Sell Your Crash Repair Business Now*

*this should not be taken as financial or business advice. If you own a crash repair business please take professional advice before making any decisions.

I am just going through the process of getting some minor damage repaired on our car and have been ruminating on the future of the insurance and repair model when we have driverless (autonomous) cars. This was also prompted by a couple of stories in The Age here in Melbourne:

Crash repair: How Ray Malone became head of ASX-listed company AMA Group

and

Driverless vehicles technology to roll out on the Tulla under trial

 

The first story describes how Ray Malone has built a Australia’s largest crash repair business, and is aiming to grow it even further. That would seem to go against the title of this post but it actually feeds into my thinking because Ray’s company provides wholesale service aftercare which will be vital in the scenario I am describing.

The second story is about how trials of driverless cars are starting here in Melbourne. This follows a large number of trials that are being conducted in various countries around the world.

Once we move to a reasonably widespread adoption of autonomous/driverless cars the local crash repair business will basically disappear except for a few large operators like Ray Malone but even his business could be under threat . The key reasons for this are:

1/ It has been forecast that autonomous cars will significantly reduce the number of car accidents that occur. This is based largely on the statistics that human error causes more than 90% of traffic crashes. So if we can eliminate the crashes caused by idiots, people under the influence of drugs and alcohol, and people driving tired or angry (Police looked into the deaths of 86 people on Victorian roads last year and found that in more than 10 per cent of cases the driver had experienced a traumatic or upsetting event.) we can significantly reduce the number of accidents.

Against this argument is that autonomous cars supplying a transport service may result in people travelling further and perhaps take more risks. Certainly it will allow elderly people who cannot drive, and young people who do not have a licence to travel in cars more than they otherwise would. There have also been arguments that because we feel safer we may take more risks as pedestrians or cyclists.  If we are conservative and say that only 50% of accidents caused by human behaviour will be eliminated we still have a significant fall in accidents.

2/ It is highly likely that we will see large fleet models emerge where large numbers of people choose not to own a vehicle. If the overall travel costs are lower than owning your own vehicle, and you can get a vehicle anytime you need one then the convenience of transport as a service outweighs the personal ownership model.  The economics for fleet owners are different than for individual owners when it comes to crash repair services. Fleet owners will want large scale service operations to reduce costs or will pay far less for the services of smaller scale operators. This feeds into a large supplier (such as Ray Malone’s company) snapping up more business. Larger scale crash repair businesses will benefit from the economies of scale that allow them to use new technologies such as robotics to increase throughput and reduce costs.

3/ The model for crash repair business location will change. Currently crash repair businesses are located in scattered locations throughout the suburbs and inner city. This is because if I want to take my car in for crash repairs there is a significant time cost for me to take my car to a location that is not near to my house or business. I have to travel to the crash repair business, and then get back to my home or place of work. So I want the crash repair business to be reasonably close. The location is mainly driven by the customer. If my personal driverless car needs crash repairs it can drive itself to the crash repair site, and a fleet service or a shared personal car service can replace my transport needs in the meantime.

If I was asked to drive my car (actual damage pictured below) to a service centre 40 km away I would not be very happy, but if my car can take itself then location becomes much less important and the costs of the business become far more important. Locating the crash repair business in areas of lower property costs with good transport links makes far more sense. It also means that the employees of the business will have lower property costs if they live locally. We already see this model in light manufacturing and food processing/handling facilities locating around hubs on ring roads, away from  inner suburbs with high property prices.

If a fleet ownership model predominates over personal ownership this effect will be even higher as large scale fleets look for cost reductions through economies of scale.

corolla damage 1

 

So if we summarise all the factors together if we assume a 45% reduction in total accidents (50% of human error crashes) and a tripling of scale that comes from the changes described above we get an 82% reduction in the number of crash repair businesses in any city.  I believe that the changes in scale may be even higher and we may end up with only 5-10% of the number of current crash repair businesses being economically viable.

