Sounds + Food 'n' Retail

The world of business, I think, has a certain illogical—the "human element"—shell around it, but centres around the concept of supply and demand. How you create a business where demand is high, how to you make sure that you have sufficient supply and/or not too much supply. You can see this play out in a number of places, e.g. on the web you have scaling issues, when your service proves to popular (e.g. Twitter), or you have the case of the million+ blogs that are collecting dust, because no-one ever reads them, or because the blogger was unable to gather enough interesting supply.

In restaurants, or food-places, you also see this play out. A couple of months ago, I was going to write about take-out, how some businesses embrace and others avoid it, and why. I think the reason is, at least in part, to control supply. If you control supply, then you can focus on quality and charge a higher price. You also become an artist/creator, rather than a factory.

How do you limit supply? Two ways, I think. Mainly it's the physical space; by limiting the number of seats in your venue, you ensure that a certain quota is set (of course, the question is also whether that quota is met, which comes from quality inspiring demand). By investing in quality-ingredients, you not only limit your budget, but also your production-capacity, and it forces you to limit supply. That's a little vague, I know, I haven't worked it out 100%.

The other way, is to have an increased level of supply. How do take-out and fast-food places do it? By standardising as much as possible. Whether it's the ingredients, which are mainly starch-based (burgers, pizza, noodles, etc.) and cheap, the production-facility (often just an oven, a grill, or a big wok), or a standardised customer-space (from seats stapled to the floor, to waiting-lines, to a website/phone nr.). All of which enables you to deliver mass quickly.

I was thinking about this today after watching "Iron Man," which is one big Burger King (and US-army) commercial, and getting a cheese burger afterwards. Burger King was packed and, ironically, slow. The "waiting in line" method doesn't seem to work that well when you have 50+ people waiting, and a limited space behind the counter to deliver burgers and stuff. People on both sides were bumping into each other constantly, and I actually had to wait over 5 mins, even though I was second in line.

On some level, I like to think that technology can solve a little bit of this problem. If you look at Zara and H&M, which I wrote about last week, both are very advanced in this area, in order to optimise and speed up their production, logistics, and merchandising. Of course, that's on a back-office level, and that's not the same as the front-office, where customers interact with a business. No one wants to be confronted with a screen to do the ordering, but sometimes I wonder if people wouldn't be happier just pressing some buttons in a fast food joint, rather than waiting in line. Of course that would mean more seats, as more people would sit down, and more staff, as someone will have to bring that food to the table.

In the end, it probably comes down to experimentation and constant improvement. That said, apart from the computers that cashiers operate, and quicker food-preparation, not much has changed in the last 50 years for the people doing the actual eating.

The picture is courtesy of lightningspeed.net.

Time for a wee break. In the last week, I've been researching Zara and H&M a little, to better understand the retail-sector and the fashion-segment. I'll probably have to do a follow-up to this post, as there is lots to say about both businesses, but here's some initial impressions, nevertheless.

First off, H&M appears a lot more clean in its approach. Judging by the annual reports alone, H&M not only has a 2007-edition (Zara is only up to 2006), but it is also only 85 pages long (presented in an eco-friendly 2-pages-per-side way), while for Zara, or actually Inditex, it's mother-company, the annual report is a stunning 450 page long!

Now, that's really not all that surprising, as Inditex is composed of a number of companies, and it is extremely vertically integrated, while H&M employs the Nike or Apple model—it designs and it retails, but it doesn't produce.

Why this is so, I can only guess, is due to their origins. Inditex comes from Spain, traditionally a low-waged country, while H&M is Swedish, not a low-waged country. Similar to IKEA, I imagine it was an economical decision to outsource most of its supplies.

It's very hard to separate Inditex from Zara, as both are founded and owned by the same person, Amancio Ortega Gaona, Spain's richest man. Zara has been in existence since 1975. H&M was founded by a Swede, Erling Person, in 1947, who ran the company to ca. the mid-90s, but which has continued to be a family firm.

Their business-philosophies are fairly similar, a low-cost, high-quality approach to fashion, as opposed to traditional brands, where quality most often equals price.

Zara made lots of headlines with its extremely high turnover of products—it produces around 11,000 items annually (as oppsed to 2,000-4,000 for other retailers); 15-20% produced before, 50-60% at the start of the season, and the rest during. If a product fails to do well, it is usually removed after a week in stores.

H&M made headlines with its celebrity-marketing, which is noteworthy, as Zara has virtually no marketing. Instead, because it has such a high turn-over of goods, customers tend to visit it more often, expecting new things—an average of 17 times per year vs. 3 times for other stores!

Both employ mostly a wholly-owned retail-strategy, except in countries where this is not possible. And both are very advanced in their use of IT to manage logistics and production, which is definitely seems to be a key-characteristic of delivering fashion quickly and find ways to decrease costs.

H&M's largest markets are Germany, Sweden, the USA, Spain, and the Netherlands (in terms of sales). For Zara it is Spain, France, Germany, and Mexico (in number of stores).

That's all I can think of in 30 mins or less…

Take a look at this quote, which I posted a few days ago:

"There should be a rule: before helping the environment in one market, we should be required to think through the impacts on other markets." (source: Freakonomics blog).

Or, to put it differently, every action has a (sometimes equal) reaction (I think the traditional phrasing ignores the human element). The idea that everything is interconnected is both fun to right-brained generalists like me (not a compliment), and scary at the same time. The global economy is very complex and, I would say, impossible to regulate.

