Mar 7, 2022 | Change, retail, Strategy
The supermarket business model, like most others, is evolving as we watch. It is slower in Australia than elsewhere given the challenge of distance and the stranglehold of Coles and Woolies. Nevertheless, it is evolving, and we can learn from elsewhere.
Four years ago, with great fanfare, Tesco in the UK launched a discount supermarket chain they called ‘Jack’s’. It was intended to compete with discounters Aldi and Lidl, to be the British hammer blow on the invading German discount retailers.
At the time, it seemed to me that the game was already up, that the position the discounters had carved in the market would be impervious to the exhortations of then Tesco MD David Lewis, calling Britain to arms.
Prior to the launch of Jacks, there was considerable shuffling of deck chairs as other retailers, Sainsbury and Asda particularly adjusted to the discounters by M&A. Since then of course we have had the fiasco of Brexit, still evolving amongst the shattered supply chains. This has been graphically illustrated by the carnage at the port of Dover, and inability of British farmers to farm in the absence of eastern European labour.
Now Jacks is closing, its promises of stores in every major town never eventuating. Jacks only ever opened thirteen stores, six of which will be converted to Tesco, the other seven just closed.
At the time in a post I reminisced on the demise of discounters in Australia, saying ‘I suspect history will reveal that Tesco has made a huge blue’. At least they recognised the mistake relatively early and reversed course under a new MD.
Given Australia tends to follow the evolution of the British supermarket sector by a year or two, what can we anticipate domestically, particularly from the two current retail gorillas, Woolies and Coles?
- I would not expect either to make the mistake Tesco made and open a discounter. In the past, both have dabbled with discount retail brands, none of which have survived. Besides, they have both watched as Aldi has carved out a place without launching a discount rival, it is unlikely they will change direction now.
- The doubling down on home delivery will continue, as will the logistic arrangements that support home delivery, and the technology that enables it.
- Retail is fragmenting. Consumer behaviour is evolving rapidly, accelerated by Covid. There is an obvious trend towards on-line and specialist retail using multiple channels of distribution, attracting consumers from their large-scale competitors by offering other than ‘average’ products. Some retailers are designing their stores as an ‘experience’ as much as a place to shop. These stores are a brick in the brand building wall, and are in effect, another form of media as well as a retail outlet. Apple saw this first, opening stores progressively around the world. By the traditional retail measure of success of margin/sq foot, Apple is now the most successful retailer in the world. At the other end, we see small stores, even ‘pop-ups’ selling very specific and focussed ranges. In between, shopping malls have passed their peak, the massive floor space they occupy will need to be re-purposed, at least in part. The potential here is for locally focussed office and residential hubs with a mix of specialist stores and entertainment venues.
- Direct to consumer from the farm is increasingly possible and attractive. Farmers markets will continue to grow and nibble away at the supermarket share of produce, by delivering superior taste and quality. I love so called ‘summer fruit’, peaches, nectarines, and plums. Finding any in a supermarket that do not feel and taste like a cricket ball is impossible, as they are picked in bulk and green to survive the supermarket supply chain. They may look OK, but the taste is what really counts, and here they miss out badly to specialist stores.
- Harris Farm has considerable potential if they can resist the temptation to become more like a ‘chain’. Woolies had a go at high quality specialist food retailing with Thomas Dux, and at first got the recipe right. Sadly, success breeds intervention by the back office boys who never actually see a customers, which resulted in ‘Dux’ being sent to the naughty corner to die.
- Automation in big distribution centres will continue to drive costs out of the system. Ocado, the British online grocer is licencing their technology around the world. Coles did a deal with them back in 2019 to build two automated fulfilment centres, which will feed into their home delivery strategy and no doubt generate a lot of thinking for the standard supermarket Distribution Centre logistics chain.
- Aldi will continue to grow, more slowly than to date, as they expand store numbers in an already saturated market. Costco with currently thirteen locations around Australia have the potential to double in the next few years. Their differentiator is an entirely different business model, which is very hard to copy for any established retailer.
