Future retail success will come from ‘Organic Intelligence’

Future retail success will come from ‘Organic Intelligence’

Oct 24, 2018 | Change, retail

 

There is some really interesting and contradictory stuff going on in retail.

On line shopping is continuing to expand at breakneck speed, so we are told. According to Statista.com the current percentage in Australia is 7.2%, but the percentage varies enormously from very little to an astonishing (estimated)  19% in China.

Small brands are being created, that rapidly become big brands, such as Shoes of Prey, that would not have been able to get off the ground pre internet, and bricks and mortar retail is struggling, going out of business at a rapid rate.

The latest casualty is Sears, the ‘Amazon’ of a former era, started in 1886 by Richard Sears, selling watches on the side of his day job as a railroad station manager. After the first catalogue was produced in 1896, to bring access to goods to the widely spread American population, Sears expanded geometrically. It was an entirely mail order operation, ‘analogue on line’ until the first store bricks and mortar store opened in 1925 adjacent to the distribution centre. The  following rapid spread of stores, saw the end of ‘Mum and Pop’ stores around the country, who could not compete with the range or prices that Sears offered.

Sound familiar?

Sears became a huge diversified business, accumulating a huge property portfolio as well as associated businesses and brands they owned, but it started to unravel in the mid 90’s, just as ‘Big Box’ retailers moved in, and the net evolved as an alternative channel.

Now we have Apple and Amazon investing billions in bricks and mortar stores, re-imagining them, but they are still bricks and mortar, and they are profoundly successful.  Apple, on a sales per square foot basis, the standard retail KPI, is the most successful retailer in the world. Amazon effectively acquired Whole foods for nothing, paying $US13.6 Billion for the chain, then seeing the share price rise in the following days by more than that amount on the back of the purchase. While Whole Foods is yet to make the expected profits, it is early days. On top of that you have Amazon bookstores and Amazon Go carving out a niche.

When the two most innovative and successful  retailers in the world double down on a business model, it might be worth a close look, and when it resembles an older model, but is clearly superior, that examination should be very thoughtful indeed.

The factor that has driven the success of Amazon, and all other on line retail, is Artificial Intelligence. The ability to write code that can trawl through mountains of data, identify patterns, and alter the output as a result of that recognition. They get better with use, but within the boundaries of the algorithms.  The factor that made Sears, and all other analogue retailers successful over the years, and has taken Apple to new heights, is the opposite side of the coin.

Organic Intelligence.

That ability of human beings to exercise empathy, and make connections an algorithm cannot yet make, and perhaps never will.

Apple and Amazon are learning to use both together,  and are streaking ahead as a result. Meanwhile, those legacy retailers who have not figured out AI are struggling, and more often than not, reducing their investments in Organic Intelligence as a short term means to reduce costs, so assisting in their own demise, as did Sears.

I wonder of any of the legacy retailers in this country will still be around in a decade?. To me it looks like the only one in the FMCG market that has demonstrated an understanding of the power of Organic Intelligence is Harris Farm.

 

 

 

 

 

What is the future of FMCG brand loyalty?

What is the future of FMCG brand loyalty?

Jul 16, 2018 | Branding, Marketing, retail

 

A few things have happened in the last few weeks that made me ask that question.

  • Coles MD John Durkan articulated a clear strategy for house brands, to build them at the expense of proprietary brands. I cannot help wondering if his successor will follow through.
  • I received a package from Amazon full of books, ordered in front of the new GST regime that came in on June 1, and it was covered with ads for Amazon Prime, which is now arguably the most successful loyalty program on the planet. At the time I was surprised, but then a day or two later, I realised they had launched in Australia.
  • Another small supplier to FMCG, a formerly successful business in a country town that had been around for 25 years, with a small but seemingly loyal consumer base, quietly packed it in. In the scheme of things a relatively insignificant event, unless you happen to be one of the people who have worked there for ages, and now find yourself unemployed and unlikely to be re-employed in your home town.