There's a couple of things going on the world, which I'm sure everyone is aware of. There's a number of wars, there's the weakened dollar, there's some kind of housing-related recession going on, there's a shortage of oil, our planet is perceived as suffering and currently being saved (I hope), there's India and China, the rise of the Anglo-Saxon system, etc. etc.

And some of the biggest problems facing the food-industry (depending where you are in the chain), are rising food-prices, which relates to that oil-shortage (both in terms of pricing, but also because of alternative fuels using farm-products), the rise of India and China, and some other factors; and the costs of keeping green, which has largely been inspired by companies like Wal-Mart, but also by the (exaggerated) need for global diversity by customers (which the food-industry is also partially to blame for).

The solutions vary, and are, so far, very defensive in their nature. For the cost of going green, most pollution comes from transport and the solution is to either use the most eco-friendly way to go: on land, by train, across water, by ship; or to go local—which companies like Marqt seem to focus on, but which also comes with the pitfall of seasonal shortage.

For rising food-prices, again one solution is to go local, to save on transport and have some control over how farmers work, and be able to charge higher prices to the rising local-conscious consumer. But a bigger solution is for more food-production to happen (much of it currently goes to India & China, or to biofuels), and possibly from smaller farmers. The problem here is that it will take time (some estimate decades) for smaller farmers to get ready.

Both are definitely big picture-problems, and will take time to solve. One thing, I'm personally looking at, are micro-lending sites like Kiva.org, which put you into contact with local farmers, allowing you to help them out in your own way. From a Venture Voice interview with one of the founders, I understand that some of these investments happen within the context of a community, where each member keeps watch over the other's use and repayment of the funds, in order to ensure a good outcome, and so loans will continue to come in. But, while I think it's well worth the effort, this is still a small-picture solution to a much larger problem.

The way it looks right now, the solutions have to be planned in the long-term and on a large scale. There is definitely space in the farming-segment for more production to happen. In the mean time, food-prices will continue rise, as will the price of educating consumers to make more responsible choices. I like Tesco's approach in labelling the origins of their food and allowing people to make more carbon-friendly (locally focussed) decisions. But that doesn't solve the problem for farmers in remote areas of course.

Sigh, if you just got a headache, I sympathise, as I just got one too.

Further reading:

• NYTimes: Environmental Cost of Shipping Groceries Around the World
• Economist: The new face of hunger
• Buzzfeed: Food Hoarding

The picture is courtesy of ABC News.

I just discovered a new podcast called "Big Ideas" (iTunes-link), a series of lectures on anything from the impact of urbanisation on musical tastes, to designing menus for restaurants. Oh, and it's Canadian. Not that that's bad, but some parts of the lecture covered local conditions.

John Schneeberger starts his lecture (dated March 1, 2008) off with the basics of menu-design, namely that they should reflect three things:

• What you stand for? Aka. what kind of food do you like to work with?
• What demographics are you targeting? Income, religious issues, etc.
• What are the current trends? And are they for real or just a fad?

Generally, when running a restaurant, you have to understand three things:

• Customer-decisions are always a trade-off between price and quality
• Traditionally, dishes consist of three components: protein, starch, and vegetables.
• What we understand as taste, actually comes from three sources: fat, salt, and sugar.

Any more "avant-garde" food-entrepreneur will have to face these three as a challenge at some point.

Schneeberger discussed three booming trends, vegetarianism, organic food, and local produce, and mentioned a number of challenges related to these.

Vegetarian cooking
The thing to understand about this, is that it's generally cheaper. Schneeberger mentioned a 1:10 ratio when you compare the cost of producing vegetables to the cost of growing a cow. And while it's a booming trend, the industry, somewhat mis-guidedly, still often focusses on trying to replicate the taste of meat, which is impossible (think veggie-burgers, etc.).

Instead, they should be thinking about nutritional value— vegetarian food has been correlated with lower health-problems and is for that reason often recommended by doctors. The problem with these types of diets is of course that they are low in those qualities we would traditionally associate with taste: fat, salt, and sugar.

To create dishes that people actually enjoy, restaurants have to look globally, e.g. Asia, where more exotic vegetable components can bring some needed flavour to these dishes. I think he mentioned seaweed, but also stinky tofu (see pic), which is a type of fermented tofu and one of the few ways to naturally bring flavour to that type of protein.

The implication is that vegetarian food requires a significant amount of specialisation and is often hard to combine with meat-cooking.

Another complication arises from vegan (no dairy, honey, animal-derived products) versus lacto-ovo (incl. dairy, honey, animal-derived) cooking. The first makes it very hard to create a (traditionally) tasty dish. The second, lacto-ovo, allows for more flexibility, through the use of ingredients like eggs, which not only provide extra protein, but also bring a lot of flexibility to the kitchen. You can, for instance, make foam out if it, which would enable the creation of deserts & soups, etc.

Organic cooking
First of all (and I'm not sure if this is just restricted to Canada), an organic food label refers to the production method, not necessarily the quality and taste. Since organic food is more expensive, and taste is not guaranteed, you have to wonder if your clientele is willing to pay extra for that service (remember the trade-off between price & quality!).

The big selling-point here is the information about the product. People like to know how their food was produced; it has a certain value to know that there are no chemicals or genetically modified components in what you are eating. But again, that must be a value that is clearly advertised and which may not be important to every type of demographic.

Local produce
The advantage for the restaurant is that they can form better relationships with their suppliers, it's also cleaner in terms of carbon footprint (less transport), and it also has some marketing value to a certain demographic.