If I own a crash repair business in any suburb in any of our major cities I will come under pressure from a high scale panel beater business set up on the fringes of the city with lower property costs.

So, if you are a crash repair business:

  1. Assess whether now is a good time to sell to someone else who does not understand these changes.
  2. If you think I am wrong then you should suspend that thought for just a few minutes and  think about what it means to your business and your assets if I am right. Even if you think that chance is only 5% you should set up a series of questions for yourself to monitor in coming years so that you can change your mind if the changes start to happen. Those questions include:
  • Is the practical outcome of accident reduction matching the rhetoric of the technology experts and the modellers? Look for signs of early change, cities where adoption is at the forefront of the change and make an assessment as to whether the predictions on accident reduction are true (or even going to be exceeded) and then think about the timing of the implications.
  • Look for areas or cities where the first full scale mass adoption of driverless cars might take place. For example Singapore, with a small land mass, and a relatively authoritarian government might be one. This will give you early signs of what larger scale adoption might look like.
  • Is the adoption model going to be a personal one or a mass fleet one? If the model is primarily a personal one then you should be thinking about whether you can become one of the new mega panel beaters on the fringes of the city that will survive the change. If the model looks to be a primarily mass fleet adoption one then there are less possibilities. Those fleet operators will either run their own operations which are standardised and mechanised or they will use their economies of scale to drive down margins in the businesses that supply them. You can still run a good business that way but the opportunities will be limited and will require lots of capital to create the volume throughput and economies of scale required. You will have to compete with the Ray Malone’s of this world.
  • Are any early models of very large scale, city fringe located crash repair businesses starting to emerge anywhere around the world? Are they successful?
  • Are car companies changing their business models for car repairs. For instance electric cars have far less moving parts than internal combustion cars. Does that make a difference to your business model? Are modularised car construction and repair systems emerging that will increase the capacity to adopt robotic repair and maintenance systems that will advantage large throughput car repair and maintenance systems?

While these changes may take 15 years to start to significantly impact on the crash repair business, once they become obvious the window to realise the business value by sale will quickly snap shut.

This is just one of the many implications of change from the widescale adoption of driverless cars.I am writing a book on driverless vehicles with Chris Rice (@ricetopher). It is called “Rise of the Autobots: How driverless vehicles will transform our economies and our communities. Stay tuned for more writing as we develop our thinking further.

 

Paul Higgins

Electric Cars and the Legacy Issue

Chris Rice and I are currently writing a book on the rise of autonomous vehicles and their widespread effects across our economies (entitled Rise of the Autobots: How Driverless Vehicles will change our Societies and our Economies). One of the keys to looking at what these changes might mean and the rate at which they will occur is the speed of adoption speed of electric cars and autonomous vehicles combined together.

There have been lots of excited announcements about electric cars over the last few months including:

India to make every single car electric by 2030 in bid to tackle pollution that kills millions
The Electric-Car Boom Is So Real Even Oil Companies Say It’s Coming
When Will Electric Cars Go Mainstream? It May Be Sooner Than You Think

The reality is that the adoption of electric cars will have several bottlenecks including but not limited to:

  • Battery availability.
  • Production capacity for manufacturing.
  • The reluctance of people to adopt the technology until they are completely sure that the charging issues and the range issue have been adequately dealt with.
  • The long-term nature of the turnover of the vehicle fleet.

Both battery production and electric car production are ramping up but the last point is very important when we start looking at the critical mass needed to disrupt a range of industries, including petrol stations and their supply chains, maintenance and repair systems, and the electric power grid. Even when it becomes a sensible economic decision to purchase a new electric car over an internal combustion engine (ICE) powered car, someone with a 7 year old vehicle is not going to immediately changeover. This is both due to the capital nature of the change and the fact that if electric cars are more economical than ICE cars the resale value of second hand ICE cars will fall dramatically, reducing the interest and capacity of people to purchase a new vehicle (if purchase is the model). This will be exacerbated if the new electric vehicles also have significant advantages in autonomy.

