2018 - The year in review

Date Posted:1 December 2018 

mycuppa's 2018 year in review

 

It's been a big year, so we have a long list of topics to cover.......

Burning gas and burning out.

Without doubt, 2018 has been our most challenging year since 2007 and not for reasons that first spring to mind.

We de-commissioned and sold 2 roasting systems, then installed a relatively large and complex plant using the world's most advanced and intelligent roasting solution.  These initiative were the graceful swan's fast peddling legs under water and out of sight.

Our programs were completed whilst maintaining our break-neck speed in roasting, packing and sending out customers orders with astonishing efficiency whilst growing our customer base by a healthy 25+% in a tough, competitive and saturated Australian coffee market.

It smells like a whiff of success but I'm really not so sure. It was tough, way too tough to be brutally honest.

These days our operational velocity is really quite difficult to sustain every day - it's not just a simple case of roasting more kilos, but the high labour efforts involved to ensure the diversity of our large portfolio is freshly roasted and the flexible options we offer our customers - we are selling literally 400+ enumerations of coffee every day when you consider pack sizes and grind types - all processed with speed and precision.

Are we hitting walls ? - probably. Do we have to think a bit differently in the future ? - absolutely. Have we got the answers and plan ? - not yet. Will we keep pushing the limits for our customers ? - you bet !

Fake news, smoke & mirrors

I'm no economist and at times my grasp of numbers is limited to counting scoops of coffee into buckets, but as keen observer of all things around me I can't help but wonder about the doom and gloom peddled by a toxic media and politicians deeply out of touch with the wants and needs of their voters.

Surely, it's at odds with reality and the recent Victorian State elections proved a compelling case of most pundits getting it completely wrong and being caught by surprise.

Sensationalism sells as they say - housing values crashing, bank and big business profits declining, retailers going bust, congested transport infrastructure (a rare truth), wages stagnant for almost a decade - if you believe the media it appears our golden days are well and truly now behind us.

Yet why is our economy apparently booming and enjoying it's longest growth run in history and more to the point, why have some of the smartest folks in Australia - those boffins working in think tanks - proven that market powers of large companies are at their peak and dangerously increasing - to the detriment of consumers and market competition.

Unemployment is at healthy levels, immigration continues literally unchecked at a record pace and even though I'm on the road early each morning, the traffic is packed with Tradies in a rush to their work site before the sun rises.

Just 5 years ago the roads at 6am were far less congested and these days I'm the only person on the road not driving a ute or van, no wonder Toyota Hilux was Australia's biggest selling car in 2017.

Drive almost anywhere in Melbourne and you are bound to hit road works - probably more than once - it's been that way for years and a reliable bell weather of economic progress at a frantic pace. Travel down suburban Melbourne streets and there are at least one or many sites with extensive building underway, knocked down for a Dual-Occ or Triple-pack. Councils love this density as it generates higher rate revenues.

In my neighbourhood each Saturday morning, the peace and quiet is disturbed by the sounds of a house nearby being demolished - why they do this on a Saturday morning is anyone's guess, oh, yes of course........WorkSafe inspectors don't work Saturdays !.

I haven't been up to Sydney in a while, but I'm guessing it's likely to be somewhat similar - land is precious and anxiety over it's future value holds our minds to ransom.

What these signs of activity signal is that capital and funds are being employed - circulating and driving the economy by fuelling growth, but it's likely these positives are confined to just a few economic sectors with construction being the biggest beneficiary. In Vctoria, 1 in 10 are employed in construction or infrastructure.

Retail is shifting faster than anyone realizes - especially flat-footed retailers

Walk through retail precincts and it's an entirely contrasting image of empty stores, tacky "SALE" signs and sluggish trade - sales assistants with long faces. Some of Melbourne's once worshipped shopping strips like Bridge Road and Chapel Street are experiencing vacancy rates of 20% to 30% - smart operators have moved out, landlords want high rents and hence a major disconnect with realities.

In last month's article, we outlined challenges in hospitality and these pressures continue to build each day with many cafe owners desperately wanting to pass through that exit door.......rising costs versus price deflation - the grind of always being squeezed hurts. For the first time in almost 15 years we are seeing cafes closing - not just changing hands.

Coles and Woolworths, along with many large retailers are adjusting their strategies to shift away from chasing sales volume through fierce discounting and re-positioning to extract better margins from smaller stores where the range can be tailored to the demographic.

If I wasn't mistaken, this gives up a sign Coles and Woolworths have conceded price war defeat to Aldi - a brand that is now Australia's most trusted - a feat that reads like a fairytale.

Retailers are streamlining and rationalizing their product range, focusing more on their own private labels where they generate higher margins and innovating through value-added solutions such as prepared meals.

