An Amazonian window?

Yesterday’s news that Ocado is in risk of breaching its bank covenants, coupled with its fall in share price, could represent a takeover opportunity for Amazon

Loan covenant definition:
A condition with which the borrower must comply in order to adhere to the terms in the loan agreement. If the borrower does not act in accordance with the covenants, the loan can be considered in default and the lender has the right to demand payment (usually in full).

Minimum financial ratios
The borrower is required to maintain a certain level in key financial ratios such as:
- Minimum quick and current ratios (solvency & liquidity)
- Minimum Return on Assets and Return on Equity (profitability)
- Minimum equity, minimum working capital and maximum debt to worth (leverage)

Market impatience
Given that Ocado is forecast  to make a loss of 1.5% in 2012 and 2013, it is unlikely that in the current climate, the markets will be prepared to tolerate any further delay in achieving acceptable levels of profitability.
Moreover, a leading retail analyst has warned that online grocer Ocado is in significant danger of breaching its banking covenants this year, owing to a toxic cocktail of a "pile of debt and falling market share".

Ocado’s dilemma
Essentially, Ocado has reached a point that often causes problems for an undercapitalised business needing to fund the development of critical mass.
They have broken the back of grocery home delivery in an M25 enclosure that has the potential population to provide a profitable opportunity for the right company.

The Amazon opportunity
Amazon meanwhile needs a way of adding groceries to its repertoire and showing it can match traditional providers in terms of service level, profitably…

We believe that taking over Ocado would provide such an opportunity.

As you know, Amazon entered the UK grocery market last year with a piece-meal ‘multiple-delivery’ model that failed to impress anybody other than those people who saw it as merely an opening gambit.
Moreover, in July last year it was mooted  that the acquisition of Ocado might represent a good opportunity for Amazon, at a time when Ocado’s market capitalisation was £1bn.

With Ocado’s market capitalisation now having fallen to £365m, we believe that the likelihood of a bid is a running certainty…

NB If you want to catch up with Amazon see our free paper Amazing Amazon

Just a virtual Hut?

Following the success of Amazon, it is unlikely that many will underestimate the potential of The Hut, especially given the direct involvement of Terry Leahy and now Stuart Rose…
For those who may have been a little distracted by the 7 years preparation for the Olympics, The Hut sells fast moving consumer goods that are non-perishable with high levels of repeat purchase, and premium luxury products with higher average unit sales and strong consumer loyalty.

Investment and backing
The business has expanded greatly since their launch in 2004, and with the help of c£75m (raised over three years from both individual investors such as Terry Leahy and financial institutions).

Key websites
This investment capital has funded the organic launch of websites across a number of sectors including clothing, footwear, bags and accessories plus a number of acquisitions including gifts, health & beauty HB1, HB2, HB3  and sports nutrition, a total of 16 web-sites.
The Hut Group’s huge customer base is split between Consumer, Prestige and Lifestyle with fashion falling under both Consumer and Prestige

Making The Hut real for suppliers 
The issue for suppliers is how to justify treating the Hut as a major customer, with a share of attention and NAM-talent far in excess of its actual size, when many suppliers  allocate resource and talent based on historical size of business.
These same suppliers normally have no problem allocating their best brand managers to embryo products, leaving their lesser talent to maintenance marketing of established brands.

Treating retailers and brands ‘equally’
This all goes back to the need to treat customers as equivalent business units to brands of the same size, never forgetting that in the end brand equity is sacrosanct.
However, if a customer generates 10% of sales and profit, and a brand represents 10% of sales and profit, then surely they require equivalent resourcing, at least… The same holds for potential shares of the business
Finally, if anyone at board level lacking a sales background needs convincing, it might be worth pointing out that a major customer represents a gateway to the consumer, and is in a position thereby to concentrate or dilute the brand message, depending on how well it appears to fits with the store offering…

The Hut is already too real to either ignore or short-change in terms of resourcing…  

'Eating cake' no longer an option in Andalucia?

                                                                                                  pic: Libcom.org
Unemployed take food from Mercadona and Carrefour.
Earlier this week, unemployed fieldworkers and other members of the Spanish union SAT went to two supermarkets, one in Ecija (Sevilla) and one in Arcos de la Frontera (Cadiz) and loaded up trolleys with basic necessities including milk, sugar, chickpeas, pasta and rice, which have been given to charities to distribute.

With unemployment in the area at 40%, compared with a national average of 24%, the union plans further actions in a protest against austerity cut-backs.

