Feb 3, 2023 | Branding, Demand chains, Marketing, Small business, Strategy
Woolworths last week announced they would close 250 of their current 300 in store butcher shops. Clearly, centralisation and opacity of the supply chain that serves customers via Woolworths is geared to the lowest common denominator, price.
At the other end of the scale is Wolki farm in Albury. This is an integrated farm to retail supply chain that innovates at every point. Rather than just trying to do the same job as always for a lesser cost, they re-engineered the whole chain. From their website: ‘We are the connector between the conscientious consumer and quality produce’
Their 24/7 retail outlet in Albury is just the end of the chain, but full of innovation. I do not normally inhabit TikTok, but this video of owner Jake Wolki’s view of the future was referred to me by a (younger) friend, who knows my views about agricultural supply chains.
The challenge both retailers are setting out to address is the core challenge of marketing: how to create and communicate value that motivates customers to a transaction facilitating longer term engagement.
Woolworths (and Coles, Aldi, et al) do it by price and convenience. They might mumble about quality, but it is at best a second order priority. As long as it is edible, legal, and delivers the category target margin, it is OK. By absolute contrast, Wolki’s (I do not know them at all, had not heard of them until last week) are clearly focussed on quality, product provenance, and integrity. The price they charge for their produce will reflect all that, but no consumer who is looking for the cheapest cut of meat is likely to find it at Wolki’s. What they do get in detail is supply chain transparency that delivers the provenance and guarantee of quality of the product they are about to buy.
That may interest only a small proportion of the market, but that proportion is significantly larger than it was just a couple of years ago, and will continue to compound.
It seems to me that Woolies are repeating the mistake they made with Thomas Dux 6 years ago. They are ignoring the messages being sent by consumers from the ‘edges’ of their customer base that ‘Mass’ was not acceptable. More probably, they are choosing to ignore those consumers in favour of low cost supply chain control, and reluctance to rock the competitive ship by innovation. Perhaps they will prove me wrong, and use the remaining few in store butchers to experiment?
Photo credit: Wolki Farm from the website
Jan 30, 2023 | Governance, Small business, Strategy
The Federal Government committed to a $15 Billion National Reconstruction Fund’ in the October 2022 budget. While the 7 priority areas have been articulated, and there is a better than average website full of glossy photos and optimistic copy, we are waiting on the details.
Of the $15 billion, 8 billion has been earmarked as follows:
- Up to $3 billion for renewables and low emission technology. (I wonder how much the fossil fuel industry has earmarked in their political diaries for carbon capture projects that double as subsidies)
- $1.5 billion for medical manufacturing. Moderna has already committed to completing an mRNA manufacturing facility by the end of 2024 in partnership with the Feds, which must chew up a chunk of that money. They have also just tripled their price/dose in the US for a technology that greatly benefited from public funding during the pandemic. I wonder how the PBS will address that one?
- $1 billion for value adding resources. Presumably, this is to start to cover some previously fumbled bets on Lithium, and rare earth mining and processing. We have roughly 50% of the global production of Lithium, 25% of known global reserves, but capture virtually none of the value of the stuff as it goes into battery production.
- $1 billion for advanced manufacturing. The facility set up by Flinders University in Tonsley Park in SA in collaboration with several defence suppliers, and the Manufacturing Institute of Scotland, one of the UK’s successful Catapult programs has a run up start. It is envisaged that defence accredited SME’s will be able to access funding and mentoring from the arrangements. This seems to be a very sensible bet, hopefully just the start of many experiments, but I am not holding my breath.
- $500 million for agricultural value adding covering food, fibre, fisheries and forestry. For an industry sector where Australia has consistently demonstrated a capability to innovate as a response to the poor average quality of our soils, this seems parsimonious.
The balance remains unallocated, waiting on the detailed guidelines.