- The demise of proprietary brands in Australian FMCG has probably reached its lowest point. Coles and Woolies have ransacked the profitability of their supply base, who have responded with little or no investment in genuine innovation, ultimately the only source of real growth. I suspect that some smaller brands may start to reappear as Coles and Woolies seek to differentiate themselves from each other, Aldi, and the alternative distribution channels slowly emerging.
- The big retailers will, or should, start to experiment with some of the technology proving successful in the US and China. The obvious place for such an experiment is in some of the CBD locations they both have. Shoppers looking for a quick shop for dinner as they run for the train home, might value the sort of service offered by Amazon Go and others.
- Managing inventory for suppliers will become even more difficult. Retailers are continuing to reduce their order quantities while increasing the order frequency and placing rigid delivery times on suppliers. This volatility is making supplier demand planning progressively more challenging, while getting paid in a reasonable time means they are funding the retailers. I suspect there will be technical solutions to demand planning evolving that involve AI, interacting in real time with store traffic, weather, and events to deliver a demand number by location. It may be that the DC starts to pack retail shelves, which are delivered on a roll in roll out basis to stores, removing the in-store labour and reducing back store footprint size. At Dairy Farmers 30 years ago, we experimented with this idea for fresh milk, and while it was promising, it did not catch on. Just 30 years too early?
- The physical movement through the supply chains is an increasing problem for supermarkets. Traffic density, and fewer drivers available as the old guard retires, unreplaced by a new driver cohort willing to accept the rigors of driving semis in heavy traffic for 12 hours a day. Combined with the challenge of demand planning, this will increase the number of product out of stock at the retail face, encouraging consumers to alternatives.
No business model remains unchallenged, and can remain unchanged in the face of evolving competitive circumstances. The supermarket business model is no different, although proving to be more resilient than I had thought it would be a decade ago. The core assumption of the business model however remains unchanged. They control a choke point in the supply chain, and take a margin that reflects their power on both sides of that choke point.
Feb 28, 2022 | Leadership, Management, Strategy
History is littered with examples that convincingly make the case that a battle on two fronts can never be won.
Our business literature is similarly littered with examples of business failure brought on by the competing demands of too many markets calling on a common set of resources. The metaphor of war is routinely used in business literature, I have used it myself many times. Phrases like ‘the high ground’, ‘resource mobilisation and concentration’, ‘overwhelming force” and so on.
How odd then to find myself saying that success absolutely relies on being effective on two fronts at the same time.
Those fronts are not different enemies, or geographic locations, distribution channels, customer groups, or any of the other regularly used differentiators, but they can be all of them.
The two fronts are ‘attack’ and ‘defence’.
The disciplines used to assemble and deploy scarce resources to take advantage of opportunities, look for new products, and outflank the opposition whilst defending your home ground are common to all situations.
Resources are limited, opportunities to use them are not.
How many successful football teams have you seen that cannot both attack and defend? The really good ones swing from one to the other, and back again seamlessly, without a loss of position or momentum. Each player knowing their role in any given situation, understanding how that role contributes to the overall outcome of the play in progress, and ultimately to the score at the end of the game.
The best I have seen at this in recent times is the Melbourne Storm rugby league team. Irrespective of personnel on the field, every player knows his role in both attack and defence, and swings seamlessly between them in concert with every other player on the field.
It is the same in commercial life.
The imperative to grow also means that the home base, the source of the cash today, is effectively defended even as it evolves to deliver cash tomorrow.
I am constantly reminded of Charles Darwin’s observation that ‘it is not the strongest of the species that survives, nor the most intelligent, it is the one most adaptable to change’
How good is your organisation in this tug of war operating on two fronts?
Jan 24, 2022 | Leadership, Management, Strategy
As I observe the better performing manufacturing businesses around, I see some components not spoken about in any of the verbiage that comes from the various interest and political groups.
These common themes are:
They are close to customers.
This means they are less price sensitive than competitors and are focussed on building a bigger pie in collaboration with their customers. As a result, they always outperform those trying to grab a bigger part of an existing pie using price as the primary driver.
They have high level trade skills.