There is  no doubt the trend towards house brands across all categories of consumer spending will continue as retail supply chains become more transparent and global. Consumers are in a position to make judgements on the value they receive based on information from a variety of sources, not just on a label. Combined with the increasing necessity to pro-actively manage their spending, why would they not go for a cheaper item that delivered similar characteristics to a proprietary brand?

The driver of the change is digital. It is revolutionising the way consumers shop, by delivering them information that disrupts existing brand equity relationships. Consumers are now way less tied emotionally to brands, simply because they no longer have to be in order to feel confident about themselves and the quality they will get.

The ‘brand trust’ needed in the past has been replaced by access to information.

Retailers from FMCG to all forms of specialty retail see this. They are setting out to replace the consumer preference for product brands with a preference for their retail brand. Pretty much a strategic no-brainer when you think about it, but hard to deploy, simply because consumers do like some choice, and they recognise the retailers self interest in housebrands.

Mr Durkan points out that in some categories, the Coles house brands have a 50% market share, and seems to wrongly equate that number to consumer preference. In fresh produce, this number would be more like 95%, (I do not have numbers, this is a guess based on what I see) simply because Coles, (and Woolies) have not allowed proprietary produce brands onto their shelves, with very few exceptions, almost from the beginning.

This is not  driven by consumers, this is driven by  the strategy to capture the proprietary margin. If you are a shareholder, particularly of Woolies over the last decade, it has been a good outcome, but for a shopper, not so good. When was the last time you bought a plum in Coles that did not taste suspiciously like a cricket ball?

In FMCG retail, the driver of the change has not been digital, that is just an enabler, the real driver is Aldi, whose growth has hit the gorillas hard, and they have yet to find an answer. Aldi is a retailer, just like Coles and Woolies, but with a limited range, all housebrands, with a very few selected exceptions  like Vegemite and a few Arnott’s lines. This is not digital, it is a different business model, and neither of the gorillas has met Aldi on their own ground.

It is easy to be smart with hindsight, but here goes.

Woolworths responded to Harris Farm, and the move towards ‘specialty and fresh’ with Thomas Dux, initially very successfully, then screwed the pooch by not keeping it separate. Had they persisted, they could have built a very profitable and sustainable business, on a different platform to Woolworths.

The same opportunity offered itself in discount retail. It was not as if there were no precedents! I am old enough to remember ‘Jack the Slasher’ stores that stirred the pot  probably  35 years ago, Franklins, Jewel, and others. Discounters do work, they do attract customers. Aldi has just done it better than its forebears by eliminating transaction costs, and keeping overheads at a minimum.

The problem Coles and Woolies have is one of identity.

They are used to being all things to all people, and cannot conceive of a situation where consumers reject the idea. By eliminating proprietary brands, they are also eliminating one of the paths to differentiation and some level of intimacy with their customers, which will turn out to be a  bad mistake.

My view is that it is much harder now to develop a brand that builds and retains consumer loyalty than it has ever been, but then greater rewards will go to those who succeed. Those that do succeed will do so outside the ever decreasing  reach of the current retail gorillas, who will become increasingly challenged by both technology and new channels to the consumer.

 

What does the FMCG future look like?

What does the FMCG future look like?

Apr 27, 2018 | Customers, Innovation, retail

It is easy to be critical of just about anything, much harder to be constructive, and make suggestions about how to  change the things that attracted the criticism.

In my case, I have been critical of the retail gorillas, Coles and Woolworths for some time, specifically their capacity to change what appears to an outsider, to be their strategic priorities.

As a shareholder in both however, (via managed super rather than choice) I have been rewarded by the returns.

So, I am going to stick my neck out and make some observations, in no particular order, and would welcome feedback.

Delivery services.

Busy crowded lives seem to require a delivery service, and Coles and Woolies have dabbled in it with the delivery trucks we now see around. I have not used either, but several acquaintances have, several extensively, and generally just shrug with resignation at the inaccuracy, inconsistency and uncertainty involved, and wonder if it is worth it. Perhaps the order/pick-up combination will be the answer to the ‘last mile’ problem, as most of us have cars.

