The downside of FMCG retail scale.

The downside of FMCG retail scale.

Feb 14, 2018 | Innovation, retail, Strategy

Woolies and Coles have around 75% of FMCG sales in this country, depending on whose numbers you believe, and which categories are included.

They have huge scale, from the farm gate through the supply chain to the consumers wallets. As a result, their cost of capital is low, as lenders, both cash and equity see the risks as being low. When you add in their ‘trading terms’ as a component of  their cost of capital, as it should be, the numbers would look even better. Pay your suppliers in 90 days, having used your scale to reduce the price to subsistence levels or lower, minus  the deductions for whatever you can dream up, during which time,  the stock has turned over several times.

Bargain!

By contrast, the small suppliers, those few that are left,  are seen as poor risks, which in fact they are being an endangered species. Their costs of capital are high, as are their operating and working capital costs, which leaves little to nothing to be invested in the future of their businesses.

That is why they have mostly disappeared. Their management has been unable to balance the competing demands of low price and increasing operating costs, such that even large seemingly successful businesses became smaller unsuccessful ones to be sold off to whoever had the cash. Consider Goodman Fielder, SPC, Dairy Farmers, National  Foods, CSR, …… need I go on?

The long term problem that this trend delivers is that innovation, the creation of new value for customers, and the lifeblood of retailers comes from the edges, from outside the  status quo. It is usually those smaller, entrepreneurial businesses that get in there and have a go, take a risk, and survive on their vision, wits and determination, that deliver the category makers.

Pity they are almost all gone, and what we have left is a number of ‘traditional’ retailers seeking to optimise their existing operations, while having nothing to fight the well-funded disruptors coming to eat their lunch.

Woolworths emasculating and closing Thomas Dux is the classic case of corporate strategic blindness. Now they have backtracked with the very well thought out new Marrickville Metro store, which is not Woolworths, but the ghost of Thomas Dux back to haunt them. Meanwhile, Amazon is really innovating, taking their pilot Amazon Go store public a couple of weeks ago, in a move that goes well towards defining the store of the future.

The downside of scale is the conservatism and lack of real innovative and strategic vision that comes with a business intent on optimising the current model. If that worked, Olivetti would  still be a significant player in the document creation business, Kodak would still be creating memories,  and Microsoft would still be a near monopoly.

Header credit: apologies to Monty

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.

Is Amazon Go the supermarket of the future?

Is Amazon Go the supermarket of the future?

Jan 25, 2018 | Innovation, retail, Strategy

Amazon has been experimenting since December 2016 with a concept store ‘Amazon Go” in Seattle. It has been a ‘Beta’ store, open only to Amazon employees, as they set about solving the obvious wrinkles in an environment with no cashiers, and no self-serve cashier machines, just a ‘walk in walk out’  App that manages the whole process.

Oh wonder of wonders, no queues!

Amazon Go opened to the public  on Monday this week. The key question is what are they going to do with it?.

It seems to me there are two basic strategic choices:

  • Roll it out via their own stores, an Amazon Go expansion,  and/or via Whole Foods, which gives them an immediate footprint of 470 stores in areas with higher income, and tech savvy consumers
  • Sell the technology to other retailers,  just as they have with Amazon Web Services.

Of course, they are also able to do both. Amazon is perhaps the most agile large enterprise the world has ever seen, able to manage multiple lines of concurrent innovation that would choke every other business.

For what it is worth, my bet is that Amazon will progressively roll out the technology into selected Whole Foods stores, the ones surrounded by higher urban densities, in what will be a ‘mass beta’ of the technology, then sell the technology to others as they have done with AWS. This would enable them to capture a slice of the installation costs as well as ongoing software subscription revenue and a percentage of sales.

A goldmine amidst a disrupted retail business model and consumer experience. Not since the first Piggly Wiggly supermarket was opened in 1916 have we seen the potential for retail disruption on such a scale, and at such speed as I suspect we will see.

I do not know what is happening in the executive suites of Coles and Woolies, but if they are not deeply concerned about their current business model in the face of this coming Amazon tsunami, they are truly short sighted.  My instinct is that the strategic deficit of Coles and Woolies is just too wide to be easily bridged by the tactical stuff they have both used with varying success for the last 30 years. It is not as if they are alone, major retailers worldwide will be in trouble, Tesco, Wal-mart, Carrefore,  and all the rest will be on life support with them without radical change. I suspect the only one capable of that scale of change is Wal-Mart, run by a Kiwi expat Greg Foran, who missed out on the top job at Woolies a few years ago.

