What retailers can learn from the Game of Thrones

 What retailers can learn from the Game of Thrones

Mar 28, 2018 | Change, Governance, Leadership, Strategy

The ‘Game of Thrones’ series is an unlikely metaphor for Australian FMCG retail. There are however commonalities. Intrigue, politics, intense competition, vendettas, invasion by ‘wildlings,’ dumb decisions motivated by ego, desperate defence of the status quo, and more.

However, the world of retail is changing around us, just as did the world around Westeros, and potentially with similar bloody results.

The business model that has served so well since Piggly Wiggly invented the supermarket in 1916 is becoming redundant.

The incumbents are fighting to save the status quo, the invaders are looking everywhere for weaknesses to exploit, and the natives are restless, irritable, and open to offers.

All retailers, from the corner store to Walmart, Amazon, local farmers market, and the two Australian FMCG gorillas, Coles and Woolworths, work from a similar business model. All that changes in the model is the emphasis put on the different components.

StrategyAudit.com.au

All retailers are facing the pressure of change from the digital transformations of our world, what interests me specifically is the manner in which the Australian retailers are adapting, specifically Coles and Woolworths to the changes.

The gorillas consolidated their market power, still somewhere north of 70% by the relentless growth of market share through competitive pressure, and ruthless optimisation of their supply chains over time, leaving consumers with little option but to shop with them.

However, optimisation has a down side.

It breeds resistance to change, a dismissal of the minor disturbances that happen on the fringes, which are seen as little more than an irritation, unlikely to have any impact, and complacency. Just as Netflix was an irritation to Blockbuster, unlikely to be relevant, until it was, and then it was too late for Blockbuster.

It seems to me that the incumbents in Australia are paddling the same boat. Woolworths opened, then closed down Thomas Dux, in what I regard to be a great example of short sighted strategic stupidity, but at least they are consistent.  Then they botched in spades their foray into hardware with Masters, closing it down ironically as Wesfarmers buys into Homebase in the UK in an effort to spread the gospel of Bunnings. That did not turn out too well, Wesfarmers taking a $1.3 billion hit in February, and more recently announcing that the Coles business, apart from Bunnings and Officeworks would be flogged  off into a separate listed entity.

In other words, the incumbents are paddling around in the same warming pot as interlopers turn up the fire.

There is a lot going on at the fringes. Companies and technologies as varied as Amazon, Costco, Farmers markets, Harris Farm, Kaufland, various ‘pick your own’ schemes, organic, home delivery, and all the rest interrupt if not disrupt the market, and around the corner you have Alexa, AI, AR, Blockchain, personalised communications, Robomart, and who knows what else knocking at the door.

Optimising the existing model is coming to the end of its usefulness, the gorillas need to get out and get a bit messy.  They do not need to make huge bets as with Masters and Homebase, but they do need to clean out their own business model to make them easier to deal with, thus prolonging the profitability of their current investments, while building the retail model that will sustain into the future. If the best they can do is remodel an old crappy store into a very nice new one with better ranges, layout and lighting, as Woolworths has with Marrickville, then they are in trouble.

This is a big call, telling the future is not a productive pastime outside the circus tent, but having a lot of small bets on what it may look like would be useful. Take a long view, nurture some of the more looney ideas, and assume that the march of technology will not stop at a point of convenience for them, and one or two of the bets might turn out to be trumps. (whoops, not sure of I should use that word any more)

When I can help you consider the impact of all this change on your business, its profitability and longevity, get in touch, and I will be delighted to apply my knowledge and experience to solving your challenges.

 

Cambridge Analytica and Facebook stretch the boundaries of digital privacy.. Further…Again

Cambridge Analytica and Facebook stretch the boundaries of digital privacy.. Further…Again

Mar 22, 2018 | Change, Governance, Strategy

The Channel 4 expose of Cambridge Analytica last week has started a firestorm of commentary.

Rightly so, but  is it not ironic that the tools CA used to swing the US presidential election are now being used against them after the tactics were revealed?

Facebook, and all the other digital platforms are just wholesalers of eyeballs, in business to collect then monetise their access to personal information, freely given. This how they make their money, exchanging access to the very detailed personal information they collect on their platform users, to advertisers for money.

I wonder if any of us should be surprised at the revelations? This is what they do with our cooperation. The problem in this case is that 50 million of the people whose data was skimmed did not know it was happening and had not given permission for it to happen.The tensions inside Facebook, and the other platforms, between those whose job it is to generate the revenue, and those charged with the responsibility for data security must make for some pretty lively conversations!

