Dec 4, 2014 | Category, Marketing, Operations, retail, Small business
Data management & analysis
The second of 10 ways to beat the supermarket gorillas at their own game, after understanding the way the supermarket business model works, is to be savvy with data.
Supermarket retailing is heavily data intensive. These days, any retailing beyond the archetypical lemonade stand by the side of the road is data intensive, but particularly supermarkets. Commonly a supermarket range is up to 30,000 Sku’s across a number of different formats and geographic and demographic locations, and several thousand suppliers, all with their own focus and story to tell.
The supermarkets physical space needs to be allocated across the Sku’s chosen to be on range in the way that best delivers a return on their investment in the particular store and strategically across the chain.
SME suppliers to chain supermarkets usually are playing from a position of weakness, as they lack the scale to have the data and category management resources that supermarkets demand. However, their strength is that they can be far more agile and market sensitive that their bigger rivals, often SME’s can develop and launch a product before a multinational can get the first development workshop together.
Whilst supermarkets have a wealth of data at their fingertips, both their own, and that supplied by their large suppliers, they recognise that not every piece of data is worth the digits it is written with. Data is only of any value if it leads to some sort of actionable insight, and it is here that SME’s have an advantage despite the disadvantage of small size. Making the connections between differing seemingly disconnected data points is where the gold is hidden.
There are several points at which data can be collected, from which insights can be gained. Internal, observed and purchased.
- Sales and margin history. No SME should be without a robust and detailed sales and margin analysis of their own sales history, and thus ability to forecast with some certainty. Every SME has a sales history in their accounting package, most do not use it. Most use the “Office” package, which included Excel, but many do not use the power of the tools in excel. Pivot tables are the most underutilised and useful tool I have ever seen for SME’s. If you are one of the majority who do not use them, wake up, spend 30 minutes on YouTube figuring out the basics, and start generating insights. Also in excel is the V-Lookup tool, which can be enormously valuable to SME’s to keep accurate track of a whole range of variables in their business.
- Sales intelligence. SME’s are usually in a position to have unfiltered market intelligence in the hands of decision makers easily and quickly. Usually the people best positioned to see change as it is evolving are those in direct contact with customers and consumers, often the lower paid front line staff. Being engaged with these staff, or indeed as is the case for many, being that staff as a part of the role of the SME business owner puts you in a position to see shifts as they occur, if you are watching. Finding a way to turn these random conversations and insights into data points that can be connected and acted on can build into a significant competitive advantage. There is no substitute for the insights gained by simply watching and understanding the drivers of consumer behaviour, then crafting an offer that adds value.
- Agile operations. Scale brings its own momentum, despite the huge improvements over the last 20 years by the adoption of Lean practises. Large suppliers to supermarkets, with large factories, fixed planning cycles and extended supply chains are often caught short by the unexpected and unplanned. Agile suppliers can often fill the gaps created, but do so they need to be able to make very quick decision on costs, time frames, and operational priorities and limitations. To make these decisions, they need absolute understanding of their cash and financial position, costs and decision drivers like break even points, the impact of discounts, and negotiation trade-offs they can make. To be truly agile, you need accurate and detailed financial and operational data that is easily useable to make well informed decisions, then track the outcomes of those decisions.
- Be experimental. Having good data enables experimentation on a scale that offers great insights, but minimises risk. The supermarkets are increasingly amenable to enabling SME’s to experiment with all sorts of offerings as they learn as well from the activity. However, you cannot just walk in and expect to be taken seriously without a history of sensible innovation and a relationship with the individual decision makers in the retailer. Having robust, realistic and well understood strategic and operational planning in place is a must if you wish to be experimental and stay in business.
- Purchase syndicated data. Scan data can be purchased in many forms, and to varying degrees of analysis and detail. There is a significant cost to this information, firstly the purchase costs, but more importantly, the data analysis capabilities. Increasingly scan data is being matched to the behavioural data emerging from store loyalty cards to add another dimension to decision making, and this trend will only accelerate. SME’e can dip in and out of this data, taking a slice here and there to provide insights without the significant investment of being fully engaged. Treated sensibly, it can be used a bit like market research, taking a small and well defined sample and using it as representative of the whole picture.
