Trends Really Matter – Ask Safeway and Aldi

by | Oct 23, 2013 | Current Affairs, Defend & Extend, Food and Drink, Leadership, Lifecycle

On 11 October Safeway announced it was going to either sell or close its 79 Dominick's brand grocery stores in Chicago.  After 80 years in Chicago, San Francisco based Safeway leadership felt  it was simply time for Dominick's to call it quits. 

The grocery industry is truly global, because everyone eats and almost nobody grows their own food.  It moves like a giant crude oil carrier, much slower than technology, so identifying trends takes more patience than, say, monitoring annual smartphone  cycles.  Yet, there are clearly pronounced trends which make a huge difference in performance. 

Good for those who recognize them.  Bad for those who don't.

Safeway, like a lot of the dominant grocers from the 1970s-1990s, clearly missed the trends. 

Coming out of WWII large grocers replaced independent neighborhood corner grocers by partnering with emerging consumer goods giants (Kraft, P&G, Coke, etc.) to bring customers an enormous range of products very efficiently.  They offered a larger selection at lower prices.  Even though margins were under 10% (think 2% often) volume helped these new grocery chains make good returns on their assets. Dillon's (originally of Hutchinson, Kansas and later purchased by Kroger) became a 1970s textbook, case study model of effective financial management for superior returns by Harvard Business School guru William Fruhan.

But times changed.

Looking at the trend toward low prices, Aldi from Germany came to the U.S. market with a strategy that defines the ultimate in low cost.  Often there is only one brand of any product in the store, and that is likely to be the chain's private label.  And often it is only available in one size.  And customers must be ready to use a quarter to borrow the shopping cart (returned if you replace the cart.) And customers pay for their sacks.  Stores are remarkably small and efficient, frequently with only 2 or 3 employees. And with execution so well done that the Aldi brand became #1 in "simple brands" according to a study by brand consultancy Seigal+Gale.

Of course, we also know that big discount chains like WalMart and Target started cherry picking the traditional grocer's enormous SKU (stock keeping units) list, limiting selection but offering lower prices due to lower cost. 

Looking at  the quality trend, Whole Foods and its brethren demonstrated that people would pay more for better perceived quality.  Even though filling the aisles with organic
products and the ultimate in freshness led to higher prices, and someone nicknaming the chain
"whole paycheck," customers payed up to shop there, leading to superior
returns.

Connected to quality has been the trend, which began 30 years ago, to "artisanal" products.  Shoppers pay more to buy what are considered limited edition products that are perceived as superior due to a range of "artisanal quality" features; from ingredients used to age of product (or "freshness,") location of manufacture ("local,") extent to which it is considered "organic," quantity of added ingredients for preservation or vitamin enhancement ("less is more,") ecological friendliness of packaging and even producer policies regarding corporate social and ecological responsibility. 

But after decades of partnership, traditional grocers today remain dependant on large consumer goods companies to survive.  Large CPGs supply a massive number of SKUs in a limited number of contracts, making life easy for grocery store buyers.  Big CPGs pay grocers for shelf space, coupons to promote customer purchases, rebates, ads in local store circulars, discounts for local market promotions, sales volumes exceeding commitments and even planograms which instruct employees how to place products on shelves — all saving money for the traditional grocer. In some cases payments and rebates equalling more than total grocer profits. 

Additionally, in some cases big CPG firms even deliver their products into the store and stock shelves at no charge to the grocer (called store-door-delivery as a substitute for grocer warehouse and distribution.) And the big CPG firms spend billions of dollars on product advertising to seemingly assure sales for the traditional grocer.

These practices emerged to support the bi-directionally beneficial historically which tied the traditional grocer to the large CPG companies.  For decades they made money for both the CPG suppliers and their distributors.  Customers were happy. 

But the market shifted, and Safeway (including its employees, customers, suppliers and investors) is the loser.

