News of the end of the engagement is confirmed… By Dr. Clive Black

April 25, 2019 2:07 pm
View Article

The Competition and Markets Authority did not believe that Sainsbury and Asda had become charitable organisations with the sole aim of cutting the grocery shopping bills of the British.

Sacre bleur!

How could the regulator possibly not see that and so supposedly believe that the prime motives behind the proposed merger was to masque the deteriorating trading position of Sainsbury’s Supermarkets and to allow Wal-Mart to exit the UK? In doing so how could that self-same regulator also believe that a duopoly in the British grocery market could in time raise prices? Look at the example of other domestic monopolies…, banks, telecoms, trains and utilities, what’s the problem?

“…..there is probably a sense of relief that the merger is not taking place with the supply base.”

The analysis of the whys and wherefores of this now doomed merger will be debated for some time one senses but what could it mean for the British grocery supply chain?

Well, at first base there is probably a sense of relief that the merger is not taking place with the supply base. Such an emotion will have been felt firstly by international brand owners, who were the prime initial source for synergies from the combination, and then by domestic players, who were thrown into the mix once the provisional findings were released in February and Sainsbury and Asda clamoured to demonstrate £1bn+ of price cuts.

Whilst so, it is important to note that the CMA has acted because it does not believe that a more concentrated industry is in the shoppers’ interest on a five, ten, fifteen year plus view. As such, the trade should be planning for a more competitive British market for longer as a result of this deal being prohibited as bizarre as that may seem; duopolies tend to result in consumers’ being ripped off in the long run.

Post the CMA’s decision all eyes will be on Sainsbury’s future strategy, particularly for a grocery business that has been sustainably losing market share with falling underlying like-for-like sales in 2019 even with modest inflation in the system. We doubt that there will be a revolution at JS and talk of the security of Mike Coupe’s position appears knee-jerk to us. However, a reset and focus of some sorts is necessary as Sainsbury cannot cut itself to growth. Hence, expect some change from JS, particularly around availability, product specification, service and supply chain costs.

As for Asda, well Wal-Mart may be regretting its justification for the Sainsbury merger, not least the preference to exit the UK. Morale at Asda House maybe better now that collusion with Sainsbury has been prohibited and the mood music should be sweeter than is the case at Holborn too. Quite where Wal-Mart goes with Asda though remains to be seen.

“….the CMA has acted because it does not believe that a more concentrated industry is in the shoppers’ interest…”

For choice, we sense a period of quiet reflection and focus is most likely, particularly continuing to work on Asda’s price differential with the German discounters. Beyond that though we will see if private equity fancies Asda or if in time Wal-Mart sees a listing on the stock exchange, an initial public offering, as a route to escape these shores.

The attempted merger process has been a material concern for the supply trade. A little like Brexit, its implications were uncertain, but dealing with it probably meant change. Quite whether or not that change was good or bad was to be determined. Now with Sainsbury-Asda’s prohibition one uncertainty has been removed. However, because of that it probably means a more rather than less competitive industry in the long-run.

In this respect cost leadership will remain to the fore as supermarkets continue to work with their supply chains to reduce costs. The domestic and international grocery supply industry is Coriolis’ forte in working with operating executives to be more productive. Collaboration in this area maybe increasingly timely.

Dr Clive Black

Advisor to Coriolis

April 2019

Three Little Birds…; Taste, Sustainability & Well-being by Dr. Clive Black

March 25, 2019 11:37 am
View Article

The great, sadly late, Bob Marley sang, ‘don’t worry about a thing, ‘cos every little thing is gonna be alright’.

Maybe Prime Minister, Theresa May, and the swamp creatures within her Cabinet alongside the likewise creatures sitting on the soft green leather at the Palace of Westminster feel that this is the way to run a country. At times it is all that many business folks can draw upon as a modus operandi to navigate their way through the UK’s supposed exit from the EU.

Fatigue is an understatement for the nation’s mood on how the political process has panned out. The term ‘national interest’ has been much used but totally abused by every shade of UK politician. And so who knows how things are going to progress but it is an exercise in mis-management of literally the highest degree. Due to that incompetence, the nature of any split and the time that is likely to take looks like it is going to be more costly, extensive and distracting than necessary.

“Fatigue is an understatement for the nation’s mood on how the political process has panned out.”

Whilst venting one’s spleen can have a modest if very temporary palliative effect, the reality is that the food & beverage industry in the UK has to operate within this chaotic environment. Indeed, through the extensive short-shelf life composition of many products, the food industry is absolutely at the forefront of the economic impact of UK-EU relations and, within the wider context, most particularly the positions of the respective industries in Northern Ireland and the Republic of Ireland, where one has to be worried that chaos could prevail. More broadly, food & agriculture are likely to be a central challenge for any trade deals that the UK engages within, if ever.., most notably the USA, where the Irish border, again, will be a key axis.

Beyond all this macro-political and global trade ‘stuff’ it is important not to lose sight of real people, shoppers, consumers… Like me, maybe you, they are sick & tired of ‘Brexit’. Indeed, many have stoically got on with their lives despite the self-centred, attention grabbing and detached operating in the House of Commons. And those shoppers continue to display behaviours that represent considerable opportunities that it is great to see entrepreneurs in the UK seize upon and see-through.

Most particularly is the shoppers’ appetite to pay more attention to what they are consuming. Good taste remains at the forefront of their behaviours, a simple human trait that is a key contributor of added value food – premiumisation amongst proprietary brand (PB) and private label food & beverage is, therefore, a structurally important underlying feature of the market. Good taste rarely is a function of chance though as opposed to the quality of ingredients, processes and the story around a product. Increasingly, therefore, we see growth in the British food market revolving around a joined up story with new lines taking share from legacy brands that have overgrown and at times overstayed their welcome.