They have a higher rate of apprentices and tradesmen in their ranks. In the absence of publicly available vocational training, they find ways to deliver it to employees internally. This determination often extends to their key suppliers, adding glue to the supply relationships and enabling innovation through their supply chains. Skilled tradesmen are valued not only for the skills they have, but as people who have combined trade skills with experience, and are therefore tertiary qualified by an alternative route to a university degree. They are often better able to get stuff done as a result. Their deep respect for trade skills results in less turnover of personnel, delivering a substantial competitive advantage.
They seek tertiary educated employees.
The education does not have to be specific to the businesses, they are seeking people who have demonstrated a capacity to apply themselves, learn, and who are curious about what is going on around them. This looks expensive on the surface, but it gives them an ‘intellectual edge’ in the competitive game.
There is a continuity of leadership, and leadership style.
While the individual leaders might change over time, the style remains consistently participative and flexible. This leadership culture comes with a very clear set of performance expectations for individuals and the operations, which evolve in parallel with the strategic and competitive demands of the market.
Optimised and messy live together.
While there is a very strong focus on optimising operations, there is also a recognition that innovation, which is expensive, risky and messy, is fundamental to future competitiveness. They find ways to live with the ambiguity that comes from focussing on optimisation for the existing major part of the business, and exploration at the ‘sharp end’ where they are building the base for tomorrow’s cash flow.
They have big ambitions.
Their strategic planning sessions are not just extrapolations of the current in a nice location with a few beers for bonding. They deeply question the assumptions that shape the business, and allow many voices to be heard, and they reach for the ‘big’ outcome.
This is all effectively anecdotal, coming from observation rather than published data, so it may be a bit flimsy, but it does pass my ‘pub test’.
Header cartoon Credit: Hugh McLeod at www.gapingvoid.com
Jan 21, 2022 | Change, Leadership, Strategy
Momentum as we all learnt in high School physics is Mass X Velocity.
Decisions made have no mass, but they do seem to have the characteristic of building momentum.
Those businesses in my experience that have an overt bias for action make more decisions, get more done, succeed more often than those less willing to decide and act. They also make more mistakes, as they make choices with less than complete data, but are also willing to recognise mistakes earlier and back out, avoiding the ‘sunk cost’ syndrome.
Opportunity cost is hard, if not impossible to quantify, but it is clear to me that those who have the bias to action, make decisions and act on them, will suffer from opportunity cost less than those that wait for perfect, or just more information, by which time the opportunity had gone.
Dad joke:
Knock knock…..… Who’s there? ..….. Opportunity…………Opportunity who? ………….Silence………..
Opportunity does not knock twice!
There is a balance however.
Moving quickly in itself should not be the objective. The challenge is to quickly understand the balance of risk and reward that enables a decision and subsequent action that is important. It makes sense to spend more time considering a ‘bet the farm’ decision than one that is less likely to be catastrophic should it go pear-shaped. Some decisions can be reversed quickly in the event of new data emerging. The mistake is taken as a learning opportunity and embedded in the ‘wisdom’ of the enterprise, to ensure the same mistake is not repeated.
Amazon Prime has been the mother of all marketing tools, delivering Amazon a competitive advantage that has overwhelmed all comers. However, Prime was not born in its current form. It went through a number of iterations over an extended period as Amazon experimented, learnt and doubled down on what worked, while removing the pieces that did not.
Prime started as a ‘2 day shipping’ promotion in a narrow geography, under a promotional name. It evolved to 2 day shipping in the US as the standard, to expedited shipping for a fee, to free shipping with a Prime subscription membership. Over a decade, Amazon has progressively squeezed the time between order receipt and customer delivery at an astonishing rate, that competitors have failed to match. This progressive compression of their decision making and implementation cycle is a key to their competitive advantage.
This bias for action, transparent accountability and learning does build momentum, and once going, is very hard to stop, and almost impossible to compete with successfully.
Nobody ever claimed the prize from Colonel ’40 second’ John Boyd. He was never beaten in a dogfight simulation because he grabbed the initiative and held it, operating inside what he called the oppositions decision making cycle time.
This is decision making momentum, which he codified as the OODA loop.
