Drawn & quartered

Every quarter the UK retail market share figures make stimulating reading...winners, loses... but what are you meant to do with it?

Last week's Kantar Worldpanel trumpeted the huge news: Lidl is now the number seven grocery retailer in the UK.

What I found just as interesting was what's not being more clearly called out: inflation & store numbers

Hurrah! Inflation is driving top-line. So it should. The problem is, if you are not tracking ahead of inflation, you are still declining - and the big 4 are struggling and will largely continue to do so.

Tesco showing like for like growth should surprise no one. They have been rationalising their store base, so those staying open will see a natural rise in traffic as shoppers go to their next nearest Tesco.

If the Booker deal doesn't proceed. What then? If it does, Tesco will find themselves focused on store and supply chain optimisation and there are real risks of loss of short-term focus on the core as management time deals with structural property issues

Asda are stymied. The have the wrong store footprint for 2017 and beyond. They know it - but it's hard to see what they can do about it. They have over 600 stores, but for how long? They will need to find bottom line efficiencies to compensate for real terms top-line stagnation

JS are also in a bind, their NISA bid looks decidedly less tasty after the Morrisons/McColls coup and is already and unsurprisingly rumoured to be on hold. They have to hope the Argos move really delivers.

So of the four, only Morrisons seem to have their act together at the moment, but even then the McColls deal is not a slam-dunk and will have to deliver value. It buys Morrisons time, maybe two or three years as the deal expands their effective store base

The real inflation-busting action is happening in Lidl and Aldi who together notched up total market share gain of 1.3% points. And they are achieving this off a still-developing store base and c. 2000 SKUs many of which are confined labels

These factors are the killers. The limited range has a very limited impact on the number of items per trip shoppers buy, but they have a massive impact on system efficiencies and price. And will continue so to do. The more stores they open, the more winning they will do.

So here's a thought, when you see the quarterly share data, take half and hour and think about your business and retail customer investment choices moving forwards and consider what insights might be drawn

• Do the inflation check - who is winning, really
• Make sure you are modelling each chains store numbers and development plans into your thinking - where will each chain be in 1, 3 and 5 years - and what share will they have?
• If you aren't learning how to win with Aldi and Lidl, you are already losing
• If you are a food business - make sure you have a credible out of home strategy
• And I didn't even get to Amazon yet

Morrisons: The safer way than Safeway

Morrison's capturing the McColl's supply contract is audacious. The decision to execute using the Safeway brand is not unproblematic.

Why so?

The continued expansion of Aldi & Lidl across the UK; JS's moves to acquire NISA and Tesco's drawn out deal to bank Booker means the battle for proximity store dominance is fully engaged and price competitiveness is crucial.

It is likely that most Safeway SKUs created will have an existing Morrison's counterpart and will be produced on the same lines. But this means more complexity for the factories to manage, more packaging, higher inventories of finished stocks, interrupted runs, more waste and overall impaired economics. This is unhelpful to McColl's; it could be damaging to Morrisons. Running with the existing Morrison's portfolio conversely would bring efficiency benefits to both.

Remembering Safeway?

Safeway is an old aunt who died some time ago. She wasn't anyone's favourite aunt and if truth were told, she had developed a rather unusual and not necessarily pleasant aroma over her last few years. Safeway disappeared in 2004 having seen customers flee away and then savaging itself with a programme of deep branded price cuts that proved self destructive. I dare anyone to name a signature Safeway SKU that they fondly recall or whose absence has been missed. Anyone making the "residual fondness" claim is either trying to post-rationalise or is seriously misguided.

A blow to Sainsbury & Asda

Whether this is a first step to a full acquisition of McColl's by Morrisons will have to be seen but overnight Morrison's have secured a serious grip on the UK proximity retail market. The deal blows a huge hole in JS's plans to acquire NISA. The value in that idea seems dead in the water. And it exposes Asda to the challenge of why they didn't see this play and make a move: as their sales continue to dip, there is no obvious path forward.