To illustrate this issue we took a look at the vehicle fleet in New South Wales in Australia If we look at the statistics at the end of the fourth quarter in 2016 it gives us a snapshot of the vehicle legacy issue. The following graph shows the year of manufacture for light vehicles registered in NSW at the end of 2016. The majority are passenger vehicles:

light vehicle registrations in NSW 2016 Q4

Source: http://www.rms.nsw.gov.au/about/corporate-publications/statistics/registrationandlicensing/tables/table113_2016q4.html  – accessed July 24th 2017

While the 2016 manufactured vehicles are under-represented in this graph as many 2016 vehicles are registered in 2017, it nevertheless gives a clear picture of the ownership structure of light vehicles. If we look deeper in the data we see that 20.1% of the registered light vehicles are manufactured prior to 2001.

If we look at heavy vehicles we get a similar picture albeit with different percentages:

heavy vehicle registrations in NSW 2016 Q4

There are some differences in the data between light and heavy vehicles:

  • The first is that there are significantly more 2007 heavy vehicles registered than any other year. This probably relates to GFC issues.
  • The second is that the heavy vehicle curve is lower than the light vehicle curve. This probably reflects a pattern of use where heavy vehicles are sold into a secondary market that will discount vehicles significantly if the economic model is significantly different than the new vehicle one, extending the useful economic life of the vehicles. This means that the percentage of total registered heavy vehicles prior to 2001 is 34.2%, much higher than light vehicles.
  • The third is that there are many more vintage models in the light vehicle category, reflecting the motoring enthusiast and restoration market. So there are 3,379 registered light vehicles manufactured 1900-1949, but only 21 heavy vehicles for the same period.

A very simplistic look at this data says that even if every vehicle sold new in Australia was electric from say 2025 was an electric car, and the purchase patterns remained stable after 5 years we would have between 31% and 40% electric light vehicles on the road and in 10 years it would be somewhere between 50 and 60%. This pattern is highly unlikely and so the real adoption rates will be well short of that. Every year that the purchase pattern is 50% electric and 50% ICE will slow the transition as those ICE cars will be on the road for a long time.

This adoption cycle is complicated by our view that increasing automation will result in more fleet ownership models, and shared car rides, reducing the total sales of new vehicles. While this means that battery and electric car manufacturing do not have to ramp up as much to get to 100% of new sales it changes the adoption curve.

Now both those simplistic analyses assume the normal pattern of car purchases and ownership will remain in place. That is also unrealistic. All we do know is that the adoption rates will be relatively slow because of the legacy issues and the turnover of the vehicle fleet as a whole. Cars are not smartphones. We will be doing some more modelling on the possible scenarios over the next few weeks. Follow us here if you want to see them and help us think through the changes.

 

Featured Image is from :

Top 8 Secrets for Competitive Electric cars-Tips for Auto Manufacturers by Ameen Shageer

 

 

The Supermarkets Demise – A Scenario

Back in November I wrote a post entitled: Are The Two Major Supermarkets in Australia Doomed?

If you are at all involved in the retail food chain I suggest you go and read it in full. The short answer is yes, but it will be a slow train crash.

A story in MIT Technology Review last week illustrates one of the possible models that can replace the supermarket model of today:

Autonomous Grocery Vans Are Making Deliveries in London

 

Of course supermarkets will be trying to incorporate such systems into their business model as well but my view is that because of their underlying legacy systems they will find the transition close to impossible.

The story is about a quite limited trial but it points towards a possible future:

“On the back of the vehicle are eight pods, each with a crate that can hold three bags of groceries. The van is filled by human hands from a small distribution center—in this case, a larger Ocado van, which stores 80 of those crates—and sets off following a route to its drop-offs, which is broadly planned in the cloud but ultimately executed by the vehicle. When it arrives at an address, the customer is alerted via smartphone and must press a button on the vehicle to open a pod door and grab the groceries.”