Isolated incident?
Whilst this development might appear to be an isolated incident in a region suffering extreme hardship, it is symptomatic of the pressure building up in many countries as a result of attempts to balance economic disparities.

There are obviously serious social and political issues involved that need to be covered elsewhere.
Equally, we do not believe it is in our remit to advise retailers or suppliers ref their policies on charitable donations. 

Ignoring the symptoms?
However, if either party believes that the business of selling and buying can continue ‘as normal’, i.e. without factoring these pressures and actions into business strategies, their business models will become increasingly unrealistic in terms of predictable output, and will gradually become unsustainable.

Action 
We believe that these unprecedented circumstances require a fundamental review to determine what business the company is really in, where it is realistically headed, at what rate, at what cost, at what level of risk, with what minimum output in a real world, where people are prepared to break the law in order to survive.

Awaiting a return to 'normal' is no longer an option…

Tesco’s ‘arm’s length’ artisan coffee shop business, an approach to 'over-branding?'

                                                                           pic: University of Cambridge
Yesterday’s announcement of Tesco’s entry into the artisan coffee shop business via a non-controlling stake in Taylor Street represents a move to ‘….help build brands where we believe we can add value; much in the same way we did with [garden centre chain] Dobbies, [video and music-streaming sites] blinkbox, and We7’.
It could also an acknowledgement that the Tesco name is ‘over-branded’, at least in the UK.

An incremental option for Tesco? 
This means that Tesco could now begin to capitalise on its ‘back-of-shop’ and supply chain expertise/muscle, leaving all ‘front-of-shop’ activities to their business partners….. "we are investing in the entrepreneurial founders of a new venture. The Tolley family will decide the business strategy….Taylor Street is a successful artisan coffee shop business with a loyal and thriving customer base…"

Why the hands-off approach?
Tesco need play no overt role in the day-to-day business, i.e. front-of-house, but the likely addition of buying muscle, distribution, instore décor/equipment, purchasing of roll-out sites, and potential use of spare space in ‘over-capacity’ stores could provide all the help a small company needs, and can receive from a ‘sleeping’ partner that also has one eye open…
In practice, everything the consumer sees will be Taylor Street/ Harris and Hoole, whilst what the consumer cannot see, will be supplied by Tesco..
A neat way for Tesco to generate incremental profits, without adding to ‘Tesco’ presence in the UK.

The supplier’s options?
From a supplier point of view, the customer gets bigger…
However, this can represent an opportunity for those who really think through and are willing to integrate with Tesco’s options for a company with a 30% share of the grocery sector, and an engine that is capable of far more…

Virtual shops vs. bricks – some spacial implications?

With a 2012 anticipated 13.2% share of all UK retail trade, and growing at 14%, in a flat-line market, online retail has to represent an unforeseen alternative to ‘real’ retail space. In other words, given the relatively slow reaction of retail space development to market demand, it could be said that UK retail space is already 13.2% over capacity, in that online is taking 13.2% of all retail sales. Moreover this situation will get worse as online grows, especially as online can react ‘instantly’ to market demand, scaling up at relatively little incremental cost…

The real space requirement:
In addition, as shops become more efficient, generating increased revenue per sq.ft., coupled with suppliers’ increased distribution efficiency (smaller quantities delivered more often = increased availability, 100%, zero-defect), adding store-level assortment, matched to local need, it can be seen that even less physical retail space will be required.

Buying time:
This means that major retailers will attempt to diversify even more to buy time, as they slowly readjust to market demand in terms of reducing their physical space i.e. sell off redundant shops, whilst taking some comfort in the growth of their online business, without fully appreciating the cannibalistic element…
Besides which, with Amazon at 50% of all online, no one can rest easy…

Supplier action:

• Suppliers need to reassess brands in terms of their bricks vs. online balance vs. real demand
• Where physical in-store presence is required, the brand will need focused support and performance-based-reward to justify its footprint
• Where shoppers need to handle the brand, suppliers will have to make case for purposeful ‘show-rooming’ and reward the retailer appropriately
• Suppliers need to drive store redundancy via 100% zero-defect supply, and optimise space productivity until a level of retail space is achieved that is more in line with market realities

All else is detail…

Tesco trials UK’s first virtual stores

                                                                                      pic: The Financial Times
Tesco on Monday launched a two-week trial of the UK’s first interactive virtual grocery store at London’s Gatwick airport, following positive results in Korea,  an innovation which generated 25 million online posts around the globe. See Tesco Vid

Holiday-makers in the North Terminal departure lounge can browse 80 core products, from milk and bread to toilet paper, displayed on 10 large refrigerator-sized touch screens. They can scan bar codes with a smartphone to place them in a Tesco.com online shopping basket, and arrange for delivery when they return from holiday.