More reasons to drive with Morrisons

One can see the headline attraction of using the Safeway brand. Words like uniqueness and point of difference come to mind. And certainly one can make the case that it carries greater residual heritage than NISA's Heritage label. A less emotional view might have stressed the shared economic benefits of leveraging the Morrisons brand across the McColl's estate. Safeway may be nicer than NISA; but Morrisons is the safer way.

Amazon: Imagine...

Imagine.

Fast forward fifteen years. Imagine every rule and assumption you currently hold about retailers, manufacturers, brands and own labels being swept aside.  This new dawn is fast approaching.

Let's start with a general observation and a governing hypothesis:

1. First the observation: Grocery retailers are just aggregators. They have, over the last fifty years, provided the most convenient and efficient ways to connect brands and consumers. During this time, realising their lack of self identity and feeling the need to differentiate from other brands, retailers developed loyalty devices - the most powerful being retailers own labels. 
2. The hypothesis: Our children and their children will see no utility in driving to a hypermarket to peruse aisle after aisle for everyday groceries. Mobile will be their point of purchase. Others will do the physical hard yards. 

On top of these points, consider the Amazon factor....and three implications of their operating model and the broader changes impacting the industry: (1) No listing/slotting fees; (2) Portfolio neutrality; (3) The supply chain of everything

No slotting fees
In the world of grocery, listing/slotting fees are a core part of the retailers income stream. In fact, across the world, it is a general truth that most retailers make a loss on their trading activties with shoppers. The margin comes from supplier income and listing fees are a core element. The more innovation, the more fees are generated. Some retailers even charge delisting fees to cover the costs of markdowns associated with failure.

In the Amazon world today, suppliers manage their own catalogue: list whatever you like. It's unclear whether this is a deliberate, long-term strategic choice - but it would be unwise to assume it is a quirk of immaturity. For suppliers, no slotting fees is innovation nirvana. It will make launching with Amazon a deeply attractive proposition and put pressure on established retail business models.

Portfolio neutrality
Although there are some muttering of Amazon wanting to develop their own retail brands, they would be delighted to list everyone else's. Imagine, Tesco Finest or M&S Gastropub being delivered via Amazon. This would revolutionise our understanding of retail own brands.

1. Today, you can only buy Tesco Finest in Tesco...but imagine if the rules changed. Retail own brands would become brands - succeeding or failing on their market merits. Instead of Tesco, Sainsbury, Asda toilet rolls competing with Andrex head to head in individual outlets, they would all compete. The shopper gains total market visibility and accessibilty. Let battle commence.
2. But retailers don't make their own brands. The unspoken truth of M&S food is the array of companies manufacturing for M&S. Able to compete directly these companies may quickly become branded players themselves. Whose Lasagne do you prefer: Greencore vs 2Sisters? With higher velocities and the same quality standards, these companies will produce beyond M&S quality at below Aldi prices via Amazon.  Will retail brands survive?

The supply chain of everything
In the days before Hypermarkets and centralised distribution, UK high streets were clogged with large delivery vehicles dropping off small orders every day to local supermarkets. Tomorrow we face the prospect of our suburban roads being perpetually obstructed by a steady stream of retail delivery vehicles trying to home deliver our on-line orders. We trade one convenience for a new inconvenience.

In a portfolio neutral world, with all products available by Amazon and unencumbered with physical retail operating costs, their structural advantage will be untouchable. Amazon can become everyone's supply chain. Fewer delivery vehicles, less congestion. The aggregation of aggregation.


As John Lennon might have put it;
Imagine there's no Walmart, 
It isn't hard to do
Nothing to queue or drive for, 
And no Clubcard too
Imagine one supply chain, 
Delivered home by drone
You may say I am a dreamer
Bezos' not the only one
Just one click you can join us
And the world will Amazon
Imagine.

(Go on, admit it..you sang the verse didn't you?)

Tesco: That David Moyes feeling...

