Apr 15, 2024 | Governance, Leadership
We lost an intellectual giant last week, Daniel Kahneman.
Psychologist and Nobel prize winner in economics, he along with long term collaborator Amos Tversky, created what has become known as ‘Behavioural Economics’.
So what you say.
In 2010 Kahneman published research that demonstrated that income was strongly correlated with happiness at lower levels, but above a seemingly modest level (US 75K at the time) it had no effect.
In 2021, a Wharton academic Mathew Killingsworth published a paper that came to the opposite conclusion.
In order to reconcile these conflicting outcomes, Kahneman teamed up with Killingsworth and a third, neutral researcher to establish the truth.
The result was a case of diminishing returns.
It found there were substantial gains in happiness up to 200k income, but after that, diminishing returns kicked in. The ‘happiness curve’ flattens out, eventually delivering no increase in happiness with an increase in income.
This seems to make sense to me.
At a point, an increase in income does not increase happiness (I aspire to discovering that point) it just becomes a scorecard, no different from the one used on a golf course.
Given this instinctively sensible outcome, should Dr Chalmers add a level to income tax?
At a point above an income level few will ever see, impose a further meaningful tax rate on the increments?
Despite the inevitable screams, they will not miss the money, and you never know, it just might make those few happier.
Apr 8, 2024 | Change, Leadership
The only way to solve a problem, particularly a significant one is to understand the cause of the problem and eliminate that cause.
Rip the band-aid off.
Taking a short-term action to address a symptom of a problem is just kicking the can down the road. The problem will return unless the root cause is addressed.
In a previous life working in a regulated industry, I observed many problems that were never addressed. Simply, they were papered over with a short-term fix that looked good as action had been taken. However, they only served to compromise performance and leave the problem to someone else. The industry ended up with a huge pile of band-aids obscuring and complicating the identification of the root causes of the problems that continued to emerge.
Deja vu is upon us.
The current housing crisis is an outcome of decisions made progressively over the last 40 years. Some were made with the best of intentions, others for purely political reasons. However, the chickens are now crapping all over the hen house in the form of a housing crisis that will not be solved by sticking another band aid, or even a couple of boxes of them, over the symptoms of the problem.
The solution hides in addressing the cause.
Progressive governments have given investment in real estate significant tax advantages. This diverts that investment from alternative more productive uses, leaving us with the current shortage of housing, and stratospheric rents.
Ripping the band aid off now will be extremely painful for tax advantaged investors, but is essential.
There is a budget due in a few weeks, I expect more band-aids.
The current government when in opposition lost an election by proposing some sensible but relatively painless, to most, measures that started to address the root cause. The then government, now the opposition, was relentless in painting the sensible moves as robbery by the government.
It was as stupid and false as to claim that electric vehicles would kill the weekend.
Most of us would be better off with changes being made, our children and grandchildren most certainly would be.
Unfortunately, the battle for political power outweighs consideration of real debate, long term perspective, and benefit to the majority.
The longer we leave it, the greater will be the pain when the time comes that we have no option but to rip down the mountainous pile of band-aids.
Apr 2, 2024 | Branding, Change, retail
The retail landscape is changing, even as the two retail gorillas hunker down and set about extracting more from the current model.
Following are a few of the macro trends I see that will continue to erode the current model that has been so successful.
Declining customer loyalty.
I have no numbers, but anecdotally, where in the past you shopped at Coles or Woollies, now you have Aldi, Farmers markets, Costco, Harris Farm, and a range of specialty retailers all competing successfully for the consumers dollar. I no longer know why anyone sees any of the major retailers as ‘their’ store. Loyalty is something that is given in acknowledgement of great service, and the gorillas have failed in that space.
Changing customer habits.
Associated with loyalty, customers are looking for things other than just the lowest price. Increasingly they want product provenance, domestically produced product, they are increasingly sensitive to the ingredient lists, and spurious health claims. This is all happening as the gorillas remove the options from their shelves in the game of short-term margins.
The continued growth of home delivery by the gorillas since Covid gave it a turbo-boost seems here to stay. Interestingly, home delivery also seems to be a useful brand building tool for the gorillas. Anecdotally, consumers tend to stick with one or the other of Coles or Woolies for delivery in greater numbers than they exhibit loyalty when shopping for themselves.
Investment attraction.
Aldi has invested successfully, Costco while going more slowly than expected, appear here to stay, farmers markets have become ‘corporatized’ to some extent, Harris Farm continues to invest, and specialty stores continue to ‘pop up’ although few survive for the long term. It seems that the market is sufficiently big, that with only two major players there is risk capital going in at the fringes, and in the long term, the fringes tend to become mainstream. Looming over all this is the shadow of Amazon, and more generally the move away from the bricks and mortar business model. I was betting a few years ago that the Harris family would cash in and sell to Amazon, a transaction consistent with their strategy in the US. So far, I have been wrong.
More recently, the public and political attention focussed on the gorillas can only have a negative impact on the investment attraction of FMCG retail.
Business model proliferation at the fringes.
While the supermarket model absolutely dominates the current landscape, technology and changing consumer attitudes are enabling evolving business models to compete for the consumers dollar. Two of my neighbours combine to buy meat in bulk direct from a farmer in the Southern highlands. It started as all the meat from a single animal, which meant lots of mince. Recently much of that mince is being made into sausages, and they are experimenting with differing sausage flavours for variety. This proliferation seems to me to be another signpost that change is coming, like it or not.
