Business-Ready Online Checklist for SMEs

GrowthPath's SME Online Checklist will help you make sure you are not falling behind as online business enters a new phase in Australia.

In a report released yesterday by the Australian Food and Grocery Council, the share of Australian supermarket private labels sales is expected to rise to 40-50%. The report,    2020: Industry at a Crossroads describes this as a level consistent with mature markets. Many angry manufacturers blame this on the high concentration of Coles and Woolworths; in contrast, I believe the high concentration is more likely to explain why private labels in Australia are currently only 25% of food and grocery sales, much lower than comparable markets elsewhere. Please see my earlier article for more on that point: Private labels and supermarket competition

Despite the facts in the report, the report blames this apparent normaliastion of the food and grocery market on the high concentration of Coles and Woolworths.

It also acknowledges other factors which are more likely, such as the high AUD.

Being positive, some advice is given to local players:

(from  2020: Industry at a Crossroads)

Brand equity doesn't come from simply being on the shelf. It comes from innovation.

So where is capital expenditure going?
Mostly into cost reduction and capacity increase: more than 80% of expected capex is in these categories.
The survey indicates that only 11% of near-term capex is going into new product capability.
So local players are gearing up for more volume and lower unit costs. This could be interpreted as getting ready for low-margin private label volumes. Is this wise?

The report believes that at current exchange rates, 70% of private label products will be imported, so the demand on Australian production will fall just as our manufacturers are apparently investing in capacity. The other concern is that the report expects large scale investment in high-capacity Asian production.

Local manufacturers will struggle to compete on price given these head-winds, regardless of capex.

I think they should be gearing up for flexible, diverse manufacturing with an emphasis on innovation and local trends. This is how high-wage manufacturing survives in Europe. At Philips in Europe, we took the initiative of sourcing entry level products from China before the retailers, and kept control of the category and the supply chain.We invested substantially in innovative, consumer-focused products (including sourcing of more or less stunt innovations) and lead the market in followiung local trends, which increased our added value as category leaders with respect to the grocery chains. Above all, we delivered very high service levels and enormous flexibiity through our local manufacturing capacity. 

This is more likley to be the path to success for Australian food and grocery manufacturers.

SMEs take note: the inability of large businesses to do what they need to do can seem incredible. It's very hard for some leopards to change their spots. A case in point is the move to online retail.

An interesting example is David Jones. The magazine accompanying the Dec 2, 2011 Australian Financial Review had a good interview with Paul Zahra, CEO of David Jones (an upmarket department store).

In the interview, there were some startling facts about the failure of DJ's online effort.

Mr Zahra revealed that under the former CEO, David Jones canned their online effort after losing $28m. Losing $28m is remarkable for a channel where the turnover would have been below $5m. Normally we associate online stores with low fixed costs (and therefore low contribution margins and cheap prices). There are a couple of ways you can lose a huge amount of money. You can sell below variable costs, and lose money on each sale, or you can have astronomical fixed and startup costs. (A large firm can invent a third way: it may allocate irrelevant corporate overheads, and include them in the loss). I can't believe DJs achieved enough volume to blow $28m on selling below cash cost. This leaves fixed costs and startup costs. Spending that on consultants, developers and marketing is always possible, but it seems remarkably generous. I'm guessing some very over-priced acquisitions.

For SMEs, the lesson is that a firm with top-class management, a ridiculous amount of money and a nice strategic plan completely screwed up. Many smaller businesses have stepped into the gap.

However, that's in the past.

DJs obviously needs to find a successful hybrid online solution. There's no point establishing a traditional online store: the margins are low, and the added-value of the existing business is too low. Instead, DJs is using the role model of Neiman Marcus, an upmarket US department store with a decent complementary web offer. NM claims that online is about 10% of revenue ... perhaps it doesn't sound much, but Myer said it was selling only $5m online (a year ago, before it relaunched), which is about 0.2%.

In the bricks-and-mortar world, David Jones and Myer have followed different strategies: Myer went for the store-in-a-store concept. To my mind, this leaves David Jones standing for something more than Myer: Myer's approach is basically to become a landlord. At David Jones, you are more likely to engage with people who work for David Jones. Mr Zahra claims that market research reveals much stronger customer service ratings  than "our main competitor": I can easily believe that. How does this fit with an online approach? 

Establishing hybrid retail channels is not easy. One US analyst praises Nieman Marcus approach to its online offer is "From its email to digital look books, look books to the e-commerce experience, Neiman Marcus has created a seamless experience for their shoppers". DJs has already made a seamless customer experience a bigger part of their in-store experience.

Myer and David Jones need to find an online approach that delivers healthy margins. Using comparative advantage analysis, DJs is more likely to succeed than Myer, in my opinion.

However, even if they do succeed, it will have taken years. Years after the time that it was obvious that the Australian retail market would face significant disruption, years in which new players have established themselves.

Many Australian branded goods FMCG manufacturers are nervous about the proposed increase of private labels on the shelves of the two large supermarket chains. In some comments, this is linked to the 80% market share of the Coles and Woolworths. Other approaches are even more defensive and futile, such as trying to prevent "copying" of branded-product packaging.

I have a strong FMCG manufacturing background. I'm not anti-FMCG. But I don't believe in trying to hold back the tide. Change is coming. It's overdue. There are ways to respond which are based on getting ready for the future. Trying to erect barriers in the face of this change will fail, and distract FMCG manufacturers from adapting. So not only is it a waste of money and effort, it is worst of all a waste of time. If manufacturers try to solve this by going to war with the big supermarkets, they will lose, and deserve to lose. Instead, they need to offer products that consumers want to pay for. Since their customers are committed to making private labels a bigger, it's time for the manufacturers to look for opportunities in this change.