To me it is one of the decisive competitive tools of the information age.
Jan 17, 2022 | Strategy
It is the beginning of an uncertain new year, following two chaotic ones. Many will have found that performance has been stunted, not just by the chaos of Covid, but by the lack of a capacity to co-ordinate and align activities across competing needs.
Often strategy is confused for a statement of a high-sounding mission or purpose, or the set of values under which they will operate. Sometimes, the strategy statement is as simple as the EBIT objective the MD set for the coming year.
All are necessary, none are strategy.
Your strategy statement should be your competitive game plan. It sets out in simple words three parameters:
- Your objective. This should never be a platitude, or something that can be applied to any business in your competitive sector. It must be the item against which all actions can be judged over an extended period. These are always best articulated using the SMART framework.
- The scope of activity. Your scope is a guide to which activities will be pursued, and more importantly, which will not. Defining what you will not do, removes much of the uncertainty about how objectives will be achieved.
- Competitive advantage. What is it that you do, or intent to do, that will deliver greater value to customers than they can find with your competitors. This is often the hardest of the three to articulate, and often becomes a statement of what you think you do well, or are setting out to do better. This is of no value in the absence of customers caring. A $50 watch tells the time as well as one that costs $50,000, so having a watch that tells accurate time is not a competitive advantage.
When your strategy statement achieves these three things, articulating the objective, scope, and your competitive advantage, in a short statement, you will have achieved more than most, and are off to a good start.
However, there remains the challenging task of implementation.
No matter how articulate, insightful, engaging and motivating your strategy statement, you will have achieved a score of 1 out of 10 on the strategic scorecard.
The other 9 points are reserved for implementation, the really, really, hard bit, the every- day work of leadership and management.
None of this is easy, is rarely done in a short time, and never without vigorous debate based on data, and the varying analyses of the implications from the data that can be made. It is also an iterative process, that improves with vigorous ‘pressure testing’ and ‘what if’ questions.
The question ‘How does this activity add to the achievement of the strategic objective‘ should always be asked during the course of normal activity. In the absence of a good answer that reflects the objectives of the strategy, the activity should not proceed.
Let me know when I can help you sort out this Gordian knot.
Jan 13, 2022 | Customers, Marketing, Strategy
Google has been a revelation, all the answers you need at your fingertips, or so it would seem.
What is the consequence of this instant question gratification?
Do we ask better questions, or just more superficial ones?
Does the volume of questions we ask, to which there are instant answers, substitute for the value of the fewer but deeper questions we used to ask?
My clients and those in my networks hear me rambling on about what I regard as the key to success. That single characteristic I have seen in all successful people I have known, and watched from a distance. Yes, they are all smart, and yes, they are all motivated to success, but underlaying those two factors is a third characteristic:
Curiosity.
I have never seen someone who is smart, and successful, who is not also curious. I have also seen many who have both of those characteristics, but are not successful. Generally, they strike me as not being also curious.
I use Google and Wikipedia every day to answer questions that emerge as I service clients and write this blog, but neither offers the catalyst to a post. That catalyst is curiosity, sated by the deep but selective ‘backgrounding’ I do of books, podcasts, blogs, journals, and absorbing informed commentary.
They are where the catalysts are hidden, uncovered by curiosity.
Social media, Google and Wikipedia specifically have sated our curiosity at a superficial level. No longer do we have to search for answers to questions, they are dished out for us, making life easy, but reflecting the superficiality of the answers to the superficial questions we ask.
Are our lives better because of this ability to get immediate answers to questions?
Undoubtedly yes, but are the questions as useful, offering the deep insights found as we used to dig around for answers, often finding that the initial question was inadequate, superficial, or simply the wrong question.
I like books, my car is a mobile library from which I can consume from a menu of offers in the idle moments between the busy times out of my home office. The one I pick at any time is most likely the one that relates to a question on my mind at that time, or that throws light on a topic of current interest.
Thanks Google and Wikipedia, you have made my life easier, both because I can find the answers to superficial questions, and because most of my competitors stop there, at the superficial.
You need books to go deep.
