Apr 2, 2024 | Branding, Change, retail
The retail landscape is changing, even as the two retail gorillas hunker down and set about extracting more from the current model.
Following are a few of the macro trends I see that will continue to erode the current model that has been so successful.
Declining customer loyalty.
I have no numbers, but anecdotally, where in the past you shopped at Coles or Woollies, now you have Aldi, Farmers markets, Costco, Harris Farm, and a range of specialty retailers all competing successfully for the consumers dollar. I no longer know why anyone sees any of the major retailers as ‘their’ store. Loyalty is something that is given in acknowledgement of great service, and the gorillas have failed in that space.
Changing customer habits.
Associated with loyalty, customers are looking for things other than just the lowest price. Increasingly they want product provenance, domestically produced product, they are increasingly sensitive to the ingredient lists, and spurious health claims. This is all happening as the gorillas remove the options from their shelves in the game of short-term margins.
The continued growth of home delivery by the gorillas since Covid gave it a turbo-boost seems here to stay. Interestingly, home delivery also seems to be a useful brand building tool for the gorillas. Anecdotally, consumers tend to stick with one or the other of Coles or Woolies for delivery in greater numbers than they exhibit loyalty when shopping for themselves.
Investment attraction.
Aldi has invested successfully, Costco while going more slowly than expected, appear here to stay, farmers markets have become ‘corporatized’ to some extent, Harris Farm continues to invest, and specialty stores continue to ‘pop up’ although few survive for the long term. It seems that the market is sufficiently big, that with only two major players there is risk capital going in at the fringes, and in the long term, the fringes tend to become mainstream. Looming over all this is the shadow of Amazon, and more generally the move away from the bricks and mortar business model. I was betting a few years ago that the Harris family would cash in and sell to Amazon, a transaction consistent with their strategy in the US. So far, I have been wrong.
More recently, the public and political attention focussed on the gorillas can only have a negative impact on the investment attraction of FMCG retail.
Business model proliferation at the fringes.
While the supermarket model absolutely dominates the current landscape, technology and changing consumer attitudes are enabling evolving business models to compete for the consumers dollar. Two of my neighbours combine to buy meat in bulk direct from a farmer in the Southern highlands. It started as all the meat from a single animal, which meant lots of mince. Recently much of that mince is being made into sausages, and they are experimenting with differing sausage flavours for variety. This proliferation seems to me to be another signpost that change is coming, like it or not.
Margin pressure.
While all this is going on, margins through the supply chain are under increasing competitive pressure. This pressure impacts enormously on the decision making of incumbents, offering niche opportunities to newcomers and new business models to make a case with consumers.
It seems to me that the incumbent retailers are waiting to see what happens. History tells us that this is not an effective strategy. The better course is to shape your future in some way that suits your aspirations. It would be naive to say this was easy, it is excruciatingly hard, which is why so few are able to make the transformations necessary.
I keep on harping about the failure of Woolworths to leverage the start they made with Thomas Dux. To my mind it was a classic strategic mistake to back away.
My conclusion is that the current management culture at both the retail gorillas lacks the courage to explore, be curious, make investments that are separate from the main business, and stick to them in the face of short-term challenges. Instead, they have chosen to hunker down and optimise the current model.
Mar 28, 2024 | Leadership, Small business, Strategy
Success of an SME means they have crossed that shark filled river where most SME’s fall over.
They have sufficient scale to employ functional personnel to address the day to day running of the business, and are returning the cost of capital and a bit more to the owner.
For some this is a level of comfort that is satisfactory, but to most who have strived to get across that river, it will not be enough, they are of a personality type that will be looking for the next challenge.
So where should they look?
Do yourself out of a job.
When you can go away for 3 months and wonder why nobody missed you, the business has reached the point where you are no longer needed daily. Accept that and get a life, or knuckle down to scale the business. For many that might mean becoming a non-executive chairman, staying engaged, but well away for the week-to-week challenges. You have created a manager system and ‘bench’ that does that. Leverage it.
Identify the industry constraints.
