Where will the retail gorillas make profits tomorrow?

Where will the retail gorillas make profits tomorrow?

Apr 20, 2016 | Customers, Marketing, Operations, retail, Strategy

Coles and Woolies are locked in a battle for share of the customers wallets and throats that becomes more complicated every day.

The competitive landscape has changed. The old model of them against each other and independent wholesaler supplied groups, has been spiced up by Aldi, Cosco, and the tide of competitive business models evolving both in store formats such as the convenience small stores around commuter points, farmers markets, and digitally enabled sales.

Those sales I call ‘Beyond Checkout’ cover everything from online ordering with home delivery to the evolution of old fashioned drive thorough pickup.

In my view the battle is a losing one for the gorillas without significant change to their operational culture. Their current business models are based on mass merchandising, not easily made compatible with the personalised service delivery and the  lower volume specialised products now being sought. You need go no further than the disappearance of Thomas Dux for evidence.

Having said that, I see 5 general areas for operational innovation of both the gorillas that would deliver ongoing profits, and sensitise them to the changes happening beyond the walls of their stores.

  1. In store technology deployment.

Deploying some level of the data driven category management control to store level would greatly enhance assortment optimisation, out of stock reduction, and margin maximisation. The assumption of course is that there is staff in the stores with the nous to leverage the information  they are being given.

There is also the juicy thought that stores will be able to connect to consumers in close proximity to stores via their mobile devices geo location capability and make them offers based on their purchase patterns. Then there is the option of instore kiosks harnessing the value of instore video and personalised advertising and promotion, again catalysed by your mobile device.

  1. Leveraging existing asset

Reduction of maintenance and running costs with innovations like rooftop solar power, preventative maintenance programs, improved store security, and stores as the logistic base for home delivery. Home delivery will become more and more important to time constrained consumers, so developing a compelling offer should be high on their agendas. To date the penetration has been poor because the logistics, particularly for fresh and frozen product is really challenging.

  1. Employee productivity improvements.

With better staff training, particularly in produce, customer sensitive opening and closing times, cash register  speeds (the Aldi insistence on prominent bar codes by observation speeds up throughput significantly), much can be achieved. Self-serve checkouts currently rolling out with store renovation programs have clearly been a success with consumers, and offer significant productivity improvements.

  1. Value chain optimisation

The use of collaborative technology  that goes back into supplier production planning and collaborative volume management from the production line to the checkout has been around for years. However, there remains huge opportunities to extract benefits from inventory management for all in the value chain. The barrier is cultural, as the gorillas want all the benefit to come their way, removing the incentive for suppliers to take risks and innovate, except when under the whip.  Collaboration through the value chain can deliver great benefits when done well.

  1. The customer experience,

What is retail about, if not customer experience?

It is here that retailers can differentiate themselves in all sorts of ways.  What they cannot do is demand from head office that customers like them, and prefer their stores over the others. Store choice is a personal thing for consumers, made up of many elements, but creating a store environment where the employees are pleased and proud to be of service is a great start.

Long way to go there.

What the senior management can do is provide the infrastructure that enables that level of personalisation and service to be delivered in stores, and the leadership to create and encourage the customer centric culture that front line employees then deliver.

And a final thought: Is that the light at the end, or a headlight?

E-tailing is a huge threat to the gorillas, and while it involves capital to develop and deploy the technology, it is essentially an individual engagement and transaction. Online gets all the publicity, but still only accounts for around 6% (depending on whose numbers, and which categories you look at) of sales. The gorillas should see E-tailing as their next opportunity area, to be embraced rather than feared.

Remember what happened to the Blockbuster video business? They had the game by the throat, Netflix was just an irritation in the corner, so they ignored them.

Bamm! Blockbuster is gone.

While it is still pretty hard to stream a family roast dinner, the lesson of Blockbuster should not go unheeded by Coles and Woolies.

 

Are Woolworths new “Essentials” really essential?

Are Woolworths new “Essentials” really essential?

Apr 12, 2016 | retail, Sales

Woolworths have announced a change of their ‘Homebrand’ range of housebrands to ‘Woolworths Essentials’ a more ‘upmarket’ housebrand.

If that is all that is happening, will this just be putting lipstick on a pig?

The strategic and competitive challenges facing Woolies run way deeper than the packaging on a housebrand offering.