The access to the a wider set of eyeballs, via the downloading Apps, games, surveys, and the rest with ‘Friends permission‘ such as the popular game ‘Farmville’ enables access to the personal data of friends of those who are engaged. This Friends access allows ‘thousands of layers of personal information on millions of accounts‘ to be collected. That data was then analysed by Dr. Aleksandr Kogan using the principles developed by  the Psychometrics Centre at Cambridge University. Dr Kogan analysed the data collected for Cambridge Analytica, that had the objective of developing and delivering messages specifically targeted at an individual in order to move their voting behaviour.

Truly scary stuff, science fiction just a few years ago.

Facebook has since suspended Cambridge Analytica and associate SCL (Strategic Communication Laboratories) from facebook, while defending their own actions claiming ‘Protecting peoples information is at the heart of everything we do‘. Suspension is apparently, the ultimate sanction. I guess that we should all be grateful they are looking after our privacy so well, and not going out hawking it in the local bar.

Facebook is really under the regulatory gun in all this, coming as it does on top of the revelations about Russian troll farms and the possible influence they had on the US Presidential election results. However, they should not be the only ones under scrutiny for the use of personal data for profit. That is simply the business model that has evolved in front of us as we all use social platforms of all types and names. Facebook just happens to be the biggest, and best suited to electoral ‘management’ if not fraud.

While the personal information zealots cry about making potentially life saving medical records available on line, and politicians of all colours bleat about how important information privacy is, a hard argument to beat, we all continue to give it away happily for access to ‘cat porn’ and the menu of the local pizza shop.

The debate should be a wider one.

How much power do we want concentrated in the hands of so few providers of digital tools, and how will we  regulate them to ensure they play a constructive role in the development of our communities and society. The follow up question is I suppose, do we have the political machinery with the skills and balls to do anything about the obvious answer.

 

Header cartoon credit: Partial ‘First dog on the moon’  cartoon The Guardian 21/3/18.

Update: March 23

Mark Zuckerberg has released a statement that acknowledges the problem, gives a timeline of what Facebook has done to secure information, but goes nowhere near an apology. I suspect there will be some flurries meant to make Facebook look better, and as a salve to those calling for regulatory action, but little if anything of any consequence will change.

Second update March 24.

I just stumbled across this editorial by Mitch Joel, to my mind one of the interesting and informed thinkers in this space, that really gives some added context to the conversation. It supports the view that none of us should be surprised, we have willingly participated in the end of privacy, and besides, use of social data to manage (code for swing) electoral outcomes in this way is well known.

 

Third update April 16. 

I was sent this very useful explanatory video produced by the NY Times, describing the sequence of events. Thanks Geoff!

Fourth update May 24.

Aleksandr Kogan, the data scientist behind SCL has his say in an interview with Buzzfeed.

The rise and rise of the digital milkman

The rise and rise of the digital milkman

Mar 8, 2018 | Change, Marketing, retail

The retail gorillas, Coles and Woolworths may still have 75% of grocery market share, but they are in the gunsights of a horde of hunters, all using new fangled weapons developed from the base of ‘Digital’ in a myriad of ways.

Meanwhile. The gorillas are acting like frogs, quietly doing backstroke across the pan, and back again, as the digital hunters pile wood onto the stove. They do have some digital services, order and delivery, order and pick up, but all suffer from the disease that eventually killed Thomas Dux, they are an offshoot of the current model, not an experiment  designed from the ground up to disrupt and destroy the current model.

In the future, the business model we are all used to, the suburban or mall based supermarket carrying anything from 1,000 Sku’s as does Aldi, up to 12-20,000 as do the biggest Coles and Woollies stores will decline significantly in importance. In the future, the  supermarket as we see them currently will be a much smaller part of the revenue pie, for a number of reasons:

