Mar 22, 2024 | Customers, retail, Small business
Anyone dealing with Australia’s two supermarket gorillas knows how hard it is.
You know the old adage:
Question: Where does a 400 kg gorilla sleep?
Answer: Anywhere they bloody like!
Over the 45 years I have rubbed up against them, beginning as a young bloke when there were a number of now disappeared alternative retailers, it has only become harder. However, the rules of dealing with them have not changed much, just become clearer and more cut-throat.
Some years ago I did a presentation to the CEO’s of the SME group of companies who were members of the food industry lobby group AFGC. Looking back on that presentation, republished in several places, it is clear little has changed, certainly not for the better for battling SME’s.
My advice to those I work with also has not changed much, and can be summarised as:
- Have a solid commercial foundation before you contemplate the challenges of distribution through supermarkets.
- Never forget that retailers might be your customers, but they are not your consumers. At best they are a massive barrier between you and your consumers.
- Be relentlessly focussed on your long- term strategy, while recognising retailers are only the means to that end, not the end itself.
- Unless you are clearly differentiated from others, particularly in the minds of consumers, you will be a retailers breakfast.
- Know your numbers intimately. This is the barrier upon which most are wrecked, they have insufficient control and understanding of all their costs, margins, risks, and cash flow.
- Be very willing to say ‘No’ and live with the consequences, as they will almost always be better than the consequences of saying ‘Yes’.
These basic rules, and several others were the topics of conversation in a podcast with Chelsea Ford, published yesterday. The links to the podcast on Spotify and Apple are below.
🎧 Spotify: https://lnkd.in/dWzMN5mN
🎧 Apple Podcasts: https://lnkd.in/dq7yWGJZ
Mar 21, 2024 | Collaboration, Governance, Marketing, retail, Strategy
Collaboration between competitors is illegal, but tough to prove. It is also the natural state of affairs in an oligopoly.
When a competitive market evolves over time into an oligopoly, the focus of management attention of the remaining oligopolists moves from the customer to the competitor. With the resources available to an oligopolist in any decent sized market, they will know in considerable detail the strategies, internal processes, pricing, and resource allocation choices made by their competitors almost as quickly as they happen.
Supermarket competition in Australia has evolved in this manner. It has turned from ruthless competition for customers 40 years ago, to ruthless collaboration between the two major players now.
Collaboration is illegal, and I am sure that the leaders of the two supermarket gorillas are not setting prices together, or collaborating in other ways that would be contrary to the competition laws in this country. However, given there are only two of them, and they have the resources to watch the other very carefully, there is a sort of quasi co-operation that emerges.
It is driven by the commonality of their activities: The need for shareholder returns, driven by market share acquisition costs, both fixed and variable. They work aggressively on both, and if they did not, the senior management would be fired. In addition, directors have legislated fiduciary responsibilities under the Corporations act in relation to shareholder interests and importantly, returns.
We must also remember that via our superannuation funds, we are all shareholders in Coles and Woolworths.
Once again, just like the ‘housing crisis’, we have short term populist press release driven band-aids being suggested. They are touted as the remedy for long term strategic choices made in the past that to some, have turned sour.
The time for institutional concern about the increasing power of supermarket chains was when they were assembling the scale they now have. All of the take-overs and mergers that have happened have been waved through by the ACCC. This is despite commentary at the time about the impact of the lessening of competition for the consumers dollar.
Now it is too late, other remedies must be found, which do not include a forced break-up. Apart from the immorality of retrospectively applying new rules to the conduct of business, there is no logical or practical way to break apart either of the supermarket chains.
We should stop bleating, and get on with life, while ensuring we do not make the same mistake again.
Header credit: Gapinvoid.com. The cartoon put a huge amount of meaning into a simple graphical form. Thanks Hugh!!
Nov 27, 2023 | Branding, Customers
Every time I go through a supermarket checkout, I find myself surprised at the total of the bill. Should be used to it by now, but no, I’m not!
The two supermarket gorillas, Coles and Woolworths have both released their annual results in the last month, and shareholders, which via superannuation is most of us, should be very happy.