The disadvantage is that supply cannot be guaranteed during all seasons. Schneeberger mentioned something called a "100 mile diet" for instance, but restaurants catering to that need will probably have problems in the winter.

Thoughts
Overall, a pretty insightful lecture of the more exotic (and trendy) type of cooking and its trade-offs.

These types of specialisation are still pretty niche, require significant resources in terms of tools, know-how, and supplier-relations. But, if executed well, a niche can be extremely profitable.

I thought that it was interesting that all the traditional means of cooking, the ingredients and the taste-makers, were pretty incompatible with these newer trends. As such, you are essentially climbing up a hill, trying to educate the mass-market. At the same time, good execution, together with differentiation from the norm, seems like a formula for success.

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.

East Asia

• 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.

Europe

• 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.

India

• 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.

North America

• 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

Singapore, Hong Kong, Japan

• 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.

South and Central America

• 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.

Final thoughts
Some general conclusions can be drawn.

• 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.

The book 'WAREHOUSE & DISTRIBUTION SCIENCE,' which is available as a free download, provides some incredibly detailed info on how to effectively set up warehouses and distribution chains. Well worth a glimpse, if not more.

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?

Last weekend, the Dutch financial Times, FD.nl, had an interesting part-article / part-diary of Henk van der Doelen, owner of a chain of ca. 30 drugstores in the Netherlands. Originally part of a franchise called DA (2nd largest in the Netherlands, afaik), he and several people decided to split because of restrictive conditions. I've followed this story for a while because I'm interested in franchising, and because drugstores are big business in the Netherlands (market-size: ca. €3,5 billion), probably due to its trading history in spices and herbs.

His company, Drogisterij-parfumerie, was founded in 1970, has 270 employees, 29 branches, and an annual revenue of €23 million.

The business also employes a franchise-formula, called 'Pour Vous' (Dutch link), which has existed since 1975 as a soft franchise. It asks a monthly marketing-fee of €250 and / or (this part is unclear) €7000 per year for commercial and marketing-related activities. Total innital investment to join the formula is estimated at €300.000.

I created the colour-coded picture below out of curiosity. How exactly does a retail-chain owner divide his time? Naturally, one week's activity should not be generalised across greater periods or different businesses, and I probably mislabelled some activities. But you can let me know that in the comments. ;-)



What is interesting is that there is a fairly even division of activities, apart from maybe marketing. From the article, I did get the sense that he was more focussed on warehouse-actitivities, also living close to the central warehouse, but he pretty much kept his finger in all the relevant pies for running a business of this sort.

What is also interesting is that he essentially plucked out a number of franchisee-branches out of DA's franchise-network and created his own. In the sense of whether franchising is entrepreneurship or not, I do think that this again confirms that the options remain wide open. This story also sheds a light on what can happen if a franchiser's policies are too restrictive for franchisees.

From my understanding, DA has been making moves towards a more integrated strategy, which did not sit well with many franchisees. Apart from the ca. 30 branches that Drogisterij-parfumerie took with it, another 40 left to join D.I.O. (4% market-share). This still leaves DA fairly strong, with 452 branches and 15% market-share, behind the number 1 in the Dutch market: A.S. Watson (Kruidvat, Trekpleister, and ICI Paris XL) with 877 branches and 40% market-share.

One of the stories, I covered last week in my links, uncovered an interesting statistic. Only about 3% of retail sales in the US happens online. I don't think these stats are at all coincidental. While I see a bright future ahead for the online retail of media-products, I find that what the internet cannot provide, is the "closeness," that is sometimes needed for evaluating certain types of goods, like food and clothing. I have commented on this before, implicitly, with a post on the web as a third place, and about the lack of cohesion that Facebook provides.

At the same time, as The New Yorker story reports, what the internet has changed is how we shop; it is much easier to research and comparison-shop than it was before the internet-days. A survey by Accenture found that ca. 66% of those surveyed compared products online, and another study showed that the internet played a significant role with ca. 75% of electronics purchases.

IInnovate has an interesting podcast interview with Scott Dunlap, CEO of NearbyNow, which has come up with an interesting way to exploit the informational advantages of the internet and mash that with the qualities of physical shopping. Following short video shows how their service works:



Clearly technology has evolved a lot in the last few years, making this possible. NearbyNow works via the web and via mobile. I'm not sure if they are using any location-tracking & matching services, but certainly they are heading in that direction. On the retailers' side, there is plenty of technology that makes this possible also. Electronic inventory and point of sale systems allow both for the checking of stock-levels and for consumers to reserve items to be picked up and tried on at a later date.

One issue that entered my mind, is that of efficiency. The way NearbyNow operates is through malls in the US, most of which are, as I found out, owned by 6 major companies across the nation. US's scale-economies win again! In Europe, the situation appears a little different. Culturally, linguistically, technologically, and legally, it is a much more fragmented market, with far fewer malls also, and that may make it difficult for a unified service like this to operate as efficiently as it would in the US.

There is also the issue of too much transparency, which is worrying to some retailers, and addressed in the podcast-interview. But what does seem certain is that this is exactly the type of service that consumers value, and as such one that any consumer-centric business should encourage.

Will a service like this ever replace shopping in its entirety? No, I'm essentially betting my future that there are plenty of qualities *real* environments will continue to offer over virtual ones. But there is no reason, none at all, to try to integrate the good qualities that the web does possess—information at your fingertips—as elegantly and effectively as possible into those experiences.

It is time for those links again! This time, we'll be discussing the economics of Apple's physical stores, how Walmart is enforcing RFID, how retailers are trying to trick people to buy more expensive things, how people perceive fun in games, and 10 ultra-geeky home-cinemas.