  • Cost of entry is reducing. Cost of entry into FMCG has been, and will be further, eroded. From global sourcing from low cost non proprietary manufacturers, to the ability to cut out the retailers with direct to customer channels. These days, all you need is an idea, a little working capital and youtube channel. This may be a radical over-simplification, but there are now products and brands we have never heard of that are selling successfully using this direct model. There have been some notable successes, like Dollar Shave club, a 2012 start-up recently sold for a billion dollars to Unilever, after becoming the second largest shaver brand in the US. No supermarkets. I have read commentary that a $billion hugely over values the purchase, but given it gives Unilever an entry point into a category where they had no offerings, that is adjacent to their mens grooming and personal care business, it makes a lot of sense. Similarly, Procter and Gamble, not known for knee jerk marketing, is trialling a laundry pick-up and delivery service branded ‘Tide Spin’ in Chicago,  and is experimenting with Amazon Prime, and IoT  again using the Tide
  • Availability is the new benchmark. The gorillas have up to 20,000 SKU’s on their books, most individual outlets will not have more than 10,000 on shelf, available, after local conditions are accommodated. Digital retailers have hundreds of thousands of options, all available within a very short time. If you need it right now, immediately, go to the local store, and if they have it, so can you, but if you can wait a day, you can have whatever you want delivered. It seems to me a that consumers are prepared to pay a premium for convenience, simply an anagram (almost) of ‘Availability’.
  • Customer loyalty is dead. Loyalty to a channel, and individual retailers in the channel has been eroded terminally by the range of purchase options opening up. Coles and Woolies compete on price, and parking, only two of a wide range of options consumers now have available to them to determine ‘Value’  of a purchase channel.

 

The complication for digital ‘mass grocery’ has been that challenging ‘last mile’. How do you get the products to the consumers efficiently, and cost effectively. It can work pretty well for high value dry goods, perishables present  their own particular problems nobody has solved yet. Indeed, Aussie Farmers Direct, one of the groups that seemed to have survived the start-up phase, and had built a customer base and presumably processes to manage customer relationships went into administration on Monday, March 5, citing competition from the supermarket chains as the reason.

However, autonomous everything powered by data will deliver us models that work, just as Uber cracked the taxi industry, and is now moving into home delivery for restaurants with UberEats, Supermarkets are an easy next step.

As I reflect on my commercial history, part of it was in the dairy industry, where there were milkmen calling on pretty much every suburban home every day. There was a ‘Depot’ system covering the country, and every milk company tried hard to get the ‘milkos’ to deliver more than just milk. After all, they were there anyway, so the marginal cost was low. Hindsight, and we knew it at the time, tells me that the communication and payments systems were not up to the job 30 years ago.

They are  now, so I predict the return of the ‘Milko’ just the digitally enhanced model. Pity the dairy companies all took the short term view and flogged off all that real estate with the depots on them!

Photo credit: Ben Watkin Via Flikr.

Do we still need book stores and publishers?

Do we still need book stores and publishers?

Feb 23, 2018 | Change, Marketing, retail

 

I love books, real books, items where you physically engage with them, turn the pages, scribble in the margins, pass them onto friends with a handshake and a ‘you will enjoy this‘.

Behind me (chronologically) are those who have grown up with e-books, blogs, podcasts, and all the other digital distractors, who have missed the joy I have always had in a bookstore. Instead they browse the Amazon catalogue and recommendations, and look up ratings by people they do not know on sites that have no interest in being transparent.

Very efficient, but to an old fart, not always a substitute.

Despite the gloomy outlook, I still think that the few bookstores still around will survive, having identified a clientele who like me values a real book. Stores like Berkelouw books in Sydney  with 10 stores, and 200 years plus in the business, where a book is more than an item in a catalogue, where the staff live and breathe books, and communicate the passion.

Perhaps not, the numbers seem to be against them, although Amazon opening bricks and mortar bookstores should tell you something. There are also a few specialised book publishers around, those with a deep knowledge of their topic domain, that seem to be hanging in there.

Authorearnings.com has a database that records all book sales, a treasure trove of information if you are a book tragic. Here are some highlights from the January 2018 report, and some thoughts.

  • Amazon sells half the ‘books’ in the US. That number is made up of e-books 55%, print 39% and fast growing audio books making the balance.
  • The dollar shares are very different, print sales make up 63% of the value, unsurprising when you consider the relative value of a $3 e-book and a $100 textbook, which are still largely print. How long this print bias in textbooks will last is anyone’s guess, but mine is not too long.
  • The sales split in categories of books, unsurprisingly, is very different. Digital has consumed fiction, with 90% of romance purchases are e-books,  while poetry and drama are still overwhelmingly print, albeit off a way smaller base.

Books are the original long tail business, millions are ‘published’ and most sell only a few copies to their friends, colleagues, and mum. However, some are still of great value to a few, and we would be diminished by their absence. Digital has made the long tail accessible to us all, suddenly those lost gems are easy to find, even if you do have to read them on a ‘device’

The strategic question is will there still be a need for publishers in a decade?

