Online grocery is not easy…By Dr. Clive Black

November 22, 2018 9:41 am
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Time creeps by. It is hard to believe that a somewhat younger Tim Mason, then a Director of Marketing at Tesco, launched Tesco.com, a new online grocery proposition, twenty-one years ago! Since then the digital world has been a veritable revolution, now penetrating all walks of like and in increasingly connected ways through the Internet of Things.

The UK, despite the difficulty in gaining a working mobile telephone signal in half the country, is globally advanced in the digital consumer field; the said Mr Mason is now CEO of Eagle Eye, a global leader in digital consumer loyalty programmes where one Sir Terry Leahy is a non-executive director. More broadly, that advanced international status of the UK as a digital consumer economy is exemplified in the BRC-KPMG Retail Sales Monitor for October 2018 where over 27% of all non-food retail orders were online; that is approaching one in three items.

The UK is also advanced when it comes to e-grocery and in Ocado it has what is in effect an online  fulfilment specialist, as opposed to a proprietary grocer, that can deliver pomegranates robotically picked to the moon. More broadly we also have one of the highest online grocery participation rates on the planet, sitting at around 7%.

What is perhaps noteworthy about this statistic is that whilst 7% of a c£190bn market is a considerable value being shopped online with a corresponding large volume of units being delivered in white vans across these Isles, it also tells us that c93% of groceries bought in supermarkets in the UK are done so by shoppers in stores! So, after a generation of online activity, shops remains hugely relevant to the food industry and, it should be noted, that the vast majority (90%+) of online grocery orders are picked from supermarkets.

“The UK has one of the highest online grocery participation rates on the planet, sitting at around 7%. “

The reason for what may be deemed a rather pedestrian rate of penetration progress by the online channel in food largely is economic. Online grocery is fiendishly difficult to do on a profitable basis. Ocado has been twice rescued since its IPO and remains barely profitable where it matters at the pre and post tax level. Furthermore, the supermarkets, faced with the disruption of the limited assortment discounters (LADs) and wider profit collapse have had to pare back their online ambitions to reduce the profit outflows.

Accordingly, we see much more pedestrian growth rates in the UK e-grocery channel as 2018 comes to an end, circa 7-8%, as the supermarkets ease off on free delivery slots and coupons and vouchers to capture the online shoppers’ custom. The economic reality is that shoppers invest a lot of resource in time when they walk the aisles, fill their trolleys and baskets, stand at the check-out and take their bags home. To replicate that is a labour intensive and costly exercise, one that few models to date mean that a satisfactory economic return is achieved. Indeed, returning to Ocado, the challenge for centralised fulfilment of multi-temperature goods to a dispersed customer base is particularly difficult to make an attractive return on invested capital.

“Online grocery is fiendishly difficult to do on a profitable basis.”

The challenges of online shopping, most notably the rather boring exercise of buying on a screen.., has been reflected upon by Amazon, which has subsequently acquired high-end Whole Food Markets for c.US$14bn and commenced the trial of the ‘Go’ format; a cash-less store. Such investment suggests to us that Amazon understands the central role that stores will play in the grocery market, noting that Fresh in the USA has not been a disruptive force yet, as Ocado has not in these islands.

What this means is the future of supermarkets appears quite secure and the art of good shopkeeping remains as important today as it ever did. Online will continue to gain market share but at rather more pedestrian step than many technophiles predicted/predict, noting the ongoing role of stores in e-fulfilment too As such centralised fulfilment can be expected to remain at the periphery of activity and, this being so, we would be surprised to see Amazon acquire a major British grocery in time, which is likely to put the cat among the pigeons; for the LADs mainstream online e-grocery appears a challenge given the cost focus of their business models.

Tim Mason and Tesco were so far ahead of the curve in the late 1990s and whilst the supermarket business did reach its zenith a decade later, it is worthwhile noting that it has a c40% share of the UK online grocery market as the second decade of the twentieth century comes to an end. Understanding not just the direction of travel but the pace of the online journey is important when considering food markets.

Dr Clive Black

Advisor to Coriolis Consulting

November 2018

Amazon.. is the ‘World’ closing in…? by Dr. Clive Black

October 29, 2018 12:00 pm
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Amazon is an amazing story. In a very short period of time this business has grown to be worth around a trillion dollars. A clear focus upon customer service backed up by a never-ending commitment to development, from the most complex advances in the digital technology world down to the most simple practical human assists, has underpinned the Group’s meteoric trading and share price valuation progress.