In terms of the final use case:

“Clarke imagines vehicles like these being used to provide on-demand delivery of groceries from a small nearby distribution hub, so that instead of booking a delivery slot customers hail their groceries—when they arrive home from work, say, even if it’s late at night.”

This ties in with an interesting analysis of the IPO for Blue Apron, the food company which delivers meal recipes and the main ingredients for those meals to your door. In that analysis in the New York Times, chef Amanda Cohen theorised that the Blue Apron model may destroy itself. She describes the fact (which went against her initial view) that many people she has spoken to said that the Blue Apron process had given them the confidence to cook more. If she is correct then this means that Blue Apron is training its customers not to need it any more, not a great business model as it means lifetime value of a customer may be severely limited.

The combination of these stories may point to a completely different future. As Amanda Cohen says:

‘” In Hong Kong, many people swing by a “wet market” on their way home from work and pick up the vegetables, fish or beef they’re going to eat that night. Same thing in France, Latin America, South Korea or pretty much everywhere people don’t load up their giant S.U.V.s with giant quantities of groceries to store in their giant fridges once a week. The meal kit model of keeping some staples in the cupboard and getting the fresh stuff as you need it is the market way of doing things”

One of the major problems with food delivery systems and in particular with automated delivery systems is what do you do with the fresh stuff because timeliness and the refrigeration process really matters. This is exacerbated by the fact that people are home at different times of the day or night and cannot necessarily take delivery when the delivery system wants to deliver . Various ways of solving this have been proposed including smart delivery lockers in apartment buildings or the local post office, etc. I can see that models emerging where all of the non-fresh goods can be delivered by an automated delivery system from a small local storage facility where you request delivery when you are home, just like you do when requesting an Uber right now. There may even be discounts for people who take quick delivery so storage space is always available, or people who will take a shared delivery and therefore will wait longer.

If this is part of a wider adoption of driverless cars then it can be part of a larger change. Driverless cars do not need to park, or at least do not need to park in busy or congested areas. I am an advocate for a driverless car adoption model where government or privately owned fleets provide transport as a service and surpasses the personal vehicle ownership model that has dominated the last hundred years. Even if that does not come true individual owners can hire out their driverless car when they are not using it so it does not have to be parked in front of the house or the office, or at the train station.

I I imagine a changed urban environment where mass adoption of autonomous vehicles changes the urban landscape by freeing up parking areas on streets and parking facilities . The freed up space on streets creates the capacity for more foot traffic, and increases in safe bike lanes while, driverless vehicles increase the capacity for people to travel for short trips locally. The parking facilities can be repurposed for storage and/or specialty markets for fresh products.
In that changed local environment we could see a model where large scale supermarkets are no longer the norm, where specialty fresh food stores spring up everywhere within easy travel distance of people’s homes. These specialty stores would be powered by the back end logistics that Amazon creates for Whole Foods, or their competitors (go read Ben Thompson’s excellent post: AMAZON’S NEW CUSTOMER for more details on their strategy) You would pick up your fresh product and speciality items on your way home from work or by a short walk or bike ride, or driverless car ride to the local store. Automated vehicles would deliver the staples to your door on request using pre planned orders or automated ordering systems like the Amazon Dash Wand.

In many areas this could revive the concept of neighbourhoods that really work in urban environments.

There are many ways the supermarket model will be attacked in the future. This is just one possible scenario. Given the pace of driverless car adoption and capacity for the car industry to deliver the full model is still a fair way off. The automated delivery system is not so far off. It fits the four level of automated driving systems by being in a geofenced area (local delivery only from a small storage/transfer facility), and carried out at low speed to reduce the risk of accidents. Full level 5 driving automation where vehicles can go anywhere in all conditions and no driver actions required are a lot further off. That does not mean there will not be continuing experiments with automated food delivery systems.