However, if it is a signal that the changes are cultural, and the changes are to impact the way the organisation operates, it may be the start of a competitive revival. To be fair however, Woolworths’ financial performance over the decade up to only two years ago was outstanding and shareholders had been a very happy bunch on the supermarket side of things. However, the suppliers have recently decided they have had enough, and customers are becoming more open to alternatives.

Suppliers and customers are surely pretty important groups to a retailer.

Housebrands started as strategic move in Australia by Franklins in packaged goods almost 40 years ago, as outlined in this ABC podcast. They had been around in variety and general merchandise for some time before that, Marks and Spencer in the UK pioneering the idea way back in the 1920’s.

Franklins raison d’etre was customer value. They achieved this by a combination of low prices, aggressive promotions, and the widest possible range of products. The addition of a low priced housebrand range in heavily shopped commodity categories made absolute sense, so they started with ‘No Frills’ margarine in the late 70’s.

At first, many Australian consumers hid the No Frills products in the bottom of their trolleys, hoping none of their friends saw, as it was perhaps a social indicator that could see them accused of being cheapskates or down to their last bob.

The brands you buy were, and still are, an important part of your own self-image.

Pretty quickly however, shoppers discovered that some housebrand Sku’s s offered great value, so they locked in on them, and the presence of a housebrand in a trolley came to indicate a canny, value-conscious shopper. Conversely they also rapidly discovered the Sku’s that offered only price as an incentive to buy a rubbish product, and discarded them. Consumers are very quick learners, and make choices in discriminating ways.

Experimenting with housebrands

Since those early days, retailers have experimented widely with housebrands, coming up with sometimes elaborate words to support the introduction of fancy labels on the same stuff, or to simply copy the new products of a proprietary supplier before the category is established in consumers minds.

Fluff when substance is needed.

The strategy has changed radically from the Franklins’ original model of using housebrands to deliver value to customers, to one of capturing proprietary margins without the expensive, and long term work of brand building that requires an understanding of consumers lives outside a supermarket. Instead their control of what goes on their shelves has been used to squeeze the margins of the remaining proprietary suppliers while filling the now vacant space with their own “Faux-brands”.

Niche housebrand

Both Woolworths and Coles have leveraged their mass merchandising and supply chain expertise into liquor retailing.

Go into Dan Murphy’s and look at their range, particularly of beers, fancy niche names, many of them are just sold in Dan’s, with no marketing credibility beyond the shelf space and quirky name.

They are a Housebrand.

Both also have ‘cleanskin’ wines also housebrands, but unashamedly so.

 Market niches

Private Label quality has improved over time, some of them are pretty good, as good as proprietary brands, although usually a bit different in composition, packaging, or in some way at least moderately meaningful to consumers.

The problem is that the retailers are in the business of flogging stuff. Product to consumers and shelf space to suppliers. It is a high volume, multiple  transaction, low margin business. By contrast, suppliers are in the business of building brands for the long term based on consumer preferences, behaviour and emerging lifestyle trends. They are the ones seeing market niches emerge, and building new products to suit, but why take the risk when you know that the retailers will copy you in a short space of time, squeeze your shelf space, and screw you on margin and terms.

Where will the genuine, category creating innovation come from? Not from the retailers if the past is any guide.

Not all the blame for the innovation stagnation that is evolving goes to the retailers. Proprietary marketers are also in the gun. It is suppliers, albeit under considerable retailer pressure, who have allowed the categories to become commodities by transferring the innovation and marketing funding to price promotion, thereby destroying the value of their brands over time.

Years ago as a young product manager, I worked for what has become Meadow Lea Foods. Meadow Lea margarine had been built into one of the strongest brands in supermarkets, with a dominating market share well over 20%, in a crowded field. I have not seen ‘Mum’ being congratulated for probably 20 years, presumably the available marketing and advertising funds were swung from what had worked to build the category, into the retailers pockets.

What is Meadow Lea’s market share now? I bet it is in single figures with the rest of the commoditised products in the category, although I have not seen any figures for a long time. Building a brand is a journey that is never complete, and if you stop giving consumers a reason to buy yours, they will follow your advice and stop.

8 reasons the opportunity for consumer goods SME’s has never been greater.

8 reasons the opportunity for consumer goods SME’s has never been greater.

Mar 14, 2016 | Change, Management, retail, Strategy

Think about it.