Margin pressure.
While all this is going on, margins through the supply chain are under increasing competitive pressure. This pressure impacts enormously on the decision making of incumbents, offering niche opportunities to newcomers and new business models to make a case with consumers.
It seems to me that the incumbent retailers are waiting to see what happens. History tells us that this is not an effective strategy. The better course is to shape your future in some way that suits your aspirations. It would be naive to say this was easy, it is excruciatingly hard, which is why so few are able to make the transformations necessary.
I keep on harping about the failure of Woolworths to leverage the start they made with Thomas Dux. To my mind it was a classic strategic mistake to back away.
My conclusion is that the current management culture at both the retail gorillas lacks the courage to explore, be curious, make investments that are separate from the main business, and stick to them in the face of short-term challenges. Instead, they have chosen to hunker down and optimise the current model.
Mar 21, 2024 | Collaboration, Governance, Marketing, retail, Strategy
Collaboration between competitors is illegal, but tough to prove. It is also the natural state of affairs in an oligopoly.
When a competitive market evolves over time into an oligopoly, the focus of management attention of the remaining oligopolists moves from the customer to the competitor. With the resources available to an oligopolist in any decent sized market, they will know in considerable detail the strategies, internal processes, pricing, and resource allocation choices made by their competitors almost as quickly as they happen.
Supermarket competition in Australia has evolved in this manner. It has turned from ruthless competition for customers 40 years ago, to ruthless collaboration between the two major players now.
Collaboration is illegal, and I am sure that the leaders of the two supermarket gorillas are not setting prices together, or collaborating in other ways that would be contrary to the competition laws in this country. However, given there are only two of them, and they have the resources to watch the other very carefully, there is a sort of quasi co-operation that emerges.
It is driven by the commonality of their activities: The need for shareholder returns, driven by market share acquisition costs, both fixed and variable. They work aggressively on both, and if they did not, the senior management would be fired. In addition, directors have legislated fiduciary responsibilities under the Corporations act in relation to shareholder interests and importantly, returns.
We must also remember that via our superannuation funds, we are all shareholders in Coles and Woolworths.
Once again, just like the ‘housing crisis’, we have short term populist press release driven band-aids being suggested. They are touted as the remedy for long term strategic choices made in the past that to some, have turned sour.
The time for institutional concern about the increasing power of supermarket chains was when they were assembling the scale they now have. All of the take-overs and mergers that have happened have been waved through by the ACCC. This is despite commentary at the time about the impact of the lessening of competition for the consumers dollar.
Now it is too late, other remedies must be found, which do not include a forced break-up. Apart from the immorality of retrospectively applying new rules to the conduct of business, there is no logical or practical way to break apart either of the supermarket chains.
We should stop bleating, and get on with life, while ensuring we do not make the same mistake again.
Header credit: Gapinvoid.com. The cartoon put a huge amount of meaning into a simple graphical form. Thanks Hugh!!
Mar 19, 2024 | Governance, Marketing
Recently at a meeting of SME’s, I found myself in a conversation about accessing government grants, initiated by a guest speaker. She was a very impressive woman with significant experience delivering grants from the Department of Industry.
The notable omission was, in my opinion, a view that reflected the experience of someone contemplating investing the time and energy into an application should consider.
Full disclosure: I ran a small grant funding business called Agri Chain Solutions as a contractor for almost 3 years from 1999 to 2002. It was a company limited by Guarantee, with a commercial board, and ranks as the only time I am aware of that a task has been outsourced by the federal Bureaucracy in this manner. The department concerned, then called Agriculture, Forestry, Fisheries Australia (AFFA) was implacably opposed to the exercise, and only complied after express instruction from John Howard, as the then new PM.
Following is a list of the irritations you can expect.
- Ambiguous guidelines, and sometimes they appear to be on roller-skates as you seek clarification.
- Unusable templates, seemingly designed to frustrate applicants.
- Bureaucratic time and commercial time do not match. The process will always take longer and consume more resources than you think would be possible as you initiate the process.
- The revolving door of ‘officials’ who will manage your application, through to the approval and then implementation. You will constantly be covering the same ground, again, and again, as departmental personnel rotate.
- Commercial in confidence: it does not exist.
- Rounds and the money has run out. For ease of management, most grant programs operate in ’rounds’, and when the money for that round has been allocated, bad luck. You could reapply in the next round. This system disregards overall merit, replacing it with merit in a particular round. The result is weak projects in less competitive rounds are sometimes approved, when in later more competitive rounds, highly meritorious projects miss out.
- The effect of influence of competitive rent seekers. Who you know is always important.
- The time taken to prepare without any indication of the probability of success usually challenges resources of SME’s. This leaves the field open to larger companies with the staff, who probably need the grants less.
- Having inexperienced young bureaucrats believing they’re important, and can dictate to you particularly in grant implementation.
- Recognise at the outset that an application will take a long time, consume significant resources, and you may not be successful. When you are not successful, the reasons for the failure may never be clear.
- Grants are taken into account as revenue, and therefore if you make a profit, you pay tax on it.
- Finally, what is important to you is usually absolutely irrelevant to those responsible for assessing and progressing your application for ‘their’ money. They are just people with their own baggage, ideas, perceptions, ambitions, and worries. Your application amongst all the others in the pile hardly rates on their radar.
Header credit: Cartoon by Tom Gauld from New Scientist magazine.