It seems supermarket shopping has transformed in the last 10 years from a single, large pantry-filling trip in a shopping centre on a Saturday into daily trips to local foodie outlets picking up something for "tonight". Fuelling this growth are the food delivery portals, scraping the profits and margins from food outlets and posing the question "what will you be eating tonight ?".

The entire mindset now for groceries has changed from the traditional bulk weekly spend into one of convenience and choice - with retailers moving fast to play catch-up by matching this transition with smaller, targeted offerings and home delivery from nible, strategically located "dark stores".

However, in moving away from the pursuit of volume, these approaches risk short-term backlash from investors, analysts and shareholders accustomed to basing their valuations or measure of a company's performance predominantly upon like for like store sales growth. The first sniff of a potential top-line sales decline and it sparks share price routs.

Myer is a classic example of a business in serious trouble having spent too long juggling sales figures attempting to hold a line through margin destroying discounting and in the process they completely abandoned their customer base and lost the basic art and spirit of retailing.

With Myer's declining sales of 4.8% and a somewhat lame 3.6% online growth, it's going to be a tough road ahead for the retail icon and I'm not sure their "back to basics" strategy applies to the changed ways in which consumers spend - it's essentially an outmoded and desperately vague concept to hope buyers return without doing something radically different other than rationalization.

Knowledge (a.k.a. power) shift - the consumer is better informed than the retailer

Some say it's the digital disruption cannibalizing retail - dramatically increasing the possible number of alternatives and spreading the market segments wide open by offering the consumer literally unlimited choice. It's precisely how Amazon conquered the US by recruiting thousands of sellers all competing for the attention of the buyer by discounting deeper and deeper.

There is more than a degree of truth in that sentiment and I only have to look at my own personal habits to know what's happening. These days I cannot make any decisions before researching on my ipad, phone or computer.

This research consumes the hours each night before bed, instead of watching TV. Doesn't matter if it's a special bolt, a jib-crane or a set of tyres........I prefer researching to viewing the nonsense on TV as broadcast networks lose the plot with lame, re-hashed, tacky reality productions.

More importantly, I'm completely immune to any form of advertising as my shopping regime has a laser-like focus.

A few weeks ago I needed nitrate single-sided adhesive tape and Bunnings is just 1.5km from our warehouse, but because I loathe battling traffic late in the afternoon and wasting more than an hour, I ordered it online from a specialist tape provider interstate. Their offering was more expensive, but importantly it was tailored and frictionless - so they won my $$.

Bunnings' deliberate strategy to avoid comprehensive e-commerce (for them it makes sense at the moment with a monopoly and the up-sell opportunity from in-store visits) they lost my custom that time.

The Bunnings website was clunky and unhelpful. In their defence, they have 100's of thousands of products, but the point is they were not interested in helping the customer be time efficient - instead forcing the customer to come to them and self-serve. It's their model and strategy.

Somehow along the way of becoming too busy to partake in shopping I subsequently lost the knack of picking up a phone and speaking to a person, or jumping in the car and visiting a seller. When you are time poor, "shopping" moves from daytime to night and product delivery becomes an essential criteria.

Another unreported economic segment on the rise are online shopping addicts - that person who just can't resist looking at deals or new stuff - an electronic marketer's dream.

20 years ago they might have loved watching the ads on TV, listening to the radio and secretly binged on late night shopping channels, even if the sales pitch involved wasting a cringe worthy 12 minutes of your life putting up with a long drawn out infomercial.

Yes, we all know one, that person who derives immense pleasure flicking through new glossy department store catalogues for inspirations to spend. Real shopping junkies crave constant retail therapy and it's unlikely they will give up visiting the shops - loving anything new and exciting regardless of whether they really need it - reminds me of my darling wife Dianne, she prefers to get dressed up and shop, whereas I prefer to order online and have it delivered, I'm not lazy, just time poor.

Online Marketplaces - merchants on a hiding to nothing.

If you believe the so-called experts, it appears that Online marketplaces have become the new retail battleground. In Australia around Y2K, eBay enjoyed a long reign having killed off Trading Post as the default location for buying and selling used or unwanted goods, but as eBay's commercial focus shifted to extracting higher fees for limited value-add, sellers deserted the platform in search of free exchanges like gumtree (also owned by eBay).

Around 2010, eBay began the process of pivoting from a marketplace that relied upon a high number of used goods being sold by individuals into a platform that recruited traditional merchants with store fronts needing an extra channel online. Their pitch was "we have the buyers", whether it was true or imagined.

