Sounds + Food 'n' Retail

According to Distrifood.nl (Dutch) the " man's cola" showed a nice profit this last year, making it the top new introduction to a brand in 2007.


(Source picture: Elsevier.nl (Dutch))

I only point this out, since Coke Zero is one of the first food-related topics I wrote about on Tech IT Easy; a, fairly clear, signal that it was time to "spin-off" to this blog.

Just a short tweet.

I'm currently reading a Dutch book on the 2003 crisis at Ahold, but which is actually a historical account of how the corporation came to be. A couple of things I found interesting:

• Ahold actually stands for AH (Albert Heijn) Holdings


• We all know that things are cyclical, but it was interesting to read how a recession and high oil prices were a challenge that Ahold had to face in the 60s-70s, and how they managed to survive.


• In order to inspire Dutch people to shop more, they introduced a financing scheme for fridges, which people couldn't afford at that time. General Motors did a similar thing to help people afford their cars; seems like an interesting way to "upgrade" an economy.


• The fear of a socialist government drove Albert Heijn to look outwards and form Ahold (similar to why IKEA decided to globalise also).


• One of the consequences of politics at that time was the board of directors, meant to provide impartial guidance and represent the workers.


• They made extensive use of consultancies (often McKinsey) whenever they decided on a strategic trajectory.


• One of the directors was a big fan of Harvard Business Review :)


• They use the US as a source of knowledge on how to design their supermarkets. Later on, moving to the US was also seen as a way to increase that learning, as well as a new revenue-source.


• When AH moved to the US, they also brought their own ideas, like, eh, advertising (a terrible, terrible idea).

That's it for now! I'll go into greater detail at a later date.

Just read an interview with Ford's ex-CEO Jacques Nasser on the training programs that were prevalent at that time (2000). He justified their need, by outlining the history of the car-industry between 1905 and now.

• 1905-1920s - colonisation of car-companies: smaller replicas of car-factories in the US were being built abroad. Hardly any competition.
• 1920s-1950s - nationalism: lots of countries were building their own national vehicles. Competition mostly on a regional level.
• 1960s-1980s - regionalism: the rise of trading-blocks (NAFTA, EU, etc.) and as a response the functional/regional division of companies.
• 1980+ - globalisation: global competitors, more markets, more divergence of consumers, more need for people/ideas/growth.

The situation at Ford
The result of the last period is that there are more Ford-people around the globe to manage, that more markets need to be served with different needs, and that the company that can generate economies of scale & scope, while being most consumer-orientated wins.

Two strategic priorities are at play here: consumers only see a part of the car, which means that the hidden qualities can be mass-produced; and consumers value those qualities most matched with their environment—e.g. in Brazil, so I read, roads are abysmal (if any Brazilian reads this, correct me), and good suspension is highly valued. In China, luxury models are mostly driven by chauffeurs, while the consumer sits in the back, hence he/she values luxury in that part of the car.

In this scenario, two types of qualities are valued with people: to understand the corporate qualities of Ford and make decisions that favour its mass-market strategies; and those that understand the local environment and can design car-offerings tailored to local needs.

Social operating mechanisms at Ford
Ford, at the time of the interview, had about 12 programs aimed at promoting these skills. The ones mentioned, included: Capstone, which is aimed at (24) executives; Executive partnering, aimed at (12) promising managers; Business leadership initiative, aimed at the whole organisation; and a weekly email-newsletter, called "Let's chat about business," also aimed at the whole organisation.

Methods + Aims were:

• Team-building - to get people to work more closely together / develop a corporate culture
• Teaching - to get people to understand the priorities at a corporate level, rather then just at a divisional/functional level
• Projects - to get people to come up with problems plaguing their organisations at that time and develop creative solutions to them.
• Shadowing - to develop leaders

Thoughts
Several thoughts going through my head at the moment. I am both uncertain how relevant this is to the SME-environment, and at the same time I do a lot of "social engineering" and can certainly think of a few cases in my past where a certain structure would have benefited the small teams I worked in. I'll probably write a third post about the SME-perspective at some point in the future.

My favourite way to picture "social engineering" however, is through designing processes that bring elements of the organisation together with customers and "raw-inputs" (new technologies, future employees, and partners, etc.). Maybe, I'll write about that at some point too.

Of course, I always appreciate the reader's perspective on this. Social programs at an SME-level, good for team-building or bad because it distracts from survival-priorities?

The picture is courtesy of articlescaravan.com

When I first wrote this post this afternoon, it was really long. After cutting it a little it's still really long. Sorry about that.

A lot of people I know from uni are into this thing called New Business Development (NBD). It makes sense, since it's the title of a course we studied together and it was absolutely the best course I've had in my life. Around 60 hours of hell per week for 2-3 months, but one hell of a ride too.

NBD is a necessary mechanism for when your core-business is stagnating. Let's say you have a good high-volume business, but competition is hammering you with low prices. If you can find a new business opportunity that allows you to make money differently, preferably at high margins, it's a good business opportunity. If it's synergetic with your core-focus, then it's an excellent business opportunity. Three small examples I stumbled across these last few days come to mind.

1. Bookstore + café. Verdict: logical
Buying books is a luxury. They serve no real purpose (unless you want them to) and are generally aimed at price-insensitive people. It is also a fairly slow sale. You are selling information, people are swamped with information, and it takes them time to make a decision. Sometimes… not always. I think time + the amount spent on an item also correlates positively, up to a limit.

That combines well with a café. The luxury-aspect allows you to charge more in cafés as well, meaning higher profit margins. Cafés lead people to relax and spend more time in bookstores, meaning they will likely purchase more books too. Combining the high traffic of price-insensitive consumers together with high profit margins and you have a good business. Also, it's a great way to compete against online-retailers, who are not able to add the atmospheric value.

2. Fruit-vendor + fruit-shake stand. Verdict: logical
Fruit is generally a low-margin product. The fruit-vendor in question sells 5 KG of Spanish oranges for €2. You can charge more for fruit-shakes; To the consumer, they taste good, represent health, and require very little in work (all emotional values = higher price-insensitivity). The fruit-retailer sells an orange fruit-shake of 0.5 litres for €2.50. Assuming that's about 1 KG of Spanish oranges, that's quite a lot more profit than €0.40 would give you. But of course there are other considerations.

The fruit-vendor is located right in the centre of Rotterdam on the busiest street. Likely the cost of renting a place is expensive, so is the added cost of producing the shake. The fruit-vendor also competes with a fruit and vegetable market, located a few hundred metres away, and a supermarket, 50 metres away. And his new business competes with other fruit-shake stands. What makes this combination work?

The higher profit margins for convenience-fruit-products, combined with high volume of people passing by is good. It also persuades investors to loan the money for the fruit-shake machinery, which they would probably not do for a low-margin business in a less favourable location. There's a lot of efficiency also; fruit is sourced from the same suppliers, so are packaging-materials, and the retail-space acts as a warehouse. Because fruit is cheap and the retailer has a large selection, he can charge lower prices than the competition and offer more variety. And he enjoys high profit margins even if the volume of fruit-purchases is lower because of the price-competition from the (super-)markets.

3. A eurostore + scooters. Verdict: illogical
This case is a little more complex and contextual. A year ago a eurostore, which is like a dollarstore—a shop offering a great variety of goods at low prices—started offering scooters alongside their regular products. They quickly abandoned the experiment and I have a theory why.

Likely this deal came out of partnership with scooter-retailer/-importer. The eurostore was in a good location with lots of traffic (good for the scooters) and the scooters would give it much higher margins than their regular products. Seems like a win-win.

Consumption of "euro-"goods is different from that of scooters, however. With the first, people expect stuff to break and don't come asking for a warranty. They just buy another. Buying a scooter or anything over a certain amount is very different. People expect extensive information, they may want a test-drive, they certainly want a warranty, and after-sale support.

Since the eurostore is what it is, a store with low margins, this kind of service is out of its realm. It ends up referring customers to the actual scooter-retailer, and very likely the purchase happens there also. Unless you have a contract that specifies this eventuality, gone is the alluring profit-margin. And that, as they say, is that.

