Posts Tagged ‘tesco’

Where’s The Economy Really At?

Friday, August 13th, 2010

I have been intrigued by comments by Mervyn King and others about the state of the economy, as I am not sure whether they ever take into account the real situation for small companies.  So I thought I would briefly blog some notes about Steenbergs at present.

Employment – Unemployment : one of our members of staff has just left to another business on site and we are advertising to fill that post at the Jobcentre Online (our favourite way of advertising), which is just the best service.  In the past, when we have sought to recruit for this same role, we would get maybe 3 or 4 applicants, but this time we have 20+ applicants and they are still coming in. 

Firstly, it’s a warehouse role, so where are the ladies who would like to do this, as while it is being offered as part-time and for anyone, we are only getting men applying and of all ages, but not a single woman.  Secondly, there appear to be a lot of local people who have been made redundant recently.  Thirdly, I am not sure whether there are really more people available, or whether because of the gloominess in the air, people have set are prepared to look at a part-time role where in the past they would only have looked for full-time.

Finally, we are changing a full-time role into a part-time role, or perhaps no role if we do not find the right person. Are we simply part of a general caution in the economy that has become fearful about recruiting, because of the fixed costs of financing such a role and the structural rigidity of hiring someone (and the emotional desire to keep that person employed once taken on) rather than bringing in temporary staff as and when we need them.

Credit quality: We have noticed a real fall off in the credit quality of businesses we deal with over the last 6 – 9 months.  Now my dad always says that “only businesses with no business have no bad debts”, but still people who do not pay their debts frustrate and waste a lot of time and energy.  I know that some of you will say use credit checking agencies and that will mitigate your risk, but most of the people we deal with have no credit history as they are small, start-ups or have no real debt history, hence we need to make our own judgment calls.  So while we have not had such a big bad debt as we had 3 years ago (I am crossing my fingers and touching as much wood as I can find as I write that spookily self-prophesying line), we certainly have had more in volume.  Most have been small debts of less than £100 each, but they add up and are truly infuriating. 

Many people this year just seem to be disappearing or telling us that they are closing down without paying out their debts, or the administrators get called in to protect the creditors – has anyone ever been paid out by the administrators as it is mysterious how the banks and the administrators themselves seem to take any available cash and leave the small creditors out to hang and dry?  It’s that eternal thing of the big being protected and the weak being screwed. 

Our worst recent experience was The Natural Kitchen that went down last year after they had ordered lots of kit from us just before going into administration – the annoyance was they only bought from us because as Northerners we did not know they were in dire straits (I am sure everyone in London knew!) and when we asked for the stuff back they said they would pay for half of the invoice as they knew they did not really own it, but they never did – rightly assessing that we would never drive from Yorkshire to London to take back the remaining stuff from the shelves; serves me right, I guess.  And Natural Kitchen are backed by millionaires from the property world and investment banking, who quaff their premier cru wines without a care for the hard earned cash of others – disgraceful, but completely legal – aaaargh, it still makes me grumpy!

Sales: actually, they are doing surprisingly well, but we continue to innovate, tweaking our designs, range and recipes.  A few buyers of bulk ingredients are trying to switch to non-organic from organic, but some of the less active ones from last year like Spicemanns/Kerry Ingredients and Elgar Foods and Walkers Shortbread are buying again, while new ones are coming on stream, such as Northumbrian Fine Foods and John Morley; we seem to do well with small batches of blended spices for organic Fairtrade mixed spice and organic sausage seasonings (e.g. for Northumbrian Quality Meats and Riverford Organic) that no-one else will or can do, including exports of our organic curry powders to the Continent.  Prices are stabilising with less currency turmoil, even though commodity pressure is still upwards, which gives better pricing forecasts overall; everyone was nervous in 2009 as costs were all over the place, and contracts from previous years had became onerous. 

General retail is only slightly up, but that’s partly our fault as we have chosen not to embrace with the big bears of the retailing world as we are not ready to lose control of who we are and what we stand for, even if it means sales will not go into the stratosphere; we are seeing good sales of Steenbergs organic bakery ingredients via distributors like Hider, Queenswood, Suma and Tree of Life and continued good sales into some of our bigger stores like Fenwicks, Selfridges and Wholefoods on High Street Kensington, as well as really exciting enquiries from overseas, such as Whole Foods Market in the US. 

Then the web store is going a storm, but that’s more to do with increased tinkering by Sophie and me on search engine optimisation and playing with social marketing (the challenges of Facebook, Flickr, Linkedin, Twitter and we are even looking at how to use Youtube), allied to a massive increase in the range of products that we sell.  We genuinely think we do differently from anyone else’s way of retailing (whether or, and will continue to do it in our own eccentric way, for better or worse, chosing products that fit with Steenbergs image as ethical, green and different. 