I have previously suggested that Amazon might reach out to Harris Farm as a way to build a footprint in Australian retail, by leveraging the lessons that will emerge from Whole Foods. This now seems even more likely than it was 6 months ago when Whole Foods was acquired.

Amazon is going gorilla hunting.

Addendum April 2024  It seems the answer to the question, asked way back in 2017 is ‘NO’ According to this report in 2024, the technology, even with the addition of AI which has exploded onto the scene since December 2022, the AI is really a bunch of Indians sitting at desks annotating video feeds. https://www.businessinsider.com/amazons-just-walk-out-pullback-shows-ai-way-to-go What a let-down!!!!

 

 

 

Optimising does not always deliver results: Re-frame.

Optimising does not always deliver results: Re-frame.

Dec 13, 2017 | Change, Innovation, Strategy

Lean thinking, and the lean toolkit have changed the manufacturing landscape around the world. The elimination of waste in processes is now standard practice in every successful business, and the tools of Lean, 5 why, 5S, and all the rest play a key role, and have been successfully migrated into functional areas outside operational ones.

However, like any tool, you have to have the right one in your hand to effectively address the situation in front of you, and lean tools are not always the best ones.

Lean is largely about optimising the existing processes by elimination of steps that add  no value, the elimination of waste.

However, when applied to strategy development they are not useful in many circumstances.

Had the Taxi industry applied a 5 why analysis to their industry, they would not have come up with something like Uber. They would have cleaner taxis, drivers who know their way around, quicker response times, and a way to address the shift changeover lag. To come up with an Uber required the industry to reframe the source of value they create for customers, who want to get from point A to Point B in the least possible time, at the least possible cost, while being kept fully informed. A 5 why or alternative popular tools like a SWOT would not have given them the answers that led to Uber, they needed to reframe the industry entirely from the perspective of the customer.

The problems of the taxi industry were not solved by Uber, they entirely reframed the value proposition to customers.

Innovation is a particular challenge for lean thinkers, as it is always messy, risky, ambiguous, and a long way from optimised. However, it is an essential part of commercial evolution, without which we would end up in a homogenised world.

How boring would that be?

Photo credit Jon Swansan Via Flikr

8 unfortunate realities facing every small business entrepreneur

8 unfortunate realities facing every small business entrepreneur

Oct 3, 2017 | Customers, Innovation, Small business

Every time I turn around I see another ad touting the ‘laptop lifestyle’. Travel, work occasionally, and have the money rolling in, just because you have invested in yourself and bought a course from a self-styled guru.

Of course it does happen, but very occasionally, and each time it does the person has met a number of key hurdles.

When you think about it the rules of  business apply irrespective of the size or nature of your business.

There has to be a market. Nothing succeeds without customers, and customers do not come to you simply because you are following your passion, which is the usual pitch. I would  love to be able to make lots of money by splitting my time between surfing, tramping through mountain streams in search of that elusive rainbow trout, and drinking lots of expensive wine, but have not found anybody willing to fund me as yet. From time to time, an entrepreneur creates a market, the magic can happen, but if your name is not Steve Jobs, Peter Theil, or Richard Branson, do  not count on it.

You have to create value. Being paid is simply a by-product of creating value for someone else. It does  not matter what the product is, someone will only pay for it when they see that they will get something out of it greater than the cost to them.

You need  to pay the bills. Every business has expenses, some are discretionary, others are overheads, that show up irrespective of any revenue generation. Those bills need to be paid, you need to eat, and the kids need a roof. This reality is the one that stops many from following the whacky advice to ‘follow your dreams’ and luckily so. However, the business management task is to reduce expenses, particularly the fixed expenses as much as possible, while still generating the revenue and absolute margins.

There is a lesson in every set-back. Life is a learning experience, and failing to learn from every situation you find yourself in is short-changing yourself. As a young product manager I also had to cover the sales territories of the NSW reps when they were on leave. Every couple of months I had to take 2-3 weeks out of what I believed was a busy and useful schedule to go around stores and sell to people who really did not want to see me, I hated it, but learnt more in those months than I realised, and now insist that all marketing people I hire have a period ‘on the road’.

