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.

Barriers and opportunities for small business innovation in supermarkets.

Oct 13, 2015 | Customers, Marketing, retail, Sales, Small business

supermarket innovation

Innovation in supermarkets

 

Small business suppliers to supermarket chains are substantially compromised by the lack of resources to innovate.

Peter Drucker stated 50 years ago that innovation is the only really sustainable competitive advantage, and the passage of events have proved him correct.

Commercial survival requires that you are able to continually innovate, or you rapidly find yourself left behind, simply because everybody else is.

Knowing this does not however, make the challenge any less daunting, especially in an environment like FMCG where the retail gorillas stamp on variation as a source of transaction costs, and are actively seeking to reduce SKU numbers by pushing housebrands.

Lets define what we mean by innovation for the purposes of this post.

It does not include business model and process innovation. Both are terrific ways towards commercial sustainability, are paths every business must follow, but have little to do with innovation from the customer perspective, at least in the short to medium term.

By contrast, product innovation is concerned with new stuff that adds value to consumers.

Pretty simple definition, that precludes line extensions, which are just a fact of life, and product changes, which are again a fact of life.  We are seeking  to talk about the things that really make a difference, and how and why that happens.

 

Following are some thoughts on the nature of the strategic environment we find ourselves competing.

Innovation Paradox. Big businesses get big by being able to reproduce things without variation, their processes ensure consistency, and reject the outliers. This goes as much for people as it does products, so generally large businesses have more difficulty seeing and acting on something new than small ones. There are obvious exceptions, and large businesses everywhere are seeking ways to overcome the innovative inconvenience of their scale, with greatly differing levels of success. Nevertheless, the generality holds, but the small business end of the  FMCG supply chain has been decimated, perhaps almost eradicated  by the scale of the supermarkets and the power of their business model. Where is the innovation going to come from I  wonder.

 

Risk. The risk profile of every business is different, but as a generality small businesses have a greater capacity to take risky decisions, but a less capacity to absorb them when they  go pear-shaped. Large businesses survive on consistency as noted, and success for individuals in a large business is usually counted by their successes, failures are frowned upon, so the tendency to take risks is reduced, hence, their inability to innovate. Again there are notable exceptions, but they always occur when there is a leader who mandates and lives risk tolerance.

 

Wide view. Any organisation, no matter how big, only has a small proportion of the people thinking about the categories they compete in, so why do you think you will come up with the great ideas? Those using what I have always called “Environmental Research” always do better. This has nothing to do with hugging trees, and everything to do with understanding the context in which the behaviour of your consumers happens. When you understand the context, and see shifts, the opportunities suddenly become more easily identified.

 

Habit. Consumers are driven by their own habits, and once formed, it takes a lot of effort to break them. Habits work because they make our lives easier, and we are loathe to risk what we know works, for that for which there may be a question.

 

Boundaries. Innovation efforts need boundaries, or they tend to wander off into irrelevancy. I have found it far better to provide those boundaries in the pre-workshop, if that is what you are doing, material. It is necessary to encourage people to as the cliché goes, “think outside the box” but it is counter productive to have people thinking outside the municipality. Far better to ground the process in a context that is familiar, where there is market and customer knowledge available to feed the process. Without such grounding you tend to get uncertainty and irrelevancy, and ideas and conversation that skates across the surface rather than digging deep to where the problems and opportunities that provide the fodder of successful  innovation are buried. I love the metaphor of Classical music and Jazz in the context of innovation, the score provides the boundaries. To be a good classical music player, you need to be a master of your instrument, and be able to reproduce note perfectly what the composer has written, the allowable variation is very small, the emphasis is on technique. Jazz by contrast requires that you are a master of the instrument, as well as the music to the extent that you can take what a composer has written and innovate around the base rhythm and melody, so you need to be not just a master technician, but a master of the music. Great innovation in a commercial environment   has exactly the same characteristics.

 

Think different. The great 1997 Apple advertisement  said it all, but how many corporate entities will tolerate the crazy ones? Very few. If you are to truly be an innovator, somehow you have to accommodate some crazy ones. Generally they  are tough going, irreverent, unconcerned with status and the status quo, constantly irritating the nice smooth flow of processes that deliver the consistency that corporates thrive on.

 

Problem definition. Innovation occurs when a problem is solved. Often it is an old problem solved in a new way, sometimes it is a problem unrecognised until the solution comes along, the classic example being the post-it-note. A huge part of the challenge of innovation is the identification of the problem. Rarely does a problem emerge with a fully-fledged solution, but as Einstein, in my  view one of the greatest marketing thinkers who never receives any credit at all once said, “if I had an hour to solve a live changing problem, I would spend the first 55 minutes defining the problem, the rest is just maths.”

