Sounds + Food 'n' Retail

I'm still "on a break," but stumbled across this interesting titbit from a book on warehousing-practices. If you don't like reading lists, too bad because it's interesting, but I've also summarised the key-points in the end.

China

• Low labour and land-cost, but high equipment costs, translate into large (e.g. 250,000 square feet), low warehouses like in the US, but often lacking even a forklift.
• Certain goods like consumer electronics, are of such high value, have a short life-cycle, and thus a lower inventory-cost, that expenditure in state-of-the-art technology is justified.
• Certain cost-saving practices, like removing the pallets from shipments in order to ship more goods, cause some inefficiencies other countries, like, eh, re-adding pallets.

• A traditional focus on personal relationships and less on computational models, means there's a lack of data and opportunities for improving performance are not well-developed.
• The most active economic areas are separated by lots of water, which means lots of product conveyed by air (for high-value or time-sensitive products) or ship (for bulky items or commodities). The high costs associated with this, are incentives to consolidate freight.
• Therefore, more strong regional hubs, like in Hong-Kong and Singapore, are expected to emerge.

• High labour-costs and an inflexibility of the work force have lead European warehouses to be more advanced in terms of automation.
• A growing common market will also lead to more economies of scale in the future, leading to larger, centralised warehouses.

• Characterised by cheap labour and land-cost, but relatively expensive capital costs (machinery and the like) and an underdeveloped infrastructure (both physical & administrative).
• The markets being supplied are generally local and not very wealthy, which leads to the SKUs not being high cost and there being little incentive to increase efficiency through capital expenditure (IT).
• Global demand means that larger distribution centres are being built around large ports like Mumbai (Bombay). The lack of land there is leading to high prices, comparable to Singapore/Hong-Kong.

• Characterised by a culture of mass-consumption and a uniformity of the market and distribution infrastructure, which translates into large centralised warehouses and accelerating rates of product flow.
• Warehouses are often situated in the countryside surrounding metropolitan areas, which is cheaper, while being well-connected.
• A good telecommunications-infrastructure enables better supply-chain co-ordination; Warehouse management systems are generally advanced, and the rich data leads to better tracking and performance.
• High labour-cost are off-set by using cheaper migration-workers

• Due to a lack of land and high labour-cost, warehouses tend to be built high.
• Elevators are one bottleneck, caused by this style of building, however a Singapore warehouse has found a solution to this: A multi-floor facility with no automation or elevators, but, instead, a spiral truck ramp so that trailers may be docked at any floor (see pic). This does claim more land area, which must be recovered from above, and doesn't work well if trucks have to shuttle between multiple floors.
• While both Singapore and Hong-Kong act as hubs, Singapore is much more international, receiving goods from manufacturers all over Asia and shipping it to other countries; Hong-Kong receives mainly Chinese goods. Also, for the latter, many of the goods come in via trains and trucks, while leaving by ship or flight, while for Singapore it comes and leaves via sea and air.

• Labor costs are low, though not as low as in China, and the nature of its local economy and customers does not justify high equipment expenditure.
• The only exception is Mexico, which can quickly ship products to the US and keep its inventory low, thus justifying state-of-the-art technology.

• Labour costs are a factor when considering automation; automation is a factor when considering optimisation; optimisation is a worthwhile expenditure when dealing with high value goods with a high velocity.
• Cheap land seems a fundamental advantage, looking at the logistical nightmares that Singapore and other high-rise builders must be experiencing.
• Access by land will significantly decrease the cost of transport. Generally, a well-developed infrastructure means more access to wealthy markets and enables warehouses to store high-value/high velocity goods, which is good for them.

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.

Really no shortage of interesting links this week, which is always nice. At the same time, it makes choosing 5 that much harder, but here goes.

• An Alien in Japan: Charlie Stross describes his trip to Japan last summer. …From Yokohama to Tokyo to Kyoto; …about shaved cats, getting lost in shopping malls, to Hello Kitty, and extreme bathing, to monorails and re-building history. A very interesting read, which presents some insights into that alien world, Japan.
• Blasting scents into coffee-consumers' brains: Roger Dooley explains the importance of environment to sensory experience, and describes how Nestle's Nespresso found their way into people's noses, brains, and hearts. In coffee, just as with good food and wine, scent is everything! Food for thought.
• Can experience be designed? After reading Bob Jacobson's essay, I'm not so sure. He writes about placing human experience into the centre of the design process, about systemic relationship between information and the environments (see above link as an example), about the difference between user- and human experience design, and how you can probably never design an experience to completely meet a person's expectations. At least, I think that's what he writes. So much of this text is far above my head, but worth reading to guide your mind into new directions, and a must-read for anyone interested in creating experiences. It's all a pre-cursor to a book, which, judging by the range of material, I expect to be published in 2 to 5 years, but which will be well-worth the wait. In the meantime, check out Bob's great blog.
• The downside of franchising: Richard Layman, in his artsy urban blog, writes about how franchises have transformed L.A.… into a clone of just about any other city. A little anecdote: I observed a similar trend when I was last in Belgrade, Serbia, which I hadn't visited since the war. It looks just the same as any other city, and that's sad because I remember there being a lot more authentic clothing- and food-venues. When I see this, I'm not sure I'm a fan of globalisation, or franchising for that matter.
• A twosie on Human brand-carriers (Sounds like a disease, doesn't it?): Two articles discuss this, one, by the NY-Times, on rock-stars and their interaction with brands. As one artist put it: "The barriers are changing and we as artists are making less and less money, and we have to get creative." At the same time, I have great sympathy for artists like Springsteen, Tool, and N.I.N., who refuse to corrupt their art. And another article, by HBR, on endorsements in sports, which is, at last count, a 100 billion dollar industry. I'm fascinated by this phenomenon, so maybe I'll write something about it in the future.