Where the demarcation between this fund, the funds allocated to the CRC program, which recently announced $148 million to 6 CRC’s (from a final submission list of 26) is a bit unclear to me. However, what is clear by the thrust of all the programs and press releases, is that the emphasis is on high tech, however you choose to define it. The normal, run of the mill SME manufacturer, those not engaged in technology, struggling to pay the bills, employ and train people in the absence of TAFE, keep up with bigger domestic competitors funded from overseas, are left out in the cold.
It is easy to draw the conclusion we do not need them, and individually we do not. However, collectively they are a huge part of the economy, employ hundreds of thousands, and generally pay their taxes when lucky enough to make a profit, without engaging the services of accountants in Bermuda.
Most innovation comes from SME’s. Not just the technical innovation that drives the defence, electronics, and space industries, but the more mundane process and customer innovation that drives an SME to see a market opportunity that others do not, or choose not to see. Such innovations are sometimes potentially disruptive to an established group of big players who would rather stomp on the SME than change the business or product model that had made them successful. Often, these incumbents are protected by so called ‘industry standards’ written by those same incumbents, further expanding their hold on the status quo.
For that latter group of SME’s, they have a problem evolving from the deindustrialisation of the Australian economy over the last 30 years. This is graphically illustrated by Australia’s drop to 91 from 60 just 20 years ago on the latest Harvard Economic Complexity model. This puts us just behind powerhouses like Kenya (90) Laos (89) Uganda (87), and a host of others we would dismiss as ‘third world’ economies.
This lowly position is compounded by the currently disrupted industrial supply chains: they cannot get their hands on the equipment necessary to move quickly to fill the market gap. This assumes they can access the equity and/or loan funds necessary for the commercialisation, and the skills to run the gear.
There are also various programs run by the states, for all sorts of reasons, chief amongst them seemingly the opportunity for a press release and flurry of PR activity before an election. Printers (those that remain in business) are expecting a mini-boom in NSW over the next few months.
Being one who has seen this problem from both sides, I do not underestimate the challenges. Nevertheless, effectively ignoring a very substantial group that provides many day to day goods and services, employing and training thousands, and generally making an irreplaceable contribution does not seem sensible.
It seems to me that the answer of the question in the headline is ‘you can’t’
Is there anything I have not seen that assists these enterprises?
Feel free to disagree, or indeed, provide advice I can pass on to those struggling enterprises.
Sep 23, 2022 | Branding, Communication, Management, Marketing, Small business
In 1960, E. Jerome McCarthy published his idea of the four foundations of marketing. Price, Promotion, Product, and Place. The world has changed in the intervening 62 years, so you must wonder if this idea is still relevant, let alone a foundation.
To my mind, they are not only relevant, but retain their place as a seminal part of the marketing process, it is just that the context in which we think about marketing has changed radically, so the role the 4 P’s plays has also evolved.
This used to be simple, there was a product, and there was a price. Whether it was a consumer product, or one sold to another business, it was simple, and uncongested with notions of service.
Life, and the environment in which we compete has completely changed. Let’s see.
Product.
The idea of ‘product’ has changed along with everything else. We used to buy a car, increasingly, we are now buying the means to get from point A to point B, and discovering new ways to pay for it beyond the options of cash, or some sort of loan from a bank.
Product rather than being a singular physical product or service delivered has become a system that delivers value. The scope of ‘produc’t has also changed from the immediate geography to global, and the channels by which this is achieved look nothing like those available 62 years ago.
Price.
The exchange of money is how the economy goes round; money is the fuel. However, the articulation of the ‘Price’ of a product/service bundle has changed as much as everything else. Along with the product and delivery options now available are the pricing options. There are now many ways to be paid, only a few of which were available 62 years ago.
In all developed economies to differing degrees, the taxi industry has been regulated over time. Nothing changed from 1962 when the ‘Four P’s were articulated until along came Uber and disrupted the cosy taxi environment. Uber eliminated the uncertainty of how long you had to wait for a ride, creating great psychological value, and introduced surge pricing that would entice more supply into the system at times of high demand.