  • Many domestic competitors are gone, sent to the wall by combinations of the high $A, the power of the retail duopoly to call the tune with prices and terms, house brand expansion, and poor management.
  • Coles and Woolies have lost some of their grip as Aldi makes inroads, and some of the independents like Ritchies continue to compete effectively in local markets, and access to food service, ingredient and alternative retail becomes easier.
  • Consumer brand loyalty has been disrupted by the disappearance of some of the favoured brands, offering opportunities to forge new brand loyalties
  • Marketing expenditure can now be highly directed, and its effectiveness measured and continuous improvement be applied.
  • The costs of the tools like the analytics required to do effective category management, a data intensive exercise are  getting cheaper and cheaper, and the skills needed to make sense of the data more available.
  • SME’s are recognising that collaborative actions are not verboten, but are in fact very sensible and cost effective. Making it easier, digital technology has removed one of the greatest barriers to effective collaboration, the inability to communicate.
  • SME management has also recognised that collaboration is strategically and operationally sensible to build comeptitive scale to enable long term prosperity, so there are potential partners around.
  • Export is easier, as trade barriers are dropping, and product niches are often global

None of this of course is of any value unless you have the cash flow, determination, and management capability to make the changes necessary. However, those that have survived the last 10 years are a robust bunch, now the pressure is off a bit, don’t make the mistake of taking a breather, get in there!

 

Why did Thomas Dux really fail?

Why did Thomas Dux really fail?

Feb 10, 2016 | Branding, Marketing, retail

There is a whole lot of discussion around the progressive closure of Thomas Dux stores by owner Woolworths, and the assumption that it will be closed down if a trade sale does not evolve.

Maybe there is a plan to save it, but I cannot see it, and having bought some rubbish grapes at an inflated price in the Lane Cove store during the week,  I do not know what it might be.

Not a lot of the discussion actually addresses the strategic failure that is the foundation of the commercial failure, just its superficial symptoms.

Strategic failure seems to have found its way into Woolies DNA over the past 15 years or so. They became so financially dominant in supermarkets that they forgot that they still have consumers to keep loyal, suppliers to keep in business, and competitors very keen to eat their lunch. They have done OK in petrol, well in liquor, absolutely bombed in hardware, poorly in general merchandise , and missed office supplies, electrical and furnishings completely, and are fiddling around with odd things like pet health insurance. Not a lot of logic in that mix.

I have watched Dux closely since the launch,  had a number of clients products listed, and visited all the Sydney stores multiple times since the first Lane Cove store opened. Until a short while ago, I really thought they would defy the corporate odds, and make it work.

The apparent failure is a sad day for the specialty end of the Australian food manufacturing industry, what is left of it, one less way to reach consumers.

So, with the clarity of (almost) hindsight, where did they go wrong?

 

Confused business model.

Whilst Dux had separate management, they operated out of the Woolworths warehouse, using the WW back office systems and presumably KPI’s which are all focussed on mass merchandise, stock turn and margin. This makes sense to the accountants who seek efficiencies but in the end forces the big brother behaviour on the upstart sibling who needs to do things differently to survive and prosper.

They forgot their “Why“.

Perhaps they never had it beyond a kneejerk response to an upstart competitor. The slogan “Inspiring your passion for food” is at least a half way decent one, until you see packets of mass market products available in the Woolies and Coles stores next door at lower prices. As a consumer, going into Dux , the presence of such items is inconsistent and diminishes any claim to a differentiated and valuable consumer value proposition.

Value delivery.

Consumers are not stupid, there is a limit to the price they will pay for something with a fancy name, fuzzy claim and benefit, and not much else. Pushing the prices beyond that limit in order to boost the GM% is pretty silly, because you do not bank percentages, just dollars. It is a fine line, but by observation, they got it wrong as much as they got it right, which is not enough.

Discounters are not the competition.

Giving in to the accepted wisdom that discounters are winning and that Dux is competing for the same consumer dollar is nonsense.  Consumers are looking for an experience, for specialist products not available in mass retailers.  They started well with their “foodies”, in store chefs available to give advice and recommendations, but the enthusiasm for this potentially differentiating strategy seems to have waned over time. Behaving like a discounter in some Sku’s but like a high end, fancy pants deli in others just confuses consumers, and I suspect their own staff.

What you will not do.

Strategy is, amongst other things, about what you will not do, as much as it is about what you will do. Thomas Dux seems to have forgotten this lesson and succumbed to the temptation to stock SKU’s that did not add to the positioning of Dux as a retailer on whom you could rely on to deliver quality and differentiated specialist food products along with a level of service well beyond the usual expectation. This confuses and devalues the brand. Thomas Dux is like any other brand in a development phase, it requires absolute focus on what makes you different and better. So why can I buy Kelloggs Corn flakes and Blend 43 coffee there?