Final thoughts
High traffic of goods is a good basis for new business development. It means you have a customer-base to which you can try and sell other products and services, hopefully at a good margin. Location and demographics are important also. Both the book- and the fruit-retailer were well-located and had access to a good demographic, allowing them to sell at high margins and high volume. The eurostore was only well-located. Synergies are vital. For the bookstore it was consumption-pattern and price-insensitivity; for the fruit-vendor it was offering essentially the same product in different packaging; for the eurostore there was little, or rather, none.

Isn't new business development fun? And was my analysis correct?

I'm writing today's post mostly as a way to relax me. I've been in a bit of a panic these last few days because my main machine, my trustworthy mac, is giving me kernel panics and I'm in the middle of a project. It's not a nice feeling, and any repairs, I've been informed, are bound to take 10 days. So, blogging to relax, yes, but don't expect regular ones, especially considering this machine can "explode" at any time.

NYTimes recently wrote about a strategy employed by US cinemas to draw in more people. I quote:

"Reserved seating, plush rocking chairs and made-to-order food make Mr. Redford’s Sundance Kabuki theater feel more like a restaurant than a traditional cinema. It also has a 50-foot-high lobby with live bamboo, a glass atrium and reclaimed wood walls. Here, a night at the movies is less about enduring the hordes at the mall and more about feeling pampered."

According to the article, big US-chains are building such upscale cinemas to draw people back into the experience.

While I am a big fan of the cinema-experience and actually worked at exactly such a venue, years ago, as a cocktail-mixing barkeeper, I think there are several reasons why such a strategy won't work.

The nature of movie-viewing (1): regardless of how luxurious a place like that is, you'll still have to sit in a dark room and won't actively notice the luxury or people around you, except for before and after the movie. The reason why people like dining in luxury-restaurants is because of the luxury, yes, but also because you share it with a group of people. In cinemas, luxury is not an emotional draw.

The nature of cinemas: cinemas are still very much in a mind-frame of providing experience of the masses. That manifests itself in a McDonalds' mentality of serving guests standardised services, having a lot of seat-rotation, cleaning big rooms (badly) in less than 10 mins, etc. It's a lot of little things, but they add up to a reputation for mediocrity, and people really just come to view the movie and be with their friends.

The nature of movie-viewing (2): YouTube, the internet, modern lifestyles, etc. have created different viewing-patterns, and there is a much greater focus towards viewing media in bursts. I think that the cinema-industry thinks that it is competing with some kind of emulated experience at home, but I don't think that's generally the case. So what are cinemas competing with and should they compete with it?

Luxury is not mass: Cinemas need masses of people coming in, and luxury cinemas actually only aim to address the (imagined!) needs of a few. In my opinion, it is not a customer-focussed strategy, and is for that reason alone bound to fail.

What should cinemas do?
Now, I'm not all against a certain level of luxury. I like comfortable seats as much as the next guy and I'd love a good cocktail every once in a while. But I think standards should be upgraded throughout the cinema, all the way down to the lowest seats, and that everyone should have the option to get a cocktail (if they have the budget).

There's two main selling-points for cinemas, I think, and those are timing and technology. They are still the first to air a film (ignoring piracy), which will hopefully not change. So, for blockbusters, cinemas reign is pretty much guaranteed.

Apart from blockbusters, there's something special about seeing indie movies in cinemas, which I include into timing. I'll never forget watching "Howl's moving castle" in the cinema, it was a magical experience, one that I could never have at home.

As far as technology is concerned, admittedly we are in an age where big screens and high-def visuals and sounds are becoming commoditised, though no one is as yet planning to install a 50 ft. screen in their house, afaik. I do think that cinema-technolgy should be upgraded, all the way to the point of the IMAX-experience.

Admittedly, there are some problems with 3D-tech. It increases the cost of producing a film and won't translate well to home-viewing (I think). But my point is that cinemas should keep differentiating themselves technologically.

People is a third selling-point, though I think that unless you like going with 8+ people to the cinema, you will be able to emulate that at home.

As far as luxury is concerned, again the basics should be present, and cinemas have to make money, but cinemas would become a lot more popular if they kept the price of seats down, increased the quality of service, and charged what they charged for luxuries. The one thing that I can't stress enough is staying a leader in technology (video & audio) as that is truly where the emotional draw for cinemas comes from.

But maybe I'm wrong!? Feel free to let me know in the comments.

I'm glad to get this out of my life. It is probably the last bit of procrastination left over from the period spent writing my thesis. Following is a continuation of my coverage of IKEA's growth as a business, which I began, in a wordy fashion, by looking at the Scandinavian years. I decided to shorten that somewhat, as really the book (if you can read it) already does a great job of describing IKEA, though my version is perhaps easier to digest.

1961 - Already when Ingvar Kamprad started trading, he had formed relationships with suppliers from abroad. He employed this strategy also when he launched IKEA, forming relationships with Polish and other Eastern European suppliers, which gave him a drastic price-advantage over his competitors.

1973 ca. - After the incubation-time in Scandinavia, Switzerland was the first country, that IKEA expanded too. Reasons included its neutrality, a healthy economy, low taxes, and a greater entrepreneurial spirit.

1973 ca. - When the Kamprad family left Sweden, they founded several foundations in the Netherlands, Switserland, Panama, and the Dutch Antilles.

1974 onwards - Expansion in Germany, Munich (one of the wealthiest cities in DE). The store was a great success, and Germany is still a pillar of profitability for IKEA today.

1975 - first stores opened in Australia, Honk-kong, and Canada, through franchising. In 1980, IKEA took over the Canada-chains, as those were not being run well.

1978 - First store in the Netherlands. It did not go well at all, due to a lagging marketing-campaign. Only in 1982 onwards did IKEA book successes with the Dutch. 1994 started a huge boom of expansions in the Netherlands (more detail was provided about Dutch branches, because the book was Dutch). Belgium also saw stores after 1978.

1982 - IKEA set up Stichting INGKA Foundation in the Netherlands, which was Kamprad's way of keeping IKEA for IKEA instead of having to give it away after he died. It was in charge of IKEA from then on.

1983-4 - stores in Gran Granaria, Tenerife, and Saudi-Arabia.

1984 - IKEA starts "IKEA Family" loyalty program for customers and also introduces its first luxury furniture product-lines.

1985 - first store in USA and kept expanding. Famously (I read at least 1 case-study about it) there was some teething-trouble at the beginning and it took a while for IKEA to find the correct formula for the US market.

1986 - 60-year old Kamprad steps back as CEO and gives reigns away to 35-year old Anders Moberg.

1989 - the fall of the Berlin wall. The roughly 500 suppliers that IKEA had been working with in the Eastern block, suddenly found their economic situation drastically change and prices started to go up. Out of loyalty, IKEA vowed to pay up to 40% of the price-increases for its Polish partners.

1991 - the Eastern European crisis lead to a strategy-change. IKEA became a producer of furniture. Due to its long-lasting relationship and involvement with suppliers, it possessed the necessary know-how, and becoming a producer would also have positive effects on its flexibility. IKEA could focus on Just-in-Time production to overcome the production-problems it had had in the past. In 1991, it took over a Swedish producer of wood-products, and after the privatisation of the Polish furniture-industry, IKEA took over three companies there in 1992 as well. This became part of a trend and every-time it had the chance, it would take over a supplier in Eastern Europe.

1991 onwards - also saw an IKEA expansion of stores in Eastern-Europe.

1992 - IKEA took over Habitat, a British retailer of furniture, that had previously caused a style-revolution in Britain. Until now, IKEA had not expanded to the UK, and it was assumed that it was Habitat's strength that was keeping it at bay. It was forced to sell, after expanding to France, Germany, and Spain, which had caused it to make huge losses. IKEA also used its presence in those countries as launch-pads, keeping Habitat as a separate brand.

1998 - China! Already having been a supplier of IKEA's since the 70s, and generally believed to be a huge opening market, IKEA opens its first store in Shanghai, through a joint venture with a Chinese firms. It was an exploratory step as the Chinese were not yet economically ready for the type of products the IKEA offered, though the assumption was that China's economy would grow 10% per year. IKEA wasn't competing on price either, basically being more expensive than any local competitor. Only after severe price-drops, did the business take off.

