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

How do you measure the scalability of your business?

How do you measure the scalability of your business?

Jan 23, 2018 | Change, Governance, Management, Strategy

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.

‘Stickiness’.

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.

 

Referrals.

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.

Margins.

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.

Investments.

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

Jan 11, 2018 | Change, Governance, Strategy

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.