Amazon has been an undoubted force for good for many shoppers. Time constrained, albeit largely richer when it comes to cash, Amazon’s enormous proprietary and wider market place platform, has helped millions of shoppers to quickly, conveniently and reliably purchase goods, with a service back up that is largely second to none.

For the tech-savvy, particularly in the US, Amazon is a core part of folk’s life when it comes to buying goods and, increasingly, services. From a start in books and entertainment, the Group has deepened its penetration, now to be a generator of entertainment content – including Jeremy Clarkson (choose your own personal description of that character) – and moving from inanimate goods to the grocery sector.

Groceries have not been easy for Amazon. We are pretty certain that the business would have expected to have been further on by now than when Amazon Fresh started its commercial life on the US West coast. However, as Ocado has found in the UK, when it comes to central picking of multi-temperature and deferentially taxed goods (i.e. alcoholic beverages) it is hard to make money.

A clear focus upon customer service backed up by a never-ending commitment to development …… has underpinned the Group’s meteoric trading and share price valuation progress.

 

Accordingly, whilst we have seen Amazon invest heavily into the grocery market, much of its capital allocation has been offline, not online. Indeed, we assert that the acquisition of Whole Food Markets in the US, with seven stores trading in the UK, was an admittance of the challenges of pure-play groceries and  the reality of the stickiness of store-based grocery shopping. Amazon has further backed offline, albeit innovatively, through its Go store, which is a seamless transition from the digital payment industry to food shopping; time will tell if it works.

Whilst all this is so innovative, so intellectual and so rewarding for Amazon shareholders and shoppers alike, not everything about Amazon has been so amazing and so virtuous. Indeed, it is now not unreasonable to assert that Amazon is becoming a victim of its own success. Furthermore, whilst Amazon is very clever in many respects, it is far from tuned in on many other fronts, particularly around its impacts.

Many American and British shopkeepers will not have Jeff Bezos at the top of their Christmas card list, as he had led the charge of the online revolution; that is not to criticise Bezos & Co., as the digital revolution was going to be led by someone. However, some will complain that Amazon has perhaps advanced whilst others compete with one arm behind their backs.

In particular, they will complain about his lack of interest in the taxman – the roads that millions of miles that Amazon’s vehicle utilise have rarely if ever been constructed with the aid of taxes from the Group. So much so, that Tesco’s CEO, Dave Lewis, is now associated with calls for the British Chancellor of the Exchequer, Philip Hammond, to implement an Amazon tax; a charge on digital sales.

….not everything about Amazon has been so amazing and so virtuous… whilst Amazon is very clever in many respects, it is far from tuned in on many other fronts, particularly around its impacts.

Equally, there have been calls by trade unions and labour campaigners for sometime about the nature of Amazon’s labour process, also challenges about its regard for, or lack of it, for the environment; reflected in masses of plastic and cardboard utilisation amongst other things. In respect of the former, the very recent increase in pay for workers in the US and the UK is interesting, although whether or not Amazon believes workers paying more in PAYE in the UK represents a contribution to The Exchequer, remains to be seen.

Amazon will continue to innovate and to invest. We also sense that the Group will retain a relentless focus upon its customers. Whilst this is so, the business is facing more scrutiny – see The Times investigation into perhaps questionable charity donations in the UK – and it is required to be more transparent and credible in its behaviour. In respect of the latter, there perhaps remains more to do from a business that in many respects has an everyday touch but in others is frighteningly detached, maybe arrogant and demonstrating hubris too?

Whether Amazon has been through the zenith of its growth and achievement remains to be seen; it has been a remarkable journey to date. However, one senses that the authorities, the regulators, are starting to catch up with a business that has had a free lunch for a long time and maybe enjoyed it a bit too much. More discretion, humility and in-touchedness to its wider environment may have cut off what are likely to deeper and greater controls and constraints upon the Group than may have otherwise been warranted.

Amazon has dipped a toe into the British grocery scene and we expect further patient progress. We may yet see Amazon Go in London and other major British cities, we may yet see Whole Food Markets build out a little more, we may yet see a more material acquisition of a UK grocer. Whatever pathway Amazon takes hereon, we sense it will be forced into a more responsible and balanced approach.

Dr Clive Black

Advisor to Coriolis Consulting

October 2018

Arise the Duopoly? by Clive Black

September 18, 2018 11:06 am
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The proposed merger between Sainsbury and Asda (Wal-Mart) is genuinely mega-stuff in the corporate retail world. The proposed deal represents a material potential threshold in British retail history, bringing forth an effective duopoly because alongside Tesco UK, broadly in their present form, the two businesses would have c.60% of the domestic grocery market.