As usual, my bookmarks can be found here, and the previously covered links, here. Enjoy!

Link 1: Why is Apple saturating (US) cities with retail stores? is a question that Choire Sicha asks on Kottke.org, and lead me to this profit & cost breakdown of Apple's retail stores at Seeking Alpha (see pic below). It does appear it's all about the money, though hard it remains to read Apple's mind 100%. In related news, OObject lists all the items needed to build an Apple store.



Link 2: Is RFID economically feasible? I'm planning to dedicate at least 1-2 posts on RFID on this blog in the future, as I've essentially been following its development since the early coverage on Slashdot. This story on InformationWeek discusses the pressure that Walmart, certainly the biggest champion for RFID in the retail-arena, is putting on its suppliers to finally add RFID into their logistics-chain. As far as I remember, the latter have been complaining about the unfair balance of cost that RFID causes, shifting most of them onto suppliers. I assume, however, that these chips and pallets are reusable.

Link 3: What makes games fun? Lightspeed Venture Partners has an interesting blog, which mostly discusses the business and principles behind digital games. I follow it because games are fun, and if you can understand the source-code of fun, you can replicate it elsewhere. In that spirit, then, it links to an interesting white paper trying to map out what exactly goes on in gamers' heads while playing games. Part 1 is also very much worth a read.

Link 4: A buyer's christmas? The New Yorker digs into consumers' buying behaviour. Interesting is, that people use the net most often to find info, not to buy, but can use that info inside stores (we'll still need ubiquitous internet for it to be shoppers' utopia, however). Equally interesting is, that if a store has two microwaves, consumers will usually buy the cheaper one. With three products, however, they will usually by the mid-priced one. There's still room for trickery, I guess…

Link 5: 10 stunning ultra-geeky home cinemas. In the spirit of my previous post on cinemas & luxury, I thought that this link would be fitting. The Star Trek-themed one is a little too geeky for me, but the Titanic one (no. 6) looks awesome. I'm still doubtful about whether it's about the design or about the movie, but I can't deny that people put a lot of work into designing these.

Just some finishing up on the IKEA-book. Following graph describes the structure of IKEA's business, as far as I understand it.

1: Stores - The way the company expands horizontally, is through a tightly controlled franchising system. This both saves costs and minimises international risks.
2: Sales & service - the company is tightly integrates its sales- and service-operations with customers, the latter taking over 80% of the work (and loving it). Huge cost-savings, also benefiting customers.
3: Supply, manufacturing, design - The company is equally well-integrated back up the value chain, with suppliers, manufacturing, and design, and has—since the 90s—been expanding its operations in that direction. Some cost-savings by introducing savings up the logistics-chain, and more flexibility in manufacturing.
4: Management structure - non-public virtual entity that licenses the IKEA brand and is able to offset international tax-differences by being located in Belgium/the Netherlands and changing the terms of licensing-agreement as needed.

You can draw your own conclusions from that, together with what I've written before.

Things that stuck out from the book included:

• Ingvar Kamprad, the founder, who has both a trader's mentality and is at the same time a community-person;


• Sweden, IKEA's country of origin, whose restrictive tax policies actually resulted in pushing the business to become a global company;


• IKEA's cost-philosophy, which is very frugal and part of the company-culture, and also transmitted to the supply side and to customers. Some problems retaining top-employees as wages are not competitive;


• Its franchising-system, which somewhat surprised me, can be explained by the scientific way in which IKEA's operations has been built up. The more rational, the "easier" (a relative term) to replicate. It's also in line with the business's rapid global expansion and its drive to push down costs;


• It's a private company, which makes it less visible and (relatively) less accountable to the public.


• Its vertical integration with suppliers and customers, enabling it to quickly respond to new trends and problems, as well as introduce higher cost-savings than its competition.

All in all, a very interesting company, and actually very similar to eBay in some ways, I think.

P.S. I'll be taking a few days off, to recharge some creative energy.

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.

Man, I collected so many links, that I'll probably have to write three updates to cover the most important ones. We've got a lot of ground to cover, so let's get started. You can find my previous coverage on interesting links from the web, here, and my continuous stream of bookmarks, here.

Link 1: On Magnetbox - Correlating cool with tech - With pictures like the one below, my work on this blog is really done. Interesting is the rise of computers vs. dance & hip-hop music (both of which are hugely benefiting from the cost-savings made possible by PC-based studios. (A note: low industry-barriers = high chance of suckage!). Also note the fall of art, after the colour TV was introduced. Kottke also made some comments about it.

(Click on picture to magnify)
Link 2: On BuzzFeed - Touch-Screen Ordering - BuzzFeed presents us with some stories about automatised ordering. There are both advantages and disadvantages, I think. Good is that it minimises errors in ordering and can interface well with back-office operations, such as ordering new supplies. It might also fit with the individualistic preference for self-service, I wrote about before. The disadvantage is the cost and the margins of error that information systems bring (I still shudder at the thought of the LAS disaster (pdf)) + the lack of the human factor. Martin Kunzelnick (German) links to some videos of Microsoft's Surface in a restaurant-environment.

Link 3: On Lightspeed Venture Partners - It is no accident that Typhoid Mary was a woman - Although it's a horrible-horrible title, and perhaps an obvious point, I've been coming across many stories about the social qualities that women possess, making them better at PR, marketing, sales, relationship-building. Something to keep in mind for any people-based business.