As Ben Thompson states in his article groceries are about 20% of consumer spending (USA). That is a big prize and lots of people are going to be going after it. Long term an automated vehicle delivery system will be a part of that. How big a part, and in what form remains to be seen.

 

I am writing a book on the adoption of driverless cars with Chris Rice entitled Rise of the Autobots: How driverless vehicles will transform our societies and our economies. Follow me here or on Twitter for more updates as we write and publish.

Paul Higgins

 

 

 

The Future for Accountants

The story for accountants the last few years has been increasing levels of outsourcing tasks to low wage environments such as India, and increasing levels of automation for their tasks and their clients. The early stage of that process has been the automation in accounting software systems such as QuickBooks and Mint. Increasingly this automation will move into more and more of the accounting space including real time artificial intelligence auditing systems, automatic preparation of increasing complex tax returns, and structuring credit arrangements.

These things generally start out small and at the less complex end of things and accelerate into more complex areas before people realise it has happened.

So where is the new value for accountants. Primarily this has to be in the process of value creation for clients. Therefore accountants need to move up the value chain and Examples include:

1/ Transformation of business processes around technology changes and the re-training of staff for their SME clients.

As I wrote in Questions on the Future of Work a recent McKinsey report has stated that

According to our analysis, fewer than 5 percent of occupations can be entirely automated using current technology. However, about 60 percent of occupations could have 30 percent or more of their constituent activities automated”

This supports the notion that apart from a few isolated cases (e.g. truck drivers with driverless trucks) technology does not replace jobs but replaces particular skills or tasks. More importantly business processes and the ways in which we serve customers are changed by the introduction of various forms of artificial intelligence into technologies. This can be a customised approach for vendors like Salesforce Einstein which is adding AI services to its sales, and customer service offerings at around US$50 to US$75 per user per month. Or it can be more fundamental changes to value propositions and business models and the underlying capabilities required to deliver them.

Either way we appear to be entering an era where the jobs people will do will change even more rapidly than they have over the last 10 years and will constantly change rather than be part of a single change management process. In my experience most organisations with under 1,000 employees have little idea on how to approach this problem. This is a huge opportunity for accountants who already have close contact with their clients.

2/ Assisting clients with understanding their strategic landscape

In a world that is moving faster and changing more rapidly than ever before operators of SME businesses are facing greater uncertainty than ever before. They are also facing a paradox. The pressure on them means that they must spend more time focusing on the operational matters in their business but they are doing so right at the time that looking around to see what is happening becomes more important. Just last week I was working with an SME business that is very well run and focused on all the right things that need to be done for the next 12 months. At the same time they were not thinking very deeply about the future and that their decisions (that were absolutely correct in a short term sense) might mean for their long term future.

This means that there is great value for an independent adviser that sees a wide range of other businesses and can:

  • Provide a better strategic understanding of the industry in which the client business operates. Examples include looking at possible industry scenarios for 5 years time and trying to understand what the interim competitive position might be.
  • Cross pollinate ideas and ways of doing things from other businesses in other business sectors. Sometimes very simple tools and approaches from somewhere else can significantly improve a businesses bottom line.
  • Look at the business from a dispassionate but involved perspective and ask questions the business is not asking itself. Examples might include – does your logical short term investment in cost improvements weaken your balance sheet and capacity to respond to x/y or z which are significant risks?  OR What custom built systems are you using which can be supplied via industry standard products or new utility services.
  • Run a structured red team/blue team process to attacking and defending the business from an outside perspective.

 

3/ In the future: utilisation of AI to augment their own capabilities

The reality of artificial intelligence is narrow expertise systems rather than a general intelligence. So we will see artificial intelligence systems that can aid sales people and customer service people but cannot do other things (see Einstein above). We will see narrow artificial intelligence systems that can assist doctors but not do much else. The list goes on.