I think the answer is ‘Yes’ but not like  they  are currently and have been in the past. They will become more like collaborators, and business partners, than just another cog in the supply chain as they have been. Publishers play an important role in the curation and editing of books. Authors  want to write, and often do not want to be bothered by  the commercial end of  the business, and in any event often have little marketing and commercial skills, so need a third party to help.

Editing is also a must, if a book is to be more than a jumble of words. Steven Pressfield in his great ‘Writing Wednesdays‘ blog makes it clear that he could not do what he does without his editor Shawn Coyne. If a writer of the skill and experience of Pressfield needs help, the rest of us are in real trouble without it.

Photo credit. Geoff Roberts. Goulds Books Newtown Sydney.

PS. After posting, a friend referred me to this video of the 6 most beautiful bookstores in the world. Suck it up Amazon!

 

 

 

How does the Amazon innovation formula keep replicating?

How does the Amazon innovation formula keep replicating?

Feb 7, 2018 | Change, Governance, Innovation, Strategy

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 Visualcapitalist.com

 

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.

How?

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

 

Update June 2018.

Amazon bought on line pharmacist ‘Pillpack’  last week for almost a billion dollars, saw its own share price jump double what they paid at the same time industry incumbents collectively lost 10% market valuation. Jeff Bezos has signalled his interest in pharmacy in various ways for years, so this should not come as a surprise, but it seems to have done so, as the threat of Amazon had clearly not been priced into the market valuations of the incumbents.

The Pharmacy guild in Australia, one of the most powerful lobby groups in the country, should be asking themselves if they are next for the chopper.

Update August 2022.Amazon last month paid $A5.6 billion for subscription health service One-Health, which gives them a network of doctors surgeries around the US. If ever there was a huge industry mired in its own importance, removed from the needs of those it is supposed to service, and ripe for disruption, it is the US health care industry. It will be a tough nut to crack, others have tried and failed, but Amazon has the street-cred to make it happen. The ‘flywheel’ at work again.

Australia Day 2018

Australia Day 2018

Jan 26, 2018 | Change

It is Australia day down under.

A day we celebrate…… what?

The landing at Sydney Cove of the first fleet of convicts and their equally corrupted gaolers?,

The invasion that ended a way of life that had existed for how many thousands of years?

The beginning of the  vibrant successful multi-cultural community that is modern Australia, with all its faults and problems, still the best place on earth?

Depending on your perspective it can be any or all of the three.

The current debate about the meaning of Australia day is probably useful, but let’s focus on some facts rather than allowing it to be another example of our ability to bellow a personal view  at each other and treat it as a fact.

Mark Kenny’s insightful article advocates for May 9, for some very good reasons. It is the date Australia formally became a self-governing federation in 1901, the date the parliament formally shifted from Melbourne to Canberra in 1927, and the date in Bicentennial 1988 that the current parliament house was opened.

Oh joy, some facts and solid argument why the change should  be made, and for the first time I find myself agreeing.

However, perhaps we should also be considering some of the stuff that will make the future of our children a successful one, rather than squabbling about the trappings of position today.

  • How is Australia to compete in the modern world of digital everything without the industries based on original science? History suggests that commercialisation of this sort of research takes 30 years, way beyond the electoral cycle that seems to determine the funding. The choice of professor Michelle Simmons as Australian of the year is a wonderful choice. A scientist at the cutting edge of research into the stuff that will reshape our society, leading a great team, and, a woman in a mans world. That is how we will compete into the future. (thank heavens the Aussie of the year is not a sports star, again)
  • How is our education system going to accommodate the demands of a society radically different from the one that the teachers grew up in? The choice of Eddie Woo, a local maths teacher who has conquered teaching maths on line is inspired and well deserved, and I am sure his students will represent the new generation of contributors to Professor Simmons work.
  • How are our institutions, designed to accommodate the world of the 20th century going to evolve to give us the confidence and ability to continue to be a success in the 21st. Our governments and their politicians, churches, educational processes, and pretty much all others are on the nose, despite them being inhabited by a vast majority who work hard to do the right thing.
  • How are we going to retain the successful human melting pot we have been in the face of the apparently increasing levels of xenophobia domestically and the pressures externally to be more open and accepting of differences?

 

Enough of that, I am going to fire up the barbie and have a coldie, or two. Isn’t that what Australia Day really is, a day to kid ourselves that the future will look very like  the past, and all we have to do is turn up?

Happy Australia day.

 

Image credit : City of Geralton WA RIC1383.jpg