In the US there is a service called ‘Instacart‘ that appeared to be doing an ‘Uber’ on grocery shopping and distribution. In Australia, ‘Uber eats’ seems to be bobbing up everywhere, delivering from all manner of food service outlets. Shopping and delivering seems to be a small step to take, or just the delivery part after order assembly in store.

By contrast, Kaufland in Germany appears to have walked away from their on line grocery services, citing the costs of the ‘last mile’ making it unprofitable. This is in the face of Ocado in the UK seeming to go from strength to strength.

In summary, a lot of experimenting to do before the best model evolves, but the common element appears to be basket size. Encouraging on line shoppers of any sort to increase the order size makes some of the other problems less important. It is a standard retail metric, and even more appropriate for on line.

Digital marketing development.

Amazon has mastered the art of cross selling and using feedback to overcome the barrier of not being able to see, touch and feel products as you can in a bricks and mortar store. The current on line gorilla catalogues are just that, catalogues, little more. No cross selling, no recipes, no personalisation based on browse and purchase history, no seasonal suggestions beyond the digitisation of the generic  ‘shop now for Christmas’ stuff. With a few digital tweaks, the current catalogues look like the pages of Co-Op ads in the Wednesday afternoon  newspapers that used to be an important part of dealing with the gorillas.

Opportunity waiting?

Store automation.

Amazon has ignited retail with Amazon Go, poking into action all sorts of activity from the usual suspects as well as some unexpected places.

Hema supermarkets are quickly opening stores after 18 months of testing and development in a Shanghai pilot. Owned by Alibaba, the tech in these stores and the levels of service they offer will, or should concern the two Australian gorillas. Alibaba also has a pilot unmanned Tao coffee shop. I wonder at the quality of the coffee, but who would want to bet against that being commercialised?.  Another Chinese start-up called ‘Bingo Box‘ is planning unmanned convenience stores after a (reported) successful pilot in Shanghai taking Amazon Go type technology a step further.

It also seems obvious that there will be automation applied to the routine and labour intensive job of shelf filling, facing up, and highlighting offers of various kinds. Wal-Mart is experimenting with that idea in 50 stores, using robots to check inventory stock weight, location and pricing, and the other US retailers are not being left behind. Kroger is playing with mobile apps, to communicate offers, lists, coupons, and personalised messages, as well as scanning items in store to reduce checkout lines.

Supply chain automation.

Somebody, somewhere,  will apply Blockchain to the entire supply chain for a product. It will be  kicked off by a consumer taking a product from a shelf, being relayed back through the chain, creating production orders, invoices, inventory management, all ending up in an automated Kanban system at the store selling face, creating a genuine demand chain. The technology to do all this exists, in pieces, so putting it together will not be far off.

The only thing certain about the above thoughts is that there are many I have missed.

Photo credit; Mark Stevens via Flikr

The rise and rise of the digital milkman

The rise and rise of the digital milkman

Mar 8, 2018 | Change, Marketing, retail

The retail gorillas, Coles and Woolworths may still have 75% of grocery market share, but they are in the gunsights of a horde of hunters, all using new fangled weapons developed from the base of ‘Digital’ in a myriad of ways.

Meanwhile. The gorillas are acting like frogs, quietly doing backstroke across the pan, and back again, as the digital hunters pile wood onto the stove. They do have some digital services, order and delivery, order and pick up, but all suffer from the disease that eventually killed Thomas Dux, they are an offshoot of the current model, not an experiment  designed from the ground up to disrupt and destroy the current model.