The modern approach to artificial intelligence systems is basically on of machine learning which requires large training data sets and a large market to justify to expenditure on development and training. Therefore we will see AI systems developing in markets where there are either a lot of customers, or high margin customers, or both. Given how many accounting practices there are around the world the accountancy business is one that is ripe for such a development.

Veterinary Schools as a Platform (VSaaP)

Late last year we worked with the Australian Veterinary Board Council and the Deans of all the Veterinary Schools in Australia and New Zealand looking at what the future of veterinary education and regulation might look like in 2031.  The date was chosen to be the time when a 12 year old just starting secondary school now would be a graduate of 2-3 years standing. We looked at a whole range of issues including availability of smart phone based diagnostic kits for pet owners, artificial intelligence systems for diagnosis, urban densification and its effects on pet ownership, veterinary practice corporatisation, international trade requirements, and the need for wide or narrow scope veterinary degrees.

One of the ideas that emerged from the process has stuck in my head and I think has great scope to revolutionise how we provide a much wider range of education at universities and for education post graduation.

Essentially the is one where  the veterinary school acts as the primary site of education for those subject areas that need face to face contact and technical expertise that cannot be achieved in an online, video, or virtual reality environment.

All other subjects/modules are accessed by the students via the school platform and the teaching material and processes that form the basis of those modules can be supplied by any accredited service across the globe. The model looks like the following diagram if we just look at one module, in this case cat medicine at the vet school at the University of Melbourne:

Vet school as a platform image

On the supply side of the platform (above the line in the diagram) cat medicine courses are supplied by all the possible services globally that wish to provide that service and who are able to meet the curriculum needs.  The platform would be agnostic on delivery systems as long as outcomes where met.

On the demand side (below the line in this diagram) each student in this model can choose who their supplier of education in cat medicine is. In the picture above Isabelle has chosen Sydney University because they have a great reputation but also provide face to face services at the school in Melbourne. Ivy and Anne have chosen Seoul National University because they have a great reputation and their virtual reality applications suit their learning style and they have been offered lifetime professional development at a low cost as part of  the deal.

The school accredits multiple providers from interstate and/or overseas for each module (the school itself can provide modules in competition with these modules if it desires). Students can choose the best provider for the module or subject they wish to complete.

Competition on the platform fosters innovation in teaching content, support and methodologies that best meet the student’s needs.

Collaboration may occur between schools with centres of excellence formed to compete with international providers. E.g. Sydney University could be the cat medicine centre of excellence that allows economies of scale to be achieve on content creation and methodologies (for example virtual reality technology is still quite expensive but spread over 1000 students the costs come down).

Uncertainty about the future education and information needs is dealt with by the system working as “plug and play” with new subject matter being able to be added as flexibly as possible, and many providers producing a much larger resource base. This should allow more rapid adoption of new content as the world changes (e.g. big data systems/network facilitation for clients with home diagnostic tests).

On top of the pre-registration process it could also be used for post registration professional development with or without limited degrees. Currently vets have to learn and qualify across a massive range of animal species but many go into small animal practice and never see a cow, sheep, or pig again. Shorter narrow species based degrees could be supplemented by post graduation systems that allow vets to qualify in other areas if they wish to change careers or specialties.

By taking advantage of education technologies to improve the efficiency and quality of education a school as a platform system. There are multiple advantages to this beyond what has been discussed above:

  • The time and costs of delivering some content can be reduced.
  • Greater value can be created in other areas by increasing the time and resources applied to the teaching of those areas.
  • Self paced degree systems could be put in place where the pace of learning is determined by the student rather than the needs of the lecturers or the school.

Regulatory/Accreditation issues could be relatively straightforward if the existing schools are accredited and the content partners are required to meet content and/or competency based assessments. Combined with limited degrees, intern models, etc. the issues can become quite complex. The accreditation process itself may need to become more flexible and capable of responding faster to changes in technology.