Link 4: On Reuters - Pizza Hut rolls out nationwide mobile ordering - A news-item (finally), and I'll probably delve into this topic sometime in the future. Arguably, Pizza Hut has been pursuing a different strategy from pretty much 98% of the pizza-restaurants out there. I'm sure that there is considerably brand-loyalty towards Pizza Hut, which will give it an advantage over delivering pizza-franchises, HOWEVER, it will probably be competing on price, which the franchise has not done so far. I'm not sure how that will affect their brand at all, but it's something to keep an eye on.

Link 5: On WSJ - Who's Buying the Bookstore? - arguably, there are few retail-outlets that evoke such an emotional response as bookstores. I find them comforting, and very similar to churches, in the way that it really is expected of you to be silent while browsing (on a side-note, I discussed a link of Dutch bookstore being opened in a church before). It's also a symbol of a community, as WSJ points out. Well, with competitive pressures from Amazon et al., these types of stores are clearly disappearing, or changing into hybrid monsters, which smaller stores can no longer compete with. WSJ points out a phenomenon related to that community-spirit, which is very touching. Capitalism isn't everything, particularly in places that target the softer pleasures in life. I'll have to reflect more on this, as I'm very attracted to these types of stores, and would love to set one up myself.

That's it, for this week. I'll see how I'll catch up on the rest of my links, but this went great (took 20 mins), and I always enjoy re-reading my bookmarks. I hope you do too.

I'm currently working on a wrap-up of what I wrote about in months 3-6. It's usually a monthly tradition (see months 1 & 2), but this one is extra long and taking me some time. Apologies for the silence this has been causing this week.

One of the things, I'm working on is a work in progress, a map of the food-industry. Step 1 is to identify the individual segments, which, I should note, are probably transferable to a great number of industries. Future iterations will include identifying specific companies in each segment, as well as sub-segments, and specific segment-pains also.

• Segment 1 - the production of raw materials: This can involve anything from growing coffee-beans, to potatoes, to rubber and trees (later used for packaging). Some vertical integration with segment 2 and perhaps 3.


• Segment 2 - the production of consumer-goods: The activities here involve sourcing raw materials and producing them into goods, ready for retail. From my understanding, there are a number of super-producers (Unilever, P&G, etc.) and more specialised ones. Some vertical integration with other segments, plenty of horizontal integration also.


• Segment 3 - retail: A diversified segment, consisting of super-markets, specialised stores, and hybrids (which combine retail with other services like music, etc.). Some vertical integration occurring, with e.g. private labels, and large franchises like McDonalds & Starbucks that communicate directly with segment 1.


• Segment 4 - consumers: too diversified for me to summarise at this stage. What I do note is that the reach of customers is increasing up the value chain: organics, enviromentalism, etc. are all signs of this.


• Sub-segments - marketing & logistics: It has been my observation that the degree that these are externalised depends on the resources available within and the complexities of the tasks. What I also noticed is that it's the supplier, not the buyer, that takes care of these things. And finally, that it's segment 2 that is usually responsible for marketing their products to segment 4, the consumers. I expect that something similar is or will be occurring from segment 1 to segment 4, to address concerns consumers may be having about production-methods.


• Meta-segment A - regulation: It has been my observation from my thesis that the government is a factor at pretty much every stage of the process of bringing a product to the market. It is a tool both for consumers, for larger interest-groups, and for businesses to stimulate change within industries, with all the consequences that has. Again, regulations pertaining to organic & green production-methods, as well as human rights and memberships of trade-unions are just a few of many factors to consider here.


• Meta-segment B - optimisation: This is where I would place consultancies, which are super-specialists aimed at improving processes in and between organisations, but also aiming at customers who are having more and more information at their disposal, more cash, and more complex needs.

That's all for now. Please let me know if I missed anything or if you disagree with something. I am here to learn!

I'm hoping to finish up my wrap-up by this weekend and that it will be business as usual next week.

Continuing from part I - obesity, this post will be equally light as I have "♫ my mind on my money and my money on my mind… ♫" Or something to that effect.

According to a carbon-emission calculation of PepsiCo's Walkers crisps, the majority of carbon emissions come from the production of raw materials (44%) and processing thereof (30%). A Dutch magazine, Tijdschrift voor Marketing, attributes the majority of the carbon footprint to transportation of said materials, and forms the conclusion that more and more production and consumption has to happen on a localised scale.

Even though the makeup of those figures may be open to interpretation—there is no breakdown about what in the first 44% is due to actual farming and what to transportation—perhaps, Mr. Kuiper, the author of that piece, has a point.

In a TED-lecture, James Howard Kunstler argues that the 'hydrogen-economy' is a pipe-dream and we must start thinking about creating urban environments fully equipped with the means of production, transportation, living, and waste-disposal, all in one. Very inspiring, though clearly requiring significant paradigm- and resource-shifts from today's globalised economy.

Clearly transportation comes at a cost, the question is how much the alternative would cost. Building super-farms, creating artificial climates to grow exotic food, waste-disposal, dealing with virus-outbreaks—regarding the latter, farmers already have problems dealing with chickens, sheep, and cows now, let alone having to deal with something like Kunstler's utopian vision—all of which represent costs that have to be accounted for.

But, I don't want to sound like a pessimist. I actually love the idea of a super-farm and a super-urban environment, regardless of the monetary cost. I'm sure plenty a sci-fi artist has tried to draw such a very thing (as have I). It's complicated, expensive, but exciting at the same time.