Surge and subscription pricing have changed the face of commerce globally. Amazon uses both in their operations, adding the willingness of a buyer to pay higher prices based on their browsing and purchase history.
Place.
We used to buy products at a defined place, in a defined manner. No longer. The notion of ‘Place’ has been replaced by one of ‘How’ you buy rather than ‘where you buy’.
The old model of a set of mechanically driven distribution channels has been replaced by a melange of ‘omni channels’ that deliver value in a wide variety of ways.
Control of the channels, formerly in the hands of the sellers has moved into the hands of the buyers, who demand and are given in increasing amounts of transparency backwards into the supply chain. All this is enabled by the explosive growth of digital technology.
Promotion.
If the other factors have changed radically, there are no words to describe the magnitude of the change to the ways promotional activity has evolved.
It used to mean the way we gained attention of potential customers via a limited number of options, engaged them, then sold product through whichever stable distribution channel was available. While the core process is unchanged, how we promote out products has exploded.
This brings us back to the question posed: are the for ‘P’s’ of marketing still relevant.
My answer is ‘Yes’, but the clothes they wear have changed radically and therefore the way we think about then must change.
My response to the change necessary is to look at the marketing process more from the perspective of the customer. This brings me to the view that both customer and supplier can look at the process from within the framework of Objectives, Value proposition, Ideal customer, and the Current state. Each party to a transaction sees these four parameters differently, but they are all relevant to the way the transection and relationship proceeds.
Aug 1, 2022 | Change, Small business
Covid has led to quite a bit of M&A activity amongst the difficulties of trading. I know several ‘baby boomers’ who have just packed up and left. A number have sold businesses they previously intended to continue for a while, and leave ongoing entities to family, and other shareholders.
Several have sold with an earnout period and discovered too late that there were things in the fine print that tripped them up and reduced the payout to next to nothing.
Poor planning and advice, but most importantly, lack of attention to the implications of the financial detail in the agreements.
Following are a number of the common pitfalls you should be aware of.
However, first and foremost, you must recognise that a payout period is really just a transfer of risk from the buyer to the seller. The degree of this transfer is dependent on the conditions in the contract and actions taken by the buyer post transaction.
Earnout revenue targets.
These come in many forms, often broken into categories.
- Many purchases are made for the sole reason of gaining access to the seller’s customer list. In this case, the seller is kept on to assure those customers that it is business as usual despite the change in ownership. Many things out of the control of the seller can impact on the attitudes of the customers, and often a change of ownership is just the catalyst customers needed to look around, and do an assessment of the levels of value being delivered. This usually results in revenue being lost.
- A buyer may cut the sales and marketing expenditure impacting on sales, a decision out of the control of the seller, but potentially impacting on the earnout numbers.
- A buyer often justifies some of the benefit of a purchase in the ‘back office’ economies they appear to bring. These projected savings can be the result of over optimistic projections around available savings made to fit the guidelines of the purchaser. They can have the impact of reductions in the level and acceptability of the service provided to customers. These can impact revenue and payout numbers while being out of the control of the seller.
- Post transaction, sellers often lack the drive and commitment they had prior to the sale, despite the earnout terms.
EBIT targets
EBIT targets are even more ‘manageable’ than revenue targets by a buyer. Being at the bottom of the P&L offers opportunity to load up expense captions from Cost of Goods Sold through trading expenses and fixed costs in all sorts of ways. This will be detrimental to the seller’s payout at the end of the period. Human nature being what it is, there is little motivation for the buyer to maximise the payout to the seller, and conversely, many reasons to take a ‘hit’ in the first periods of ownership that also serve to reduce the payout. Just a few of the many examples I have seen:
- IT integration costs, often the basis of M&A justification blow out way beyond expectations.
- One off costs associated with staff redundancies can cost a lot of money. Often there are assurances in place about staff, but who needs two of everything post acquisition, so job losses are frequent and often deep, creating unplanned costs.