Manchester United's ten month disastrous flirtation with David Moyes is over. To many, he had been "dead man walking" for months. Despite long-terms critics like myself incessantly calling for his head even before he was appointed, the prevailing mood among the faithful had been to tough it out. 


Moyes was Sir Alex Ferguson's pick and who could argue with that? I never understood the call to give him more time.  After all, why would you give a failing arsonist this luxury? Out of all competitions and no European football for the first time in two decades, time finally ran out for Moyes.

There are some striking parallels between Manchester United and Tesco - organisationally and managerially. Organisationally both have been at the top of their game for the past twenty years. 

Both had  leaders, peerless in their domestic arena who anointed their successors and both business models have been changing profoundly with the influx of massively funded competitors arriving seemingly from nowhere.

For United, the arrival of Abramovitch at Chelsea brought the first high profile billionaire in to the public glare but it is Sheikh Mansoor's arrival at Manchester City and his impending purchase of a new NYC MLS franchise that changed the game. At the same time the Qatari's bought Paris Saint Germain in France and spent $145m on new players last season. United, in transition, have been caught flat-footed.

In mass retail, Tesco are being outplayed by international competitors. Aldi and Lidl from continental Europe, Walmart in USA and UK. But it's the new, next generation giants Amazon and Alibaba that threaten to overwhelm mass retail globally. Tesco have plenty of ideas; possibly too many, without the bandwidth to deliver. Last week's announcement of the decision to open seven F&F Franchise stores in Boston was dwarfed by Uniqlo's declared intention for global fashion domination.

When Philip Clarke recently noted "bigger is no longer better", he was hinting at a problem Manchester United are also facing. Patchi prove how small focused retail businesses can deliver outstanding concepts - way better than anything a mass provider can execute. This is fine for niche, but neither Tesco or United are niche propositions. It's not “big isn't better”; it's more "the new big is bigger" - and for both soccer and mass retail, to play in the “new big world”, you need to have a deep reservoir of international cash to compete.

Asda (Walmart), Boots (Alliance-Walgreens), Aldi (Albrecht family), Lidl (Schwarz family), Sainsburys (25.99% owned by PSG's Qatari Sovereign Wealth Fund) and Superdrug (AS Watsons) appear to have the ownership structure to provide access to external capital. 

Tesco, big in local terms, may need a stronger, internationalised financial backer to secure their long term competitive future. Of concern, Berkshire Hathaway, one of Tesco’s two main institutional shareholders have been reducing their exposure. Similarly, United need to find investment minded billionaire owners to underpin their future.

In the ultimate paradox, United who have fallen furthest will turn around fastest.  United will hire a globally recognised football giant, who in turn will be given $150m and eighteen months to rebuild. Tesco, by contrast, retain their UK's #1 position, but their grip on share is slipping with challenges across their business model. None of this disappears whoever is in charge

Despite a torrid season and all the popular commentary calling for Moyes' exit, once the narrative became front and back page news, his position was untenable. 

Tesco has similar problems. Last weekend's heavyweight papers were filled with negative critique. Journalists are talking with fund managers: they speak of leadership replacements. The narrative is who and when, not if.  Interestingly, former Tesco executive Tim Mason, fancied by some as Clarke's replacement, broke his fifteen month twitter silence last week, referencing two damning articles on Clarke's reign. The jockeying is well and truly under way.

It was never going to be easy filling their respective predecessors' shoes. Both Moyes and Clarke inherited organisations that had over-traded their pasts whilst competitors were investing for new tomorrows. If Philip Clarke reads today's papers he might be forgiven for feeling he has been visited by the ghost of Christmas future. It's that David Moyes feeling...

Tesco: Time to reset the clock

Yesterday's latest Kantar Worldpanel data brought little comfort for any of the UKs Big four retailers. The 0.4% drop in Sainsburys' share versus last quarter highlights Justin King's personal astuteness in calling time on his own leadership at just the right moment. His touch is almost as measured as was Sir Terry Leahy's departure from Tesco.