In the future, the business model we are all used to, the suburban or mall based supermarket carrying anything from 1,000 Sku’s as does Aldi, up to 12-20,000 as do the biggest Coles and Woollies stores will decline significantly in importance. In the future, the  supermarket as we see them currently will be a much smaller part of the revenue pie, for a number of reasons:

  • Cost of entry is reducing. Cost of entry into FMCG has been, and will be further, eroded. From global sourcing from low cost non proprietary manufacturers, to the ability to cut out the retailers with direct to customer channels. These days, all you need is an idea, a little working capital and youtube channel. This may be a radical over-simplification, but there are now products and brands we have never heard of that are selling successfully using this direct model. There have been some notable successes, like Dollar Shave club, a 2012 start-up recently sold for a billion dollars to Unilever, after becoming the second largest shaver brand in the US. No supermarkets. I have read commentary that a $billion hugely over values the purchase, but given it gives Unilever an entry point into a category where they had no offerings, that is adjacent to their mens grooming and personal care business, it makes a lot of sense. Similarly, Procter and Gamble, not known for knee jerk marketing, is trialling a laundry pick-up and delivery service branded ‘Tide Spin’ in Chicago,  and is experimenting with Amazon Prime, and IoT  again using the Tide
  • Availability is the new benchmark. The gorillas have up to 20,000 SKU’s on their books, most individual outlets will not have more than 10,000 on shelf, available, after local conditions are accommodated. Digital retailers have hundreds of thousands of options, all available within a very short time. If you need it right now, immediately, go to the local store, and if they have it, so can you, but if you can wait a day, you can have whatever you want delivered. It seems to me a that consumers are prepared to pay a premium for convenience, simply an anagram (almost) of ‘Availability’.
  • Customer loyalty is dead. Loyalty to a channel, and individual retailers in the channel has been eroded terminally by the range of purchase options opening up. Coles and Woolies compete on price, and parking, only two of a wide range of options consumers now have available to them to determine ‘Value’  of a purchase channel.

 

The complication for digital ‘mass grocery’ has been that challenging ‘last mile’. How do you get the products to the consumers efficiently, and cost effectively. It can work pretty well for high value dry goods, perishables present  their own particular problems nobody has solved yet. Indeed, Aussie Farmers Direct, one of the groups that seemed to have survived the start-up phase, and had built a customer base and presumably processes to manage customer relationships went into administration on Monday, March 5, citing competition from the supermarket chains as the reason.

However, autonomous everything powered by data will deliver us models that work, just as Uber cracked the taxi industry, and is now moving into home delivery for restaurants with UberEats, Supermarkets are an easy next step.

As I reflect on my commercial history, part of it was in the dairy industry, where there were milkmen calling on pretty much every suburban home every day. There was a ‘Depot’ system covering the country, and every milk company tried hard to get the ‘milkos’ to deliver more than just milk. After all, they were there anyway, so the marginal cost was low. Hindsight, and we knew it at the time, tells me that the communication and payments systems were not up to the job 30 years ago.

They are  now, so I predict the return of the ‘Milko’ just the digitally enhanced model. Pity the dairy companies all took the short term view and flogged off all that real estate with the depots on them!

Photo credit: Ben Watkin Via Flikr.

Do we still need book stores and publishers?

Do we still need book stores and publishers?

Feb 23, 2018 | Change, Marketing, retail

 

I love books, real books, items where you physically engage with them, turn the pages, scribble in the margins, pass them onto friends with a handshake and a ‘you will enjoy this‘.

Behind me (chronologically) are those who have grown up with e-books, blogs, podcasts, and all the other digital distractors, who have missed the joy I have always had in a bookstore. Instead they browse the Amazon catalogue and recommendations, and look up ratings by people they do not know on sites that have no interest in being transparent.

Very efficient, but to an old fart, not always a substitute.

Despite the gloomy outlook, I still think that the few bookstores still around will survive, having identified a clientele who like me values a real book. Stores like Berkelouw books in Sydney  with 10 stores, and 200 years plus in the business, where a book is more than an item in a catalogue, where the staff live and breathe books, and communicate the passion.

Perhaps not, the numbers seem to be against them, although Amazon opening bricks and mortar bookstores should tell you something. There are also a few specialised book publishers around, those with a deep knowledge of their topic domain, that seem to be hanging in there.

Authorearnings.com has a database that records all book sales, a treasure trove of information if you are a book tragic. Here are some highlights from the January 2018 report, and some thoughts.