It takes time.

Dux has been around for a while now, perhaps 10 years? That should have been enough time to establish a defensible place in consumers minds when it is clear there is a segment looking for an alternative to the mass market supermarkets. I suspect that the financial pressure has increased markedly over the last few years as Woolies excursion into hardware drained group profitability. The net result was that the quarterly numbers mattered more than the long term, so savings were made by management, the sort of savings that delivered me the rubbish grapes the other day. If the grapes were not good enough to justify the price, they should not have been on the shelf. That sort of challenging culture requires time and continual effort to reinforce, and a reversion to a quarterly focus removes the management incentive to not sell grapes this week because they are not good enough, they need the margin today at the expense of tomorrow.

 

Meanwhile  Harris Farm, the original target of Dux appears to be powering along. Perhaps Woolies will rue the day they did not buy Harris Farm when they were still young and vulnerable. I understand they tried, but were given the finger by the venerable Mr Harris.  Perhaps they should have tried again, it would have been less costly to both their coffers and their reputation.

What do you think?

 

 

What is the difference between Mark-up and Margin?

What is the difference between Mark-up and Margin?

Jan 13, 2016 | Customers, retail, Sales

Words are wonderful things, they allow us to communicate meaning.

However, some words are easily interpreted in differing ways, making the shared  understanding challenging, and sometimes the differences are exploited in a selling situation.

One of the common “pea & thimbles” I see when small FMCG (CPG to my American friends) businesses are negotiating with chain retailers is the variable use of mark-up  and margin, particularly by retail buyers in a high pressure sales situation where the supplier is being put through the wringer.

Following is a quick explanation of the generally accepted meaning of the two terms.

Mark-up reflects the number, absolute or more generally percentage that an item sells above its cost.

If an item costs you $1.00, and you sell if for $1.50, the mark-up is 50%

Mark-up = profit/Cost

Margin is the profit made as a proportion of the sale price. Using the simple example above, profit is .50 cents, the selling price is 1.50, so the margin is 33%.

Margin = gross profit/revenue.

Imagine you are negotiating a promotional deal with a buyer, a discount for a period of time against an agreed  purchase  volume by the retailer.  The buyer uses the terms interchangeably, referring to his margin as only 33%, when his minimum allowable is 45%, conveniently forgetting that one is margin, the other mark-up. He uses that as a means to persuade you to dip deeper into your pocket to fund the promotion based on the significant orders you will be receiving, and might even do a ‘once-only, just between us’, deal where he accepts 40%.

markup Vs margin tableHe has not done you a favour, but he has enhanced his margins, which is generally the retails KPI, considerably.

 

 

Small business beating the barriers of FMCG category management

Small business beating the barriers of FMCG category management

Dec 2, 2015 | Customers, retail, Small business

Small business beating the barriers of FMCG category management

One of the core challenges in category management is simply the way the term has been interpreted operationally.

Let me explain.

Category management is a data intensive game, the numbers count for everything, and the depth that can be plumbed nowadays with the combination of scan data, loyalty cards and increasingly social data is astonishing.

However, this can lead to a sort of blindness.

If it is not in the data, by definition it does not exist.

Right?

Wrong.

Think about where all  the great innovations have come from.

“Left field” is the usual term. Few genuine  innovations have come from the established orthodoxy of any category, they involve things that currently do not exist or exist in another, unconnected category in a different form.

The disciplines of Category Management, weather we like it or not tend to eliminate these outliers, thus limiting category innovation.

Not the desired outcome.

The challenge of running the data intensive margin maximisation regime by leveraging existing category variables while minimising risk stifles true innovation while encouraging range extension behaviour.

Innovation by its nature is both risky and outside the accepted parameters of category consideration. Successful innovation  requires both leadership and  wisdom to be displayed before a guernesy is given for the investment required to get a new SKU on shelf, even if it is a replacement for a tired item.

Neither management quality is in great supply.

It is in this space that SME’s can build a competitive position against their larger competitors who may have the advantage of scale as well as  category captain status, but are failing to be genuinely innovative. By building a history of innovation in outlier and niche retailers, independents, and direct to customers, smaller suppliers can build the  “attraction  quotient”  with the supermarkets, and have the chance to retain some control.

Become successful in those outliers and the mass retailers will follow, that is their nature, they are followers.

Somehow you have to find a way to manage by both the data, and a product benefit /brand narrative that is entirely from the perspective of the consumer.