But spare a thought for everyone still at Tesco. Retail is tough when your weekly numbers are perpetually red. Missed targets drive stress and undermine confidence in equal measure. This is especially hard when you are still market leaders. You should be winning, you should feel like winners. You don't and everyone senses your pain. It is suffocating.

 

So what can they do? Tesco need a radical response and reset the clock on everyone's expectations. 

First, Tesco should explain to the markets what a great job they did historically in driving national UK coverage. Noting Asda's announcement this week of their intensifying moves South; Tesco can proudly note they are the only one of the top four UK retailers with a truly national footprint. They got there first, it has provided a competitive advantage for a period of time, but not forever.

Second, it follows Tesco should reset long-term expectations of their natural market share being somewhere between 20%-25% of the UK market. This will cause pain to the share price in the short to medium term - but it is a statement of inevitability. Tesco cannot open new physical stores as fast as others because they already have their footprint. And they can't acquire anything meaningful given their market share position. Furthermore, for all the success of on-line, the evidence so far is that it’s only a mechanism to slow Tesco's rate of share loss.

It is worth recognising for every new store opened by a competitor, as a rule of thumb, 30 pence of every pound through their tills comes directly from Tesco. So with Aldi, Lidl, Asda and Waitrose still expanding; who knows what course Mike Coupe will set for Sainsbury; and Amazon / Ocado expanding their remits: holding as much ground for as long as possible is Tesco's challenge.

Third, Clubcard needs a structural rethink.  Critics note it has evolved from being a strategic builder of store loyalty into a driver of supplier promotional investment. If the phoney price war ever starts, suppliers will be caught between the investing directly in price or through Clubcard mechanics: both may not be affordable. 

A simple switch in emphasis could prove powerful. Instead of offering schemes to let you redeem Clubcard vouchers outside of Tesco, they should work with third parties to give Clubcard vouchers to reward non-Tesco purchasing. Eat in Cafe Rouge - earn extra Clubcard points and bring the spend back in store. Likewise with Petrol: Tesco’s pump prices are already competitive- stop giving money off fuel in-store, give store vouchers on petrol sales instead.

These points are not panaceas. They bring pain.  Yet they will allow Tesco to celebrate "still above 25%" on each set of results, enable them to approach right-sizing based on a reframed future and refocus Clubcard on driving traffic in-store. Most importantly, they reset the clock on market expectations and buy Tesco some much needed breathing space. 

Aldi: The Tinned Tomato Test

Want to know how Aldi deliver outstanding product quality and unbelievably low prices?  Simple really. Take the tinned tomato test. 

 How many SKUs of tinned tomatoes do you need in a retail portfolio? (I am not discussing Passatas, Purees or any other variation on a theme, just tinned tomatoes..I mean, how complicated can that be?). 

How complicated? Aldi have 3, Tesco have 36, half of them Tesco own brands. 

Everyone understands simplicity beats complexity in the battle for cost leadership; but quality leadership too?

Ever since Aldi and Lidl first dropped anchor, the major retailers took the view if you could match the discounters price with your cheapest on display offer, you were doing enough to hold your own. Price was the variable to match; quality was located higher up the ladder.

Hmmmm....really?  Aldi's UK website features 22 separate quality awards over the last 2 years: Cheese, Wine, Baby, Frozen - demonstrating outstanding quality can go hand in hand with portfolio simplicity and low prices. 

Category for category, the major retailers can match Aldi's quality and prices; they just struggle to do both jobs in a single product.

When Aldi's Mince Pies beat Fortnum & Mason - all historic assumptions of price / value equations go out the window: Waitrose quality at Asda Smartprice prices. WOW.

If you can't beat them, join them. Fewer products of outstanding quality will drive higher velocities, lower costs and lower prices. It will also mean fewer suppliers. And branded manufacturers better get with the programme because defending inflated brand to own label price premiums will be squeezed like never before.

