The rise of the smaller players #retail #kantar @kantar_uki

A few weeks old again. Must get better!

The kantar Worldpanel data landed this morning and it makes sobering reading for the BIG 4 with all 4 posting declines although in a market that was only marginally up this was perhaps expected.

  • Tesco – -1.5%
  • Sainsbury – -0.7%
  • Asda – -2.2%
  • Morrisons – -2.9%

So using this data you would call Sainsbury the winner at Christmas with a significant increase (7%) in their online sales.

The real joy comes at the bottom of the market with Lidl, Aldi, Co-Op and Ocado seeing growth. 

  • Aldi – 5.9%
  • Lidl – 10.3%
  • Co-op – 3.0%
  • Ocado – +12.5%
  • Iceland – 1.3%

The Hankins Hot take – Like the last few years the “discounters” have made inroads at Christmas however in line with the suggestion yesterday I think we are seeing the rise of specialists with distinctive propositions finally seeing the benefits.  They are never going to be the biggest but they could be highly profitable entities alongside the big 4 serving particular needs.  The rise of online shopping is another evolving picture.  Christmas is perfect for this as no-one likes to trundle round the crowded supermarkets fighting over the last Gluten Free pack of Mince pies, much better to book your slot in September and do it all online!  M&S will be looking at this with delight due to the growth at Ocado whilst Waitrose will be worrying about the financial impact next year with only 3 months to “restock” the online shopping larder.  As to Co-Op and Iceland their trajectories seem secure as they reap the benefits of their recent transformation plans.

#Greggs are my new favourite on the #highstreet #retail

Many of you will be aware of my continued evangelist role for Next but there is a growing competitor for my corporate love and that is the home of the vegan sausage roll (and slice), Greggs.

With its 4th!!  Profit upgrade of the year the business is performing exceptionally well with product innovations driving a significant uptick in penetration and combined with a broadening of physical availability, the business is currently reaping the rewards of its strategy which is underpinned by a simple ambition “to create a business able to fulfil 2000 outlets).  Their annual report isn’t out for a little while but by announcing they are to pay out a £7m bonus pot to staff they’ve signalled their rude health.

Hankins hot take – As a QSR (quick service restaurant) up against the might of McDonalds, the mid-market coffee and food shops and the supermarkets Greggs are in a hyper competitive sector but have succeeded through a focussed pursuit of a clear strategy.  At the heart of this success is an interesting “quirk” of an ambition.  I’ll explain.  Many companies will say they want to grow to a certain size or number of outlets, the difference with Greggs is that their ambition was to build the capability to fulfil first.  It sounds simple enough but in the graveyard of modern retailing its not hard to find businesses that have grown too big too quick.  The impact of Amazon on changing consumer expectations is all about quick, easy fulfilment being a pre-requisite of modern retailing.  Greggs have executed this is spades.  They are likely to reach their target of 2000 outlets in the next year or so, the next challenge will be on  finding additional environments to target (they are rolling out in petrol stations and services stations as we speak), maybe we’ll see stations and airports becoming part of the mix soon!?!

Greggs are one of the most successful modern businesses out there are the moment.  I’ve compiled a simple list of the 5 requirements of a successful high street chain / retailer taking evidence from a variety of players and will look to get some time in to present to the various teams soon.  If you or your clients are interested in hearing more then please give me a shout.

#H&M and a an interesting retail trend #ARGOS

I need to get more efficient at posting these when i actually write them. A bit late but never mind

Some of you may have missed the recent H&M results announcement but contained within evidence of an interesting trend in retail and one which provides guidance in how to compete with the Amazons of this world.