Time is your most important asset. Time is our only truly non-renewable resource, and yet it is so easy to waste. Professionals tend to organise their time more productively than amateurs, they spend time practising, honing their skills, so that when the time comes they perform on cue.. We all see ourselves as photographers, as we now all have a camera in our pockets. However you can always tell an amateur shot from a professional one, the pro is better in a whole range of subtle ways, simply because the professional has spent the time to practise, and learn the skills.

Be different and be a master. Success rarely comes to those who are the same as everyone else. It comes to those who are different,  who have a unique take, and who are the masters of  their craft. In the digital world, the mantra I use is ‘pick your niche and own it‘ or as Steve Martin says, ‘be so good they cannot ignore you‘

Evolve and adapt. For most of human history, the past has been a pretty good indicator of the future, change happened slowly. Not so any more, relying on the past to forecast the future is a sure way to be wrong. Owners of small businesses have the power to move quickly, adapt their processes, learn by trial and error while their larger competitors are still at lunch. Of course, they do not have the depth of resources to be wrong too often, so it is a Darwinian process.

There are no silver bullets. We humans usually look for the easy way, and this is the hook used to sell us the silver bullet that turns out to be lead. You can get lucky, who you know does count, but the old adage that the harder I work the luckier I get holds.

Apart from these challenging realities, being an entrepreneur is really a doddle!

The excruciating paradox for the innovator.

The excruciating paradox for the innovator.

Aug 17, 2017 | Innovation

Successful innovation generally comes from being small, with little baggage, no institutional ‘downside’ and few inhibitors to the ability to be truly agile in response to weak feedback signals from customers. Innovation is also a consumer of cash, rather than a generator, although that fact of history is being rewritten by the plummeting cost of tech. Usually the innovators have the will, but do not have the cash, the big companies have that.

So, to be successful, as a rule, you at least have to be able to think and act like a small enterprise, but have the resources of a big one.

Back in my early corporate days I worked for Cerebos Australia, then a modest sized, but hugely profitable offshoot of a British multinational . When I joined, Cerebos marketed Cerola Muesli , with considerable success, but margin was hard to get. In the process of creating new products, we created a muesli bar, a mobile, healthy snack that could go into  a lunchbox, and being made of muesli ingredients, was guilt free, or at least, less guilty than a candy bar.

We cobbled together a  bit of gear to add to the production muesli line, and successfully trialled the products to modest outcomes in market research. With the great benefit of hindsight, the encouraging but modest research outcomes were the result of asking people about something they had not seen, so had no context or frame of reference. Nobody to that time had seen a muesli bar, and did not really understand what it was, or more importantly, the value it could deliver.

I did the work, produced a business plan, and was committed to the launch, but the top end of the volume projections I was comfortable to put my name against were below those required to generate the rate of return demanded by Cerebos, and given the perceived risk,  setting out to create a totally new category, was too large, the project was binned before birth.

Then, several years later, when Uncle Toby’s launched their version, which was a close match to the products we had developed, the volumes they achieved in the first 6 months bettered my most optimistic 3 year projections  by a considerable margin.

Creating a sales forecast for an entirely new product, is a function of research, insight, optimism, wishful thinking, and plain lies, all mixed up into a set of projections. Often the most important ingredient is the insight and domain knowledge , but the only thing you know for sure is that the forecasts will be wildly inaccurate. Mostly those inaccuracies reflect the optimism which fails to materialise, but from time to time, great projects are left in the dust, and it is only with hindsight that we wonder why they could not see what now seems obvious.

Innovation inside a large company is challenging. They became big and successful by doing a few things well,  time after time. By improving operational efficiency, they leverage the mathematics of scale and scope. By contrast, anything innovative is messy, risky, and not subject  to rigorous quantitative analysis: there are no hard numbers, just instinct, dodgy projections, and belief.

Perhaps that is why the successful VC’s around do not, as is commonly believed, fund the true start-ups at start-up. Those are funded by the ‘Trinity of F’:  Friends, Family and Fools. The VC comes in when the proof of concept is at least partly there, and they do not invest in the business plan, weighed down by mindless excel projections, wishful thinking, and desperation to snag some money to keep up the car payments, they invest in the people.