2000 - Russia. The company had already had talks in 1988 to open for business there, however the collapse of the Russian empire delayed that. Finally, based in part on Kamprad's gut-feeling, the decision was made. It was a good one. In year 2, the annual revenue was $260 million, making it one of the most successful expansions ever. 45,000 people applied to 600 vacancies in the first store. Due to high import-taxes of 28%, the decision was also made to start producing furniture locally also.

And everything else… is history.

Note that, as I used a single source for this time-line, a Dutch/German book on IKEA's 11 secrets, this blogpost cannot be taken as an ultimate authority on IKEA's growth-strategies. At the very least, I got some dates wrong.

Final thoughts
In my first post about IKEA's growth, I wanted to make clear that how a business expands is largely related to its origins. The relationship with Eastern-Europe is both due to a cultural proximity with that region, as well as Ingvar Kamprad's drive to lower costs. Germanic countries were also a logical step because of linguistic, and hence cultural similarities, as well as similar economic conditions.

Territories with which it was as yet unfamiliar, were being expanded into in a risk-reducing fashion, through franchising in Canada, China, and Australia, and later on in China, through joint ventures also. The acquisition of Habitat in the UK, could be perceived as a risk-reducing move also.

It is generally recognised that European firms are better at managing international expansion, simply because of the compressed experiences they get from growing in heterogeneous Europe, which makes them more flexible in other countries also. Still, you could see that certain culturally remote countries posed some difficulties, such as the US and China, and even the campaigns in Germany and the Netherlands did not proceed flawlessly.

All that aside, to me the most interesting part of all of this was IKEA's shift in strategy in the 90s, turning from being a retail-outlet to a producer-retailer hybrid. It is both a radical shift, but from what I understand, a very logical one.

That's it. Tomorrow, I'll publish some notes about the biggest pros and cons about IKEA's business.

The picture is a mash-up of the Evolution 101 podcast logo and IKEA's logo.

I've long been interested in the idea of franchising, though I'm somewhat conflicted about how to look at it. One the one side, it seems* like a relatively easy way to start a business, on the other side, it seems* a relatively cheap way to grow your business (*: within limits).

WSJ recently published an excellent study on high-performing franchises in the US. The choice of franchises is extensive, just like I concluded in my post on top-German franchises. At the same time, the most apparent choice, that of food, seems less and less attractive, and I quote from WSJ:

In particular, fast-food and casual-dining businesses, while still showing strength, with eight names on the list, also are facing pressure from wage and food cost increases. To lower operating costs, several food franchises already are shuttering some locations.

Arguably, a business that is thinking about growing through franchising is faced with some restrictions. Writing a franchisees-manual is a scientific process, you'll probably have to restrict the complexity of operations so that they can be replicated, and there will still be some overhead related to managing the brand and some of the more problematic franchisees.

I think that it is that standardisation of operations, made big through the economies of scale so easily achievable in the US, that is bring competitive problems to chains, even to wholly owned ones like Starbucks. If your core-product is simple, and your business uses a simplified operation, then how hard is it for your competitors to replicate your whole business-model and -strategy in the long-term, really? It is only if your business strategy includes complex competitive advantages, such as extensive vertical and horizontal integration across the value chain, and/or if your business-model is based on "high-tech" components or processes, that you have a real chance of beating the clones. And to relate it to the rising operating costs, mentioned above, business with true competitive advantage can raise profit-margins or off-set the costs elsewhere, instead of having to close operations.

But ok, long-term strategic considerations aside, I see franchising is an attractive way to enter the business-world as an entrepreneur. The question of whether it's faux or real entrepreneurship, is not pertinent, I think. Considering that you have a wide range of choice of franchise-business opportunities, you'll still have to work hard to succeed, and the growth-opportunities can include starting multiple franchises also, it is not that different from starting any other kind of business. In my mind, I compare it to internet-entrepreneurship, which also relies on a large amount of free tools and distribution-mechanisms, but is still dependant on that special something for it to be successful.

What makes franchising particularly attractive, is the decreased amount of risk. According to a study in the Netherlands, 65% of franchises are still standing after 3 years. Compare that to independent start-ups, of which only 15% are alive at that time.

A large cause is, I'm sure, the level of support from the parent-company, which differ from business to business, and can include delivery of goods, marketing, administrative and IT services, made cheaper through centralisation. And they are frequently guided through the process of setting up and running the business, including legal advice. In exchange, they give away either a percentage of profits (ranging from 5 to 40%) or a set monthly sum to the franchiser.

The WSJ-article also lists the amount of investment typically needed to start a franchise. It ranges from ca. $5200 for an automotive company, to a staggering $1,3 million for a steakhouse. Of the 25 franchises recorded, only 5 received some kind of financial assistance (none of which in food). Another article at WSJ discusses some of the attitudes towards financing franchises, particularly during the current US-recession. Incidentally, another article in Dutch Elsevier magazine, sees franchising as an excellent way for businesses to grow during a recession, as it requires less human costs.

All in all, it is probably a safer way to start a business, though with all the points I made above, I don't think of it as 'light' entrepreneurship. There's clearly a lot of risk involved, beforehand, in terms of choosing the right franchise with growth-potential, financial risk to fund your business, market-risk, when you launch, and competitive risk, after your up and running.

I still want to discuss this topic further at a future date, particularly focussing on what its like to turn your own business into a franchise, and some other stuff related to buying into one.

The picture is courtesy of friendlyfranchising.com

Every industry has a number of pains. Arguably, a problem in the FMCG (fast-moving consumer goods) sector is that the market is saturated and that margins are fairly low. Over the next few weeks, I plan to take a deeper look at companies within the FMCG-segment for food, in order to understand the structure of the industry better, and the challenges faced by companies—new and existing.

Somewhat related to this, I came across an interesting article at HBR, on "strategies to crack well-guarded markets," which I'll go into now.

I'm a great fan of the book "The Art of War" (not to be confused with "The War of Art," that I reviewed a few months ago…). Sun Tsu offers some timeless and broadly applicable tips on how to fight battles that cannot be won by force alone. The quote I remember best goes something like this (paraphrased):

"A big army is like water; it is fluid, it can envelop you, but it is also hard to control. Fight a big army like you would water, in places where it finds it difficult to move."

HBR makes a similar point in their article (abstractly paraphrased to stay in character):

• Thread lightly - using a minimum of resources to enter these new markets also minimises the risk associated with these experiments.


• Be unpredicatable - when doing things fundamentally different from your enemy, you end up catching him off-guard and slow to respond.


• Use a dagger, not a sword - just like Sun Tsu's point about water, it perhaps makes little sense to use a bucket at the beginning. Instead attack there where it least expects it—via a market-niche—and start building towers.


• As well as a combination of any of the above

The article also gives some excellent examples from the beverage, game-console, and retail-markets, and is well worth a read.

It reminded me to pick up the book, "Blue Ocean Strategy" again, which describes methods on how to find uncontested market-space, based on an analysis of existing products and companies and their shortcomings.

A pretty obvious example of this is the Nintendo Wii, which Jeremy discussed on Tech IT Easy some time ago, and which is reaching out to a whole new group of consumers, who traditionally not play console-/computer-games. Interestingly, the HBR-article looks at a related company, Jakks Pacific, which has also entered the console-market to compete with the big three, and has done so successfully by competing on price ($20 consoles) and marketing (working with big partners like Disney).

Other examples of Blue Ocean Strategies include Cirque Du Soleil v.s traditional circuses, which is a big inspiration to me personally, and Starbucks in the 80s-90s and on US-soil (!).

In the case of Starbucks, you certainly couldn't argue that their strategy is "blue ocean" in Europe or even globally today. However in the US, when they started, they targeted a niche demand for quality coffee, reshaped the value chain of a coffee-retailer, and initially grew through the acquisition of the Starbucks-brand and coffee-plant. Today the situation is somewhat different, Starbucks is the incumbent and its competitive advantage relies on finding new business opportunities. Whether they succeed, the future will show.

