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

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!!!!

 

 

 

The evolving Push & Pull of the supermarket business model.

The evolving Push & Pull of the supermarket business model.

Nov 30, 2017 | Change, Marketing, retail, Strategy

Established supermarkets around the world work from a pretty similar, well-honed playbook. The current business model of supermarket retailers is all about scale and leverage applied to their supply chains, and offer of range and price to consumers. While there are many variations in the detail, in principal  they  are pretty much the same, a ‘Push’ business model.

By contrast, the rapidly evolving ‘E-Tailers’ exemplified by Amazon and Alibaba are pull models, relying on customer engagement to activate the sales process.

When you look  closely at the business models of Amazon and Alibaba, the gorillas in the E-tailing space, there are significant differences. Amazon still at some point in the chain physically handles the products they are selling, and they do often take ownership at some point, while Alibaba at no time touches or owns the products, all they provide is a platform for the exchange to take place, and they make a commission on the transaction.

The established retailers are driven by the core assumption of the 20th Century that price of the product, range, and location of the store will be the dominant factors in determining customer loyalty, which are both supply chain factors. By contrast, the models of the e-tailers are truly customer centric. The value chain is driven by the demands of the customer, which can be influenced, if not completely managed once enough data on the individual is available.

The difference from a strategic perspective is the technology required to drive them both.

It seems to make sense that the existing supermarkets will be setting out to match the customer centricity advantages of their digital competitors, while retaining the advantages bestowed by their control of the supply chain.

How do they do that?

Not easy, but increasingly becoming not just possible, but a reality. By combining their supply chain knowledge with the customer information being collected on store cards, the geolocation capabilities of mobile devices, and social ‘Big data’, supermarkets could find themselves in a position to ‘flip’ some of their revenue from Push to Pull.

Imagine the situation where Mrs Bloggs is driving on her way to pick up the kids at after school care  having finished work at her part time job.  She sometimes stops at the supermarket to do a top up shop for the household commodities, and to buy some fresh produce to cook for dinner. The supermarket  data base knows this routine, and what Mrs Bloggs usually buys from the information collected via the store card she uses.

The algorithms in the store database sends a message to Mrs Bloggs informing her of the price discount they have on a product she may not usually buy, but which they have a surplus at her local store, and the dinner prep bundle for a meal for which she sometimes buys the ingredients. In one case, there will be no discount, why discount something that is a normal sale, keep that discount dollar for a situation where it will generate incremental sales, or can be charged back to a supplier.   The alternative offer is discounted based on the stock turn and availability of the product that needs to be sold quickly. The algorithm also sends a complementary message to Bill and Betty Bloggs, waiting to be picked up, as it knows Mrs Bloggs is driving, so kid pester power is engaged.

Push to Pull.

The strategic development of our grocery markets has been cyclical.

I can still remember as a very young boy going with Mum to a number of stores to buy the groceries. In each one there was a counter and someone who took the order and assembled it from stock to which the customers had no access.  Then came the steady development of the supermarket, which increasingly leveraged the scale of the stores and their control of the supply chains to push product at consumers, and making a margin from the suppliers via retail shelf ‘rental’ and pocketed promotion fees.

The emergence of Amazon et al over the last decade has put some power back in the hands of the consumers, and they are using it, with many households now combining a visit to the supermarket with various forms of on line purchase and delivery. We are going back to the one on one model, but replacing the trip to the store, pantry management, and all the other things my mother used to do, with technology.

Those combinations will continue to evolve, driven by consumers.

Pull winning out over push.

 

Amazons Australian warehouse is finally open: so what?

Amazons Australian warehouse is finally open: so what?

Nov 28, 2017 | Change, retail, Strategy

 

So, Amazon opened its first fulfilment warehouse in Australia last Thursday, to the sounds of the incumbent retailers either telling us that they will have no effect, or just not acknowledging the appearance of a giant shadow on the landscape.

Back in 2015, Whole Foods founder John Mackey waved off Amazon, observing that groceries were a step too far for them. Pity for him he was absolutely wrong, and now works for Jeff Bezos

Does that sound like Gerry Harvey recently?

It seems to me that the most valuable warehouse Amazon has is not  the new behemoth outside Melbourne, but the data warehouse that has been capturing our digital footprints for the last decade.

Last Christmas, my wife of 35 years was moaning that she did not know what to get me, while Amazon was regularly making suggestions of things I might like, and they were usually pretty good suggestions based on the data they collected. In one sense at least, Amazon knows me better than my wife.

Scary, but just another example of the value of data.

Via Amazon Web Services, the biggest in the cloud services business, and growing like crazy, Amazon has their hands around the throats of a huge pile of data on all of us. Add to that the data facebook, Linkedin, Pinterest, Twitter, and all the rest have on us that can be leveraged, and the world of boring old retail in a shop is no longer.

Harvey Norman has a current market capitalisation of $A4.3 billion, Coles about 18 Billion, and Woolworths 35 Billion, and all are struggling. Amazon has a current capitalisation of almost $US1.6 Trillion, (a trillion is a million, million, I had to look it up to be sure) and rising steadily,

Amazon is more than a huge retailer, it is a collection of businesses and dreams that spans a huge range of activities and interests of Jeff Bezos, who has built this giant in 21 years from a simple book selling landing page in 1996.

We always think about on line as being about convenience and price, but it is more than that, it is an immersive experience, we are becoming ‘digital natives’. Our addiction to the screens and devices is advancing at a rapid rate. Nir Eyal documents the means by which we become ‘addicted’ to technology, but as a suggestion, ask your teenager to switch of the notifications on their phone, and there would be a revolution.

