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Showing posts with label amazon. Show all posts
Showing posts with label amazon. Show all posts

Monday, 28 August 2017

Drawn & quartered

Every quarter the UK retail market share figures make stimulating, 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

Tuesday, 1 July 2014

Tesco: Seeing the light, where's the tunnel?

It wasn’t meant to be like this. 
When Philip Clarke took over as Tesco boss, no one anticipated the pace of structural shift in shopper behaviours that is destabilising retail. Tesco were the most convenient and ambitious UK retailer;  they were and still are number one. So why does it feel so dire? The harsh reality is almost every reason underpinning Tesco's last twenty years of success has been turned upside down and inside out. It is hard to see any light at the end of Tesco's tunnel.

Being there
As enticing as it may be to believe Tesco decoded some retail holy grail and locked the secret away, deep in Cheshunt, the reality is much simpler and far less romantic: they have more stores than their competitors.  

According to the IGD Tesco operates over  3,300 stores in the UK with over 3.8million square meters of retail space. By contrast, Sainsbury have slightly more than 1,000 and ASDA over 500. Nor are the stores equally spread. Asda's northern and Scottish predominance presents serious growth potential in London and other regions where Tesco dominate. Tesco are the only truly national UK retailer.  Tesco just happen to "be there" more often than anyone else. But lack of choice should never be mistaken for love.

When Tesco launched Clubcard, it was no Harry Potter wizardry either: they just offered shoppers some extra, delayed gratification, value, accessible only through Clubcard. Their customers said "hell, I am here anyway, why not?"  Clubcard rolled out along with store expansion. Lots of people signed up, because lots of people shopped in lots of Tesco stores, in lots of places. It was just convenient. 

Convenience reframed
And convenience is the point. Most studies conclude the main reason shoppers patronise the stores closest to either their home or place of work, relative to whatever shopping trip / mission they need to fulfil. But, convenience is a moving feast. It used to be a hassle to shop on the high street: It was a high price, time consuming experience. Tesco drove out of town, superstores with spacious and free car parks. Everything under one roof.  Convenience delivered. 

And then came the internet and the symbiotic resurgence of small, proximity stores.  Do your big shop on line, and top up the incidentals at a locally convenient, small store, as you need to.   

That Tesco are growing their online sales is no help either. The greater their online success,  the bigger their structural challenges. The economics of operating large stores collapse rapidly when you rip out the high till-ring transactions, and then comes the second-whammy when residual spends head into small stores, even if they are Tesco's. For Superstores, it all means less staff hours to stack shelves, staff tills, cleans floors and provide shopper services. It harms the  shopping experience and drives more customers away. A truly vicious cycle. 

Tesco shareholders call for lower prices, better services and higher dividends: they yearn nostalgically for yesterday, rather than face the uncomfortable truths about today and tomorrow. 

As the UK grocery world reheats itself, Tesco can innovate all they like, cut prices as deep as they want, but they are, inconveniently, saddled with a collection of dinosaur assets: of Tesco's total shopping space, 76% is taken up by Extras and Superstores. Ouch.

Clarke knows this all too well - that's why he called time on Tesco's Superstore development. And while this trend will increase over time, it's not everyone's trend yet. Asda still see Superstore development as a valuable part of their model- they still have plenty of places where shoppers today can't access an Asda store.

Online - a glorified shopping cart
Tesco's success in online today, is a mirror of their physical success yesterday: they  had the shoppers and they got online first. But online is no more valuable a service to Tesco's shoppers than a trolley. It improves convenience. It serves to shift the location of purchase for existing shoppers. It is only an effective recruitment tool for emergent retailer and those with limited physical presence. In other words, Tesco's competitors. 

Tesco are vulnerable to a online pure-play like Amazon Fresh - who without legacy assets to support will, as an insurgent play, rip the ring out of prices. Scarily, Tesco are unwittingly and unintentionally preparing their shoppers for an Amazon future.