Aldi - like brands, just simpler. And that's how they do it. Simple really.

PS...It's not all about Aldi....The International Wine & Spirits Competition (IWSC) 2013 awarded Lidl UKs Western Gold Bourbon a Gold Outstanding Award and and ranked it 7th in the top 13 Bourbon's in the world. 

Lidl UK Western Gold Bourbon Whiskey 6 YO

Comment: "Concentrated citrus and rich honey on the nose with lovely, light bourbon backing. Slow entry onto the palate with easy flow and deep rich fullness without being heavy. In fact moves lightly and with elegance. Lovely mature flavors with caramel, malt, corn and a hint of smoke. Hints of banana and more honey lead into fine finish."

Award: Gold Outstanding

Read more: http://www.businessinsider.com/the-13-best-bourbons-in-america-2013-10?op=1#ixzz2xo1QFbBn

Aldi and the UKIP factor

There are interesting parallels between shopping and voting. We have 3 major grocery retailers and three main political parties.  All are struggling to hold the loyalty of their traditional constituents. And in both arenas the major disrupter is a four lettered fringe competitor who is doing rather better than expected.

Aldi in retail, UKIP in politics. It's not a direct relationship. It would be an uber irony if  all UKIP supporters who want to be out of the EU were intent on invading Aldi.

It's more subtle and profound.
UK shoppers are well trained seekers of daily value and are increasingly prepared to explore the fringes. In both cases, the proof of
the pudding is surprisingly good.

Shopping is voting after all, the battle for value is set and it's outcome unpredictable. The message to established UK retailers and their suppliers is simple, direct and Thatcherite: "UKIP if you want to; shoppers aren't for kipping"

Retail Revolution: "Shoppers of the world unite, you have nothing to lose but your (retail) chains".

The UK retail industry is in turmoil. With problems at Morrisons and the Coop threatening their survival; Phil Clarke's speech at retail week seeking to make a virtue of freneticism. Change is in the air; a retail revolution even

The revolution is structural, multi-dimensional and polarised. It's not just mobile internet access transforming the way we "search and purch". There is a revolutionary dynamic stretching across Amazon, Groupon, Aldi right through to Poundland and Boohoo.com. Not forgetting B&M coming to market soon with Sir Terry Leahy on board. Discounting is front and centre

Talking of revolutions, last week marked the 127th anniversary of Karl Marx' death. Some of his ideas illuminate the challenges facing established retailers facing the discount onslaught. No really, they do.


Marx saw economics as the prime mover of change.  As economic power disperses, the dominant forces (thesis) are challenged by new participants (antithesis) and the outcome of the clash would be a new, higher order economic status quo (synthesis), with communism the end of history.  Historical Materialism 101, got it?

Successful discounters are anti-establishment value re-setters and all about economics. They combine high quality with unmatched value chains. Whether it was M&S putting shirts and shorts on Britain's backs and bums (by building direct relationships with suppliers and cutting out wholesalers); Jack Cohen's "pile it high, sell it cheap" mantra in 1960s Tesco or Walmart's EDLP philosophy: these were all discounting models. Their success put a good many competitors out of business, creating a new retail establishment.

Discounters also thrive on the structural disadvantage others impose on themselves. In mass retail focus and simplicity are the partners of unmatched value chains.

When advantage is lost, death is inevitable. Kwiksave UK built a business selling a limited number of major branded SKUs, from small basic outlets at cut prices sustained on one advantage: centralised distribution. While Tesco, Sainsbury and Asda were still had suppliers making minimum drops to individual outlets,  Kwiksave were securing full-truck efficiencies, within a lower cost model and passing the savings on.  Once everyone else could match them, all Kwiksave had left were small untidy stores, a limited range of brands and no price advantage. Game over.

Retail value resetting has severe ramifications. The centralised distribution revolution, the first big data enabled shift, saw suppliers remove sales force organisations and focus on national accounts, outsourcing merchandising services to field force agencies. Expect the impact this time to be no less profound, with services like category management being outsourced to specialist providers.