Asking you a tough question: How would you do it? What would a Kunstler-inspired localised economy look like to you? Is it even possible? … well, something to think about anyway…

Arguably, I managed to write some strange posts while I was writing my thesis… some of which seem completely unrelated to this blog, and which I may shift to another blog, my first blog, which I'm resurrecting just for these types of "philosophical" topics.

Still, I liked my post on the lowest common denominator (LCD) from a few months ago, simply because I can still apply that thinking to other disciplines also. To remind you, the LCD is defined as the "lowest"—least useful, least advanced, or similar—member of a class.

The LCD of business-components
It came back to me last night, when thinking about what I wrote in my last post, on how it was difficult to sell a lifestyle product, if conditions for that lifestyle are not yet present. So you find other unique selling points (USPs), and in this case it was health as that was a key driver. To me that is finding the LCD in marketing—you find the "keyword(s)" that connects your product's message with the context of the customer.

Another example. I was thinking about writing about IKEA this week again, but it was such a simple point that a paragraph will do. IKEA is well-known for its design, yet also for its low prices. Actually design was never core-objective, it was finding the cheapest way to produce and to distribute. Design came afterwards, and was even then a matter of working with what you have: whether it's a certain kind of wood from Poland, or the hollowing of walls to make them lighter, or removing the legs from a table for packaging. It's all a matter of lowering the costs, and only afterwards about making it look nice. The LCD of production is finding that sweet spot between a cost that works for a business and a design + price that works for the customer.

Business-planning = the reduction of assumptions
One of the first things we learned in our entrepreneurship-masters, is that business-planning is a fantasy-story—we make up stuff that we hope is believable. If we can reduce the assumptions in the document, however, to the level that an outside party (and inside parties) start finding it believable, that is the key to the mission-statement, the operational plan, and to finding funding.

Bringing things down to the LCD is a way of reducing assumptions and convincing others of my idea. Explaining that production is subject to costs and design comes later is logical; or that reaching customers is a matter of finding the simplest things that connect us.

Essentially, a business-plan is a simplification of reality. Your financial predictions will likely be off by a lot or (hopefully) a little. Your marketing-plan will make certain simplified assumptions about your customers. Your production-plan will assume that all goes well. Keeping it essential, however, does have a better chance of convincing investors, etc. that you can see through the mist and identify the key-drivers for success.

Simplicity, yes, but not of skills
As I wrote last time, it's good to know the LCD of whatever you're doing for yourself. It's not good to shout it out to the world (oh, the irony!), as that really decreases your competitive advantage.

Still, while focussing on LCDs arguable simplifies the strategy, finding those LCDs and profiting from them is a matter of skill and study, of knowing your processes, your industry, your customers, etc.

Abstraction…
Now if all of this seems pretty abstract to you, you're not alone. I'm still trying to figure stuff out for myself. One reason is certainly the fact that you need to have the skills, the know-how to accurately identify key-aspects of a business-strategy, which differs from business to business. Another possible reason is that I'm completely wrong about this (let's hope not).

A final reason is that I still need to write a recap of months 3-6, which I'll try to do this weekend, before going on to other topics.

Anyway, agree or disagree? Let me know in the comments.

I'm spending a lot of time with a friend this week, who runs a start-up in a developing (2nd world) country in the lifestyle-food sector. I won't mention his name, his company or focus, or his country, nor anything confidential, because I don't want the information to be used against him. Instead, I'll talk about some general principles, that I've identified.

The irrelevance of business-literature
We both studied at Rotterdam school of management (sometimes known as Erasmus), and spent some time there last night. Funnily, I came across an article in a university-published journal identifying 6 traits of leadership to ask for in the "new" workforce. Keywords included: ethics, diversity, global outlook, tech savvy, adaptive capacity, and the X-factor (charisma?). I asked him, as a joke, which he thought applied to him. Global and adaptive, he responded. The rest meant virtually nothing to him. As a start-up, I guess, you have to do what you have to do, to stay alive.

The advantages of 2nd world start-ups
I distinguish between 1st world (e.g. the Netherlands), 2nd world (e.g. Brazil), and 3rd world (e.g. a large part of Africa), when I look at countries. 1st world countries are mature in their development, 2n world countries are not yet mature, but their economies are growing pretty fast, and 3rd world… well, I'm pretty depressed about that, though sometimes there's surprising pockets of entrepreneurship and innovation.

The advantage of a fast growing economy is that people are still figuring stuff out, meaning there are a lot of inefficiencies and gaps in the market. Another advantage, in his country's case, is the interests of governments in boosting those economies. If your innovative, the grants you receive may be both easier to get and larger in size than anything available in 1st world countries.

For start-ups, another advantage is that you can look at what works in a 1st world country and use that for your own business. This principle is not exclusive to start-ups, it's also relevant to the innovation race between Europe and the US, for instance.

The costs of educating a market
My friend operates a lifestyle-food start-up, as I said. One gap in 2nd world markets is usually that that segment is underdeveloped. But, if the economy is booming, wealth is increasing, and that certainly has a positive effect on the luxury-market.

However, when you introduce a new product to a market, you'll have to build the market up first. There are various approaches to marketing, I'll just go into the one that my friend used.

Essentially, you want to get your products into a supermarket, and you want people to buy the food. Sometimes one, sometimes both will take some convincing. In the beginning. he spent a lot of time in supermarkets, getting people to taste his food. After that went well, he could use that success to convince other supermarkets to become customers also.

Two advantages of supermarkets: they usually have pre-written contracts for suppliers so you don't have to draft them yourself. And they sometimes operate in chains, which makes it easier to get larger customers.