So, digital has become immersive, but is that not the real and under-utilised competitive advantage that Bricks and Mortar retail currently has? You can go into a store, touch, feel, try on the stuff, see how it looks in real life, it is a tactile experience.

What will happen as AI and VR explodes onto the scene, you may be able to try on clothes at home, change sizes, colours, combinations, how immersive will that be??

The reality is  that Amazon could buy Woolies and Coles out of petty cash and barely notice the bump in their cash flow. The same could be said about Alibaba, China’s answer to Amazon, that is in fact bigger on most measures, but is an entirely different business model, so is unlikely to venture into the space Amazon is carving out.

Last Thursday was no more than just another day, the opening of Amazons warehouse, just another small brick in the wall Amazon is building. We all knew the opening was coming, but it is just that the pace is picking up, and the retail incumbents are being left behind, as our lives change.

 

Photo credit: Tony Webster via Flikr.

Peer pressure destroys the power of Advertising

Peer pressure destroys the power of Advertising

Oct 11, 2017 | Change, Marketing, Operations, retail

The major consequence to marketers of the transfer of power from themselves to their customers is that the effectiveness of their marketing efforts has been deflated, irrespective of their mix of legacy and digital channels, by the power of peer pressure.

As a kid, yo-yos came and went several times, usually with the backing of Coke, as did hula hoops and several others, but the story of fidget spinners appears different.

They came from nowhere, a craze amongst teenagers fuelled by YouTube, that left behind all the usual corporate toymakers who have had to scramble to get their hands on stock, probably arriving about the time the craze will end, leaving them on the beach with warehouses of product the kids see as yesterday’s news.

The toy business, like many, has a rhythm that has evolved over many years. There are a couple of peak sales periods, and the promotion of new toys is aimed at these periods, with lead times of 12-18  months or more. These hierarchical toy marketers NPD cycle times bear no resemblance to the cycle times of the newest crazy thing that catches on.

Finger spinners appeared in the US in early 2017, and sales appeared to have peaked in May or June, and are now in decline, a decline as rapid as the rise. How do businesses geared around an 18 month product development and promotion cycle time compete in this new marketplace  powered by their consumers, not even their customers, who are often the kids parents. Kids went on line to buy these thing before the bricks and mortar retailers had heard of them. Perhaps this is the virus at the core of the recent move to Chapter 11 of Toys R Us, weighed down by a mountain of debt, just before the peak selling period.

This severely condensed cycle time is the new reality of consumer markets, and our legacy  hierarchical organisation structures are unable to accommodate the change. Instead, organisations need to find more ‘organic’ ways of responding to the stuff that goes on in their markets, to see the odd things at the fringe that might become the next big thing, and respond to them with an appropriately condensed supply chain cycle time.

It is not very often organisations will be faced with something as radically short term as fidget spinners, but the lesson is appropriate in all markets, as the disruption to one extent or another, is everywhere.  This condensation of the demand cycle, way out of the control of marketers, is a tectonic shift on the nature of markets and marketing in the 21st century to which adaptation is the key success metric.

 

 

 

Is the supermarket business model developing terminal cracks?

Is the supermarket business model developing terminal cracks?

Oct 9, 2017 | Governance, Marketing, retail

Are the tiny cracks evident in the current supermarket business model just the beginning of what will become crevasses that will swallow supermarkets, or just annoyances that can be managed?

My view is the former, although we are currently a long way from Coles and Woollies being irrelevant to our lives, and as the dominating incumbents, they do have the option of anticipating and leveraging the changes as they evolve.

The current supermarket business model was built to leverage scale. That is its strength, the ability to centralise decision making and scale those decisions back through supply chains, and out into the consumers’ pockets. Scale has been the dominating characteristic of successful businesses since Alfred Sloan turned General Motors from a failing minnow into a monolithic hierarchical organisation in the 1920’s and 30’s.

The world however has changed.

Hierarchical organisations no matter how well optimised, cannot match the agility of local competition that is more organic in nature, adaptable in close to real time, and able to take advantage of the little cracks that result from the siloed management of the legacy organisation. They are simply able to adapt quicker to the changes in the competitive context in which they operate.

We see evidence of this all around us, from the turnaround in the US military capability under General Stanley McCrystal, to the organic growth of technology companies like Amazon and Google that are organised more as networks than they are as hierarchies, to the growth of local farmers markets, and pop up stores in the increasing number of empty retail spaces in suburban malls.

The siloed, hierarchical organisations of the 20th century have seen their best and are crumbling in the face of the changes in our ability to gather, curate and share information, and then act on it to create and deliver value.

While supermarket buyers optimise their net net prices with suppliers in return for mass distribution and shelf placement, local store managers are excluded from assembling a range optimised to their local buyers. By contrast, a local operator can optimise the range, but lacks the power to optimise the cost prices by virtue of their lack of scale, but that is changing slowly.

Then you have the innovations created by technology, the Amazon Go stores, exploding options to order and schedule delivery on line, the emergence of the ‘Internet of things‘ and artificial intelligence,  coupled with the social movements that are increasingly seeking product provenance as a purchase discriminator.

All this indicates to me that the capital intensive, centralised  supermarket is becoming a legacy model, just as the Department store is proving to be, demonstrated by the tsunami of bankruptcies in the US, and Myer in Australia announcing even more closures last week.

Photo credit: Gerard via Flikr