Karl's theories were always more appealing than his solutions. It's probably why ordinary people connected with Marks & Spencer ahead of Marx & Engels. He was wrong about communism and never foresaw consumerism. If he had, he might have reworked his manifesto, urging: "Shoppers of the world unite, you have nothing to lose but your (retail) chains".  He shouldn't be discounted.

Tesco and the Art of War

“Victorious warriors win first and then go to war; defeated warriors go to war first and then seek to win.” So wrote Sun-Tzu in The Art of War. What then is to be made of Phil Clarke’s latest attempts to course-correct the UK’s retail behemoth?

Tesco’s world tour into Asia, the US, Europe, etc is in full-scale retreat with the Turkish operations’ restructure, the latest acceptance  of failure. The non-crisis crisis in Tesco Polska will inevitably lead to divestment. If anyone was in doubt: the world tour is over. Tesco went big; they are now coming home.

But while they were travelling, home changed. New competitors, formats and shopping habits have destabilised the core model. Hypermarkets are struggling. Tesco can’t revamp the retail estate quickly enough, and capital expenditure cuts along with foresaking their  5.2% margin promise mean strategy is being sacrificed to tactics, most  notably  £200 million of price cuts.

This is wallpaper.  Asda had already announced £200 million of price cuts themselves and has since added another £100 million to the fire. What no one else seems to have realised, and based on pure market share extrapolation, is  every £1 of price cuts Asda initiates costs Tesco nearly £2. So Tesco’s announcement just doesn’t cut it.

And let’s be frank, if the answer to your problems is to pick a fight with the world’s biggest price-focused retailer, you are dead before you start. Walmart’s pockets are deeper globally and shallower locally: they can stay the fight for longer, and it will cost them less.

Not forgetting, Tesco is hamstrung with Clubcard. The shining star of the 1990s Clubcard may fast become Tesco’s Tazo. (remember Tazos?). Affordable in times of growth, Clubcard risks becoming an expensive gimmick  obstructing visible value delivery. Worse still, with Tesco now accepting other retailers’ vouchers, expect Asda, Sainsburys  and Aldi to start dropping vouchers around Tesco stores in areas where they aren't trading. Ouch. 

Back to the end of the margin promise and no new commitment as to where the clock will get reset. The city vultures were already circling over the UK’s big three listed retailers to leverage out their property assets. This will now intensify: the repercussions may be profound.

The first move could well be “Coupe’s coup”. Sainsburys may use the cash pile generated to buy Morrisons and put themselves neck and neck with Tesco for the number one spot. This is the last big domestic grocery deal left and Coupe has to do something bold to make his mark. But liberated from their strong property asset based underpinnings, Sainsburys and Tesco will be left with big, cost hungry, unfocused (sorry, omnichannel) businesses under ever-increasing margin pressure facing up to a world of giants: Walmart, who won yesterday, Aldi who are winning today and Amazon, who stand to win tomorrow.

In response to all of this, Tesco jobs will go; the cuts have already begun. Expensive talent is being removed and the business is increasingly in the hands of younger, lower-cost managers lacking the experience to win the fight they face. Compare this to the vast array of Princeton, Harvard, and Oxbridge MBAs now stalking the corridors of Amazon UK along with the senior, proven buying talent fresh from Tesco and Asda.

What else can Tesco do? Well...whilst there is no Chinese medicine to fix these structural shifts in retailing, there is a compelling need to adopt new ways of working and breakout of historic operating cost structures. The race is on to take leverage big-data enabled technologies and take an axe to retail back office cost structures.

This will support a delayering of centre organizations, driving back-end costs down dramatically and allow bricks and mortar retailers to reconfigure and reinvest in store service and this is the critical point of difference to online competitors.  Sun Tzu also noted, “There is no instance of a country having benefited from prolonged warfare,” and Tesco faces prolonged war on every front with increasingly formidable rivals. Interesting times.

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