Any successful Blue Ocean Strategy depends, I feel, on the inability of incumbents to react—i.e. focussing on areas which incumbents are either neglecting or are finding it difficult to manoeuvre in. Starbucks is in a different business-cycle now, its novelty has worn off, and other companies can benefit from similar advantages in the value chain, such as sourcing quality raw materials and a huge demand in the market. I guess, to a degree, Starbucks' educational focus has created that market and given competitors a success-formula to emulate.

As mentioned, during the next few weeks, I'll be looking at other food-companies, particularly FMCG-ones, to get a better understanding of the industry and the challenges facing these firms. Who knows, maybe I'll discover some blue oceans…

The picture is courtesy of valuebasedmanagement.net.

I'm a little distracted from blogging, I'm sorry. My current activities include a last-minute scrabble-play of my thesis, to make it a more logical read, and applying for jobs. And, not unsurprisingly, I'm having some writer's block as a result.

My post from a few weeks ago, about my anonymous friend, who's running a lifestyle-orientated business in a developing market, certainly opened my eyes to this area of the market.

Today, I'll talk about another company, Milner (cheese). There was an interesting article in Dutch marketing-magazine, Tijdschrift voor Marketing, on Milner's positioning-strategy from mass to lifestyle, which I'll discuss now, and which also lead to a post on Tech IT Easy about social networks as a strategic marketing-tool.

Milner = FMCG
Milner is considered a FMCG-company, that's fast-moving consumer goods, and falls into segment 2 on my food-industry map from last week. As I observed there also, this segment is usually the driver, if not always the conductor, of consumer-marketing.

The company is currently strongly present within the health-segment for cheese in the Netherlands, with over 50% market-share. This segment is also seeing between 60-70% growth from cheeses in general.

One thing that is clear for FMCGs is that margins are generally low (generally under 10%), competition is high, and as I made clear in my post on Tech IT Easy, features can easily be emulated by other companies.

Generating complex competitive advantages
The differentiating factor is the relationship the brand has with the consumer and vice versa. A brand that is designed for a lifestyle will generally have a much higher emotional value to consumers, than one based on features like cost or taste alone.

The logical conclusion is that those companies with deeper relationships to their customers will enjoy a higher competitive advantages over companies that do not focus on these relationships. And the complex nature of relationship is one that is difficult to emulate, hence giving companies a sustainable lead in the market.

But how to do that?

Paradigm-shift towards lifestyle
A lifestyle-product can be defined as a product that is built around the context of a certain group of consumers, resulting in an emotional value, as well as one based on features. This also has implications on the product-marketing strategies that a lifestyle-orientated company undertakes. As you may remember, the company my friend operates, still spends a considerable amount on marketing-activities after 2 years.

The theory that Milner cheese employs goes as follows. A great pain for food is health—which is really just an after-effect of the lifestyle people are leading. People are constantly looking for answers, so-called lifehacks, or more diet and exercise-related advice, all to regain power over their lives, minds, and bodies.

The key-issue is how to reach these customers. By addressing the pain that customers are feeling, by helping them live a healthier life, Milner is engaging in a relationship with its customers.

How does it do that?

How the internet fits into this
Traditionally, internet-marketing expenditure for FMCGs is quite low, around the 2% mark. Milner's budget currently assigns 10-15% to internet-marketing. It is able to do so, because it is already relatively well-positioned in terms of its brand and communication, so it feels more confident to experiment with new mediums.

As mentioned in my post on the food-industry-map, marketing to consumers is the responsibility of the consumer-goods-segment, however the degree that this activity is outsourced, depends on the amount of resources available to the company and the level of complexity of the activity. Arguably, both the novelty of internet-marketing to Milner, and particularly engaging into a relationship with consumers, make marketing fairly complex affair and the company did this via a third party, Advance, an interactive marking agency.

Advance set up a site called Je Beste Dag (translated: your best day), which advises visitors on how to have better days, based on a questionnaire they fill out. The first stage of the strategy is to build up a large mass of consumers that give out their email-adresses for further advice. Currently, there's 1 million people connected to the site. The second stage is to deepen that relationship, by encouraging return-visits and ultimately start a conversation.

It's both a time- and cost-consuming process for Milner. Essentially it is the sole sponsor of the campaign and has been running this campaign for nearly half a year no, without seeing any types of new product-developments yet. It is however working together with (other) marketing-agencies to develop its brands, which includes the design, positioning, quality, etc., as well as new product developments.

The interesting part of the whole process is that the majority of visitors already knows Milner, before even visiting the site. In other words, this clearly is an interactive marketing-campaign, which deepens the relationship between company and customer beyond the brand. Also, while the segment that Milner markets to via traditional channels, usually falls in the age-groups of 40-60, the age-group it is reaching now falls between 25-45, 60% of which don't yet have children.

Final thoughts
It is uncertain what exactly will come out of this. Milner is treating their internet-campaign as just another marketing-channel and holding Advance to targets it must meet. Which also allows them to measure its effectiveness. However, with a million young people connected to the site, and the communication-channels open, my gut tells me that they will be pretty happy.

The conversational aspects that the internet provides are certainly no surprise to the regular internet-user, however many web-companies are finding it difficult to generate sustainable business-models (e.g. Twitter / Facebook). As I made clear in my post on Tech IT Easy, I think these kinds of marketing-campaigns open up some possibilities there.

Premise of this post: I'm going to get my camera fixed, for the second time in 3 weeks, at a store called Saturn. It is, as far as I know, the only other German chain focussed on consumer-electronics in the Netherlands, next to Media Markt, which is clearly the no. 1 here and in Germany. Ironically, while they appear as competitors to the consumer, they are owned by the same concern, Metro Group.

Now, I don't know the exact reason behind internal store-competition. The only company I worked for, where something like this was the case, was Sony, who allocated annual budgets to individual departments based on their performance. Reminds me a lot of the way governments are run. Of course, bureaucrats have a job for life.

While I was at Sony, I've never seen so many departments closed and managers fired, and both physical locations where I worked in Germany & the Netherlands, are no longer in existence. To a large part, in my opinion, this explains the troubles that Sony is in today, many of which are a disconnect with its audience and, very likely, caused by disconnects within the gigantic company also. But… that's a story for another day.

The other area where I know about examples of internal competitions, are product-lines. Didn't Steve Jobs once say (paraphrased): "If anyone should take marketshare away from one of our products, it should be Apple." I think that this is a conscious decision of Apple and I briefly touched upon it at Tech IT Easy, in regards to form-factor of the Macbook Air (MBA)—the screen, hard-drive, and CPU, which very much overlap with (read: fit into) other products that Apple sells, and, to me, represent economies of scope and scale to the company. It doesn't matter if the MBA sells or doesn't, what matters is that component costs will go down and innovation will go up, which is good for Apple.

Now, none of this really answers the questions why Saturn and Media Markt occupy the same market-segment. And, I have to confess, I just opened my Retail Marketing book to find the answer, and couldn't find it (the book is apparently not focussed on business strategy much).

Both Media Mark & Saturn offer similar features to customers, which are mostly represented on the chart below:

(Source: IBM white paper - "Deeper Customer Insight," which I wrote about several times before)

Some differences are perhaps that Saturn was most often located within another Metro Group-owned store, called Galeria Kaufhof, though I think they are changing that strategy in Germany, and certainly in the Netherlands, where they are stand-alone. Media Markt, as far as I know, has always been stand-alone. Both facilities are rather large, offer parking-facilities, and are usually located within the city (though in Rotterdam, Media Markt takes a more prominent place). And prices, promotions, and brands, while similar, differ in certain areas.

From this, I think it's safe to conclude that market-saturation is a clear goal of Metro-Group. By giving customers not one, but two large options, with separate deals to be had, at separate locations, etc., it appeals to an implicit customer-demand, that of choice, and takes attention away from other, "lesser," and certainly not Metro Group-owned choices.

Something else that is interesting, is mentioned on both companies' websites. Both chains are very decentralised in their management-structure. Every store acts as a self-sufficient enterprise, co-owned by each director, who, with his/her team, is responsible for how the store is run, and ultimately, how successful it is. Kind of sounds like a franchise.