Technology in delivery of course and maximising flexibility in systems is rapidly advancing. For example the University of Texas has a major collaborative project going on with Salesforce:

UT System partners with tech industry leader to develop next-generation learning platform

The future is coming faster than we think and it has the potential to radically change education models.

 

Questions on the Future of Work

Mckinsey has released a long awaited (by me anyway) report on the future of work entitled A Future that Works: Automation, Employment, and Productivity. It is a very interesting look at the technologies which are affecting the future of human work. Every business and organisation should read it in full.

Mckinsey takes a distinctly different approach than the much discussed Frey and Osbourne Oxford report on the susceptibility of jobs to computerisation.

This difference can be best seen in the following graphic from the report:

mckinsey-work-report-2017-exhibit-e1-18-separate-activities-mapped

Instead of looking at what jobs might be replaced the team at Mckinsey have examined all the activities that each job in the USA job market entails and then looked at the various capabilities for each of those activities. They have then mapped those activities against the possible timelines of those activities being able to be performed by technology.

This is important because except for very limited cases technology replaces activities rather than whole jobs.

From this approach Mckinsey have created various forecasts for both the types of activities and the sectors of the economy as shown in the next graphic which shows their view about the ability to automate those activities.

mckinsey-work-report-2017-exhibit-e4-different-sectors-mapped

Taken in aggregate their predictions are shown in the next graphic which I have annotated

mckinsey-work-report-2017-exhibit-e6-adoption-scenarios-annotated

RED: Their median forecast that 50% of all current activities will be replaced by 2055

BLACK: The rapid adoption forecast that 50% of all activities will be replaced by 2035 (only 18 years away)

GREEN – The extrapolation of the rapid adoption forecast from 2035 that shows that over 90% of current activities will be replaced by 2055.

Mckinsey also states that:

 “According to our analysis, fewer than 5 percent of occupations can be entirely automated using current technology. However, about 60 percent of occupations could have 30 percent or more of their constituent activities automated”

Apart from praising Mckinsey (which I do not normally do) for creating such detailed and interesting work, and also in highlighting the inherent uncertainty in any forecast, this raises several interesting questions in terms of impacts and change.

 

From an organisational perspective those questions include::

  1. Setting aside the changes the technology makes to our business models and speed of doing business if 20-50% of activities are going to be replaced over the next 18 years how are we going to lead our people through the continual change that is going to be required? If the average is 50% then many people will have far more of their activities replaced.
  2. If technology takes over more and more of non-routine activities in our organisation what are the skills we are going to need?
  3. If technology pushes people out of the lower skilled activities in the whole economy how many people in the whole community are capable of carrying out the higher skilled activities we will need our people to concentrate on? Will we be in an even fiercer fight to recruit the people we need?

An article in the New York Times on January 30th 2017 describes When the German engineering company Siemens Energy opened a gas turbine production plant in Charlotte, North Carolina:

some 10,000 people showed up at a job fair for 800 positions. But fewer than 15 percent of the applicants were able to pass a reading, writing and math screening test geared toward a ninth-grade education

Eric Spiegel, who recently retired as president and chief executive of Siemens U.S.A. said “People on the plant floor need to be much more skilled than they were in the past. There are no jobs for high school graduates at Siemens today.”

From a societal point of view this raises questions of:

  1. Are we heading into a period of increasing structural unemployment?
  2. How will we design an education/learning system which gives your young people the skills they need to work in the changed economy and our post school/university people the capacity to re-skill?
  3. If education is changing to be more focused on re-skilling people for jobs how do we still supply the wider general benefits of education?