None of this is easy, which is OK, because if it was, everyone would be doing it. However, many SME’s simply think it is all too hard, and stay away, effectively walking away from 75% of the volume in the market. For many, this is a sensible decision, but for some, those SME’s with a genuine opportunity to become larger businesses, building solid capabilities in collecting and leveraging data is essential.
Nov 27, 2014 | Branding, Category, Change, Marketing, retail, Small business
A short while ago, I posted “10 strategies for SME’s to beat the supermarket gorillas at their own game” which generated quite a bit of comment and feedback. Amongst the feedback were a number of requests to go into more detail on each of the strategies, and so this is the first of the series, focussed on understanding the business model of the supermarkets.
I deliberately used the word “Gorillas” because of the extraordinarily concentrated nature of Australia’s supermarket retailers, with Coles and Woolworths between them holding over 70% of FMCG sales depending on the category, and whose numbers you believe.
You know the old question: “where do the 500kg gorillas sleep?”
Answer: “anywhere they bloody like”
That was the way it was, a comfy duopoly, however, more recently there have been some major strategy alterations by Coles which has dramatically lifted their financial performance, and Aldi has successfully carved out a growing niche as a third retail presence. In addition, there are still some very good independent retailers around operating out of the wholesaler Metcash, who also competes with some of their own and franchised retail outlets.
This mix, combined with the opportunities suppliers have to sell into food service and institutional markets and increasingly direct to consumers via the net and other means makes for an environment where the agile and insightful suppliers can be very successful despite the obstacles, but it is a very challenging environment.
The concept of business models is well known, in summary, it is the expression of how a business makes money. It always involves a matrix of revenue generated, the fixed and variable costs of generating that revenue, and the choices that the business makes about its customers and how they will be serviced, and the way they incur the costs of that servicing.
Supermarkets are a great example of a number of seemingly similar competitors that have slightly differing business models. At a macro level they have strong similarities, relying on volume, price, and shopper numbers to succeed, but everyone who shops knows that Woolworths is not Coles, is not Aldi.
However, they do have some common building blocks.
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- Revenue generation. Supermarkets generate revenue on both sides of the equation.
- Shoppers buy products, paying at the checkout.
- Suppliers “pay” for shelf space via a range of charges levied for every variable the retailers can dream up. Volume discounts, payment terms, promotional levies, preferred shelf positioning, promotional slots, access to sales information, and a host of others. Some are items for which suppliers receive an invoice, others are taken as discounts off the invoice price, increasingly applied automatically as a part of the trading term package.
- Cost management. Supermarkets work on very low percentage margins, relying on the volume to generate the cash margins.
- Fixed costs are a significant part of retailers total costs, made up of the provision of the retail floor space, the logistics infrastructure and personnel. Supermarkets attack their fixed cost base aggressively using their scale as negotiation tools with landlords and logistics suppliers, while keeping a very substantial proportion of front line retail staff as casuals rather than permanent employees so they can better adjust staff levels to match activity. The sorts of choices retailers make are between high density shopping centre locations Vs stand alone locations. There are costs and benefits to each which are considered as a part of their strategic decision making.
- The biggest variable cost is the cost of good sold, and they similarly use their scale to manage those costs downward. Tactics vary between retailers, but the core game is to maximise their margins while keeping prices as low as possible to attract the volume buyers. This is an extremely delicate balance.
- Transaction costs are usually pretty well hidden in most businesses, but are really significant in the case of supermarkets simply due to the number of transactions they make. For example, there is a cost to managing the buying relationship with a supplier, but the larger the supplier, the less is the total costs/unit of sale of managing that relationship. This has led to a dramatic reduction of the number of suppliers supermarkets have in any category over the last 15 years or so a trend further accelerated by the increasingly common strategy of limiting the number of proprietary brands in any category substituting house-branded products, and reducing the number of relationships to be managed. This has made negotiating shelf space increasingly hard, and because of scarcity, increasingly expensive for suppliers, in turn putting extreme pressure on small suppliers.
