Oct 31, 2023 | Change, Marketing, Strategy
When I was a boy in this business, back in the seventies, having a brand was table stakes to be in the game. At that time, there were a number of supermarket chains, and every one was stocked with a suppliers proprietary branded product.
There were many types and scale of brands. From the small producers hoping for a modest segment in the market that would provide a living and employment in their modest factories, to the multi-national, mass market giants. There were no ‘House brands’, until Franklins as an experiment ranged ‘No Frills’ margarine, packed by my then employer Vegetable Oils Ltd, which later became Meadow Lea foods.
Over time, the number of supermarkets reduced to the two gorillas and Aldi that we have today, and the number of brands reduced from the many hundreds down to the few MNC brands, with a very few exceptions, which are slowly being squeezed of life today.
If the trends of those 40 years continue, a brand extinction event is getting closer every day.
The latest victim is Sara Lee.
Originally the brand came from the US, and at its height had diversified into a wide range of products from the initial frozen cakes to clothing, and real estate. The Australian business has been through several owners, the most recent being a Dutch company nobody outside the industry would have heard of.
Manufacturers have been their own worst enemies.
They have failed to recognise the long-term impact on their profitability of the increasing power of Woolies and Coles, with the recent addition of Aldi. Retailers do not care about proprietary brands; their goal is their own profitability. If they cannot have your product on shelf, they are just as happy to have an alternative.
Increasingly over the past 30 years that alternative has been a house brand.
When retailers own the shelf space from which consumers pick products, and also ‘own’ the sales margins from half the products for sale, guess who wins. Retailers have used their muscle to squeeze out proprietary brands, taking the proprietary margin for themselves. The stupidity is that manufacturers have aided and abetted this quest to destroy them, by supplying the products and stopping the long-term brand building that made them successful. The funds have been redirected by manufacturers from advertising and brand building back into price promotion. Selling with price being the only differentiator is a sure way to destroy a brand.
To explain the resilience of a few brands, and some that resisted the retailer pressure for years before succumbing, you need look no further than effective, long term brand building advertising. The Vegemite jingle is in the brains of most Australians over 40, and Vegemite persists. Aeroplane jelly is also there, and I would guess the brand could be rejuvenated by a return. Similarly, Meadow Lea is a shadow of its former self, but 30 years after the great ‘you ought to be congratulated’ advertising finished, the positioning of Meadow Lea remains viable, and could be revived with investment.
To explain the failure of FMCG management to continue to invest in their proprietary brands over the years, allowing house brands to take over, you need look no further than the lack of understanding of the contrary dynamics at work.
Advertising is a long term investment, over numbers of years. Advertising is treated as an expense, one that is accounted for on an annual basis in the accounts of businesses. These two contrary forces, when allied to executive KPI’s dominated by accounting thinking, and the increasing power of the retailers to demand discounts as a necessity for distribution has drained the capital necessary for brand investment. The retailers are happy, they have the margin. The short term executive profitability goals of a few executives may be reached, so they are happy individuals. However, the brands have been destroyed, and the long term viability of their manufacturing operations been compromised, in most cases, terminally.
That in a nutshell, leaving aside questions of the operational efficiency of the Sara Lee business, is why it is now on the discount block itself.
Oct 18, 2023 | Governance, Strategy
Australia is an economy that has allowed the big to get bigger to such an extent that the barriers to entry in many vital and emerging industries are simply too high for new domestically funded entrants to swallow. This has led to multinationals buying their way into our market, further reducing competition. The latest is the purchase of ASX listed Origin Energy by serial asset accumulator and tax avoider Brookfield.
We are all used to thinking about economies of scale, the bigger we get, the greater the opportunity to spread the capital cost incurred over a wider base. The obvious example is IT, the costs can be huge, but they scale rapidly downwards as the number of nodes in use increases. It costs less to run each node as you increase numbers than it cost to run the first one.
This ignores the natural increase in transaction costs that used to occur when you scaled, but the use of IT, when done well, radically reduces the friction caused by transaction costs.
When you consider the economics of scope, the same sort of thinking applies, but you seek to leverage the capabilities built in one domain into others. Amazon is the poster child, leveraging the automation of their book selling IT investments into operating the Amazon store, then into Web services, retailing, hardware, and many other products and services.
What has happened is that we have seen the two types of economies of scale and scope give each other a dose of steroids.
Take a step further back, and you see that the expansions of scope are generally coming from adjacent markets that are fragmented, and often regulated.
Fragmented markets naturally coalesce into markets that are increasingly dominated by a few firms. The power of scale in a market overwhelms the fragmentation, and you end up with fewer firms competing, and taken to its logical conclusion, you have an oligopoly. In some cases, oligopolies end up as a monopoly by another name, such as Google in search, Microsoft in office software in the 90’s. They have been ‘defragmented’ by the application of capital that delivers economies of scale.
Then follows the search for scope, the usage situations where capabilities from one market are extended to other markets, at a lesser cost than the adjacent markets could do on their own.
Into this mix you throw regulatory barriers.