The old retail adage "location, location, location" is no longer enough in grocery.  Traditional grocery stores can be located next to good neighborhoods, and execute that old business model really well, and, unfortunately, not make any money.  New trends gutted the old Safeway/Dominick's business model (and most of the other traditional grocers) even though that model was based on decades of successful history.

The trend to low price for customers with the least funds led them to shop at the new low-price leaders. And companies that followed this trend, like Aldi, WalMart and Target are the winners. 

The trend to higher perceived quality and artisanal products led other customers to retailers offering a different range of products.  In Chicago the winners include fast growing Whole Foods, but additionally the highly successful Marianno's division of Roundy's (out of Milwaukee.)  And even some independents have become astutely profitable competitors.  Such as Joe Caputo & Sons, with only 3 stores in suburban Chicago, which packs its parking lots daily by offering products appealing to these trendy shoppers.

And then there's the Trader Joe's brand. Instead of being all things to all people, Aldi created a new store chain designed to appeal to customers desiring upscale products, and named it Trader Joe's.  It bares scance resemblance to an Aldi store.  Because it is focused on the other trend toward artisinal and quality.  And it too brings in more customers, at higher margin, than Dominick's.

When you miss a trend, it is very, very painful.  Even if your model worked for 75 years, and is tightly linked to other giant corporations, new trends lead to market shifts making your old success formula obsolete. 

Simultaneously, new trends create opportunities.  Even in enormous industries with historically razor-thin margins – or even losses.  Building on trends allows even small start-up companies to compete, and make good profits, in cutthroat industries – like groceries. 

Trends really matter.  Leaders who ignore the trends will have companies that suffer.  Meanwhile, leaders who identify and build on trends become the new winners.

Sorry Meg, Your Hockey Stick Forecast for HP Won’t Happen – Sell

by | Oct 4, 2012 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Web/Tech

If you're still an investor in Hewlett Packard you must be new to this blog.  But for those who remain optimistic, it is worth reveiwing why Ms. Whitman's forecast for HP yesterday won't happen.  There are sound reasons why the company has lost 35% of its value since she took over as CEO, over 75% since just 2010 – and over $90B of value from its peak. 

HP was dying before Whitman arrived

I recall my father pointing to a large elm tree when I was a boy and saying "that tree will be dead in under 2 years, we might as well cut it down now."  "But it's huge, and has leaves" I said. "It doesn't look dead."  "It's not dead yet, but the environmental wind damage has cost it too many branches,  the changing creek direction created standing water rotting its roots, and neighboring trees have grown taking away its sunshine.  That tree simply won't survive.  I know it's more than 3 stories tall, with a giant trunk, and you can't tell it now – but it is already dead." 

To teach me the lesson, he decided not to cut the tree.  And the following spring it barely leafed out.  By fall, it was clearly losing bark, and well into demise.  We cut it for firewood.

Such is the situation at HP.  Before she became CEO (but while she was a Director – so she doesn't escape culpability for the situation) previous leaders made bad decisions that pushed HP in the wrong direction:

  • Carly Fiorina, alone, probably killed HP with the single decision to buy Compaq and gut the HP R&D budget to implement a cost-based, generic strategy for competing in Windows-based PCs.  She sucked most of the money out of the wildly profitable printer business to subsidize the transition, and destroy any long-term HP value.
  • Mark Hurd furthered this disaster by further investing in cost-cutting to promote "scale efficiencies" and price reductions in PCs.  Instead of converting software products and data centers into profitable support products for clients shifting to software-as-a-service (SAAS) or cloud services he closed them – to "focus" on the stagnating, profit-eroding PC business.
  • His ill-conceived notion of buying EDS to compete in traditional IT services long after the market had demonstrated a major shift offshore, and declining margins, created an $8B write-off last year; almost 60% of the purchase price.  Giving HP another big, uncompetitive business unit in a lousy market.
  • His purchase of Palm for $1.2B was a ridiculous price for a business that was once an early leader, but had nothing left to offer customers (sort of like RIM today.)  HP used Palm to  bring out a Touchpad tablet, but it was so late and lacking apps that the product was recalled from retailers after only 49 days. Another write-off.
  • Leo Apotheker bought a small Enterprise Resource Planning (ERP) software company – only more than a decade after monster competitors Oracle, SAP and IBM had encircled the market.  Further, customers are now looking past ERP for alternatives to the inflexible "enterprise apps" which hinder their ability to adjust quickly in today's rapidly changing marektplace.  The ERP business is sure to shrink, not grow.