Every industry has a set of constrains that are rarely even noticed, they are just the edges of the status quo. Every useful innovation that has evolved, has done so by addressing a constraint that few, if any had even seen. The outcome of this insight is to deliver the opportunity for significant value addition.
The exempla was Steve Jobs. He saw the constraints in personal PC’s when he saw the work being done at Xerox Park developing a Graphical User Interface. When deployed in the Mac, the GUI changed Apple from a hobbyist into a leading PC. He repeated the magic with the original iPod, then the iPhone, and the App store. Each of them operated in an existing environment, with existing technology that could be deployed in ways that removed the accepted industry constraint, changing the face of that industry. You do not need to be a huge organisation to do this. In my local area there is a plumber who guarantees his work, and guarantees the time he will turn up to do it. Failure to address either means the client does not pay. He charges a significant premium, and now has a number of vans on the road, simply because he redefined an existing constraint in this local area.
Identify and remove internal constraints.
As with an industry, every business has a range of internal constraints that together become the culture and status quo in that enterprise. There are always opportunities to do things better, but are often overlooked, by simply not being seen, or miscategorised.
A former client removed an internal constraint and added 10% to his gross margin overnight by doing so. The business, a medium size in his industry had kept three suppliers of the core item in his manufacturing operations holding roughly equal share of his business, for roughly equivalent products. There was little to no internal competition, each of the suppliers did so from their price list, while maintaining very friendly relations with the MD and purchasing manager. We instituted a competitive bid for a guaranteed 80% of the purchases, with the remaining 20% to go to the runner up as a consolation prize, and ‘backup’ to the major supplier. The cost reduction that came from that relatively simple exercise dropped straight to the bottom line.
Currently the evolution of AI is creating huge opportunities for enterprises to deploy tools that will optimise existing processes and enable scaling at little or no added cost. There is a learning curve, an investment required, but not engaging means you will quickly fall behind competitors, while ignoring the opportunity to go quickly past them.
Build performance consistency.
For those with a view to one day selling the business they have built, there is no substitute for being able to show consistency of performance over time.
Even when an exit is not even contemplated, seeking ways to build consistency has the result of simplifying an enterprise which almost automatically adds margin and cash.
To build performance consistency takes time and effort. It requires a combination of being ‘in the weeds’ implementing processes that recognise and address tactical and operational improvements daily, and taking a ‘helicopter’ view that enables strategic positioning. This combination is easy to say, hard to do.
A buyer is buying two things, both of which are extremely valuable, irrespective of the inclination to exit the business:
- Optimise the existing business processes and infrastructure,
- Map the path that best delivers future cash flow.
Demonstration of positive performance consistency on both these parameters will give you back time, and optimise the buying price if and when you exit.
Header credit: My thanks to Hugh McLeod at gapingvoid.com
Mar 26, 2024 | Governance, Sales
This is one of the most common questions asked, particularly when configuring a new product.
The ‘right ‘ price will be the pricing model that delivers superior value to customers while delivering optimal returns to the seller.
Developing a pricing model involves a series of strategic and market driven choices. Packaging, high Vs Low, the channels used, marketing collateral deployed, shape of your business model, identification of your ideal customer, and a host of other factors that make up the ‘marketing mix’.
However, despite most of us knowing these things, typically price is set on a cost-plus basis, mixed with what others are charging for the same or similar/substitute product.
For an entirely new product, it is a guessing game that has potentially serious consequences. At one end you kill the product, at the other, you leave money on the table.
Dutch economist Peter van Westendorp introduced a method that ended up being named for him in 1976. It has been used sparingly since, but not as widely as it should be.
It is a simple and reasonably reliable method to determine the ‘right’ price for a product or service.
There are four questions that will set your price ‘guidelines’:
- At what price would it be so cheap that you would question quality?
- At what price would you consider the product to be a bargain?
- At what price would you start to think the product is getting expensive, but you still might consider buying it?
- At what price would you consider the product to be too expensive, and you would not buy it?
Analysis of the responses will give you the point at which you are attracting the most customers who make the trade-off between buying intention, price, and quality perceptions. Putting this on a simple two-dimensional chart makes explanation easy.
Header courtesy Wikipedia
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!!