The Hankins Hot Take – Whilst the headlines focussed on the change in leadership, with a new chairman and CEO at the helm, the real news was hidden.  H&M have never been the most e-commerce led business on the high street.  A visit to any store will attest to that whilst their growth has been driven by a vast store opening plan in contrast to the actions of its competitors.  The outgoing Chairmans comment sets out the changes in the following comment “ can we use those stores even better as logistical hubs for deliveries, for pick-ups, for returns?”.  This essentially is the ARGOS “hub and spoke” system that uses the physical stores as part of its supply chain as well as its retail footprint. The Local Data Company already tells us that multi-usage property is on the rise and this change would enhance these figures.  It’s likely that whilst some stores would maintain their size, the proportion given over to in-store fulfilment would decrease with an increasing amount given over to the warehouse/fulfilment area.  The challenge will be whether this can work in the fast moving fashion world,  combined with a reduction in lease costs the multi-usage should actually make it easier to drive profitability IF stock control is effective.  As mentioned though, H&M stores aren’t really known for their order (although the COS’ and &Other stories are more controlled, if smaller) so a complete operational overhaul would also be required including more optimal OMNIchannel merchandising.  NEXT are rolling out this dynamic merchandising programme at the moment which is allowing them to sell more at full price (online) but this is tempered to a degree by the increased costs of online fulfilment although probably not quite as much as some of the NEXT sale deep cuts so “Net Net” its more profitable.

#Ocado paint a picture of the future #retail

Headlines – Group revenue up 9.9%, Retail Revenue up 10.2%, Losses increased YoY by nearly 400% to -£214m. Strong cash position of £751m + £600m bond issuance

Comments – It’s important to factor a number of elements to these numbers which on the face of it look pretty bad.  Firstly you had the big fire at Andover which affected not just Ocado Retail but also the services arm which supplied Morrisons (who had to take a Holiday), making the revenue growth look even more impressive and secondly the significant CapEx investments into the international services loaded cost into the business in year as ground was broken on new fulfilment depots.

Hankins Hot Take – A topline shock but an underlying success for Ocado who pointedly refuse mention of Waitrose at every opportunity focussing entirely on the JV with M&S and the expansion of their fulfilment and services business.  The business now splits itself into three, UK Retail, UK Solutions & Fulfilment and International Solutions and whilst International Solutions is nascent and costly due to heavy Capex, its intriguing to view Ocados route to profit via the ratio between revenue and Ebitda for UK Solutions vs Retail (14.5% vs.2.1%).  Perhaps unsurprisingly selling services are significantly more profitable than retail itself!!  As the international business grows and Capex declines then the clear implication is that profit is only a short step away. 

Another interesting angle on future development is taken by looking at the investments that they’ve made in Vertical Farming, Automated Meal Prep and 3D printing (in addition to ongoing investment in robotic arms for picking purposes) suggesting expansion of the Ocado group vertically into wholesale (like Tesco and Morrisons) and food delivery (they could be a big threat to Just EAT and UberEats).  The presence of 3D printing is linked to the variable sized fulfilment centre options that they are trialling, paving the way for “out of the box” solutions as a service.  The final word has to be reserved for the M&S JV.  Expectations are for 10-15% growth which feels reasonable bearing in mind the 2019 revenue depression felt by the fire was estimated as having a 10-20% negative affect (for a net 10% growth).  To support this SKUS have been increased up to 58k (Making Ocado the biggest grocer in the UK, Tesco have an estimated 40k) whilst regular users now total  795k (up 10.7%) and wastage is 1/6th of the market average which is an amazing result when you consider that often wastage management is the difference between profit and loss for many large grocery stores.  This is an aggressive set of forecasts by Ocado and suggests they do not fear the loss of Waitrose.

Its FAA time (That’s #Facebook, #Amazon and #Alphabet)

I dropped the Netflix update last week and over the last 4 days we’ve had three of the other big tech firms weigh in with their quarterly results.  here we go!