There's two further things to do with food, to make customer-adoption a little easier. One is to sell it in an easily digestible fashion, e.g. a snack. Two is to not do so, and instead provide customers with instructions to prepare the food. You could do this on the packaging, a website, and even more drastically (can't mention what). My friend is pretty active in this area.

Another problem with 2nd world countries is that, while your food may be part of a lifestyle in the 1st world, it's close to impossible to lead that lifestyle over there, because all the components are not there yet. So, in fact, you don't use that lifestyle as a marketing-term. Instead, focus on health-advantages, as that is often the underlying driver for such demand.

Still, even after more than a year, my friend spends about half of his monthly expenditure on marketing—which goes through a marketing-agency that designs the brand, the colours, etc.

Global outlook?
As a start-up, you have to work within certain boundaries: limited money, staff, production-facilities, time, etc.

The clients for a food-company may very well be supermarkets, which, as I mentioned, have the ability to buy a lot. My friend is expanding into other countries, but he's carefully picking the ones that don't exceed his capabilities.

He prefers a fragmented market, where he can concentrate on a one or two chains at a time, not a market where there's national chains that could bleed him dry.

Related to this, fragmented markets are usually underdeveloped also, so in fact he is exporting to countries similar to his own. That, at least, is as theoretically expected.

Theory, schmeory.
While there are certainly concepts that can be found in a number of different fields, ranging from entrepreneurship & strategy, innovation, supply-chain management, and marketing, it remains a matter of being practical, and specific to the business.

Entrepreneurship is a 60-80 hour / week job, usually. You don't have time to check out business-journals, etc. to do your job.

P.S. his business-plan was 2 pages long.

And those… are the facts of life. More, if I can think of it. The picture is completely unrelated to his product.

Every now and again, you come across something that changes the colour of your perception, that allows you to see the world in different ways. One such moment happened after reading a chapter in the IKEA-book, I wrote about before (1 & 2), on how the customer is deeply involved in the logistical process and the effects and cause of it.

As you may, or may not know, when you shop at IKEA, you generally go into the store, choose the furniture you want, pick up the already-boxed version of that item, put it in a cart, pay, drive home, and assemble it with some tools that are in the box. All-together, the customer at IKEA does 80% of the work related to sales.

I had read, in my bachelor, I think, that the reason that IKEA introduced this system was because of when it first opened its store, there was such a mass of people that their staff couldn't handle it, and that they then just decided to let the mob do all that stuff. I thought that the reason that system remained was cost-saving; I mean, how cheap is that to let customers do all that work for themselves, right? Well, that's definitely a reason, but only part of the story.

The other part is the effect it had on customers. Because you always ask yourself, why would someone go through that, when they can just pay the store a little extra for the transport and the assembly? And that's where it gets interesting.

To start, IKEA, even though it offers low-cost goods, is well-positioned for the middle-class market. The stores are outside the city, and pretty much all their customers have cars, which they can use to transport the furniture back home. I'm not 100% sure if this was by design or a consequence of other factors. But at the very least, the conditions for making the customer part of the logistics process are in place. Still, you kind of wonder. Aren't these exactly the people that could afford a little extra service?

The explanation is culture. Western culture, you could argue, has seen a shift towards individualism. People are over-informed, over-serviced, over-indulged. Sales-clerks and waiters can't wait to throw themselves at you and ask you if you're happy, if you want another…, and another, and another. It's exhausting, both for the store and for the clients.

In comes this place, which tells you, very Scandinavian, here… go do it yourself. Like a party, where you can mix your own cocktails. Where you control what goes in and what comes out. And most of all, where you get the feeling that you are part of a productive ecosystem. It's the good kind of stress.

The book quotes some sociologists, Robert Jungk and Ivan Illich, according to whom, a society which receives too many services, where every screw has a handyman, is a broken society. Services, they say, destroy activities. For every small chore, you can call an expert and let them do work that you actually do yourself. On a larger scale, services destroy the entrepreneurial drive. Also Thomas Düllo, according to whom, we live in a world of indirectness, and because of this, it's very exciting to be asked to do something. A French student was also quoted, calling IKEA: "Lego for Adults."

And there are definitely signs that suggest that society wants to move into another direction: open source, Wikipedia, Make-magazine, do-it-yourself, self-help, etc. Probably even blogging. A collection of niches to be sure, but growing ones.

Ever since reading that chapter, I sit in restaurants, stores, etc. and wonder how this principle can be worked into their or other businesses. For instance, is the take-away coffee part of it, or McDonalds' policy of throw-it-away-yourself, or Amazon. All of these "features" cause both a downward-shift in the bottom-line of "service" businesses, but they also remove the "service." And these businesses are unarguably booming too.

But I also wonder which services can be removed, and which shouldn't. More on that when I have the answer. Or perhaps you have it yourself? Let me know in the comments.

The picture is courtesy of Marco.org

Essentially private labels, also sometimes called house brands, are products branded either with the name of the retailer, or, at times, sharing some kind of umbrella-name, decided by the distributor or otherwise. But what private labels really represent, to me, is the ultimate example of a power-struggle between a retailer and suppliers. Sometimes, but not always, it also means that some kind of vertical integration has been taking place between retailers and manufacturers, or, at the very least, packaging plants.

For now, I'll just be looking at some stats on private labels. At a later date, I'll take a look at more supplier-retailers dynamics, branding strategies, etc.

Geographic share
According to an ACNielsen report (pdf), the global* market-share for private brands was 17% in 2005 (* global meaning 38 countries and 80 categories), and had grown 6% that year.