Being there...again
Clarke deserves no blame for any of this. If Sir Terry were still in the hot seat his reputation would be looking less shiny. Leahy drove UK superstore expansion, international expansion etc: yesterday's success is today's structural nightmare and whoever sits it the top job, these challenges and pace of change remain. Clarke's problem is he just happens to be there, now.

Seeing the light, finding the tunnel
So where from here? There are three possibilities facing Tesco.
1.      Tesco exits retail in the medium to long term and becomes a retail /leisure space operator – elements of this are already appearing and before you completely dismiss this idea, remember long before Costa Coffee, Whitbread had a 250 year history as a brewer.
2.      Tesco rethinks its land bank and become the UKs biggest provider of affordable housing - this idea is gaining some supporters.
3.      Tesco is acquired by a Chinese or Middle Eastern powerhouse keen to get its hands on Tesco's retail systems and talent. 

It is possible all three could happen. The final catalyst for change is not clear. 

At last week's AGM Clarke quite rightly said, "Reducing prices doesn't result in an immediate increase in sales....if it was purely an online and convenience business, Tesco would be shooting the lights out"...But it isn't and they're not ....

During one of the rounds of Middle East peace process discussions, Yitzhak Rabin was asked if he could see light at the end of the tunnel. Rabin responded laconically  “I can see the light, it’s the tunnel I can’t find”.  Philip Clarke may understand this sentiment better than most. 

Wednesday, 7 May 2014

Mothercare: When the wind blows

Mothercare, the UK's iconic retailer in all things baby and toddlers, is having it's cradle rocked. 2014 has been a tough year for Mothercare: A January profit warning led to the swift departure of CEO, Simon Calver; the share price has fallen 56% and now, reacting to new rumours over debt refinancing problems, Mothercare sought to reassure markets today, issuing the following statement:
"Mothercare notes the recent media speculation regarding its banking facilities........Mothercare is in regular dialogue with all of its financing partners, including the banks........ Mothercare is and expects to remain in compliance with the provisions and covenants of its facilities. Mothercare continues to discuss with its banks its future plans for the business and the consequential funding requirements, and is grateful to them for their continued support. " It  added "the Board remains confident in the underlying strength of Mothercare and expects results for the year ending March 2014 to be in line with current market forecasts."

Whether this allays the immediate fears or not, the winds of change for this retail sector are blowing. Morrison's have put their competing brand "Kiddicare" up for sale and all the while Amazon is ramping up its babycare proposition. It is entirely conceivable, like music and books before them, the brick bough of the baby market might break and the long term tree- toppers fall. 

Thursday, 24 April 2014

Amazon: 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

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

Wednesday, 23 April 2014

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...

Sunday, 13 April 2014

Amazon: Bezos the Omnipotent

Jeff Bezos' letter to Amazon shareholders last week makes compelling reading. It's not the scale of progress and success since 1997 that wows (though it does); it is the sense of future and the long-term bets being placed to maintain a sense of perpetual revolution.

This year is likely to see Amazon go toe to toe with Apple and Samsung for the smartphone market. And who would be surprised if Amazon turn up as a major UK energy provider when the current industry structure is broken up.

Whilst other retailers talk "omni-channel": reflecting their need to get to more shoppers wherever and however they shop; Bezos' take on life is totally different. He intends to reach more shoppers, wherever they are, whatever they buy. It's Omni-everything. It's a potent idea. Omni-potent.

Wednesday, 9 April 2014

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. 

Saturday, 29 March 2014

On-line shopping? Game On!

Mobile communications have come a long way since the early 1990s. And it sort of feels we are on a similar jouney - this time in relation to redefining the on-line shopping experience. 

Following  my blog, "Shopping? It's childsplay" March 12th) and before the announcement Facebook's $2bn+ acquisition of Oculus Rift, I had the opportunity to experience the phenomenon first hand. 

And whilst visually impressive, it did feel a bit claustrophobic - like being trapped in a diving bell. But, it is all about direction of travel - no one carries those old brick phones any more. 