- Changes in accounting practices of the acquired business, for example the valuation of inventory that is applied to the COGS, and unanticipated write-offs of excess inventory, can impact substantially on the payout numbers.
- Loading up advertising leading up to the end of the buyout period can damage short term EBIT, but benefit the long-term position of the business, post the buyout date.
One way of at least mitigating the potential disagreements and decisions taken outside the parameters of the agreement by the buyer to reduce the payout, is to base the payout numbers on free cash flow. The ways this can be manipulated are easier to define and agree pre-acquisition such that the seller is protected. The buyer still has the ability to make the changes necessary to integrate or take over the business and reshape it. Free cash flow is less complicated than agreeing what a post-acquisition ‘normalised’ P&L would look like, as the variables are reduced, and thus it becomes easier to make transparent and enforceable arrangements.
For many owners of an SME, the value tied up in the business is their superannuation. It makes sense to be very careful, as it is probably the case that the buyer has way more experience with these types of transaction than you.
Header cartoon credit: Scott Adams and Dilbert
Apr 27, 2022 | Leadership, Management, Marketing, Small business
The inflation figures released this morning put the annualised inflation rate at 5.1%, up from 3.5% at the end of the December quarter last year. While it may bounce around given the volatility of fuel and food prices, the trend is very clear, and the current election driven lucky dip of spending promises will not help. This increase in a single quarter is the largest I can remember since the mid eighties.
Australia is in for a rocky ride, and it will not matter who wins on May 21, the impact will be felt in every corner of the economy, and by every Australian.
For SME’s who have weathered the challenges of covid and are now experiencing the added burdens of broken supply chains, and lack of labour, while trying to re-establish some level of certainty in their businesses in an environment where demand has ramped up, the prospects are daunting.
Irrespective of the decision made by the Reserve next Tuesday, to raise the cash rate from the current 0.1% to 0.4% or 0.5% which seem to be the prediction of the majority of economists, the squeeze is on. Raising the rate during an election campaign will test the independence of the reserve bank. I bet there are some phone calls being made!
How will this impact your business?
Those impacts will vary enormously depending on the industry circumstances. The rate that gets all the attention is a weighted average, with the actual sector numbers varying from a slight reduction in communication costs, to a 13.7% increase for transport costs.
- Labour costs will soar, as the demand for labour continues to grow, while immigration is still constricted, and the cost of living blows out.
- Transport costs, which most just see in the petrol prices at the local station, which impact everything that moves in the economy will quickly feed into cost of goods sold in every product category.
- Businesses will see a sudden increase in their accounts receivable days, their cash conversion cycles will become longer.
- There will be pressure on margins from multiple fronts. Volumes will be constrained as supply chain failures impact, and competitors scrambling for volume will be more likely to reduce prices to grab that extra sale. At the same time, costs are increasing, and price increases will be harder to get, as buyers exercise their buying power and shop around.
- You will be pressured by your suppliers for quick payments, as they are being squeezed for margin, just as you are.
- General overheads will increase. We have seen significant increases in lease costs for small factory spaces, insurance costs will be turbo-charged after the floods, fires, and pestilence of the last 2 years, down to the little things like costs of coffee for the lunchroom. All these individually manageable cost increases cumulatively add up to substantial and hard to control increases.
So, what should the SME’s that wish to remain successful be doing?
- Customers shopping around for a deal in greater numbers can present an opportunity for those who understand the drivers of Value for customers in their specific market.
- Resist the temptation to cut marketing and selling expenses. History demonstrates with absolute certainty that those that keep marketing when their competitors shut down in tough times not only do better during the tough times but retain their positions after the worm has turned. Optimising your marketing expenditure is not the same as cutting it.
- Actively engage employees and stakeholders in ways to maintain profitability. This should always be a priority, but is more pressing and visible in tough times.
- Focus on the 10 tactics outlined in the Inflation Busting Roadmap published previously
- Consider from the perspective of necessity the five types of cost in your business, with particular attention being given to the last three, as that is usually where the opportunities hide.