- Customer service and relationships. The retailers have each made choices about the pricing, location, ranging, and service strategies that sets them apart from each other, and more subtly, they have back office strategies that differ. However, their common aim is to have as much market share ass possible, as volume is the profit generator.
- As in any market, no retailer can be all things to all people, so each makes the choice of the “ideal” customer, and markets towards them, grateful for any overlap. Increasingly the marketing is being supported by customer loyalty cards and the data mining and personalised promotional opportunities that technology is delivering, but the fundamental measures of success remain unchanged: number of shoppers, share of wallet, and basket size.
- The two major retailers have very large marketing budgets which they spend in a wide variety of ways, across all channels of communication with customers and potential customers, and often in joint activity with their suppliers, which inevitably, the suppliers end up funding in return for volume. The smaller the retailer, the less “mass market” they are, so the tactics tend to differ, although strategically, finding willing supplier partners is a core part of every retailers marketing mix.
- Consumers generally want choice when they are in a supermarket, the more the better, in any category. Woolworths and Coles stores carry 12-20,000 Sku’s (Stock keeping unit) depending on the size and location of the store, a typical IGA might carry 8-10,000, while Aldi carry just over 1,000. The sku’s carried in any store also reflect of the demographic and cultural mix. The Woolworths store in Auburn in Sydney has a significantly different product mix to the Woolworths of a similar size in Double Bay.
- Every retailer uses some form of category management disciplines as a means to monitor, adjust and locate their inventory onto the sales face in the way that best meets their customers needs and maximises impulse pick-up. This is always a data intensive mix of the volume and margin of the individual Sku, (such as Ski strawberry yoghurt 200gm) group of similar Sku’s (all strawberry 200gm yoghurt) subcategory (all strawberry yoghurt) and category (all yoghurt) and between categories. They make choices about how many brands and types to keep in stock, where they put them, on shelf and in relation to other yogurts, and indeed other chilled products. A facing of yoghurt added is a facing of some other product gone, as the sides of the stores are not elastic. At the core of the category management activities is the need to best satisfy consumers, whilst competing effectively and delivering maximised margins.
Being agile, persistent, and prepared to experiment are about the best qualities a supplier to supermarkets can have.
Oct 29, 2014 | Marketing, Small business, Strategy
Any business that has done business with the supermarkets knows that they are not there to do you any favours. They have shareholders to keep happy, customers to sell to at the lowest prices possible consistent with their margin objectives , competitors to beat, and shelf space for sale to their suppliers.
In order to survive and prosper selling via supermarket distribution takes a business model that is tailored to the demands that the retailers make.
Following are 10 strategies that have worked in the past, the more of them you cover off the better, and the first few are mandatory.
- Understand the supermarket business model. The supermarket business model is based on three factors: high volumes, lowest possible supply chain and transaction costs, and low prices. With some minor category exceptions for some retailers, they do not vary from this model, in Australia or overseas. Given the scale of their operations, they get to set the rules, and there is little room for negotiation, even for major suppliers.
- Be savvy with data. Mass market retailing is a data intensive game. The retailers have mountains of data at their disposal, and plenty of suppliers willing and able to interpret it for them, with the obvious disadvantage to those who do not interpret. Scan data, combined with the loyalty card data increasingly being used is a goldmine of demographic, behavioural, and promotional information. Being in a position to present data with your interpretation, and having the credibility to interpret the retailers and your competitors data is a price of success.
- Aggressively execute on Category Management. Category management disciplines are the foundation of the retailers ranging, promotional and in store product placement strategies. It is data intensive, and an integral part of he business model, and as such sufficiently important to be treated as a separate “to do” for those to whom success with supermarkets is essential. Allowing your products to be “category managed” by your competitors is simply not sufficiently competitive , or aggressive. You need to execute on category management in partnership with the retailers, even if you are not in the “category captain” role.
- Build a brand that has relevance and connection to consumers. The alternative to having a brand that has at least a small but demonstrable group of consumers your brand has no effective substitute, and who will perhaps change their choice of retailer for, is essential. To be a price taker with no leverage at all, is to be an irrelevant supplier who is absolutely dispensable.