Which makes me wonder whether Sergey Brin hasn't trumped Mark Zuckerberg?..With the ink still drying on the Facebook / Oculus Rift deal, Luxottica (Rayban and Oakley) announced a strategic partnership with Google to commercialise smart glasses.

In a world of technological convergence, on-line shopping will meld seamlessly into gaming and the battle for hegemony has begun. Like VHS vs Betamax, it's deja vu all over again.

The future of online shopping took serious steps forward last week. Facebook and Google threw their hats in the ring, it just leaves Apple and Samsung to make their intentions clear and who knows what Amazon and Alibaba might do. Game on!

Wednesday, 26 March 2014

Tesco: The New Whitbread?

Whitbread PLC (according to Wikipedia),


is a multinational hotel, coffee shop and restaurant company....Its largest division Premier Inn, is the largest hotel brand in the UK with around 650 hotels and over 50,000 rooms. Its Costa Coffee chain has around 1,600 stores across 25 countries and is the world's second-largest international coffee shop chain.  Its other brands include the restaurant chains Beefeater GrillBrewers FayreTable Table and Taybarns."

It wasn't always so.

From 1742, when Samuel Whitbread formed a partnership with Godfrey and Thomas Shewell and acquired two small breweries in London, until the 2002 sale of The Laurel Pub Company, Whitbread was in the beer business. 

Indeed, at its height, between 1961 and 1971, Whitbread's output increased from 2.1 to 7.4 million hectolitres and became Britain's third-largest brewer by output.
But the beer industry consolidated and globalised. Being big in one market was not sustainable. Facing the rise of InBev (now ABInBev), Diageo and SABMiller. Whitbread sank their last pint and moved on, leveraging their leisure experiences more profitably.

And Tesco?

Dominic Walsh in The Times today (March 26th) notes that Tesco have taken a minority stake in a New York Deli Diner concept restaurant Fred's Food Construction with the first outlet debuting from Monday in Tesco's main Osterley store. And Tesco are building up a portfolio of neat eateries: Giraffe, Decks, Harris + Hoole and Euphorium Bakery: Fred's is just another name on a developing roster.

Intended as incremental devices to pull traffic in to their retail stores; they may be a much bigger indicator of Tesco's long-term future. Whitbread beware: 
Fred's might be small beer today but not even Amazon have figured a way to let you eat out on-line.


Monday, 24 March 2014

The New Alchemists

Alchemy: Magic and gold: we all love it, always have, always will. Investors are no different - in fact, they are the worst: they back their dreams with cash (often other people's).

The dotcom bubble of the 1990s was fuelled by the wizardry of high tech Harry Potter's punctured only when commercial reality, dressed like the little boy in the Emperor's New Clothes shouting "you've got nothing on", burst through.

As much as investors love alchemy, they are nonchalant of reality. History is irrelevant, tomorrow is everything. This is why Amazon has a market capitalisation of $165.6bn and trades on a P/E ratio of 1307; whilst Walmart's market captilisation of $246.6bn is a paltry P/E of 14.6
Valuing a company on a forecast of a millenium of earnings seems like the hubris of the Third Reich declaring it will last a thousand years. One thing is certain: new players will arise, innovate and encroach. Just ask Nokia and Kodak.

The market is addicted to alchemy and when Alibaba floats, the markets will scream "Open Sesame" and likely place a valuation of between $150bn - $250bn on the business

The message is simple - alchemists spin enticing visions of future riches...but at some point, reality will catch up and tomorrow's businesses become today's stalwarts and markets fall out of love. The correction in value will be devastating.

We hope you enjoyed the show, magical wasn't it?

Monday, 17 March 2014

Digital Kills The Retailing Stars (A retrospective from 2011)

Written 3 years ago - "Digital Kills the Retailing Stars" was written in the aftermath of the collapse of Woolworths in the UK. Given all the changes kicking around at the moment, I thought it was worth dusting off and sharing. No apologies for the length....have a coffee...
Two things I didn't foresee: Tesco Hudl - an undoubted product success and the rise of pound stores.....Let me know what you think, all comments appreciated....enjoy!