The cost of managing compliance is going up and up.
Corporations as they scale apply capital to the management of their compliance, and the wider the scope of activities, the greater leverage they get from that investment.
Look at the fossil fuel companies in Australia. Largely they are multinationals with huge scope and scale, too big for governments to take on. As a result, the increasing returns on the capital employed historically in scale and scope, are now being applied to compliance, particularly tax compliance, as they seek lower tax regimes that insulate returns. The purchase of Origin Energy is a further example of the process.
The strategic policy dilemma for Australia is clear.
For the long-term health and innovative vigour of the economy necessary for us to climb out of the basement in the innovative economy list, there needs to be tough decisions taken that will have a short-term cost, while increasing the odds of a long term benefit. Unfortunately, there are no votes in that equation.
Oct 13, 2023 | Governance, Innovation, Strategy
Australia has a problem, a big one. Our KAP Gap is huge and becoming ‘huger’ by the month.
Knowledge-Attitudes-Practise gap is the difference between what people say they will do, and what they actually do.
At some level, we understand what needs to be done, but are so cemented into the good life that we cannot see our way to absorb the pain necessary if our grandchildren are to continue to enjoy the fruits of this country.
How do Australians respond to the reality of the latest Harvard Complexity report which records a slip from 60th in 2000, to 93rd in 2021? Being sandwiched between the manufacturing goliaths of Uganda and Pakistan is hardly a point of pride. (Perhaps we are getting used to it, given the slip of Australian rugby from the top tier to a nation ranged with the minnows of world rugby, but that is another post)
There is a notable reluctance to embrace change. Inevitably, change makes some uncomfortable, so we substitute a fuzzy slogan. There needs to be meat on the bones of an effective slogan that resonates on a deeply personal level, or it remains just fuzzy words. This applies equally to big changes as it does to the little ones we are asked to make every day, it is just that the latter are rarely seen and measured.
How is it that we are still seen as a wealthy nation?
I have an acquaintance who is wealthy, always has been, but he is a lazy sod, pretending to work, being involved in stuff that amuses him. Luckily for him, his father and grandfather were of a different sort. They accumulated wealth from hard work, taking risks, and learning from their mistakes. My acquaintance is wealthy because he is lucky in his parentage, just as Australia is lucky in its abundance of stuff we can dig up and flog that the rest of the world wants.
Little of that nasty four letter word ‘Work’ involved.
Tomorrow, as this is written, there will be a referendum. Irrespective of the view you hold, and the way you will vote, it is hard to argue that the policy choices, and their implementation has not been at an acceptable level to date. You only need to look at the ‘Gap’ between first Australian incarceration rates, suicides, domestic violence, education, and others to come to that conclusion. What this vote will have articulated is the willingness of the Australian population to accept that change is necessary. It may not always be good for everyone, and indeed, will never receive complete agreement of the detail. However, if we reject all change, we also reject all opportunity, which is rarely a good strategy.
Sep 27, 2023 | Leadership, Strategy
Intuition is widely misunderstood, often it is seen as a ‘gift’, a rare ability to generate ‘insight’ into a situation.
Over my long commercial life, I have come to a different conclusion. Intuition can be generated and managed when it is recognised that it is the outcome of a process, like most things. This process may be qualitative, and cumulative over a long period, but it remains a process. Again, over that long life I have seen it as the result of ‘environmental research’.
This is the combination of directed qualitative and quantitative research, thinking, wide reading, and engagement with people from as wide a palette as you can find. About the best source of what most would call ‘wisdom’ will come from talking to customers and consumers. Why are they buying product X instead of product Y , understanding the usually automatic trade-offs made subconsciously. What are they buying it instead of, how will it be used, how do they measure the ‘value’ of the purchase. I call it ‘Environmental research’
Do the data thing first, which avoids, or at least moderates and minimises the confirmation bias, seeing only the things that conform what you already believe.
Do this well, and your intuition will improve, while you may not even be aware of the improvement. It is a process, data first, hypothesise, test, look again to reform the hypotheses, and test. Looks a lot like the scientific method!
Sep 15, 2023 | Branding, Strategy
Qantas is at the centre of a political, legal, and social bunfight.
On Tuesday 13th, (Sept 2023) Qantas lost an appeal in the High Court, being found guilty of sacking almost 1,700 Qantas workers illegally, replacing them with staff from labour hire businesses. This whack across the corporate chops comes behind outrage at Qantas selling tickets on flights they had already cancelled, lost baggage, failure to refund ticketholders, last minute cancellations of flights, and lousy service inflight and on the ground.
Alan Joyce is the prime target of the outrage, having just walked away a few months early with a pile of cash in salary and bonuses. Then there was another pile from the sale of shares at a time when he must have known the ACCC was investigating ticket sales, but the investing public did not. By most definitions, a clear case of insider trading.
Yet, in all this, should he shoulder all the blame?