 

Margin maintenance. This is tangled up with risk profile, but is separate. Over the years I have done many proposals for new products killed at  the gate by the margin problem. “If we launch this, it will erode our margins” often true, but the standard response I give is “better us than someone else”, but it is often a futile response when the ultimate decision maker is compensated by short term considerations. After all, Kodak managed to survive for 40 years after they invented the digital camera in1975, several generations of CEO had passed through in that time, all taking their packet, it was just  the last in the line who had a problem.

 

Value not just price. Consumers look for “value”, but way too often that is translated by suppliers and the retailer into “price”. Price is just one way of reflecting value, but it is the most obvious, and easiest to articulate.

 

Barriers. Every industry has its own set of barriers to innovation in addition to the more general ones above. In the case of the Australian packaged goods industry, they are several, all associated with the concentration of power in the retail trade.

Margin squeeze

Speed of house brand copying the successful products

Timing of distribution and advertising

On shelf management of facings, cut in, position, promotional programs  and stock weight

13 week “live or die” time

On shelf upfront costs

Category management if you are not the category captain, and few small businesses are,  you are at a significant disadvantage

Risk averse retailers

Habit. Everyone is used to doing business in a certain way, so that is the way it is done.

 

Opportunities for suppliers.

Similarly to barriers, every industry has its own unique set of opportunities that when seen are open for businesses to chase.

Social media. FMCG suppliers have not yet solved the problems of how to best use social media to market their process in supermarkets.

Mobility. Engagement with the web and its tools is now mobile, a majority of net interactions are mobile, and most people have their smart phones with them all  the time. Using this capability and the geo-location capability to foster a direct relationship between the brand owner and the consumer with the supermarket playing the distributor role is a real opportunity currently under-recognised and utilised.

Food service and ingredient. These are fragmented markets, where innovation, service and brand can still play a real role, and getting a return on your investment is still up to the quality of your business, not the whim of a buyer in a gorilla suit. Depending on whose numbers you use, sales outside the major chains of ingredient and to food service outlets from fine dining to fast food, is north of 60 $billion.

Digital coupons. Retailers in Australia have ensured that the redeemable coupon, so prevalent in the US does not get a start here, too much transaction cost, but a digital coupon? Why not? There have been several tries of various types, Groupon being the most obvious, but smartphones make it so much easier to collect coupons and redeem them  in some way, not necessarily even associated with the retailer.

Range optimisation. Category management as it has evolved has always been data intensive, and from a retailers perspective, the objective has been margin optimisation. The next step I suspect will be range optimisation which is really just margin optimisation with a far greater understanding of consumer behaviour thrown into the mix. We have all operated with the view that our various research tools and their data gave us enough to work with, and they did,  but suddenly there is the “big data” behaviour mining opportunity offered by  social media and geo location, in addition to the fragmentation of times we shop, and how we place and receive orders. Range optimisation to accommodate all these changes just became in my humble view, the FMCG marketing challenge of the decade.

Innovation from the waste. Until very recently, produce that was outside the specs for appearance was consigned to the waste bin, juicing, and other marginal uses, it was not deemed good enough by retailers to sell, not because it was nutritionally or organolepticly deficient, but because it looked crook. Along came the idea of highlighting the products visual imperfections,  “Imperfect pick” is the term Harris Farm have used, Canadian chain Loblaws has successfully  rolled out “ugly fruit”  in Canada, and both Woolies and Coles appear to be tinkering with the idea currently. There are a myriad of opportunities to utilise undervalued product to build a category, for example, shin bones are the foundation of Osso Bucco, many of us will sample great Osso Bucco at an Italian restaurant, but never cook it at home, when it is an easy, tasty  meal with a very low meat cost. Pretty simple marketing I would have thought.

 

Innovation is tough, but it is also fun and makes the future. Those who just wait for the future to happen will be overwhelmed by it, those who take a role in shaping it will at least have the chance to do well.

 

This post is the 8th in the series examining the means by which small businesses can deal with the retail gorillas.

The one that started it, back in October 2014, is a summary of the 10 ways to beat the gorillas at their own game, a summary post that generated a lot of interest, so I expanded the individual points in subsequent posts.

The first expanded post was the 3 essential pieces of the business model

The second, 5 ways to compete with data

Third, 6 category management ideas for small business at Christmas

Fourth, 9 imperatives for small businesses to build a brand

Fifth deals with the reality for all supermarket suppliers, that they have two customer types, requiring different approaches.

Sixth, deals with the least understood large cost impact on small businesses: Transaction costs.

Seventh suggested ways for small businesses to collaborate for scale,