As the transformation of eBay accelerated, many merchants were becoming frustrated with eBay's treatment of sellers - regularly changing the goal posts, raising fees, making it difficult to configure shipping, enforcing special compliance in listings, etc. and more importantly eBay would modify their search algorithm (Best Match) to bias certain seller strategies giving away free shipping or overseas sellers able to bypass Australia freight companies and their sub-standard and expensive service.

Not only did merchants abandon the eBay platform, it appeared that buyers were also less frequently shopping on eBay. As a seller with 11 years of eBay experience, we could see first-hand the decline in eBay channel activity and today it represents less than 0.3% of our sales, so it's being shut down soon as it's no longer relevant. Besides, we have never been comfortable supporting eBay syphoning profits from Australia to overseas without paying appropriate taxes in our country.

Of course, eBay Australia would argue against such claims, rolling out statistics of higher shopper numbers and sales figures, but in reality there are too many competing marketplaces for eBay to remain relevant moving forward.

Gumtree cannibalized much of what eBay used to offer in the used goods segment, Facebook has it's own marketplace of unwanted items, Catch Group picks up a large chunk of the distressed inventory sector, Kogan is running fast but hitting more and more speed bumps every day and of course the elephant in the room - Amazon Australia - who's launch has been surprisingly underwhelming, but starting to gather steam as they dig into their war chest of investments in a massive recruitment driver for buyers with Prime membership.

Smart merchants see the critical importance of having a direct relationship with their customers. Amazon and eBay build their platforms to own as much of the customer (buyer) spend as they can control. The rules and policies around customer engagement on their platforms are strict and in many cases have severe or dire penalties for sellers.

Selling on eBay or Amazon is a cold, desolate wasteland of borderline slavery - there's literally no warmth or affection at a retail level and often it's only viable at razor margins with a big bunch of risks attached - nobody wins that game long term as the risks inevitable convert to stark realities.

Imagine this for a moment, a buyer on Amazon purchases a product from a seller, the seller places a nice thank you gesture in the parcel thinking they are doing the right thing, Amazon finds out and suspends the seller for attempting to solicit business outside of the Amazon platform.

It's real - believe it. Of course, most of these actions are geared towards maintaining high seller standards so the customer experience is exceptional - or that's what they lead you to believe, but it's only a smoke screen justifying their domination strategy to own the buyer.

In the US, online marketplaces account for more than 60% of retail spending with Amazon commanding almost 45% - with many predicting Amazon will pass 50% inside of the next 6 months. A recent report in the AFR claimed that Amazon AU was selling some grocery products cheaper than Coles and Woolworths.

Parcel logistics in Australia - the broken record that keeps on spinning.

Commentators and analysts like to take the lazy position in believing retail in Australia always follows the direction of the US.  There is no doubt online retail is growing fast at the expense of bricks and mortar shopping, but the key limitation holding back online retail is always going to be Australia's dysfunctional and broken parcel logistics industry.

Why ? because AusPost continues to hold a disturbing level of market power in residential freight.

Their merchant agreements sellers must accept are toxic examples of legal protection enabling AusPost to avoid all responsibilities and liabilities. It means AusPost are not accountable for anything - they can lose your parcel, they can damage it, even steal it or send it via the wrong state for 2 weeks longer than it usually takes.

In simple terms, AusPost can charge a fee for a service that is not delivered. They can perform at atrocious levels and yet they cannot be held to account - with no remedies in their agreements.

Worse still, their poorly trained support centre staff compel receivers experiencing difficulties to contact the sender to sort out the problems which, as you can probably understand is utterly ridiculous when AusPost are in possession of the parcel - it's these sorts of abject failures to take responsibility that manifest into a culture of teflon and deflection.

Merchants (sellers) in Australia take all the risk in any online delivery, yet we are powerless to help ourselves or our customers when things go wrong. It's the reason why the standard of logistics in Australia improves at a rate that is far below community expectations and standards. The distinct lack of real competition and abuse of market power keeps the incumbent in a cosy position - merchants will churn as they get burnt.

Sure, freight providers will invest in capacity and infrastructure as they can't ignore the obvious signs of growing demand, but they will do everything within their considerable power to prevent reforms of their commercial terms that make the business of residential logistics in Australia fair and reasonable to their own customers (merchants) and subsequently the end-recipients (you) - at the moment they don't need to.......yet.

Fighting the Good Fight

We have launched a campaign to strive for improvements in the standard of freight performance and commercial terms for merchants (in general) so that outcomes are more balanced and reflect the nature of expectations in a marketplace. The first stage last week was to make the CEO of AusPost formally aware of the deteriorating conditions.

We hope the initiative will result in simpler and more supportive experiences for those moments when freight incidents occur - because we care about helping our customers and in the current state there is zero support or care from freight providers - we aim to positively change that situation.