Digital Kills the Retailing Stars
The future of retail as we know it is hanging in the balance. From Cheshunt to China, digital is reshaping the course of retail developments.  There are particular dynamics in emerging economies with little historic exposure to Western retailing norms and the questioning logic is “to what extent will they need and/or acquire them? “ It is different in mature economies where big box is the common retail denominator, isn’t it?

4 connected ideas are emerging and joining up the dots creates some fascinating pictures. Of course this won’t be a universal pattern but it provides a coherent sense of retailing in the post-modern phase and it is a future that is rapidly approaching.

1.    Digital Tsunami

There appears to be a digital tsunami inexorably moving, albeit at different paces, throughout the retail universe.  Plausibly, the forces inhibiting big box development in China will simultaneously sweep away irrelevant, non-value adding retail in mature markets. 

Picture a huge tidal wave overwhelming all that stands in its path. Two groups of mature retailers are already feeling the full force of this surging power: 
  • Retailers whose businesses have an easy propensity to be purchased on-line. We have already experienced and/or are in the midst of witnessing a fundamental reshaping of retail categories including Music & Entertainment, Books, Gambling, Insurance, Consumer Electronics, Travel, Property, Greetings Cards and Banking etc
  • Retailers whose business model was so fragile that any material loss of revenue was sufficient to push them over the edge. In the UK, perhaps the earliest casualty was the Woolworth’s group that collapsed in 2008/09 as their Music and Entertainment sales evaporated under the Apple / Amazon revolution, disrupting their total commerciality. And we know there are many lining up to join them like Jane Norman, Comet, Carpetright et al

This is a hungry tide and no one knows where its path will lead and how much land will be 
consumed.  But as with all seismic shifts, the landscape is being irrevocably resculpted.

2.    What happens when your greatest strength becomes your Achilles heel?#

The seeds of this question are sown in the post-apocalyptic fall-out that follows the demise of these early casualties and it comes with the realization that retailing is, de-facto, a fragile model.
For many years, major suppliers have invested time in training their own people and developing presentations to justify why manufacturers’ margins are justifiably so much stronger than retailers. Manufacturers invest in new technologies they need to fund R&D; major retailing is a scale cash business – so focus on cash generation, GMROII etc and be satisfied with low single digit margins.
The trouble is, no one considered what might happen when business starts flowing from mature big boxes? How much contraction can be tolerated before even the best retailers hit  Gladwellian “Tipping Points?”  The best worst-case scenario, sees retailers like Tesco build strong on-line propositions – but this doesn’t necessarily help.

Retailing is a “Stock, Pack, Pick, Pay, Ship” business. It moves products from suppliers to retail distribution centres (Stock) on onwards to store shelves (Pack); from shelves to shopping baskets (Pick); through the tills (Pay) and to the shoppers home (Ship).  Conventionally, off-line retailers absorb the larger part of the Stock, Pack and Pay activities; whilst shoppers bear the burden of Pick and Ship. In recent years, a good deal of technology has been applied by retailers to bring their costs down – e.g. Cross-docking, Shelf Ready Packaging, Ship to Display Pallets and Self-Serve Tills help bring down significant chunks of the cost model. ”

With on-line retailing, major grocers have to take on Pack, Pick and Ship with decreasing ability, in the face of rising competition, to pass any of the cost increases back. (Initiatives like Tesco’s “Click and Collect” – dressed as a shopper benefit, are really just attempts to put the “Ship” costs back into the shoppers pocket).  Under such conditions, even growing sales from competitors is likely to be margin dilutive. Once you start including the spiralling costs of promotions into the retailers economics, it becomes quickly evident how, even profitable, business models can be undermined by relatively small  on-line volume shifts.

And there’s another problem. Where to do the picking? If it’s a store pick based model, it is cost-additive and margin dilutive. If you go the dark-store route, it drives sales out of existing outlets. Either way, it is bad news.