Deeper into these market developments is a process that is now and will be more so in the future central to the prospects of shoppers, society and the food industry; well-being. Awareness around the nutritional composition of foodstuffs is rising albeit there is much more for public policy and the industry bodies to do to take matters a good deal further. Such awareness, predicated upon curiosity, interest and need, is influencing behaviours around diet and health. We are not at the start of this journey but it has a long, long way to go, centred upon structural changes to nutrient consumption with less salt, saturated fat and salt and more protein, omega-3, and the constituents of fruit & vegetables, pulses and legumes.

Beyond nutrients there is the level of engineering in food, simple is becoming more virtuous, natural is preferred to synthetic and then there are the issues that are driving vegetarian and veganism, which seems to be more about personal nutrients than animal welfare. Beyond food there is the matter of sustainability; how one man, an atom, changed the structure.., David Attenborough and plastic, doing in one television programme what environmental campaigners have worked for half a century on with lesser impact.

“…we see growth in the British food market revolving around a joined up story with new lines taking share from legacy brands that have overgrown and at times overstayed their welcome.”

So, whilst we sit amongst the stench of what appear to be rotten politicians in these Isles, small minded and what increasingly appear self-centred folks, there remain real decent people out there that need the British food industry to continue to meet their needs, continue to be entrepreneurial and to continue to innovate. A glance at a supermarket shelf shows how good taste, well-being and sustainability to mention but three are structural drivers of change, opportunity and growth that the UK industry is rising too and where the future appears bright.

At Coriolis there is a team of folks that focus upon delivering cost leadership and manufacturing excellence that enable the concepts, ideas and products developed by British food entrepreneurs to also be generators of free cash flow and wealth.

As the 29th March 2019 approaches here is to a competitive, innovative and entrepreneurial British food & drink industry whether our politicians are with or without us.

 

Dr Clive Black

Advisor

Coriolis Consulting

March 2019

Political fog – Will it be alright on the night? by Dr. Clive Black

February 19, 2019 4:21 pm
View Article

The late Denis Norden made his name with his phrase ‘it’ll be alright on the night’. Each morning for some weeks and months now many of us wake in the knowledge that March 29th 2019 is one day closer, each evening we go to bed thinking.., but ‘it’ll be alright on the night’.

Whatever colour political rosette one wears upon the lapel in these times it is simply an unacceptable political situation. The uncertainty and corresponding frustration of the business community surrounding the nature and extent of the UK’s economic relationship with the EU and the wider world in fact is now palpable. I spoke at the Oxford Farming Conference in early January about the Palace of Westminster being a tank where the fish are political lunatics. Six weeks on one is tempted to say that such a statement is a bit harsh on goldfish.

It is remarkable that five or six weeks away from the UK’s exit from the EU, at the time of writing, that not a single person in these Isles knows how matters are going to pan out in our wider economic relations. For businesses this is a real concern, particularly for those that are importing components or selling goods to the EU. One can plan for certain things, as many firms have done so with stockbuilding, but in fresh and short-shelf life food products in particular  the capability and capacity to cost effectively plan in the face of such major uncertainties is nay impossible.

“It is remarkable that five or six weeks away from the UK’s exit from the EU……not a single person knows how matters are going to pan out in our wider economic relations”

Food businesses do not know whether or not tariffs and customs controls will be applied from April Fool’s Day. Ministers’ go from pillar to post on tariffs whilst the movement of goods across our international shores is a bit of a minefield to say the least. Logistics firms sit at the moment with mind-boggling confusion about how their vehicles may, or may not, move across the Irish and North Seas, never mind the English Channel.

A hungry nation is a dangerous thing and the political powers that be know that. Equally though supermarket bosses, food manufacturers, farmers and logistics providers sit and watch with horror as to how an orderly food market will progress in April if there is a ‘no deal’ scenario. The scope for material food price inflation and even potential shortages of certain foodstuffs, noting that I do not expect empty shelves to be the normal, largely because of the ‘it’ll be alright on the night ‘ syndrome, cannot be ruled out as can the growing likelihood that the 29th March maybe abandoned as an exit date, with a can kicked down the road.

Against this backdrop businesses may be keeping an  especially close eye on their costs and cash flows. Small food companies in particular may need the support of a banking system that failed them badly in the last financial crisis should supply hiatus’ emerge, from the funds to build up stocks to the need to carry higher costs without necessarily receiving payment and recovery first.

In this respect the sun will shine on April’s Fool’s Day and thereafter but an extra level of tactical nouse and agility could also be the order of the day for food companies in particular. Talking to suppliers and customers may also be a virtue so that over-planning and incurring unnecessary costs, rests alongside avoiding any obvious hurdles and barriers to trade.

“Small food companies in particular may need the support of a banking system that failed them badly in the last financial crisis”

I wish all businesses well in this chronically ridiculous situation when all of the small-minded Members of Parliament swimming in the Palace of Westminster pool should hold their collective heads in shame. The ‘National Interest’ is an anathema to them all from the incompetent Prime Minister to the shameful Leader of the Opposition, the revisionist retainers to the rabid Brexiteers, whether Ulster, Welsh, Scottish or English.

Quite what the future holds for this ‘nation’ remains to be seen. The 29th March is a day that will come and go, thereafter one senses that the political class will remain a source of instability and uncertainty for the business community; therefore a total failure of government and parliament.

Accordingly, at the end of the day, let’s hope ‘it’ll be alright on the night’ and that more stable and brighter times can be ahead. To this end I wish you all well.

Dr Clive Black

Advisor to Coriolis Consulting

February 2019

Online grocery is not easy…By Dr. Clive Black

November 22, 2018 9:41 am
View Article

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
View Article

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