Figure 1: Share & growth rates of private label by region (based on value sales) (source: ACNielsen, 2005)

Europe has the largest market-share with 23%, and Latin America the smallest, with 2%. Top countries included Switzerland, with 45%, Germany, with 30%, and the UK, with 28%. The largest Private Label growth happened, unsurprisingly, in emerging markets (11%) like Croatia (77%), Greece (24%), and Thailand (18%).

One big growth-contributor in Europe is the strong growth of hard discounters, such as Aldi or Lidl (both German chains), who are present in every European country and expanding rapidly. With Aldi, for instance, private labels make up 95% of sales.

Private label foods
Category-wise, refrigerated foods have the largest overall share of private labels, namely 32%. Complete ready meals take the lead here, with an average of 47% private label-share. In the UK, 97% of ready-meal sales are in fact private label.

Another significant private label food, or rather drink, was milk, of which private labels make up 43% of sales.


Figure 2: Value shares of private label by category (source: ACNielsen, 2005)

Other high private label food-products include frozen meat (39%), fish (39%), and vegetables (38%), and 37% for shelved vegetables. Frozen pizza is at number 27, with 17%, tea and coffee at numbers 37 and 38, with 14% and 13% respectively. Wine is at number 44, with 12%. And Beer is all the way at the bottom, at number 74 with 3% !

Among the fastest growing foods are drinking yoghurt (28% growth), baby food (20%), chocolate (13%), and water (13%).

Pricing trends
One of the strengths of private labels is of course that they are cheaper, on average 31% less than manufacturer brands. Emerging markets showed the biggest discount, with PL-goods costing 41% less on average. Europe wasn't lagging in this respect either, with an average price difference of -37%. On a country level, Greece, Australia, and Germany were taking the lead with, respectively, -48%, -47%, and -46% discounts (compared to manufacturer brands).


Figure 3: Price differential of private label by category (source: ACNielsen, 2005)

Again, concentrating on food-categories, the products that received the biggest discounts were Sports Energy Drinks (-55%), carbonated beverages (-43%), cereals (-40%), wine (-38%), and tea (-37%). Food-categories taking the least in discounts, included chewing gum (+7%), wet soup (no difference), meat (-2%), and ready meals (-5% <- I guess that explains their high market-share). 

Final thoughts
That market share is increasing more quickly in emerging countries is not surprising. Retailers there will likely not be mature and/or consolidated enough to focus on such a strategy, but this is clearly changing.

Germany's dominance is also interesting, as both Aldi and Lidl originate from there. One of my next posts will be on Ikea's European growth and Germany's also very strong there, which suggests a certain preference for low prices with German customers.

Switzerland is still somewhat of an enigma, but I'll try to find out more about it.

In terms of products, both the dominance of private labels amongst ready-made meals, and that their prices are quite similar to regular brands, is very interesting. It could suggest that customers either don't care much for quality and brand-differentiation in that sector, or that private label brands are actually quite good. The price-level would suggest the latter conclusion.

Generally speaking, refrigerated goods are different in the eyes of consumers, I think, less scrutinised perhaps, and worthy of more investigation. Milk is of course similar to water, and hence not really a product where brand makes a huge difference.

What else? Certain beverages, like coffee, wine, and beer are quite interesting, as their private label share is quite low. This would suggest a high brand-sensitivity in these sectors. The low percentage for beer (3%) is certainly striking.

More on private labels as I come to it.

This week, I seem to be taking somewhat of a personal angle, where I express my own views, rather than report and analyse those of others. I'm not sure if this is good or bad, but, after reading Fred Wilson's view on it, I think it's sometimes necessary to instil some personality into a blog.

One thing in life that I am very sceptical about is marketing, and there is one particular kind that annoys me the most. I call this argumentative marketing, and I define arguments as:

Constructing a logical set of information, meant to replace the logic present in the mind of the audience.

In other words, arguments often serve the purpose of distracting or confusing the person or group they are targeted at.

That it is not meant as arguments not containing any information! No, I think knowing that a knife can cut through a metal can of food is quite interesting! But if I were a chef and all I wanted to do is chop vegetables, and I already had a perfectly good knife, this information could also be considered distracting.

Arguments are very prevalent in our global society. Not only is advertising the number one business-model in on- and off-line media, but there are quite a number of jobs centered around constructing arguments. Take students, lawyers, politicians, consultants, marketeers, sales-people, a certain type of manager, etc. And let's not forget bloggers!

And I think the market for arguments, people, is quite saturated with them also, meaning that the value of arguments is constantly decreasing.

As always, this means that other opportunities open up, which some marketeers are already exploiting. Let's not market at all!

One way to do that would be to simplify the argument to the essentials. Have the product or service itself tell the story, by illustrating clear and simple values, which customers can grasp and share with the rest of the world.

Examples are:

• Google-search: just search
• iPod: 1 button-play
• Fast-food: colourful, good-smelling food and drinks, easily accessible (there does seem to be a trend towards more info, but I'm seriously doubting that it will last, or that it matters to 98% of customers)
• Amazon's Kindle (still sceptical): one click shopping anywhere (in the US)
• And, last but not least, the lack of title-sequences in the series "Lost," and pretty much any movie or series afterwards!

For my own business-plans, I'm much more leaning in this direction. Have the product speak its own tale. Give customers optional information, if they so desire. But ultimately it's all about building trust, a reputation based on that, and designing your business-processes to support that.

The picture is courtesy of allaboutadtips.com

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.