Woolworths pocketed $1.6 billion on significantly increased margins, and Coles managed $1.1 billion on similarly better margins. The percentages are way above those generated by peers in developed countries, for the simple reason that they are an oligopoly and leverage that power to generate profit. Aldi has made an impact and continues to do a good job of ‘keeping the bastards honest’ but the fact remains, profit comes from market power. It is also fair to acknowledge that both have done a pretty good job of optimising their current operations, which also contributes to those juicy profit numbers.
Supermarket retailers, and other retailers in a position to exercise market power, are in two businesses that together make a powerful business model:
The first is renting retail real estate to their suppliers.
The second is selling products to consumers.
Both are transactional, with constant negotiation between the retailers and their suppliers. Sadly, there is an unequal distribution of power between the retailer and the supplier, so the use of price on both sides of the equation by retailers has become ubiquitous.
They extract maximum ‘rental’ for the shelf space, while being relatively unconstrained at the checkout by competitive pressure.
As a result, suppliers are screwed down so hard that even the very best of them have trouble returning the cost of capital, and price competition that benefits the consumer is a myth.
The price-based promotion programs deeply embedded in the psyche of both retailers and their ever-decreasing pool of suppliers destroys brands. Over the time I have been watching, the supplier margins from which springs the innovation that keeps categories fresh and interesting to consumers, has disappeared.
Retailers are lousy marketers. Ask one to explain the drivers of purchase and they have only one answer: price. Anyone who has ever bought anything knows that is rubbish.
For long term commercial sustainability of both retailers and their pool of suppliers, there must be a balance between tactical promotion and the innovation investment that generates category and brand growth, and there must be serious competition.
That no longer exists. Marketing and behavioural research over many years is unequivocal. Healthy markets need both.
Retailers have used price as their only tool because they can. In the process they have killed off almost all proprietary brands, replacing them with house brands, which are no more than carbon copies. There is no longer category or product innovation, and no suppliers willing to invest in brands, just a conga line of copycats.
The cost-of-living crisis facing many consumers today will become a strategic crisis for the retail gorillas as they fail to evolve their business model.
Oct 31, 2023 | Change, Marketing, Strategy
When I was a boy in this business, back in the seventies, having a brand was table stakes to be in the game. At that time, there were a number of supermarket chains, and every one was stocked with a suppliers proprietary branded product.
There were many types and scale of brands. From the small producers hoping for a modest segment in the market that would provide a living and employment in their modest factories, to the multi-national, mass market giants. There were no ‘House brands’, until Franklins as an experiment ranged ‘No Frills’ margarine, packed by my then employer Vegetable Oils Ltd, which later became Meadow Lea foods.
Over time, the number of supermarkets reduced to the two gorillas and Aldi that we have today, and the number of brands reduced from the many hundreds down to the few MNC brands, with a very few exceptions, which are slowly being squeezed of life today.
If the trends of those 40 years continue, a brand extinction event is getting closer every day.
The latest victim is Sara Lee.
Originally the brand came from the US, and at its height had diversified into a wide range of products from the initial frozen cakes to clothing, and real estate. The Australian business has been through several owners, the most recent being a Dutch company nobody outside the industry would have heard of.
Manufacturers have been their own worst enemies.
They have failed to recognise the long-term impact on their profitability of the increasing power of Woolies and Coles, with the recent addition of Aldi. Retailers do not care about proprietary brands; their goal is their own profitability. If they cannot have your product on shelf, they are just as happy to have an alternative.
Increasingly over the past 30 years that alternative has been a house brand.
When retailers own the shelf space from which consumers pick products, and also ‘own’ the sales margins from half the products for sale, guess who wins. Retailers have used their muscle to squeeze out proprietary brands, taking the proprietary margin for themselves. The stupidity is that manufacturers have aided and abetted this quest to destroy them, by supplying the products and stopping the long-term brand building that made them successful. The funds have been redirected by manufacturers from advertising and brand building back into price promotion. Selling with price being the only differentiator is a sure way to destroy a brand.