So, I can only conclude that the internal competition paradigm is very much similar to that of Sony's, to force individual stores to perform better.

I think it's an interesting strategy and clearly Metro-Group is the winner here. How this plays out for individual stores and their share-holding directors is uncertain and clearly depends on the skill-level of store-management and the level of support given by their parent-company.

If there's one I thing I learned from my thesis it's that everything is part of a system. Most often, this system's purpose is to shift resources from and to various interconnected, yet diverse and complementary parties.

In regards to entrepreneurship, and pretty much everything else, I have a philosophy: everything happens for a reason, usually related to how you respond to opportunities. And to bring it back to that interconnected system, being in the right spot, where you can intercept flows of ideas, people, and resources, tremendously increases the chances of you finding the right business to be in.

Two examples
Two people that are fairly close to me are perfect examples of that phenomenon. They shall remain nameless, for obvious reasons. They are both pretty bright, but what contributed to their lives most, is being where it mattered.

One of my friends did a very smart thing. We studied together and when he moved back to his Eastern-European country, he noticed that a lot of traffic was coming in from the European Union, in terms of regional funds aimed at bringing the country up to par for future integration.

So he started a consultancy with some friends, to advise companies on how to apply for those funds. Initially, he thought it might just be a hobby. But what actually happened was that a lot of traffic was coming in terms of companies—start-ups, looking for funding. And it allowed him to find a business to buy into, which was well-postioned to fill a current need, and had the capabilities, but not the business expertise to succeed.

A second friend of mine was also someone who I knew would always start his own business. But he did the smart thing when he graduated (actually he did several smart things before too). He got a job at a corporation counselling start-ups on how to deploy that corporation's technology. So, just like my other friend, he got a lot of traffic in terms of ideas and people, and all he had to wait for is the right idea that would fulfil a niche in the market. And bingo. I'm not sure if he planned it that way, but he's now the founder of a start-up, filling up a need.

Underlying principles
Right places matter, but so does mentality and a number of other factors. It's not enough to just be there. The reason you are there is because you are of value to whatever network you are part of. Following are I think some factors to consider:

• Be open to opportunities


• Make strategic choices about your initial placement


• Be of value to the network you are a part of - that means being an authority, which means you have to have some schooling


• Make strategic choices about the start-ups that you encounter - are they filling a gap in the market, can you fill a gap in their organisation?


• Go back to your initial network - analyse whether all the elements necessary for success are there—smart people, funding, exit-options, technology—and can be carried over.


• If yes: launch and succeed.

Why this topic?
I always knew I wanted to start a business. Plenty of people at plenty of times, have counselled me to just jump in and do it. I didn't, because I felt the alignment wasn't there—between me, a business, and a need.

The way I'm visualising my path into this industry is among similar lines. Become a valuable resource myself. Find & build a network, where I can contribute value too. And then decide, based on timing, technology/idea, people, market-niche, and other elements needed for it to be a success.

Note to the reader: I'm still processing a lot of material I want to write about. Most of it is food and/or retail related, I promise. Expect at least two posts related to IKEA this week, on economics, design, branding, and customer-retention schemes.

I'm writing this post for two reasons. One is that I am incredibly interested in the subject of leadership and try to learn about it in whatever way I can. A second reason is that, even though my main focus on my blog is food and retail, what Matthias calls "old economy" (thanks Matthias!), I try to also be very aware of "the past, present, and future of this industry," and (internet-)technology plays very much a part in the future of retail.

In terms of leadership, Amazon's Jeff Bezos is a good person to study—a man who created perhaps the most iconic garage-based venture since Apple, and who managed to not only take his company, Amazon, public, but also stay on as CEO until now, something that is rare amongst founders. In terms of retail, Amazon is itself great company to study. It has transformed the book-industry, and is doing amazing work in terms of providing infrastructure for web-based infrastructure. And, even though they are not as yet selling any books in the Netherlands. I'm hoping that SEPA, to be introduced next year, will change that.

Before I continue, this is not really a Kindle-related post. While we're on the subject, however, let me say that I'm a big fan of ebook-readers. At the same time, there are certain advantages to paper-reading, which I'm especially experiencing since I started my own blog—namely that I can write on them. I know I can take notes on Kindle, but it's not the same. And I think the price-point of either the device ($400), or the books (a $10 intro-price), or both, is just too high for something that can be produced in mass and has no printing-, and hardly any distribution-costs attached to it.

Speaking of notes, I took some while reading a nice HBR-interview with Jeff Bezos, in which he discusses his take on strategy, innovation, customers, ... and not Kindle. I'll share these, and my thoughts on them, with you now.

Innovation at Amazon
There are generally two types of innovation, the radical kind and the incremental (or process) kind. My general belief is that, while retail on the internet radically transformed the way we shop, and will continue to do so, ultimately it is an evolution in process. Instead of giving our credit-card to the clerk, we type in a number behind a screen, etc. etc. And, since the internet has taken off, this kind of process-innovation has become much more prevalent. Now, instead of clicking 5 times to buy a product, I can click once: yay! Before you ask, "so what is 'radical' innovation to you?" I'll just say: "Space, flying car, people living under water, that kind of stuff. So get busy!"

Amazon has of course just announced the Kindle, which could be interpreted as an innovative move. But again, what will make this innovation shine, if it does, is Amazon's incredible process-strength, namely that they can deliver the device to nearly every household in the Western world at beautiful economies of scale. For now, these are paying of for Amazon, but knowing their business-model, it's pretty certain that this will pay off for consumer too… eventually.

What I like about Amazon (and got from the interview) are that they have an incredible experiment-based culture and generally take a long-term view—both rare with public companies. In terms of experiments, these are encouraged on a company-wide level, and due to the nature of experiments, are both had to predict and not unknown to fail. One example of an experiment which became an enormous, but unplanned, success, is the Amazon-associates program.

As far as time-frame is concerned, innovations at Amazon usually take 5-7 years before they make any meaningful impact on the company's economic situation. This is a big risk and is offset in a number of ways. One is to minimise the costs of experiments. Amazon has a web lab just for that purpose, which undertakes these experiments on a massive scale, collects real usage data on what works best, and is constantly trying to push the costs of these experiments down. Again, taking a long-term view, it helps when building innovation on things that won't change in the next 5-10 years. For Amazon, these are basic customer preferences, such as: choice, low prices, and fast delivery (hello Kindle?).

There are three more core-attitudes, which I think have a big impact on the way innovation takes shape at Amazon. One is, to always ask the question "why not?" According to Bezos, the biggest mistakes at Amazon come from not doing something, rather than taking the risk. And asking "why not?" instead of "why should we do it?" opens up a whole other universe of possibilities. Similarly, there are lot of difficult decisions that Amazon has had to make over the years, such as allowing reviews on their site. The vital question there was "what is better for the customer?" Last, but not least, I like this line in regards to making experiments a success: "Be stubborn on the vision, and flexible on the details."

Strategy at Amazon
The other part of innovation is execution, some of which was already discussed above. Much of decision-making comes out of the way a corporate culture is shaped. Some cultures are hierarchical, some are flat, some are individualistic, some are collective. From my understanding of things, Amazon has both a departmental structure (which would suggest some hierarchy) and takes decisions collectively. Both senior management and departmental management have mechanisms through which this collectivity manifests itself. Seniors meet once a week for four hours and once-twice a year for a two-day meeting. Homework is assigned before and the latter type of meeting deals mostly with long-term issues. Department-management has a similar system.

Some more general characteristics of corporate culture were mentioned in the interview, namely that they can be incredibly stable over time, and are self-perpetuating in the sense that they attract people who like that culture (and repel those that don't). While a company's corporate culture is probably the hardest to replicate, and can thus be a tremendous competitive advantage, the rigidity of the culture can both mean that there are limits to what it can do (and should do), and it can sometimes hamper innovation during turbulent times. At the same time, a culture can by nature be open to change, which should overcome some rigidity.