The proposed merger is an involved exercise. I cannot really believe I am stating this but, bizarrely, it could get clearance. However, the story may not end there. Going back to the start, this merger is the product of the unconditional clearance by the UK Competition and Markets Authority (CMA) of the combination of Tesco and Booker. I expected this deal to be broadly cleared but not unconditionally, that is without any balancing remedies.

Such clearance paved the way for investment bankers to entice Mike Coupe at Sainsbury and Roger Burnley at Asda, ex-colleagues, to have a go. In fact this is not a merger; it is a takeover of Asda by Sainsbury. More broadly, it is a capitulation by Asda’s parent, Wal-Mart, from the UK market as it receives an unremarkable exit valuation, takes up pension responsibilities and 29% voting rights despite acquiring 42% of the equity.

“The reality is that this is a merger of weakness.”

The deal is caught up in all sorts of delicacies and nuances. The CMA has said the supply chain will be considered as part of the broader investigation, new territory, whilst Mr Coupe has spoke of c£350m of net buying synergies, emanating from international proprietary brand suppliers; so presumably domestic brand and private label manufacturers have little to fear…!!! Hmmm. Ms. Tacon at GSCOP may actually have something to do in due course methinks…!

The process of investigation is manna from heaven for the legal profession. On what basis the CMA determines to consider the merger will be critical, Asda and Sainsbury are understandably trying to have the widest possible definition of the market. However, will they ‘get away with it’? Recent comments by Mr. Coupe that the deal needs to work financially for shareholders (FT article) suggests some doubts at first base may be emerging.

Who knows that remedies, if any, the CMA will come up with. Closing stores is not a remedy whilst disposals have to go to those that can operate a superstore. With Tesco’s dominant share that leaves few eligible acquirers; what if they do not want any stores? Hence, there is much water to flow under the bridge, and maybe quite a bit of time, before remedies can be revealed, agreed and so this deal completed.

Indiana Jones comes to mind at this point but after all that, should the marriage be consummated then the task of merging two companies that do similar things very differently, comes to the fore. Indeed, this final task could just be the most difficult of all, just when we suspect Mr. Coupe will be planning to ‘hang up his boots’, hopefully, for him, ‘in the money’.

“The two businesses would have c.60% of the domestic grocery market.”

The reality is that this is a merger of weakness. Sainsbury is suffering in grocery from the return of Tesco and is seemingly trying to cut itself to growth, which never works in grocery retailing. With Argos bedded in and masking underlying profit contraction in food, the business ‘needs a deal’, rarely a good reason to do one. As for Asda, well it is relatively weak as a pure value play against the limited assortment discounters (LADs) and inferior as a grocer to Morrison, Sainsbury and Tesco. Hence, in running out of ideas Wal-Mart is exiting through Sainsbury to focus on the Americas, China and India.

Rarely have I witnessed a deal where the supply chain, manufacturers, are so anti, so worried and so dismayed that such a position can be reached. That the CMA is considering the supply chain in its investigation, therefore, is a good thing, albeit how the CMA will look at it, well who knows?

There is much to go on, therefore, before we understand the ongoing organisational structure of a very important component of the British food system. Quite simply, duopolies do not tend to work for shoppers, they are almost inherently designed not to without concomitant regulation. Accordingly, the CMA has a tough job on the one hand, one it has brought upon itself, but maybe an easy one on the other; perhaps it’s time to look after the shopper; few seriously believe that 10% price cuts on an unspecified number of lines from an unspecified date, as suggested by Coupe & Co., is a meaningful commitment to consumers.

Meanwhile, the supply chain must weave its way through the uncertainty, not just of second-guessing the CMA, not even Mystic Meg can do that, but wider issues of sterling volatility, commodity price changes, adjusting shopping patterns and tastes and then the

crazy almost chronic situation that is Brexit (no matter how one voted the current situation is beyond laughable). In such contexts Coriolis has a skill-set that is grounded in reality, focusing upon productivity and efficiency through supporting operational excellence, which is important at all times but no more so than today.

Dr Clive Black

Advisor to Coriolis

September 2018.

Can better living standards be turned into improved supplier profitability?

April 11, 2018 4:29 pm
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The language has been, as is often the case these days, a bit over the top. However, whilst there has not been a crash in real British living standards over the last few years there has been a bit of a squeeze. In CY2017 we saw wages and salaries rise by between 2.5-3.0% whilst inflation, as measured by the ONS CPIH was hovering for much of the time over 3.0%.