Whitman's "Turnaround Plan" simply won't work

Meg is projecting a classic "hockey stick" performance.  She plans for revenues and profits to decline for another year or two, then magically start growing again in 3  years.  There's a reason "hockey stick" projections don't happen.  They imply the company is going to get a lot better, and competitors won't.  And that's not how the world works.

Let's see, what will likely happen over the next 3 years from technology advances by industry leaders Apple, Android and others?  They aren't standing still, and there's no reason to believe HP will suddenly develop some fantastic mojo to become a new product innovator, leapfrogging them for new markets. 

  1. Meg's first action is cost cutting – to "fix" HP.  Cutting 29,000 additional jobs won't fix anything.  It just eliminates a bunch of potentially good idea generators who would like to grow the company.  When Meg says this is sure to reduce the number of products, revenues and profits in 2013 we can believe that projection fully.
  2. Adding features like scanning and copying to printers will make no difference to sales.  The proliferation of smart devices increasingly means people don't print.  Just like we don't carry newspapers or magazines, we don't want to carry memos or presentations.  The world is going digital (duh) and printing demand is not going to grow as we read things on smartphones and tablets instead of paper.
  3. HP is not going to chase the smartphone business.  Although it is growing rapidly.  Given how late HP is to market, this is probably not a bad idea.  But it begs the question of how HP plans to grow.
  4. HP is going not going to exit PCs.  Too bad.  Maybe Lenovo or Dell would pay up for this dying business.  Holding onto it will do HP no good, costing even more money when HP tries to remain competitive as sales fall and margins evaporate due to overcapacity leading to price wars.
  5. HP will launch a Windows8 tablet in January targeted at "enterprises."  Given the success of the iPad, Samsung Galaxy and Amazon Kindle products exactly how HP will differentiate for enterprise success is far from clear.  And entering the market so late, with an unproven operating system platform is betting the market on Microsoft making it a success.  That is far, far from a low-risk bet.  We could well see this new tablet about as successful as the ill-fated Touchpad.
  6. Ms. Whitman is betting HP's future (remember, 3 years from now) on "cloud" computing.  Oh boy.  That is sort of like when WalMart told us their future growth would be "China."  She did not describe what HP was going to do differently, or far superior, to unseat companies already providing a raft of successful, growing, profitable cloud services.  "Cloud" is not an untapped market, with companies like Oracle, IBM, VMWare, Salesforce.com, NetApp and EMC (not to mention Apple and Amazon) already well entrenched, investing heavily, launching new products and gathering customers.

HPs problems are far deeper than who is CEO

Ms. Whitman said that the biggest problem at HP has been executive turnover.  That is not quite right.  The problem is HP has had a string of really TERRIBLE CEOs that have moved the company in the wrong direction, invested horribly in outdated strategies, ignored market shifts and assumed that size alone would keep HP successful.  In a bygone era all of them – from Carly Fiorina to Mark Hurd to Leo Apotheker – would have been flogged in the Palo Alto public center then placed in stocks so employees (former and current) could hurl fruit and vegetables, or shout obscenities, at them!

Unfortately, Ms. Whitman is sure to join this ignominious list.  Her hockey stick projection will not occur; cannot given her strategy. 

HP's only hope is to sell the PC business, radically de-invest in printers and move rapidly into entirely new markets.  Like Steve Jobs did a dozen years ago when he cut Mac spending to invest in mobile technologies and transform Apple.  Meg's faith in operational improvement, commitment to existing "enterprise" markets and Microsoft technology assures HP, and its investors, a decidedly unpleasant future.