A few weeks ago, on my blog, I wrote a post on Porter's five forces in which I outlined what I think matters in strategy, but also that it pays off to stay close to customers. Jeff Bezos shares a similar view-point, for a number of reasons. One, customer-needs change more slowly than a lot of other things, e.g. tech; and two, following the competition doesn't work well in fast-changing environments, e.g. tech. A third point is that being too competitor-focussed can result in a passive attitude once a certain dominance has been reached in an industry. You can argue about this either way, but when you look at certain large companies (no names), this "hey, we won, so why innovate?"-attitude, is definitely one that is recognisable.

One way that Amazon tries to stay close to customer-needs is by enforcing rotation. Every new employee has to spend time in their fulfilment-centres with the first year, every two years, employees have to do two days of customer service, and everyone has to be able to work in a call-centre. That includes Jeff Bezos.

Finally, he also had some advice as how to survive the transition from the founder of a start-up, to the CEO of a multinational, public company. It's simple (yeah right!). When you start, the main question is "How?"; as you grow, the question is "What?"; and when you're huge, the question becomes "Who?" There you go, the secret to being the leader of a big company.

Final thoughts
One of the weaknesses of secondary information, such as what came from this interview, is that I (and you) have to trust everything that is in the article. I can't ask follow-up questions and can't tell, by body-language, tone, or otherwise, whether some points are more important than others, or more true than others. Therefore I try to be careful to treat each piece of information as part of a greater whole. In other words, I may come across information that conflicts with what Bezos said in the interview. If it's noteworthy, I'll write a new post about it. One piece of important data, released perhaps a month after the interview, is the release of Kindle, which, as mentioned, I am sceptical of.

Two things I learned from the interview is that innovation takes time, especially to make it economically viable, for both the business and the consumer. In my opinion Kindle, in order to fit the philosophy of Amazon (which is not Apple after-all), has to drop in price, as do the books. It's a matter of ethics, of being customer-focussed, and of being a process-innovator. I can only assume, that over the next years, this is exactly what will happen.

The other thing I learned is to constantly be open to innovation that can benefit the customer. This point has been made many times in the words above, yet it bears repeating. A company can be incredibly rigid, the bigger it becomes. Competition can become incredibly threatening. Technology can change from one day to the next. But what doesn't change is that customers will pay you for products that make them happy. And I fear that a lot, a lot of businesses have forgotten that as they became big, arrogant, and focussed on anything but what customers want.

Finally, while I may be focussed on "old economy" topics, I think Amazon teaches some interesting lessons on how to remain high-touch in a high-tech environment. As such, this certainly won't be the last time I touch upon the topic of technology in retail.

Further reading
If you're interested in the topic of leadership, you mean also want to check out a list of free podcast-interviews with a number of CEOs, ranging from Google's Eric Schmidt to, indeed, Jeff Bezos, which I posted on Tech IT Easy a few months ago. Worth a listen. Oh, and don't forget to check out the original article on HBR.

This article is mirror-posted on Tech IT Easy.

Still following the great book on Retail Marketing, by Dr. P. McGoldrick, this time I'll cover the different types of cost that are included in buying, developing, and running retail locations. For previous coverage, check out post I and II

Before buying property, considerable data analysis must happen in regards into estimating turnover, which comes from data on competition, accessibility, and population. And a calculation of costs must happen, least of which is the purchase price, and more complex will be three types of cost: development costs; running costs; and contextual* costs (*: for lack of a better word).

Much of this cost data will likely come from negotiations with site developers, lease owners, and an estimation of the costs involved in the development of the location.

Naturally, with the proliferation of the internet, there are plenty of databases that offer interested parties an overview of typical sums per region or type of location. Though the following are mostly aimed at private individuals, both My-Currency and Zillow offer these types of services, and Jeremy Fain wrote about a French service, called BMyKey.com on Tech IT Easy.

Purchase price
Traditionally, rent bid theory explains a lot of price-differencials within an inner-city environment. Variety and women's clothing stores would typically pay the highest rents and grocery stores the lowest. With the emergence of superstores and their focus on out-of-town locations, this formula can not be applied so generously anymore, though, as mentioned, I think that it should logically still apply to inner-city environments, and probably to inner-malls ones also.

And while buying the property may cost a certain sum, it is not atypical that the three of the following types of cost will far outweigh the initial purchase price.

Development costs
Three types of estimates need to be made here: design estimates, which include the costs of the architectural work; bid estimates, which involves negotiating the costs of labor, material and equipment; and control estimates, which are the costs of monitoring the project-development. For more info on these, check out this document.

In addition to this there are a number of costs that can be substantial, but are sometimes not taken into account. One is site preparation, which be steep, especially if the land needs to be converted or extensive demolishing needs to take place.

In addition to this local authorities can impose a number of restrictions on the height of the building, other architectural and landscaping aspects, and demand significant concessions from retailers to build there. All of which can at the very least slow down development considerably.

Running costs
The choice of location, site, and design can greatly affect the cost of running the operation once it's constructed. For instance, multiple floors and parking will mean that lifts will need to be maintained regularly. A location with a high crime-rate will require higher security-costs and lead to more theft. And high employment and income areas will also lead to issues regarding staff recruitment and retention.

Contextual costs
I made up this term, but it actually includes costs like delivery, promotion, and the impact on other branches of the business. Delivery costs are affected by the location choice of the outlet—how accessible it is via road or otherwise; how remote it is from the main distribution network. Promotion costs are also a factor (but a topic for another day). And the impact on other branches are a very important factor to consider. The higher the existing market-share in an area, the greater the potential loss, though, according to the book, this is often accepted as a necessary trade-off to a high growth strategy.

Final thoughts
Clearly real estate is something that needs to be thought about as part of a long-term strategy and with the help of professionals. And some of this is probably not applicable to start-ups in the retail-space. That said, choosing a location by itself is already a science—whether you rent, lease, buy, or build it. And both the direct costs—purchase or rent—and indirect costs—development, running, and contextual—will play an important part in the decision-making and business-planning.

Until now, I have mainly covered the issue of competition and cost in relation to a real-estate strategy. I'll probably not go into population and accessibility just yet, and will instead focus more on more complicated tools used in real estate strategy, beyond the simple checklist, which I covered in my first post on this. These include mathematical, mapping, and some other models, as well as, hopefully, some more data on the role of IT in this process.

For a more in-depth reading, I of course recommend buying the book on Retail Marketing, which largely inspired this article.

I suck up data wherever I go (it's a curse, I know). Just last week, as I was waiting for my laptop-drive to be installed, I sat in a German bank and came across a magazine, called VR-future. Two articles caught my eye, one on the Bio*-boom in Germany, and another on Switzerland—a country that fascinates me, but that's a story for another day. 

The bio-trend article consisted of an interview with Dr. Alexander Gerber, the Germany CEO of the BÖLW (the foundation for organic products in Germany) and revealed some interesting info on this segment. While it focussed entirely on Germany, I do think it brings some interesting insights on this topic in general. (*: "bio" being the German term for organic)

Now, I should say, that I'm generally weary of the word "Boom," as I inadvertedly associate it with the word "Bust." Any market is subject to the laws of supply and demand, and a boom usually suggest an explosion of one or both, eventually leading to some fall-off after a while. I have no doubt that the same will happen to the Bio-sphere as well. There are also particularities about the organic market which I do not like, and I will go into those in my final thoughts.

The rest of this post is structured as follows. I will begin with the definition of organic, then some stats on sales, after which I will look at employment-trends, and expected areas for growth. I'll conclude with some final thoughts, to answer why I am bearish on this whole organic trend.

So, what is "bio" or organic?
From Wikipedia:

For crops, it means they were grown without the use of conventional pesticides, artificial fertilizers, human waste, or sewage sludge, and that they were processed without ionizing radiation or food additives. For animals, it means they were reared without the routine use of antibiotics and without the use of growth hormones. In most countries, organic produce must not be genetically modified.

Bio-Sales
Worldwide, while the percentage is low (Wikipedia reports 1-2% of food), it is showing far quicker growth than conventional food. In the US, Wikipedia reports a 17-20% annual growth of organic food in the last few years before 2004(!), compared to 2-3% for regular food. 2.6% of food sold there is organic. In Europe, while I don't have the stats on exact growth-rates, the percentage of of agricultural land being used to grow organic produce, is on average 3.9%, with Austria (11%) and Italy (8.4%) leading the pack.