Second, many major retailers expanded their businesses by entering non-grocery categories – many of which are in the previous list of digitally transformed businesses.  Whilst they looked opportunistic in pre-tsunami times, they are part of the risk to be contained from now on – and will be the first areas where business loss will be experienced.

All these factors are concerning but the real “aha moment” centres on the historic strength of major retailers; the real estate footprint. Millions of retail square footage and with it the ability to serve millions of shoppers every day from prime retail locations. 

Having spent decades building land-banks and property portfolios, it is common practice for major retailers to leverage the value of these assets by entering into sale and leaseback agreements with property developers. This takes assets off the retail balance sheets, provides investment capital and commits the retailers to long term leases with guaranteed annual rental escalation formulas.

Here is a recent example from January 2011

Prupim has completed the £125m purchase of three supermarkets on a sale-and-leaseback basis for M&G’s Secured Property Income Fund. The real estate fund manager has bought three Sainsbury’s superstores in Worcester, Truro and Huddersfield. The leases at stores are for 25 years, with RPI-linked rent reviews. Source:

But it’s not a new phenomenon. A similar article in 2004 noted

Tesco yesterday raised more cash for acquisitions by selling off 33 of its UK stores for £650m. The stores, which range in size, have been sold to a joint venture that is half owned by Tesco and real estate firm Topland. Tesco has also sold two distribution centres in the deal. Tesco's £650m cash will come from issuing bond debt, which will be secured on the rent that it will begin to pay for the properties. Tesco will rent the stores on a long leasehold and carry on running the operations, so customers will not see any change.  Topland, has done similar sale and leaseback deals with retailers Marks & Spencer, Littlewoods and Budgens. The Guardian, Tuesday 23 March 2004

Taking the UK as an example, the implication of a significant retail contraction  and the exodus of household brands from the high street, may well be falling commercial retail property value and rental costs. With commodity prices still having the potential to fuel cost price inflation, this is not a great moment to find yourself with long-leases, large stores, lots of them, increasing on-line competition and guaranteed inflation-linked rental increases.

It creates a toxic mix where major retailers may find themselves unable to operate stores profitably and unable to affordably close them. They could try and renegotiate the rents – but why would property companies who bought the assets in a much stronger climate want to deal?  Their only dependable asset is the rental income.

Suddenly, retailers’  biggest assets become a major headache, underpinning a structural erosion of the competitive model and reducing their abilities to respond to newer, trimmer more agile competitors unencumbered by these legacy challenges.

Put simply:  Big box retail in mature markets is under threat.

3.      The end of Tesco?

Really? Tesco? Game Over?? Accepting this is a rather extreme proposition, it’s worth considering what Philip Clarke, the new Tesco CEO, said to the British Retail Consortium in his key note address last month (June 2011)

“….in this digital world, great service, value, convenience, price – these things are no longer enough to win customers’ loyalty. More than ever before, customers’ decisions about what they buy are likely to be influenced by the power of brands”

This could have come straight from the mouths of AG Laffley  or Paul Polman. But it didn’t. It came from a top global retailer and its conclusions are far reaching. First, Clarke implicitly acknowledges some of the retail challenges we set out above. Second, if you follow through with this stream of consciousness, it has the potential to destabilize the Tesco model as we currently understand it.

Even aspiring to be the best retailer in the world, is not enough for Clarke. Tesco’s future is as a brand builder and he goes on to reference, by example, the importance of the Technika house brand as a lead play in Tesco’s consumer electronics business. Clarke goes further:  his new strategy for Tesco includes the expansion of Tesco services to more parts of its footprint.

So brand building for Clarke means building the Tesco retail brand, stretching it further and wider across more services and markets, whilst developing and supporting Category specific sub-brand propositions. Tesco already has its fair share of critics, uneasy about its UK market strength and others who believe that its ubiquity and utilitarian ambitions, trying to be all things to all people, risks mushing it into a mire of muddled mediocrity.