Facebook

Headlines – Revenue up 26% YoY, 98.5% driven by advertising, Costs up 51% YoY, Op Margin down 9%, Cash up 90% to $19bn and ARPU up 30%

Comments – As one of the more influential companies in the world Facebook attracts a large amount of interest, these numbers do look healthy but its worth identifying the number they barely mentioned and that is the drop in income of 16%, even as Capital expenditure increased by less than this.  It’s not a cause for concern yet but users are beginning to slow and the US/Canada is where the majority of income is driven with ARPU some 400% large than the nearest region Europe

Hankins Hot Take – Reading into the leadership statements its hard not to feel a bit underwhelmed by such a large and economically viable company.  There is talk about privacy but couched against a “plea” for great regulation for the industry which seems entirely disingenuous.  There is evidently a major play afoot for small businesses (the long tale) and an attempt to become THE platform for small businesses which dovetails with the platitudes around payments and the development of Whatsapp payments and the noise and subsequent silence around Libra (Facebook Crypto).  With 98% of revenue coming from advertising and huge ARPU headrooms vs the US it does feel as though FB are happy to coast along until they are forced to do something different.  Commercialising WhatsApp is an interesting avenue due to the huge levels of global penetration with over 500m daily active users and this is likely to be the biggest opportunity to drive revenue growth going forward as products like Oculus are minimal in the extreme.  This seems to be a problem affecting some of these platforms now, where to engineer step changes going forward.  That said a 26% YoY growth in revenue isn’t to be sniffed at, advertising pays!

Amazon

Headlines – Q4 YoY sales rose 21%,  FCF was up circa 25% however when we look annually revenue is up 20% YoY and income up 17%.  61% of revenue driven via the US.  AWS (Amazon Web Services) provides just 12% of income but a whopping 60% of income

Comments – Amazon continues to use its US and AWS operations to allow its International operation to run at a loss.  2018 looks like an anomaly when it comes to fulfilment growth (35% YoY) vs 2019 (17%)  which suggests the current programme of large upgrades has been effected.  This is likely to have been linked to Amazon Prime Now the rapid response delivery service.

Hankins Hot Take – There is a reason for the clamouring to break up Amazon due to the remarkable performance of the AWS cloud computing network.  It essentially allows the retail businesses to go under the radar with “international” still losing cash.  Globally there are 150m Prime users which is a huge amount of repeatable income supporting the cash generation at the levels we are seeing (c$38bn) this is likely to further support investment in programming as part of a virtuous circle to protect it against the streaming wars, Amazon are one of the potential final destinations of the Netflix business after all (although I see Apple to be the more likely to bolster its Apple TV platform).  Advertising is another glossed over area, both as an investment by Amazon and as a revenue generator.  As an investment Marketing makes up £18bn worth of cost with an estimated £11bn globally being spent, making it the biggest advertiser on the planet essentially supporting its loss making with top down revenue support.  AS regards the commercial opportunity we are only at the beginning with circa £12bn annually apportioned (but not reported) to this growing channel that was £10bn in 2018 with many territories under-tapped.  The fuss around Amazon is not misplaced.  If they get any sort of real traction with their ad product then they’ll begin to streak ahead.

Alphabet

Headlines – $161bn revenues and $38bn Net income figures are good standalone figures (18% and 24% YoY growth respectively)  with advertising making up 84% of revenues (YouTube delivering £15bn annually now).  Google cloud jumps 52% although only contributes c5% of total revenues

Comments – Scouring the news sites, its clear that the new leadership broom has led to a bit more transparency on the financial workings of Googles parent.  There are some interesting comments contained within which suggest a tightening of operations and a throttling back on the moon shots.  Advertising still makes up the majority of the business but it’s the YouTube growth that really jumps out

Hankins Hot Take – Despite the negative view of the “city” with the share price dropping nearly 10% today what’s interesting about this update and the context of these results is how well Alphabet are doing.  On the balance sheet is a sizable £100bn of Cash and Securities.  The rate of growth for the Cloud product is rapid and the accelerating YouTube numbers point to a healthy growing revenue stream especially when you consider that “direct response” on this platform is limited currently (and is Googles specialism).  The challenge is always going to be “where next” and whilst not as exposed to Advertising as Facebook there is little evidence that Google are anything other than an advertising business.  However maybe we are seeing signs of what Alphabet are really with the tightening of controls and share buybacks, essentially a VC incubator, working with external partners to develop operations and then floating them/selling them from out of the stable.  Therefore could we see a Waymo IPO  or a NEST sale to maintain influxes of liquidity to fund the rest of what they do, time will only tell.