To explain the resilience of a few brands, and some that resisted the retailer pressure for years before succumbing, you need look no further than effective, long term brand building advertising. The Vegemite jingle is in the brains of most Australians over 40, and Vegemite persists. Aeroplane jelly is also there, and I would guess the brand could be rejuvenated by a return. Similarly, Meadow Lea is a shadow of its former self, but 30 years after the great ‘you ought to be congratulated’ advertising finished, the positioning of Meadow Lea remains viable, and could be revived with investment.
To explain the failure of FMCG management to continue to invest in their proprietary brands over the years, allowing house brands to take over, you need look no further than the lack of understanding of the contrary dynamics at work.
Advertising is a long term investment, over numbers of years. Advertising is treated as an expense, one that is accounted for on an annual basis in the accounts of businesses. These two contrary forces, when allied to executive KPI’s dominated by accounting thinking, and the increasing power of the retailers to demand discounts as a necessity for distribution has drained the capital necessary for brand investment. The retailers are happy, they have the margin. The short term executive profitability goals of a few executives may be reached, so they are happy individuals. However, the brands have been destroyed, and the long term viability of their manufacturing operations been compromised, in most cases, terminally.
That in a nutshell, leaving aside questions of the operational efficiency of the Sara Lee business, is why it is now on the discount block itself.
Feb 8, 2023 | Governance, retail, Strategy
We all need to eat, but we seem to take for granted the access to processed and fresh food and groceries. To consider the ‘food industry’ as one entity ignores the entirely different strategic drivers of the three main components: Raw material production or ‘farming’, Manufacturing, and retail.
They should be treated separately as while interdependent, they are driven by entirely different forces.
In addition to food products in the FMCG basket, you have many non-food items from cleaning and homewares to health, beauty, and personal and pet care categories. Go into any supermarket, and these non-food categories take up somewhere around 20% of shelf space.
Farming.
The ‘family farm’ used to dominate the farming sector, but that is diminishing as scale enabled by capital takes the place of family intergenerational ownership. Costs come down with corporate ownership, but you are most likely to see agricultural monocultures emerge, as short-term financial returns creep up the priority list.
The register of foreign ownership, flawed as it is, records in the latest report June 2021, that 14.1% of agricultural land is in foreign hands, up from 10.9% the previous year. The National Farmers Federation estimates that 99% of farm enterprises are owned by Australians. Clearly the big are getting bigger at the expense of the small.
The infrastructure necessary for the management of farm production requires substantial investment, the rail networks have broken down, and the roads are a mess. This is a long-term problem, and the logistic costs of farming will increase faster than the inflation rate.
Manufacturing.
A report from the AFGC concludes that profitability is declining, due largely to the concentration of retail, and that imports will gain ground as a result. Currently the food & beverage manufacturing industry employs 276,000 people, 40% of them in regional areas, and has an output value of 127 billion, 32% of total Australian manufacturing output. In other words, it is big and diverse both geographically and demographically, and therefore should hold a significant place in the thinking about how we educate and groom future leaders.
The gross figures for the industry indicate that there is almost 30% of production value exported. Problem is that the vast majority of this is raw or minimally processed meat and grain, employing few people, anywhere in their supply chains, and competing in commodity markets.
Of The 8 directors of the Australian Food and Grocery Council, the industry’s ‘representative’ body, one is the CEO of an Australian beverage company, the other 9 are all the chief executives of multinationals. This is not a bad thing beyond the obvious fact that it perpetuates the lobbying and resulting policy positions of government in favour of MNC’s vs the locally owned industry.
As a young bloke coming into FMCG in the late 70’s after a few years as a nomad, there were many businesses of a whole range of sizes and types to work for. Over time, the number and diversity has been radically reduced. Significant industries like dairy are now almost complete branch offices of multinationals. The exception is produce, where there are still many farming suppliers, although there are now a few very big consolidators, like Costas, who dominate the supply chain into retail. There are no proprietary produce brands in retail, beyond a couple of minor organic brands. Retailers have ensured that they absorb all the proprietary margin in produce.