As if to push the point harder, days after Clarke’s speech, Tesco committed a major faux pas in mishandling the transfer of Tesco Bank Accounts from RBS, leaving thousands of customers without access to their funds. BBC Radio 4s Money Box programme featured the problem and despite Tesco’s best attempts to front up and downplay the issues, there was no mistaking the customer anger. Many vocalised their intention to cease banking with Tesco.

And here’s the rub. The broader your brand, the more equity management required and the more potential for fowl ups. Once your PR starts turning negative it’s hard to recover. Ask Gordon Brown.  Long before we consider the real prospects of success of Tesco taking on the likes of Samsung and LG and winning the consumer electronics war with their house brand, Tesco’s ubiquity may yet turn out to be their Achilles heel and Philip Clarke’s brand build plans, one stretch too far. So whilst, I am only half serious in sounding the death knell for the folks at Cheshunt – they have more challenges ahead of them, and tougher ones, than they’ve encountered in the last twenty years.

4.      Brands reclaiming ownership of the consumer/shopper relationship

Don’t get me wrong, I might disagree with Philip Clarke’s response, but he has put his finger on another massive challenge for today’s retail giants: “Who owns the shopper?” For the last fifteen years we have all been working with a simple governing dynamic : “retailers, having become more powerful, can and do exercise a great deal of influence over shoppers and act as,  crucial and not necessarily benign, interlocutors, in the parley between brands and consumers”.

Across the globe, major manufacturers engage with customers to protect their brand positions. P&G have long-since made an art of this and way before concepts like “shopper based value creation” were born, Tom Muccio was leading the first WalMart/P&G Global team with 140+ P&G associates based in Bentonville.  P&G decided to excel in this space out of necessity, not desire – their hearts were and will always be with the brands, consumers and shoppers.  Customers were recognized as critical arbiters of brand success. Put simply: engage or die. And if you are going to engage: engage and win.

Digital presents opportunities to stimulate fundamental shifts in the power balance in the battle for ownership of consumer and shopper relationships, enabling brand owners to reach shoppers and consumers with more precision than ever before and reclaiming a bigger stake of the profit pool.  Digital media and social networks Where historic brand communications were broad-brush and one directional, today they can be ongoing, multi-layered sets of intimate dialogues. Retail hegemony is no longer a given. The rules are there to be rewritten and P&G is keen to author them.

The shifting of vast amounts of money into digital advertising and communications is no surprise. Their desire to invest in more forward looking rather than rear view research is instructive; but it is their eagerness to understand all things retail - on-line retail via, initially Ocado in the UK , the e-store in the USA, Tide Launderettes, The Amazing Shave stores, Branded Car Washes - that represents something of a qualitatively different order.  

It is widely rumoured,  P&G would like to see c15% of their global sales operating on a direct to consumer model within a medium term span - (and why not, after all, two of their global competitors, Avon* and Amway**  have never put their products anywhere near a Walmart store). This is no thirty-minute diversionary tactic – this is game changing for the next thirty years

If Philip Clarke thinks Tesco needs to be a brand builder, perhaps P&G reckons they can regain control of their own destiny by mastering on-line retail and capturing consumer/shopper relationships in ways previously undreamed of. You don’t need the square footage – you just need great product , effective ongoing consumer / shopper relationships, backed up with stunning fulfillment. Amazon began with books and today they sell.....

The consumer relationship renaissance, commercial opportunities for suppliers and the value implications for shoppers could prove an irresistible combination as economies downshift and consumers seek ever improved value. Such innovations will suck more volume out of the established retail environment and even retailing goliaths may be toppled by digital slingshots.

Digital may not have quite killed the retailing stars yet, it has claimed an increasing number of b-listed actors, and the waters are still rising.  In 10 years we might be asking “Do you remember when Tesco had superstores? In 20 years, “Do you remember Tesco?”  And, as with all tsunami’s, by the time you see it for sure, it’s way too late.

Sunday, 16 March 2014

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 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.