the nature of that investment. It makes no distinction between operational and regulatory investments necessary to keep a business functioning, and those that have some risk associated with shoring up future revenues and margins. Investment in marketing, innovation, staff capability, process optimisation and others do not routinely turn up in financial statements, but without them any business is doomed, so seek them out in any due diligence exercise.

Good businesses make the investments in line with their strategic priorities, and track the outcomes of those investments over time.

Need help thinking about these issues, give me a call.


Einstein’s formula to calculate business value

Einstein’s formula to calculate business value

Our world is being broken into bits, powered by algorithms, few things appear to be immune to the pervasive intrusion. One that has been largely immune is strategy development, a subjective hold-out in a world of programmatic automation.

Einstein told us that ‘defining the problem is the greatest challenge, the rest is just maths’. This applies as much to strategy as it does to any sort of problem, and it seems even possible to adapt Einstein’s simple beauty of E=MC2 to the creation of business value, albeit there may be some ‘stretching’ involved.

Back in 1937 as a graduate student at MIT, Claude Shannon demonstrated that complex problems could be broken into a series of minute, sequential steps with a binary answer that delivered an outcome. This break-through created the foundation of all modern computers. Shannon then went on to demonstrate in 1948 that digital systems could not only perform logic, but also enabled transmission of information. Another technical challenge addressed that can be reasonably translated to most strategic challenges.

The problem with strategy development is not the creation of strategies,  as much as the definition of the problems to be solved, as Einstein so aptly observed.

When you have the problem defined, it is suddenly easier to break it into its constituent parts, to see the granular detail, and at least partially quantify the cause and effect chains that exist to enable informed  testing, followed by adjustments based on the outcomes.

This is starting to look like Game theory: ‘if this, then that‘ mixed in with a dose of options theory, ‘do not commit to an option amongst all those available, until you absolutely have to‘.

I think it is only right to finish where this thought started, with Albert.

His theories of relativity that famous formula we all know, but have no idea what it means, explains the workings of the universe. Perhaps it can also give us an insight into the value we can add to an enterprise, which is after all, what we are setting out to do by strategic planning.

The internet has changed everything about the business models that will be successful in the future, because of the transparency and connectivity it delivers. Therefore we need to find a way to recognise the power of digital access and the compounding that is possible by leveraging networks in our planning processes.

I like E=MC2 as a strategic metaphor, because it can explicitly compound the value of our digital networks, something not done in any model I have seen.

Here is how it works.

E is the enterprise value.   This is not the stock market valuation, which is only a financial calculation based on expected future earnings, but the total value that is created by the enterprise, which has many forms. Value can be time, services, transparency, design, everyone sees value as being different, and is subject to the context in  which it is seen. The obvious challenge is to put a number on these usually subjective items, which evolves from the other side of  the equation.

M is the mass of the enterprise.  This is the sum of the physical assets and processes of the business, the stuff that enables the work to be done.

C is Capital of the enterprise.  It includes financial capital, but the greater part is the capital contributed  by  the people who populate the place, those who are in the value chains, including existing and potential customers, and the context in which the business competes.  This comes in many forms:

  • Intellectual capital, what is between peoples ears, what they know, and how they extract and leverage that knowledge
  • Relational capital of the individuals in the enterprise, as well as those assets, both tangible and intangible, the enterprise owns such as brands, patents, and defensible market assets such as franchises.
  • Cultural capital, the way in which there is collaboration and alignment of activity towards the creation of value by the enterprise throughout the value chain, and the manner in which the enterprise, which is just a collection of people, conducts itself, both internally and externally.
  • The competitive, strategic and regulatory environment in which the enterprise competes.

This number is squared, simply because of the geometric nature of relationships, and the network effect, the more you have the greater the sum of the value that can be created.

As noted earlier, there may be some ‘stretching’ involved to apply Einstein’s formula, but on the other hand, the logic is there. This thought process came about as a result of an acquaintance seeking to sell his business.  The business brokers and accountants he spoke to all had variations of a similar formula which focussed on multiples of profitability that would be applicable, with only passing attention given to many of the intangible assets he had built up over a 30 year period. Knowing his business quite well, it was my view that the profitability multiples method substantially undervalued the business, so we set about putting numbers to some of the intangibles as a means to increase the sale price, by demonstrating that the profitability was not just robust in a challenging environment, but would be increasing over time.

The eventual sale price convinced me that Albert may have been onto something, and it just cemented my view that he was in reality, the most under-valued strategic guru in history, as well as being a pretty smart physicist.