Similarly, whilst not a crash, we are measured about any suggestion of a forthcoming surge in living standards for UK households as we see wages and salaries more or less matching CPIH as the second quarter of CY2018 commences with the prospect of a more positive gap to come. So, as the annualisation of sterling’s devaluation against the global currencies works through the system, post the UK-EU Referendum, plus as sterling actually appreciates, it has gone from USD1.20 to 1.40+ versus £1…, then we foresee an easing of UK inflation.

Correspondingly, we also believe that the labour market will remain quite tight, especially for skilled workers. Also, it feels like the freeze on public sector pay will thaw, easing any prevailing people flow to the private sector and supporting market values, leading to an expectation that wages & salaries in the UK in CY2018 will rise above prices. So, we foresee rising living standards, but moderately so, to be clear.

In CY2017 we saw wages and salaries rise by between 2.5-3.0% whilst inflation, as measured by the ONS CPIH was hovering for much of the time over 3.0%.

What does this mean for consumer expenditure in these Isles? Well, those squeezed households have been spending more of their hard earned cash on essentials rather than discretionary items in recent times – so food, utilities and fuel. Accordingly, with a little bit more slack in the system that trend is likely to ease back a little with more treating taking place.

What folks spend their money on though is shifting, with less seemingly going on things (goods) over experiences (services). We think this will continue, which will help leisure and entertainment over retail; shopkeepers are also contenting with online shift.

Will the anticipated upturn mean better times for manufacturers and business services providers? Well, there may be a trickle of rising living standards, which are a whole lot better to face than the falling ones. At the same though there is the prospect of two increases (circa 50 basis points) of interest rate accretion to come in CY2018, whilst there are plenty of cost pressures facing business.

We have touched upon labour prices already, which are expected to grow. Additionally, there is the burden of a National Living Wage creeping higher, the Apprentice Levy and the now expanded Auto-enrolment charge. Energy prices are up year-on-year as Brent Crude ICE now normalises at USD65-70/barrel rather than USD45-50, whilst rents and particularly business rates rarely tend to fall; especially for companies in the South and East of England.

As such we see structural cost pressures that are likely to lead businesses to think evermore closely about unit costs, productivity if you will, and the drivers of that including more automation, more customer insight to drive better decision-making and more agility.

What folks spend their money on though is shifting, with less seemingly going on things (goods) over experiences (services). We think this will continue, which will help leisure and entertainment over retail; shopkeepers are also contenting with online shift.

Whilst this characterisation of the UK consumer economy is high level, and cautiously optimistic, so implying opportunity, we also at a high level see cost challenge that needs to be countered, particularly if we throw import substitution and export opportunities into the mix too.

Coriolis is a business that is centred on operational efficiency at the sharp end, not the high level, from well-grounded folks that understand the importance of productivity in the evolving UK economy. In this respect, benchmarking, understanding scope to automate versus manual processes and attentively focusing upon managing costs down, is what Coriolis does; its raison is highly relevant to a dynamic UK economy.

I hope the prospect of a rising tide of consumer disposable income, even if gradual, works to your favour over the coming year.., let’s hope that there are no more snap elections and the like to b*gger things up again…

Dr Clive Black
Advisor to Coriolis

In this Amazon era, what are the major strategic takeaways for business?

October 30, 2017 3:41 pm
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Retail and ecommerce are changing globally. Around the world, new technologies, trends and business models are rapidly transforming the way people discover, shop and buy all of their physical goods, from grocery to fashion and everything in between.

“If one thing is clear at this gathering of the retail industry’s top brass, it is that pretty much everyone in the sector is figuring out how to beat, collaborate with or be the next Amazon.com.”

Shoptalk Europe covers innovation in retail and ecommerce. It focuses on the evolution of how consumers discover, shop and buy in an age of digital disruption. This year, a trip to Kobenhavn brought together the trainers, T-shirt and jackets of the retail and digital economy. Like many industry bashes just watching and listening were the key learnings as opposed to being one of the hundreds of folks trying to pass a business card to the head of Tesco Online or the founder of the Dollar Shave Club in the hope of that big time call.
A vast array of subjects were discussed at this very Americana set piece event, a paradise for the absorbers of jargon; from engaging consumers through interactive technologies to emerging technologies that drive retail innovation. That said the degrees of specialism, insight and entrepreneurship were impressive.

 

One interesting and unescapable feature of this considerable event was the elephant in the online and offline world of retail; Amazon. Amazon was revered, spoken of in the main with great deference, admiration and no small amount of fear and loathing. Amazon is distinctive in this respect as it is both a competitor for some but also a key customer or distributor as well.

So, in this Amazon era, what are the major strategic takeaways for business?