On-site help
There are staff on hand to explain how it works, to talk shoppers through how to download the app and sign up to Tesco.com – if they aren’t already using it – and even a couple of iPads to let customers sign up there and then.

Roll-out options?
If the trial is successful, Tesco could position the interactive screens anywhere members of the public congregate, the only limitation being cost-effectiveness…

Korea reality vs. the UK?
However, a key difference between the two markets is that the online-distribution infrastructure in Korea is so well advanced that it is possible for commuters to place an online order en route and have the goods delivered on arrival home.

UK distribution limitations
In the UK it will be necessary for Tesco to so manage expectation that the new facility will be seen as an enhancement to normal online shopping, fitting in with the shopper’s routine ordering-delivery process.

Direct vs broadcast media?
In terms of funding, the bar-code units will probably replace traditional poster-advertising, whilst much of Tesco’s Press and TV media could possibly be converted to direct-response advertising by incorporating bar-codes wherever possible. It would also be possible to auction some premium product-space to appropriate brand-owners.

Threat to traditional media?
The future of Tesco’s remaining media usage, thus challenged by measurable response, has to be open to question, in these unprecedented times.
In response, major brand owners may explore the application of bar-codes to their own eposter advertising, directing consumers to trade-partner retailers, by negotiation…

Either way, we are on the brink of fully complementary shopping, adding another spoke to the wheel of omni-channel fulfillment…
A pointer for your omni-channel NAM? 

Who counts for the shopper when 33% is not the same as 33%?

Superficially, if some numerate NAMs feel that 33% off-the-price is about the same as 33% extra free, what hope has the shopper?

(For those who cannot wait, run the numbers as follows:
Assume Costa charge £3 for three shots of expresso
Deal 1  gets you three shots for £2 i.e. £0.66 a shot
Deal 2  gets you four shots for £3 i.e. £0.75 a shot)
Deal 1 is therefore marginally better for your pocket, and your blood pressure…

All of this suggests that by emphasising ‘extra free’, retailers can create the same impact on the consumer, yet earn more revenue per visit….
However, deeper down, this goes to the heart of the supplier-retailer-shopper relationship, the issue of trust in brand and shop equity..

Essentially, consumer-shoppers are in survival mode, and despite their recent experiences at the hands of politicians and bankers, ideally want to save time by placing their trust in brands and shops, until experience proves otherwise.
In other words, in order to maintain that trust, and minimise festering discontent, it is important that promotions anticipate 100% transparency.
This means educating the consumer as to the real value, in order that they can outsource part of their decision-making, leaving them more time to deal with the real rogues…

Otherwise, some smart-apped savvy consumer will tumble to the deception of ‘extra-free’, will not be able to bottle it up, and like all bad news…..

For 10 other ways that shoppers are weak at maths, see The Atlantic 
Thanks to Brian Loeb for the link: See FMCG Discussion Group

Olympics brand police - how companies are challenging the limits

A crackdown by 'logo police' on brands being linked to the Olympics without official sponsorship rights have been accused of "lunacy" for ordering shops to remove sausages, flowers and bagels shaped as the Olympic rings.

Some food stalls in the Olympics village are selling chocolate, chewing gum and savoury snacks from under the counter as they cannot display items not produced by key sponsors. However, as always, satire is proving to be one of the unintended consequences of the ban.

• Glasses company Specsavers used a diplomatic blunder by Olympic staff mixing up the North and South Korean flags at a football game to design an ad written partly in Korean with the two flags and a strapline: "Should have gone to Specsavers"
• Oddbins, has offered 30 percent discount to customers with a list of items of non-Olympics sponsors such as Nike trainers, Vauxhall car keys, an RBS MasterCard, an iPhone, a bill from British Gas and a receipt for a Pepsi bought at KFC..
• Bookmaker Paddy Power was told to remove posters advertising its official sponsorship of the "largest athletics event in London this year", referring to an egg and spoon race in London in Savigny-sur-Seille, France. LOCOG backed down and the posters are still up

Have an anarchically Olympian weekend, from the NamNews Team!
...ideally in the  "Capital of England during the Sport Matches that Occur Every Four Years during the Southern Hemisphere Winter, Which Happens to Be in This Year We Are in Now"
OK LOCOG?   (source: Gawker.com)