• Seth Godin on Permeability - essentially he presents a simple test to see how well integrated an organisation is. Also food for thought for top-managers at a firm. Do my employees know my name and what I stand for? If not, why not?
• Hugh MacCleod on De-Commodification - his current business is wine, and he rightly asks about guarding against being just one of the many. His answer: blogging, aka. micro-branding. I think he could've dug deeper.
• S.B. Johnson on Literary Style and word-count - this one made me think. Steven analyses the average words-per-sentence in best-sellers and classics. His conclusion: books with an average sentence word-count of 20 words or less sell better. Made me count the words of my own sentences in my blog-posts.
• HBR on managing innovation - a nice Q&A in regards to management, creativity, disruption, and solutions. Answers are broad and range from deconstruction, to isolation, to building communities.
• NYTimes on a strange cultural trend in Japan - apparently fear is the new black and designers are creating clothes resembling everyday street-objects, like vending-machines. I can't yet draw any conclusion from this, except that Japan is a different place.

A few weeks ago, it was announced that the world's dairy prices (and anything related to that) will rise by a few percentage points. The reason being that the demand for dairy-products, most often in the form of milk-powder goods, is soaring in China.

But it's not only milk that's hot in demand, another cow-related trend is making the rounds. Surprisingly (or perhaps not), this trend was started by McDonalds-restaurants, who have been in China since 1990. And while traditionally, the use of beef was sparingly reserved for stir-fry dishes, the Mac in McDonalds has caused a drastic taste-change towards more beef-orientated dishes.

Beef-importers would be all excited, if it wasn't for one little snag: the mad cow disease, which lead to at least a few countries being banned as beef-importers to China, including the US. This certainly can't have been comfortable for them, considering they exported around $3.19 billion worth of beef in 2003, which fell to $605 million in 2004 (after the ban), and, only in 2006, did it pass the $1 billion mark to $1.63 billion.

Time Magazine writes about how Western Cattle Company found an interesting method to get around the ban, by breeding the cows in China itself. In other words, they are exporting their know-how to Chinese farmgrounds, in the city of Hohhot, China's dairy capital, which houses two of China's biggest dairy companies, Mengniu and Yili, as well as around a million cows. The Western Cattle Company is not importing cows, it buys them, fattens them up, and its off to the slaughterhouse.

The company plays both a smart and risky game. With China's beef-consumption up 31% since 2006 alone (source: USDA), and US-imports being banned, it firmly implants itself as the leading US beef-producer in China. At the same time, several similarly-aimed joint ventures have failed in the past and a large reason is both the risk of competitors and the lack of a good supporting infrastructure. As for the first, China, as with most of Asia, clearly has a reputation for being quick on the uptake and even quicker to copy. And with a lacking standard-setting authority in China, consumers will find it hard to judge whether beef comes from an authentic source or a local competitor.

Still, beef-businesses are hopeful, that as demand soars, so must complex and hard to replicate mass-production-methods. With large quantities of beef being produced comes a new problem however, that of guaranteeing the safety of the environment. Even if the cows are kept safe, there is no guarantee that the water or air is pollution-free, and that the corn being fed to cows is clear of pesticides.

Clearly, setting up shop in China does not only depend on being there quickly, but also on being able to produce mass-quanities of goods to meet the staggering demand, doing so in a fashion which makes it hard to replicate by the locals, and implementing a lobbying campaign focussed on improving the infrastructure around your production-facility. The last of which will be a nightmare for many, I'm sure.

This morning I got two stories in my s+f&r reading list, both on China. One is that the country is building 100s of hotels in anticipation of the Olympic Games next year and the World Expo in 2010. And two, that China is retail heaven.

For the first story, Misset Hotel is reporting (in Dutch, I'm afraid) that around 109 hotels are currently being built, varying in size from 80 to 4000 rooms. Last year it already reported on a monster-hotel being constructed in Shanghai, housing 3500 rooms. Now it put together a ranking-list (click dutch link; 'kamers' means 'rooms') of hotels being built, with the largest, the Sheraton Macao, housing around 4000 rooms also, on a surface area of 140.000 m2. Macao, which is an island, is attracting a lot of attention, because it features a mild tropical climate.

The second story, which is only a Business Wire excerpt from a pretty expensive (but standard) report, analyses the Chinese retail-industry through a PEST (Political, Economic, Social and Technological issues) framework. The current annual growth-rate for retail is 14%.

But clearly, while China is a big target, it is not a risk-free market. There are many concerns whether this boom will last for very long, though China is certainly betting on this being true. In terms of retail, you are of course dealing with issues of piracy, though a local presence can only be a good thing there. And there is the issue of cultural sensitivity. I remember reading that Starbucks, which is doing very well in China, had to close one of it's locations near the Forbidden City, as it was meeting with a lot of protest.

Whatever people do in China, it helps to have deep pockets to deal with the problems that will certainly arise. And it helps to do your homework. I remember doing some research on Chinese Guanxi 7 years ago, which may not be nearly as relevant today as China becomes more and more Westernised. However, it is important to bear in mind that social relationships in the country are very different from what business-people from other countries are used too. There is the emphasis on saving face and showing proper respect to business-partners.