Well, in the first instance trying to replicate or replace what Amazon does head on and win appears a bit of a forlorn hope. One perhaps needs to accept that Amazon is here to stay for a good while and is a formidable opponent. A similar perspective could be applied to Alibaba in China it should be said. Amazon has considerable scale on its balance sheet to see through its plans, which seemingly revolve around sub-optimal profitability to possibly reach a position where monopoly conditions will permit super-normal profitability.

As such, is Amazon using a form of capitalism that is sub-optimal profitability to potentially reach a market dominant position where super-normal profitability achieved? Or is that a naive expectation as Amazon is just a pseudo-commercial operation that is very ‘nice’ to its customers, earns enough to get by and will remain in sub-optimal profit mode even if it has a monopoly position? Hmmm. History does not look encouraging on that front. Head on though it feels like ‘getting by’ could be a credible outcome versus Amazon.

In this respect, who and what can stop Amazon apart from itself from becoming a ubiquitous behemoth controlling the distribution of goods & services decimating the margin structure of sector by sector? Well, competitors appear few and far between on this front albeit we note Booker-Tesco speak of their collective scale being a factor in coping with Amazon in the future.

Rather, we sense that it will be non-commercial folk and more capable competition in time, that will ultimately face into and potentially tame the Amazonia commercial beast. By non-commercial folks we think of competition regulators and tax officials, noting that Amazon was fined EUR250m very recently by the European authorities.

Capability is perhaps more interesting as a mechanism for small & medium sized companies to cope with Amazon, as opposed to large groups already with their heads above the parapet. Whilst Amazon has the reputation it has with shoppers on merit and never-ending innovation translated into the enviable functional service, there are many things Amazon is not, even as artificial intelligence, personalisation and other systematic processes emerge that mirror simple humanity come through.

As such one of the clear pendulums swinging the other way from prior narratives is the importance of stores to the future of retail. Some may have scoffed at such a suggestion in years gone by but the reality is far from so. The experiences that stores can deliver, the human social interaction, the easy choice and theatre are very, very difficult to replicate online. Indeed, many pure-play online retailers are opening stores; e.g. Ace & Tate, Birchbox and MyMuseli.

As such the first thing that dawned upon us as Amazon acquired Whole Food Markets was that in the grocery space, Amazon could not ‘win’ through centralised picking and excellent logistics to home alone. It needed the connection between a very fragmented customer base and a close fulfilment centre, that is in fact a “shop”.

Adrian Letts in Copenhagen, the Head of Tesco Online, alluded to this process too when he spoke of the store becoming more important to their grocery and non-food businesses than dark stores, for example, in the future. Indeed, the flexibility that stores offer to shoppers for direct shopping to online shopping is now only starting to become much more clearly worked out; e.g. shops as places where logistics providers can deliver products not bought in-store or sold by that vendor e.g. Amazon lockers.

Amazon should be a catalyst for management to be competitive, innovative and entrepreneurial. Efficient markets make business’ better and being better is a never-ending process. In Denmark Spencer Fung spoke of his Li-Fung business as being slow, a tortoise, that was not just competing with faster & slower tortoise but living in a world where hares were becoming even quicker. Spencer is trying to speed up his business through simplification and digitalisation, what was I saying about jargon earlier? Such a candid assessment from a large and advanced Asian group gives grounds for collective encouragement to my mind;

“the key is working out where I need to be simpler, quicker, more competitive, more innovative and so more entrepreneurial.”

The human touch, the experience, the accessibility, the theatre are all things that Amazon will have to learn about and invest in if it is to compete. As such the questions are, as spelt out by Jerry Storch, CEO of Hudson Bay Company;

Do I have great products?

Do I have great stores?

Do I have great staff?

In whatever field, a business is playing in and this use of great does not just mean higher category, super-premium and expensive, it permeates all product categories and channels. As such thinking about Amazon as a competitor and a potential distributor for goods, directly or through market place, is a healthy and logical outcome of the market economy working. Amazon is a superb construct and something to be respected and admired. Whilst so, the Amazonia tail should not wag outside the legal bounds that other firms have to abide by; something for firms, trade associations, non-governmental and official bodies to focus upon.

Coriolis is in the business of assisting business in the UK, Australia and in-between to become more competitive from within. In the fast-moving world we live in, where more is fundamentally the same than some folks think, but more is moving at the pace of Mr. Fung’s proverbial hare, help with change, help with pace and help with competitiveness is a helping hand indeed, which Coriolis is very well set up to do. Make Amazon not be a source of fear but a source of inspiration where it can be admired, copied, defied and defeated, certainly not loathed.

Dr Clive Black
Advisor to Coriolis