In Germany, the annual revenue from bio-products with discounters and supermarkets has more than doubled since 2000, up to € 4,6 billion in 2006. And, at the moment (2007), Bio-products have a 3% share of sales in small food-stores, which is expected to double by 2010. The level of food-prices, held low by government subsidies, is expected to rise in the future, which… will probably not mean much to the bottom-line of retailers and producers. And, apart from the ethical considerations, bio in Germany has very much become a lifestyle product, translating into lower price-sensitivity. According to Gerber also, a new bio-supermarket opens every week.

With all this positivity, there is the somewhat counter-intuitive trend that farmers in Germany are complaining about falling incomes, and annual growth in their area has slowed down from 20% in 2000 to 0,4% in 2006. I imagine that is so because the market is maturing and because large buyers are pushing the prices down. A similar trend is being reported in the documentary, The Future of Food. Gerber also mentioned that there is a lacklustre support from the German government and the European Union in terms of subsidies.

Employment-trends
In general, the organic sector is a pretty people-intensive industry. While I don't have global stats, in Germany, about 160.000 people are involved in creating, processing, and selling bio-wares. In the last 7 years, the employment in bio-related sectors has doubled, especially in processing and sales.

On the farming-side of things, a third more people are employed than in traditional farming. And there is a need for people in production, processing, and sales, especially in the last two areas. In addition to this, the bio-sphere is very consulting-intensive, meaning there's also a need for highly trained personnel.

With is all this need for people, the German education-system does not yet offer truly specialised courses in this area. There is a program, however, co-sponsored by the BÖLW, the government, and the companies involved, which offers training for practitioners interested in working in the organic industry. Generally however, "learning by doing" is encouraged in this field, which, incidentally, also explains the high number of consultants.

Growth-trends
Gerber sees three areas for growth: Small cities, food-venues, and apparel/cosmetics. Regarding the first, Bio-supermarkets and -shops are starting to be set up in German cities with less than 50.000 people. And there are many of those in Germany.

He also expects growth in food venues, both fast and traditional, who currently receive around 25% of food-related spending, in which bio is still only taking up a very small percentage. Finally, Gerber also expects a larger bio-component in textiles and cosmetics, though I have no stats on how important that industry is.

Some final thoughts
The organic value-chain seems to be organised in a fairly similar fashion to the traditional way of producing, processing, and selling farm-goods. Some points of note are the way that bio-products are produced, the accountability-aspects, and the educational ones.

For the first, the natural way of producing these products will require some serious adaptation by producers and distributors. And since information is such an important component to bio-products, and by now a legal requirement, it will also require producers, distributors, retailers, and marketeers to set up new procedures for extracting and exchanging information. Finally, the fact that this is a fairly new market and official training-courses seem as yet to be lacking, there is a need for educating both businesses and consumers.

All of this translates into higher costs of production, which is reflected in higher prices for consumers (Wikipedia reports this to be 10 - 40% more than with conventional products). It is only a good thing that the end-products have lifestyle and ethical value, meaning that customers will be less price-sensitive about them. But will this be enough in the long-term?

In general, farming is already highly dependant on government-subsidies, which is already a bad sign for bio-produce as that seems even less efficient. And the increased demand for goods like wheat and dairy-products, from countries like India and China, means that there is actually a need for more, rather than less efficiency in farming.

Also, the current boom in food-education seems one that is limited. Eventually, the market for information will mature, customers will know all they need to know, and will be looking at other differentiators, most likely price. Large retailers, who are able to keep prices down when needed, are better-positioned for this, versus the more specialised shops who seem to be purely focussed on lifestyle, and hence high prices. Eventually, as the market becomes mature, I expect there to be a fall-out for both smaller bio-shops and in the area of consultants and niche-marketeers.

All in all, while I'm no expert on organic produce, and while I am fairly optimistic about demand continuing to rise, I'm not sure if there are still big profits to be made on the supply-side, even though there seems to be explosive growth in that area.

That said, I'm not bearish on all things organic. Bio-food in food-venues like restaurants and similar is very intriguing and, I think, will fit very well into this environment, where fresh food and good food is a strong differentiator. I'll have to collect more data on this, but I'll definitely write something on business in this area in the future.

The picture is courtesy of Petdiscounters.com and was chosen purely for effect.

The five-forces model, as developed by Micheal E. Porter, illustrates the biggest factors that may enter into the strategic decision-making process. These are, on a vertical level, suppliers and customers, on a horizontal level, competition from products, new entrants (can also be vertical), and rivals.

To explain the horizontal/vertical, often when you talk of horizontal, you mean companies and products that are on the same level as you, competing for the attention of the same customers (and suppliers). Vertical relationships are those which a company depends on, either their relationship with suppliers or their relationship with customers. Each of these also operates on their own horizontal axis. The more powerful players on that level become, the more they can affect players on the other levels.

There are different levels of importance per force, depending on the context and type of the firm. When a company is more powerful horizontally, a market-leader, even a monopolist, it does not have to worry about suppliers as much, and is perhaps able, financially, to integrate vertically, taking over some of its suppliers and/or some of the middle-men that stand between the company and its customers. Vertical integration can be important when you want to control the supply chain for some reason, e.g. to increase the level of quality of your products. It can also become important if competition on your horizontal axis is threatening or may become so in the future.

3 examples
You can see this play out in a number of retail-situations. Apple, which is strictly focussed on design and marketing, outsources the manufacturing of most of its products, but is fairly vertically orientated towards the customer-side, doing most of its business in its retail-locations and online stores. Because of this concentration of power in the middle and proximity to the customer, it also has more power over its suppliers, able to make strong demands, and it's also better equipped to compete with horizontal players like HP or Sony, who are not as vertically integrated towards the consumer. The added benefit of a close customer-presence is also that you can use this as an opportunity to create customer-focussed products, something a lot of non-verticallly integrated players are not so good at.

Another fascinating company is Amazon, who spotted an opportunity to surpass brick & mortar stores, by becoming a distributor with a web-based store-front. Traditionally, the book-industry was organised as follows. A book gets printed, it then gets distributed, it then lands in a store, and then the customer buys it. Amazon integrated three of these functions: distribution, store, and customers (four, if you include ebooks into the formula). The end-result was that the customer became empowered: he could review books, even sell books second-hand. Which disempowered other stores where this was not possible, and publishers, who were before able to simply push out best-sellers downstream. Publishers are still powerful of course, essentially acting as a gatekeeper to writers, but this will change as soon as online publishing can be consumed comfortably.

A final example is Ikea, which is surprisingly similar to Amazon. It also started as a distributor, back in the day when a store-front was a newspaper-advert and phone-line. Ikea saved money, by working closely together with manufacturers in Poland, even building and buying machinery for them. The end-result were standardised designs, at low costs, and produced on a massive scale. It became close to the customer, by using its warehouses as store-fronts, and enabling customers to buy via catalogue and later via the web-site. Its competition was the traditional furniture store, conservative and producing designs that were both expensive and focussed on exclusivity (which translates to small-scale production). Because of this perceived strength, they were arrogant enough to not worry so much about prices on the vertical axis, both from their suppliers and for their customers. All of which could be exploited by some frugal and out-of-the-box thinking (a combo which fits surprisingly well together).

These are all three examples of durable goods. If you get into food however, even restaurants, the formula changes. But that is a story for another day.

Be a thief
Isn't 5-forces fun? I think so. So what can we learn from this? For one, that it's important to consider strategy on multiple axes. How will a business deal with its suppliers, its customers, its competition?

Also, it is actually a weakness to be too vertically or horizontally integrated, as that creates a certain arrogance and/or passivity towards how you deal with these parties. New entrants will eventually come, and probably on a different axis all-together. Being too integrated, means that the business has many dependancies, which will make it all that more slower to react to changes.

What I think always pays off, is to be close to customers. By constantly adjusting your strategy, so that the value proposition for customers is increased and personalised for them, you ensure a certain loyalty (which gives you time to change) and you can sense it sooner when their attention drifts towards other types of products.