Many have not experienced a spurt of inflation before, the last serious spurt was in the mid-eighties while Paul Keating was treasurer. In management terms, this was over a generation ago. If the experience of those times would be of benefit, give me a call.
The header graph is from the ABS website updated as the announcement of the scary 5.1% heqadline inflation rate was announced.
Feb 16, 2022 | Management, Small business
Do you ever struggle to do something you know how to do, and should be easy, at least that is the way it seems, but never get past the first hurdle.
I do. Disturbingly often.
For some years I have toyed with writing a book, becoming one of those liberated by the web to publish and perhaps generate a return from what I know, the experience I have gathered in a long commercial life.
There are several started lying around, rough drafts, notes, chapter outlines, all the stuff I know I have to do to complete something that may be of value.
I have written 2 or three blog posts every week for many years. I collect lots of ideas, stories, and metaphors from clients, reading, and just rubbing my belly thinking about stuff.
How hard could it be to pull all that together in a book?
Very hard it seems, even when pushed by some of those who know me well.
If I was my own consultant, there would be some tough love and bum-kicking going on.
Like any project, there are a small number of key questions to be asked, and answered which provides a framework for the task, then some logical steps to be taken.
Key questions:
- Who is it for? The core marketing question, who is it that you want to reach and influence to do what? In the absence of a clear answer, the result will be, at best, muddled. Luckily, I know exactly who I should be writing for.
- Why should they care? If you expect people to spend money to buy the thing, then invest the time to read it, there had better be a good reason that they should, and that needs to be convincingly communicated. Again, 25 years of contracting and consulting have given me a pretty good idea of the sort of knowledge and experience I can deliver that will increase the commercial sustainability of the SME manufacturers who are my ‘sweet spot’.
Logical steps:
- Nail the title, and subtitle. The title is in effect the headline for the book ad. It needs to convey in a few words the objective and drama of the book, provide a ‘hook’ for the intended reader. For the writer, it is the equivalent of the strategic purpose, the question to be asked continuously through the whole book ‘is this taking is closer to the objective?”
- Write the back cover. This should be the distilled sales pitch to those you want to reach. Often you will see this as an introduction, which to my mind is wasting the reader’s attention when it is the most curious, right at the beginning. Explain the value to be gained from reading the book, and how will they use this new knowledge? Ideally, this can be written by a third party, someone with real street cred, so it sounds less like self-promotion. I do not really know many people in the category. The one who would have been ideal, my original and great mentor Harvard professor James Hagler, has been sadly gone for some years.
- Write the Chapter list. This is the skeleton of the book, the bones from which everything hangs. A few sentences that specifically articulate what knowledge will be imparted in each chapter acts as an anchor around which the words and stores can be built. This requires creative thought, as most people will read the chapter list before buying the book, so the more interesting, differentiated, and engaging the better.
- Write the draft, of at least 1 or 2 chapters, They will be awful, discouraging, but out if it will come the ‘voice’ that you want to use for your audience, and the structure of the chapters. One person I know wrote their whole book as draft, it worked for him, but the added work after the draft completion to redraft the whole thing when he recognised it was rubbish was almost the end.
- Edit, edit and re-edit. Then get someone else outside to have a shot. Better if the outsider is on side from the beginning and giving the bad news progressively so you can improve as you go, rather than all at once when the draft you have is in your mind, complete. It is hard to kill off those parts into which you have poured your sweat after the words have dried too hard on the page, and in your mind.
- Marketing. Then there is the marketing and operational stuff of necessary to get it out there. Worrying about that too soon is just distracting, plenty of time at the end, and plenty of advice and options around on the best way forward. However, if you are writing the book to make money from the sales, it is entirely different to the situation where you are writing it for credibility, leading to consulting assignments, and perhaps speaking gigs. These two objectives for the book require entirely different marketing strategies.
- Do it, now. Stop thinking about it, and take action. Now.
Note to self: Read the blog, and take action as advised!