- Recognise you have two customers. The supermarkets may be your direct customers, but the consumer is also your customer, indirectly. As a part of brand building, you need to open communication channels with consumers, so that they are predisposed to buy your products. This may seem like brand building, and it is, but it is more short term direct, and actionable than building a brand which is a long term investment. Direct promotional and communication activity can now be a part of your tactical marketing plans in a far more directed manner than has ever been possible before.
- Remove transaction costs. Transaction costs have two basic causes, the first is not getting “it right first time” requiring rework to correct, and the second is the penalty of small scale. It costs the same to raise and process an invoice of $1,000 as it does for an invoice of $100,000. To the extent that technology can be applied to process the invoices, the costs will not be material, but if people are involved, the costs of the $1,000 invoice is 100 times as much as the $100,000 invoice. This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. The source of Woolworths superior performance over the last decade compared to Coles has been the impact of their reductions in transaction costs that have dropped straight to the profit line. Wal-Mart became the biggest retailer in the world by focussing on the reduction of transaction costs of all types, and passing the savings on to consumers as lower prices.
- Collaborate for scale. Small suppliers to supermarkets have to find ways to apply leverage to their opportunities. Collaborating to reduce various forms of transaction and supply chain costs , as well as pooling data and data capabilities are logical if challenging tasks. Many produce suppliers have found ways to collaborate, but their produce is unbranded, and commoditised by retailers, so it is harder for branded FMCG but nevertheless possible.
- Constantly innovate. It is almost a cliché, but nevertheless true, that to stay still is to be left behind. Innovation is a part of the necessary armoury of success. Not just innovation in the product supplied by the means of its production and supply require constant innovation.
- Build agile value chains. Commercial agility is the ability to alter processes in the face of changed circumstances without resorting to non value adding discussion and debate, and without losing sight of the objective. Agility is not flexibility, which implies that things “bend” then go back to normal. By contrast, agile value chains have the characteristic of being able to evolve rapidly, and improve in the process.
- Do not play. The last and most obvious strategy is to ignore the supermarkets, and play in channels they do not control where the value in the product is able to be recognised in some way that is impossible in the high volume low margin supermarket game. Depending on how you measure, and what category we are talking about, supermarkets control between 50 and 80% of FMCG sales, which leaves some 30 billion of Australian FMCG sales left over, not an insignificant sum.
That is an awful lot to do, and the best time to start was a while ago. However, the second best time is now, so go to it. If you need a bit of assistance, just get in touch, and I will bring along my 35 years of experience with this stuff and put it at your disposal.
Jun 18, 2014 | Collaboration, Customers, retail, Small business
Strategyaudit.com.au
Chain stores dominate our grocery shopping environment, they have developed all the advantages of scale, and use them to the advantage of their shareholders, by delivering returns, and to customers by delivering low prices.
The model works, in Australia 75% of the grocery shopping dollar goes to one of two retailers, and small retailers have been decimated.
However, small retailers are making a comeback, the ones left are good, good enough to deliver value to their customers in different ways to the chains, and they are making a good bob.
They compete with a variety of strategies, all of which have elements of the following 10 rules.
- Make the store look warm, friendly, inviting, and, importantly, current. The last Valentines day, a client put in huge volumes of roses on which he put some very cheap prices compared to the highway robbery employed elsewhere, but he also had a promotion of Chocolates and a voucher for collaborative promotion with the grog shop two doors down, on sale. He did sell a lot of roses, a pile of chocolate, and got a slice from the bubbles the grog shop sold.
- Collaborative retailing is a really effective way of building sales and relationship s with customers. The example above worked really well, as have others that group retailers of differing women’s apparel, dresses, shoes, hairdressing services, et al together.
- Experiment, with everything under your control. Store layout, range, price, stock weight and position, proximity of complementary products, promotional activity, it is a long list limited only by imagination and energy. However, experimenting is not the only game, you need to track results, now easy via the electronic tills, and if nothing else, Excel pivot tables. Understand what works, and improve it for next time, eliminating the things that prove not to work. It is a simple formula, challenging to implement consistently, but in principal, simple. Learn as you go, and as the you experiment more, you will also find your depth of tacit knowledge also increases. A small business can put in place an experiment, have the outcomes and a resulting tactical outlook while their bigger competitors are still trying to get a meeting together to decide if it may be a good idea.
