The two biggest challenges to the Australian FMCG industry are the arrival of Amazon and changing customer behaviours – each one fuelling the other. And if the incumbent retailers continue to sit on their hands, new entrants to Australia will be breeding more Amazonians as they go.
Consumers will always be in the driver’s seat, leading the way with their ever-changing preferences, priorities and purchasing habits, leaving it for the retailers to make the right decisions to keep pace.
To get ahead of the Amazonians, the whole FMCG value chain needs to adopt and adjust to new ways of meeting customer needs. The sector globally is often so focused on the end customer it forgets about the engine room which is the supply chain. Amazon did not, but even the market leader could they be blindsided by the Australian or other nations shifting the paradigm again.
We think the Australian sector is well positioned to think differently and leap frog the competition, putting itself at the cutting edge.
CEO of Woolworths, Brad Banducci said earlier this year: “We’ve gone from being reactive […] to being much more collaborative and much more forward looking with suppliers”. But this is only really following the international pack, with companies like M&S in the UK, much further down this journey with their “Plan A”. But nowhere near the aerospace sector or companies like Toyota, who actively invest in developing their suppliers’ capability and skills.
Collaboration is more than just cost saving. It is the key to improving the quality and value proposition for consumers, alongside getting ahead of the consumer trends. Taking the time to identify these opportunities, let alone the complexities in navigating both businesses to implement changes, means they often take a back seat.
It is not a shock to see the success of meal kit services in such a short period of time. Delivered to your doorstep, meal kits are mostly preferred by on-the-go consumers with poor time availability, trying to make time for leisure activities between end of work and dinner. What is shocking is that it is not the retailers leading this trend by collaboration with suppliers but new entrants starting with nothing other than an idea and some start-up funding.
Consumers are also much more conscious of food and packaging waste and knowing about the origins of their purchase. Technology and innovation through collaboration is the key to delivering on these consumer demands which incidentally usually also lead to cost improvements .
What we have learnt is that setting up sophisticated benefit-sharing models on day one or for wholesale collaboration across the industry will not work. Developing principles, and having grown-up conversations on the aligned objectives of the category is the right way forward. You need to invest in collaboration for the long term, thinking differently about how businesses work together to meet the end customers’ needs.
Perhaps the biggest blocker to this is the fragmented supply base, where retailers buying teams are dealing with hundreds if not thousands of suppliers. Consolidation would not only reduce costs through economies of scale, but only allow true collaboration efforts to get started, rather than the superficial maintenance of relationships.
Focusing on closer alignment allows quicker NPD, moving to a mentality of the lean start up where products are tested based on minimum viable products with a win-big, fail-fast mentality, quickly adapting and developing to customers needs which means challenging the normal ways of working and bucking the rules and regulations around delists and re-ranging.
Only where collaboration and a true understanding of the full value chain is in play can we really start to streamline and create an efficient value chain.
British supermarket giant Tesco had its offer to buy wholesaler Booker for £3.7bn, approved recently, claiming it will create “the UK’s leading food business”. The deal spooked the grocery sector, but investors liked the idea with shares in both trading higher after the initial announcement.
Tesco claims it will give its suppliers more customers to sell to, while giving independent retailers more choice. It also thinks it can cut down on food waste by making the supply chain from farm to retailer more efficient and it is this final point we believe has significantly more value potential than Tesco has identified.
Using technology as an accelerator, the cost savings through a merged distribution model and other operational synergies could rival Amazon and provide some thinking points for the Australian market.
A key challenge in Australia is distribution costs and how the retailers supply chains are designed for volume not speed. Direct-to-store is common in the fresh model due to the retailers’ networks being designed for pallet volumes and a lower in-store replenishment cycle. This means life on shelf and minimum order quantities drive in-store waste in a developing space.
Whether it be a collaboration, joint venture or acquisition, whoever has access to a leaner supply chain designed for smaller, more frequent delivers will be leading in the categories the customers are demanding more of, such as “fresh” well before 2025 and more like next year.
A deal like Tesco’s would significantly increase density in drops by including supermarkets, convenience retailer, wholesale, restaurants, caterers and potentially the end customer all on the same vehicle, solving one of the key supply-side problems.
Velocity is equivalent to a specification of its speed and direction of motion, translated into the supply chain world it means the right amount of the right products in the right place at the right time.
Most businesses run to stock and service into the retailers through third-party logistics and warehouses. Or retailers are pushing their own logistics solutions, creating complex and fragmented networks, with multiple points of inventory.
Each one holds a little more than the next in the chain to ensure supply. The bullwhip effect kicks in and that stock hold is multiplied to cover the variability in demand down the supply chain. In easy-to-understand terms, our supply chains are fat and getting fatter based on the wrong information being provided.
While the concept of the bullwhip effect has a lot of currency, there could be an exciting alternative to consider and an exciting paradigm change that would allow the retailers to win the battle of the Amazonians.
The potential exists for retailers vertically integrating not to the manufacturers and the farms, but actually owning the physical supply chain from the end of the of the manufacturing line onwards.
Where product flowed directly from production lines to warehouses owned by the retailers, who could then distribute to either their stores or other customers for the manufacturer, the manufacturer would agree a stock hold position and location as close to the final customer as possible.
In theory, this is moving to vendor managed inventory on a grand scale in the distribution centres; taking the Amazon model and applying it to a bricks and mortar industry, potentially significantly impacting third-party logistics and storage company’s futures.
It would remove a huge amount of stock which frees up cash, removes manual labour in warehouse processes, reduces the distribution distance product would travel and reduce overheads in function such as planning and customer service. All of this before we even consider automation and technology accelerators.
The Australian FMCG sector has the opportunity to put together this new paradigm, creating the physical network, underpinned by collaboration, innovation and technology that would make its model the envy of the world and where people like Amazon come to learn and test new ideas.
Written by Paul Eastwood and First published by Inside FMCG, download the full report here. https://insidefmcg.com.au/toward-2020/