A final thought. Business is very much an art-form and in art there is one great saying: "Good artists copy, great artist steal." The copying refers to that everything has been done to a degree. People have sold computers, books, furniture, and those products are clearly fulfilling a demand, which, for now, continues to exist. Where people can innovate is in creating new combinations of things. In other words, if you copy a competitor's business-model, you gain only the part of the market that does not already get served by the existing business-model.

If instead you steal the good parts from other business models, and create your own combinations of these good things, you can create greater value-propositions for customers than already exist. This applies just as much to combinations of five forces, as it does for anything else.

Here's an idea on how to market an entirely new concept coming to a town near you. Let's say you rented a store-space in a shopping-street and you have to make modifications. Normally this would be dead time where you would just be spending money on construction.

Reserve a space of about 1-2 metres (3-5 feet) depth behind the shop-window. Make it so that people can't look at all the construction going on behind it, and have a little curtain that you can hang in front of it.

And everyday that you are building, create a different display. One day, you could display a series of pies, another, you could display some bridal dresses. Etc. etc. One day, you could even put some people there, having coffee and reading a book. All the while, keeping the passer-bys guessing at what this new store is about.

What this accomplishes is simple. In our transparent little world, what people love most, is things that stand out and things that are mysterious. And your ever-changing display will keep them wondering during the time where you really can't do much in the way of enchanting customers.

Another thing that you could do is actually use these displays to advertise shops in your street. "Buy pies at neighbour Joe's bakery!" "Get your coffee at Jane's delicious coffee-shop!" Not only does this increase your clout with your neighbours, it may make you some money, and more traffic to them automatically means more traffic to you too!

Of course, one of the dangers is that you're building your momentum up way high and like a pendulum, if you don't prepare for the automatically high expectations that follow, it might swing out of control. So you better end up delivering a nice end-product when your store actually opens!

The picture is courtesy of marwantaher.com

Not too long ago, asked the question about whether coffee is a bad business to be in, taking into account the exploding number of quick coffee-stops, as well as the fact that global players like Starbucks, and the soon-to-come McDonalds café, are saturating the market. There's another part to this, which I actually discussed before, but I didn't make the connection: coffee as a soft-drink.

In the Starbucks-book, "Pour your heart into it," Howard Schultz talks about how Starbucks got into the canned coffee business, with the help of a chemist and Pepsi. The chemist had come up with a method to captured the essence of coffee into an extract, which enabled Starbucks to add it to a number of new products, such as ice-cream and indeed "porta-coffee," also leading to more business-opportunities outside of Starbucks-outlets. Pepsico had the "porta" knowledge, as well as the distribution-channels, and from what I hear their partnership was a raging success.

About a month ago, I wrote that Coca-Cola had entered a partnership with Nestle, to develop similar products, and just read about a another partnership between Coke and  illy, a premium brand of coffee and related products.

The rest of this post is speculation:
Now I'm sure that the coffee-makers will do their best to not have the can equal a taste of fresh coffee, though at the same time more competition in canned coffee will definitely drive the quality upwards. Perhaps up to a point where it will perhaps convince customers not to wait in the long queue associated with "good" coffee, and instead get a quickie at a supermarket or in a machine at work. Similarly, an increase in downstream-marketing by producers, may lead to an increased demand for these products up the chain, at cafés, giving Starbucks-, illy-, and Nestle-outlets an advantage over generic coffee-producers. Thinking defensively, all of this sounds pretty bad for existing cafés. I'm not a fan of thinking defensively however.

Offensively speaking, this is an opportunity. Comoditised coffee means that there is more space left for other activities which help increase the value of "third places." Comoditised coffee also means that the overall quality of coffee will go up, and that consumers will look for other selling-points. By taking a license on illy or Nestle coffee (I don't think/know if Starbucks licenses), cafés can profit from the downstream marketing that is already happening. Even cans of coffee can present an added value, for instance in large queue-situations (like the ones I discussed last time), which I perceive as an excellent opportunity for offering tasters.

And really, this may not change much for cafés. The manufacturers' downstream marketing towards consumers may cause an increased demand for illy or Nestle-coffee (or cans) in cafés, pressuring them to take it into their assortment. But the same has happened with drinks like soda and beer for decades, though I'm sure that there are some horror-stories to tell here too. And so far, canned coffee has definitely been lacking the taste department, so it may not all represent competition for existing drink-venues. I may be making an elephant out of a fly. In any case, interesting to think about and to see how this will play out.

Oh, and the picture is meant to represent a cup, spilling coffee. If it looks like crap (the coffee kinda does), my apologies.

Finally, something more food-related! On television, there seem to be two types of shows related to the business of food: apprentice-type shows like "The Restaurant," which present a new challenge every episode and where one team/person loses and gets kicked out; and then there's another type of show, not quite as successful commercially, in which an expert is brought in to help a business in need. Last night, in a bout of insomnia, I got a chance to watch an episode of the latter category, a German show called Rach the restaurant-tester, where Christian Rach, an experienced cook and food-entrepreneur helps restaurants get back on their feet.

This one dealt with a restaurant in Berlin, called "Die Blaue Ente" (translated: "The Blue Duck"), which had some interesting ideas surrounding it, but many were unfinished, and was located in the middle of nowhere, in the outskirts of Berlin.

The restaurant had several things going for it. The cook (59), was energetic and outgoing, had lots of ideas, loved animals and even had a little zoo going with ducks and other farm-animals. The food was adequate and the atmosphere inside was friendly. His wife took care of the welcoming and did so authentically.

But the restaurant had been running badly for some time. The founder had many ideas, but many were unfinished. The restaurant served all kinds of diverse dishes, but there was no clear menu-identity. And the cooking, while good, was disorganised and slow. The business was in trouble.

The challenge was two-fold. Establish a clear identity for The Blue Duck and make people in Berlin aware of the restaurant.

Brand-idenity
The cooking was already good, but it needed to shine. People needed to come to the restaurant for a reason and leave with good memories. The straightforward answer was to make the food and the name one and the same. Bring more duck-like dishes on the menu, but with a twist. So gone were the diverse dishes that had previously been served. Rach gave them a couple of easy ways to create a broad offering of "winged" dishes, which were not only easy to prepare but also allowed for synergies in cooking (you can make a lot of different dishes from one chicken). But the challenge was to bring the food to the people, and that is exactly what they did.

Creating awareness
The founder had previously been toying with an idea to serve food on the road, with the help of one of those catering-trucks. He bought a second-hand one, but had abandoned the idea and left it rusting in the garden. This gave Rach an idea though. If the people weren't coming to the food, why not bring the food to the people? So he bought the restaurant another small catering-truck, one with which they could use to serve Blue Duck-snacks at a market in Berlin. And he got them a transportable oven, which they could use to keep the food warm, and attract visitors with sweet scents. Bingo! Not only was the cart a raging success, but it lead to exactly the desired result. People started coming to the Blue Duck.

Final thoughts
I wanted to write about geographic marketing for a while, because I consider it a vital ingredient to the leisure business. As a restaurant or other leisure-venue, you don't have much flexibility to move, and I think that the thinking goes that you must be located in a premium location in order to be successful. That's true, but it also reminds me of the gold-rush during "cowboy" times, where everyone would move to the same place to mine their gold and when the gold was gone, the town would be dead. Premium locations are like goldmines, and there's a great first-mover advantage. Instead, an interesting concept is to choose any location (within reason) and try to bring customers to you based on the quality you bring.

An entrepreneur in the tourism-industry, who taught at my school, told us about a similar thing he did. He asked: "as a local tourist-attraction, how important is international business?" As it turns out, it was very important. To him, international activities involved advertising in travel-agencies all around the world, as that is where he would get the majority of his clientele.

Frequently, when I see restaurants/cafés where the staff seems depressed and business is bad, that's the first thing that comes to mind. Have you done geographic marketing?

As for the brand, not much to say there. Clearly no marketing can make a bad product good, and establishing a clear identity is key in differentiating yourself from competitors, and more importantly, gain loyal customers.

It was a really nice show, I thought, more constructive than the typical apprentice-styled alternative. Competition is perhaps part of life, but there are a lot of smart people out there who can help you just as well. All it takes is a little altruism…