- Use technology widely, not just in the tracking of sales, but in the management of your operations, and most importantly, the engagement of your consumers. Make your website the co-ordination centre of your marketing efforts. Mobile, email, social media platforms, blog posts, all potentially have a place, but mostly you cannot do them all, so make informed choices. However, you need to recognise that digital is not free, there are both operating and opportunity costs attached, and for most SME’s, a capability gap. Outsource all you can, which is getting easier by the day, and importantly, track the results of everything you are doing on line
- Make sure you have a website that does you justice. A mate sent this to me this link to Victor Churchill, a butcher in Sydney’s eastern suburbs, and now I just want to go there.
- Personalise, personalise, personalise. The chain retailers have “mass market” business model, they cannot easily personalise their offer to the customer base. They may have a technology edge because they have the resources, but how often does the casual filling the shelves greet a customer by name? Enquire after their kids, and ask how the fruit basket you supplied last week for the centre-piece of your dinner party work out?.
- Specialise in what you do best, deliver “depth” to consumers where the mass retailers can only deliver “breadth” to a mass market.
- Be the expert in your category. If you are a produce retailer, know where the best strawberries come from, and when they will be available , similarly, a fashion retailer needs to be current with the trendsetters, to know what is coming, what will accessorise easily, and how the fashion can be tailored to the market they are serving. Most people want to deal with, and seek the affirmation of experts, be the expert, and they will keep on coming back.
- Apply the disciplines of Category Management to your inventory and space management. In its simplest form, Category Management is a mindset that seeks to allocate finite and valuable shelf space on the basis of maximising the customer experience, while delivering optimised profitability and long term commercial sustainability. This can get as complicated as you like, but for an SME, building an excel database leveraging the capability of pivot tables, tools virtually every business has sitting on their PC already, is sufficient to get started.
- Watch the cash. This one always gets a run. Retailers greatest cost, and biggest risk is usually inventory, and inventory is a raging consumer of cash. On the other hand, the oldest adage in retailing is “stock sells stock”, so there is a tightrope to be walked. Perhaps the most valuable, and in SME’s underused, performance measure in retailing is stock turn. Use it aggressively to fine tune your range, and inventory.
None of these “rules” are of great value separately, but together, they offer a potent competitive tool set for small retailers.
Apr 24, 2014 | Branding, Category, Customers, Marketing, retail
Businesses spend many millions trying to understand the way consumers consider the choices confronting them in a supermarket. With up to 30,000 items on shelf, and some categories having hundreds of choices, it is a key consideration.
A mix of psychology, data science, habitual behaviour, discretionary spending dollars available, and individual preferences all play a role.
A complicated mix.
However, there is a way to at least clarify part of the mix.
Consumers use decision trees, usually without thinking about them when they are in a supermarket making their purchases.
Some purchases are automatic, a habitual choice, others are made after a considered set of choices on a range of factors important to the individual are made, and there are, obviously, many shades of this continuum that apply to a highly personal process.
Imagine a consumer approaching the dairy case looking for fruited yoghurt. Some may just buy their usual brand, flavour and size irrespective of everything else. Others will make a series of choices that will vary for every person, and may look something like the decision tree below.
It will differ for each individual, some will choose the brand first, others the flavour, or the size and price, and a whole range of variations on these factors, but based on the total sales, supermarkets will range products, and give them shelf positions and space based on sales, gross margins, delivered margins, and various promotional strategies. They also use a decision tree.
Retailers and suppliers spend huge amounts of effort, and resources. on this category management exercise, trying to read the consumers mind, and anticipate their reactions to various combinations that are available to them.
It is a data intensive exercise, well suited to the “big data” techniques that are evolving around us. Combining checkout data with store loyalty cards is now becoming commonplace, what is emerging currently is the integration of mobile and social media data into the mix.
As you walk into the store to buy something, there has already been lots of effort gone into reading your mind, and there will be lots of effort and money expended in store in an effort to manage your purchase decisions.