If there is a light in the tunnel starting to be seen evolving as a result of the disruption of supply chains, and the low profitability of FMCG manufacturing, it may be Bega. Bega Cheese, which was rescued from the clutches of the receiver by now foreign owned Dairy Farmers Ltd way back in (about) 1991, has been able to expand by buying the Port Melbourne site of Kraft, as it was taken over by Mondelez, and ending up being able to buy the Vegemite brand, and more recently the rebranded peanut butter business. Perhaps this is the beginning of a resurgence?
Retail.
Grocery market size and share in Australia is debateable depending on what is included. By most analyses, Woolworths has around 37% share, Coles 28%, and Aldi, now the real third force 11%, and the wholesaler supplied groups around 7%. The remaining 17% is made up of a patchwork of fresh and farmers markets, direct from farm delivery, small independent retailers, and convenience outlets.
In addition to grocery, there is the huge food service market, varying from the local owner operated restaurant and takeaway, to fast food chains and five-star dining. This sector consumes a large amount of product and employs thousands of people.
The power wielded by this bloc of 76% of grocery sales is immense. As they have scaled out of the ruck that was the retail playing field in the 70’s and 80’s, taking over or leaving to the receiver less robust competitors. They have squeezed manufacturer margins by a range of strategic weapons that are a classic case study of Michael Porters 5 forces. In response, manufacturers have similarly scaled by using regional manufacturing hubs, most often in Asia. The impact on domestically owned manufacturing has been dramatic, accelerated during the period where the $A was above parity with the $US, which encouraged wider adoption of house brands manufactured overseas, wiping out what remained of locally owned manufacturing. With a couple of notable exceptions, (San Remo, and now Bega, and Sanitarium who do not pay tax, for example) Australian owned food manufacturing is down to sub scale cottage manufacturers relying on the fragmented but still difficult 24% not controlled by the three retail gorillas.
It is fair to acknowledge the strategic failure of local management, while throwing rocks at the retailers. There used to be major FMCG brands owned by domestic businesses, built up over extended periods that failed to recognise the long-term strategic importance of maintaining their brands. Instead, they surrendered to the tactical demands of retailers for short term promotional dollars that assisted retail margins while keeping prices low. Short term, consumers may have benefitted from the price competition while having significantly less choice. Long term, they face the impact of an economy that has only a tiny proportion of its biggest manufacturing industry being able to make strategic choices driven by domestic priorities.
A few thoughts about the future.
Technology cannot do anything but increasingly impose itself on the industry, in all its components. Australia is already a world leader in the development and deployment of Agricultural technology. Failure to accelerate the rate of innovation will find Australian agriculture losing the current productivity edge we have, as while we are really good farmers, the soils of the continent are old and poor, subject to significant climatic risks Therefore to keep our position, we must continue to be smarter.
Innovations in retail are happening elsewhere. ‘Amazon Go’ type technology will transform the shopping experience, and home delivery will not be going away. Meanwhile Australian retailers are wedded to optimising the business model that has made them successful in the past. This will open up opportunities for alternative retail formats and processes.
Retailers are good at retailing, but have been proven to be lousy at product innovation. In the past, product and category innovation has come from businesses tapped into the consumer psyche. Unfortunately, those businesses are virtually gone, so where is the next innovation going to spring form? Certainly not from the office of a buyer whose KPI’s are all about margin today
The logistic infrastructure so vital in a country as large and diverse as Australia is in poor shape. Rail networks are broken, roads are going the same way, a trend recently accelerated by flooding, and you cannot get drivers of heavy and long-haul equipment easily. The median age of all transport drivers is approaching 50, and long-haul semi drivers is now 55, and they are not being replaced. When considering specialised driving jobs like picking up cattle from farms, the situation is already dire.
In summary, the Australian food industry is faced with a series of significant challenges that have evolved over a long period. They will not be effectively addressed by industry or public authorities that think in terms of only a four or five year strategic horizon.
Note: this post was first published in the auManufacturing Linkedin group in December last year.