  • Amazon sells half the ‘books’ in the US. That number is made up of e-books 55%, print 39% and fast growing audio books making the balance.
  • The dollar shares are very different, print sales make up 63% of the value, unsurprising when you consider the relative value of a $3 e-book and a $100 textbook, which are still largely print. How long this print bias in textbooks will last is anyone’s guess, but mine is not too long.
  • The sales split in categories of books, unsurprisingly, is very different. Digital has consumed fiction, with 90% of romance purchases are e-books,  while poetry and drama are still overwhelmingly print, albeit off a way smaller base.

Books are the original long tail business, millions are ‘published’ and most sell only a few copies to their friends, colleagues, and mum. However, some are still of great value to a few, and we would be diminished by their absence. Digital has made the long tail accessible to us all, suddenly those lost gems are easy to find, even if you do have to read them on a ‘device’

The strategic question is will there still be a need for publishers in a decade?

I think the answer is ‘Yes’ but not like  they  are currently and have been in the past. They will become more like collaborators, and business partners, than just another cog in the supply chain as they have been. Publishers play an important role in the curation and editing of books. Authors  want to write, and often do not want to be bothered by  the commercial end of  the business, and in any event often have little marketing and commercial skills, so need a third party to help.

Editing is also a must, if a book is to be more than a jumble of words. Steven Pressfield in his great ‘Writing Wednesdays‘ blog makes it clear that he could not do what he does without his editor Shawn Coyne. If a writer of the skill and experience of Pressfield needs help, the rest of us are in real trouble without it.

Photo credit. Geoff Roberts. Goulds Books Newtown Sydney.

PS. After posting, a friend referred me to this video of the 6 most beautiful bookstores in the world. Suck it up Amazon!

 

 

 

‘Organic’ investment should be the saviour of (some) retail.

‘Organic’ investment should be the saviour of (some) retail.

Feb 16, 2018 | Customers, Marketing, retail

I went into a retail store last week with a problem, not really expecting to find anyone or anything that remotely met the immediate need I faced.

My web search had revealed many solutions, none of which gave me much confidence for one reason or another, but it had sparked a few ideas.

Lo and behold, the store I went to, (after a bit of web research) an independent store that clearly understood the niche it was servicing, had made a significant ‘organic’ investment.

They had several people who understood my problem, and were able to offer several sensible alternative solutions, one of which was perfect.

When faced with the same or similar challenge again, guess where I am going!

It may not be for a while, but inevitably it will happen again. Meanwhile, guess which store I am touting to my friends and colleagues.

Ironically, it seems that the most successful retailer on the planet, when measured by the standard retail sales/sq foot, and margin/square foot metric is one of the tech disrupters: Apple. They have redefined bricks and mortar retail by adding ‘organic’ sales staff to the best long term branding job ever seen, except perhaps for a couple of the major religions. At the end of 2017. Apple had 499 stores worldwide, and not content to leave well enough alone, are continuously investing and experimenting with formats, layout, branding, and the important ‘organic’ part of this hugely successful bricks and mortar puzzle.

On Wednesday (Feb 14, how appropriate) the Myer CEO was dumped by the board for failing to turn the ship around. The last time I was in a Myer store, admittedly some time ago, as I have no wish to repeat the experience,  there was no staff anywhere to be seen. My intention had been to buy a suit that had been advertised as part of a sale. Good price, good brand, I was in the store to buy, but no sale for Myer, although I did buy a similar suit elsewhere. Firing the CEO will have little impact on my future purchase intentions, without the long term investment in one of the the foundations of successful retail, good people at the customer coal-face, and a management culture that recognises and nurtures those people.

Digital is great, the convenience, price, and range are seductive, but there is no substitute for a person who has deep domain knowledge, has seen the problem before, and who is happy to help, and clearly gets a kick out of doing so. After all that, price does not matter so much, it just needs to be in the ball-park.

Just ask Apple.

Photo credit: Harry Pappas via Flikr