Throughout his long tenure Joyce has aggressively cut costs by making radical and most ‘unQantas-like’ choices. Always he has had the support of the Qantas board. It is reasonable to assume the board endorsed all the strategies Joyce has implemented to cut costs, as well as waving through his compensation packages over the years. The chairman at least, must have also agreed to the $17 million share sale into a buyback scheme in the first week of June.
The Qantas board have clearly tied Joyce’s package to short term profitability with little regard for much else. It is therefore understandable albeit morally bankrupt, for him to optimise his personal wealth, arguably at the expense of the long-term commercial health of Qantas. As Peter Drucker observed ‘You get what you measure’.
The board is, or should be, the voice of shareholders. Qantas would be held in the portfolios of most superannuation fund managers in Australia. Therefore, we are all shareholders who will benefit from the profitability of Qantas. We have already benefited from the negotiations that squeezed $2.7 billion in various forms of support from the government over the covid period.
The morality of the governance of Qantas can be questioned, and the courts have found them guilty of illegally sacking workers, for which they (and us as shareholders) will pay a large price. There should be accountability and retribution for this sad state of affairs to be handed out. Some should go to Joyce, but a substantial majority of it should be directed to a board that has failed in its governance role as the guardians of the long term health of the business.
Note: I do not know Joyce, although did meet him once at a function, and did not like him at all. Probably because I was of no use to him, so he was abrupt (bloody rude) as he moved on to a juicier target across the room. Good riddance.
Header credit: cartoon by Lewis, from a Pinterest board by Janice Bell
Sep 13, 2023 | Innovation, Marketing, Strategy
Creativity comes from somewhere; the challenge is always to understand and manage the process and the people. This applies equally to every type of creativity, from painting, writing poetry, formulating the mathematical representations of our physical world, to designing a bridge or a house, or imagining something entirely new.
Creativity is never just a Eureka moment under the shower with no pre-work as the catalyst. It requires the frameworks provided by the pre-work to enable the catalyst to emerge.
For the pre-work to be able to provide a solid framework within which the catalyst can emerge requires years of study, experience, and lessons learned from the ideas discarded or failed, on top of the few that might succeed.
Specialise.
This leads to focus, and deep knowledge, and an ability to apply well above commodity pricing. When a service or creative product is in short supply, the price goes up. Creative people seek problems to solve, and ideas to explore, which is great, but counterproductive to finding the price that will optimise your time. Be committed to the niche, and the specialisation this niche requires will open the opportunities for other ideas and new problems to be solved.
Specialisation really only happens with the benefit of experience, which happens over time. Define clearly what are you going to do, and who do you do it for, and being very clear to both yourself and those in the market what you will not do. For SME’s this is always a very difficult series of choices to make.
By specialising, you also end up emasculating competition, as they cannot do what you can. For those who want what you provide, there is no option.
Address questions of money early.
We tend not to talk about money, it makes us uncomfortable, and creativity is very personal, not about money. However, making a living providing a creative product is why you are in business. You must be able to talk about it to make it, and talking about it delivers credibility.
Do not be scared of silence.
Nature abhors a vacuum, so the best way after delivering a ‘price-bomb’ is to embrace silence.
When selling, if you fill the void, you tend to say something that reduces the impact of the bomb.
It is uncomfortable, but you get used to it.
State the number and shut up. You will gain a lot of information from the silence. Often it saves yourself from yourself, while offering an ‘out’ for those potential customers looking for a commodity product and price to remove themselves early, before you invest much of your valuable time.
How to measure value in the conversation.
There is no easy way to measure value in a conversation, but there is no substitute to a conversation that seeks to find ways for people to exchange value, in whatever form that value takes. The answer is to discover sources of irritation, complexity, or desire the client would like to address, and propose ways to achieve that outcome. Therefore, identifying quantitatively the impacts of the problem, and the results of your solution will increase the value of your offer. The larger the problem being faced, the greater the value of the creative process.
Say ‘No’ a lot.
As Warren Buffet notes: the difference between successful people and really successful people is that really successful people say no to almost everything.
We all want more what we do not, or cannot have. Saying No increases the desirability of your offer.
Anchoring against desired guaranteed value.
If I could guarantee you an extra million dollars in profit, would you be prepared to pay half as compensation? This is a closed question, but it is an anchoring question at the high end of the range. You can work backwards from that, in terms of risk and the nature of the guarantee. This strategy is used all the time, often without us noticing. Energy retailers seem to be always guaranteeing savings on your power bills when you buy from them, knowing that few will do the measurement, and it is a hypothetical measurement in any event. This tactic can be used in many ways. For example, usually you cannot guarantee value when selling to a bureaucrat, as they cannot pay for value, they pay for certainty against a budget. Therefore, you can offer guarantees of delivery date, or performance, any factor that is quantitative.
Value is entirely subjective. At the heart of value is the trade, where you are both happy. Your costs have nothing to do with the value. People do not want your time, or your deliverables, they want the solutions to their situation that you can deliver.
To conduct a value conversation, you need to have the right questions, not the answers. Ask the questions, and the answers will evolve.
Header credit: Me. As you can see, graphic art is not part of my creative armoury.