It’s tough trying to change the world, but every small step forward is a step in the right direction – we will not give in to the temptations of a quick, easy buck, however nice that would be.

Given that ramble, where are we then? Cautiously optimistic about Steenbergs, but gloomy about the state of the economy.

I Just Don’t Get Ocado Business Model?

Saturday, July 3rd, 2010

I am fascinated by Ocado and its upcoming flotation.  Why you might ask?  Well, it is because Steenbergs is having a go at becoming an online retailer, but obviously on a micro, mini scale compared to Ocado.  But also, I just don’t understand their business model at all, because to me they are a courier business pretending to be a retailer.  And a courier with one big customer, who can also compete against them.

I will try and explain what I mean. 

The first thing we decided when we started was to outsource transport as it’s a commodity business with few barriers to entry and adds no value to your brand/business.  Obviously, bad delivery service can be a problem (and occasionally is for us), but I am glad we do not have to worry about routing vans, filling empty vans on their return journeys and optimising routing.  If we were involved in delivering chilled or frozen products we might need to consider it, but we have also steered away from those for the moment, while there are third party distributors who provide frozen deliveries and might (I suppose) do chilled if the volumes were right.

By ignoring transport and just seeking to get that cost down, we were able to focus on the core parts of retailing which are buying and merchandising.  The buying process allows you to build an image of how you look to the customer and the world out there, and (perhaps even more importantly) work on your retail margins by working on your volumes and (if you are Tesco or Sainsbury or Waitrose) your suppliers to squeeze out better margins. 

Secondly, you can work on your merchandising, including developing your own branding, so for example 98% of chilled sales on the high street come from own label and 40% of Sainsbury’s sales are own label, while the discounters have an even higher percentage.  And for Steenbergs, our own original core of Steenbergs Organic spices, herbs and teas remains what brings people into our site.

But Ocado does not do this side of retailing, outsourcing much of it to Waitrose and then agreeing to limits on how much non-Waitrose it can buy in.  So it misses out most of what real retailing is about.

Further, there is no obvious exit strategy for Ocado shareholders, as John Lewis is sitting there as a poison pill.  If you take over Ocado, Waitrose can walk and would probably want to walk (assuming that the buyer is another retailer) and you would have the headache of needing to rebuild your supply chain.  Similarly, John Lewis is never going to pay big bucks to take the whole business in house.  Then on top of this Waitrose has its own online shop and has been allowed to compete directly for customers within the M25 region, leaving Ocado with the whole of the rest of the UK to cover.

So what is Ocado?  I think it is a glorified courier business that is masquerading as a real retailer, and one that has a single major customer, which is not fully tied into supplying Ocado.  Plus if you want to buy Waitrose products, you can still go and visit a Waitrose anywhere in the UK and even buy online then collect in store. 

Although it pains me to say so, the Tesco model is much, much better.  Here, Tesco Direct complements its supermarkets with deliveries in any catchment coming out of the local store.  As a result, local store managers and workers can see Tesco Direct as boosting local business and widening their retail catchment, i.e. Boroughbridge and Ripon do not have Tescos but you can still get deliveries from Tesco Direct which will come from stores in Thirsk or York or Leeds.  Whereas Ocado actually do the opposite as it competes against your local Waitrose, as the distribution chain is separate, so why would the store manager of Waitrose in Harrogate or Hexham want you to go to Ocado?  They wouldn’t would they, so they are not going to genuinely promote competition that would effectively reduce your annual John Lewis bonus.  Note that Warren Buffet has increased his shareholding in Tesco in the last few months – what does that mean?

In fact, if you put HG4 5GZ into the Waitrose web site it tells you can shop online and pick up from store (in Harrogate) for groceries and home direct kit, while it says the delivery service is not available in our area.  There is no linkage or push to Ocado, which cannot deliver to us but Tesco, Asda and Sainsbury do.  If you are in London, say Moray Road, it does push you to Waitrose stores first and then Ocado for now, but from next year Waitrose can deliver direct within the M25; is the float being done now before any cannabilisation in sales from Waitrose next year?

Of course, Ocado will get away with it and it will eventually make a small profit, but (in my opionion) it’s investing money in the wrong part of retailing, i.e. distribution rather than buying, supply chain and merchandising.  It’s a southern phenomenon that shareholders and investment bankers in the south will see day in day out in vans parping around London looking busy, but it isn’t really out here in the styx; it just doesn’t really exist in the heart of England and Scotland where much of the nitty-gritty profits of retailing are being made.

Steenbergs already makes a real cash profit and its retail site is growing strongly year on year, but we are doing that by using internally generated cash to build the business; it will take longer, much longer to make us any money, but it does seem a more solid way to try and make money out of retailing.