Part of the answer to the second question is contained in the New York Times article where it describes the companies getting heavily involved in educating and training people with guaranteed jobs at the end of the cycle, and just as importantly no student loan debt. This was mirrored in my conversation in a trip to Austin Texas last year. Austin is growing at an enormous rate and part of the reason is that some of the major tech companies have realised that if they do not get involved with students before they graduate they may never get to hire them. So they are moving major parts of their operations closer to the Universities with strong reputations in the skills they need. University of Texas Austin happens to be one of those. Students are becoming heavily involved and supported by the companies.

When I work with clients on these issues they should be focused on the effects on their business or their organisation but the conversation always turns to the wider implications for society.

The techno-optimist argument is that technology has been destroying human jobs for hundreds of years and we have always created new ones. That is partly because we have created new capabilities that need people, but also because we have reduced the costs of inputs to make otherwise uneconomic business models viable. Mckinsey argues in their report that their median forecast results in job losses that have already been experienced in society as we reduced the human employment levels in agriculture, and then again in manufacturing. This is true if the pace remains the same.

On top of that they argue that the productivity improvements are required because we are losing the huge contribution that population growth rates have contributed to economic growth over the last 100 years. That is a good argument.

It is a brave futurist who says this time is different and it is completely plausible that the combination of new jobs being created, and the demographic change we are experiencing, particularly in developed economies will mean that we will still have close to full employment. It is also plausible that:

  • The pace of change will be at the rate that fulfills the rapid adoption scenario that Mckinsey has envisaged, increasing the rate of job losses above previous experience.
  • That as technology pushes people out of a whole range of human capability jobs we will find that a significant minority of people do not have the ability to carry out the jobs that are created.
  • That a significant group of people that have the abilities will be left behind because they cannot gain the skills required to harness those abilities.
  • That the combination of the two groups will either have to work for very low wages in order to not be replaced by technology or be permanently unemployed.

That is a recipe for societal unrest way beyond what we have seen in the rise of Donald Trump and Marie Le Pen. If the political response to the issues of the people that have expressed their frustration at the current system is to promise a greater share of the benefits of the economy and a genuine attempt to do that is derailed because of technology changes we could be in for a very bumpy ride indeed.

 

 

 

 

Are The Two Major Supermarkets in Australia Doomed?

Yes but it will be a slow train crash

Following stories in the Australian Financial Review and News Limited last week (Amazon delays Australian launch to September to include fresh goods and Amazon to ‘destroy’ Aussie retail ) I decided to complete this analysis which has been kicking around in draft form on my system for a few weeks.

It is not just Amazon that is the problem. A combination of threats on margin, volume, and customer traffic is threatening the existing business model of the major supermarkets. Not all have to be successful for there to be major effects. To understand how that is happening we need to understand the business model.

A long time ago I tried to get ex Woolworths Chief Executive Paul Simons to come on board to market Australian Pork by becoming Chairman of the Australian Pork Corporation. That bid failed but something he told me about the supermarket business when we met has always stuck in my mind. Paul told me that there were five things that attracted people into supermarkets and while they were there they bought a heap of other stuff. Those five things were discounted bacon, Coca Cola, Pal Dog Food, fresh meat and fresh vegetables. A quick look at the Woolworths weekly specials catalogue for Victoria for the week starting August 31st (when I first started putting together this article) shows discount bacon, a discounted leg of lamb and a discounted whole duck front and centre on the first page. That is followed by  a full page spread on fridge mate packs featuring Coca Cola and two full pages of double points on fresh fruit and veg.

woolworth special august 31 2016

Source: Woolworths

 

Given that was the early nineties we could probably add rotisserie chickens, specialty pet foods, Huggies, petrol vouchers, and reward points to the list. That does not change the point that there are major group of items that get us in the shop and we buy other stuff when we are there. We certainly might buy half price Edgell Red Kidney Beans when we are there over another brand or product because they are on special but it is not going to get us in the door.

Later I chaired a board where a senior executive of one of the major supermarkets was also a board member. He told me that the supermarkets did not make money out of selling things. Their main two sources of income were the cash difference between when customers paid and when suppliers got paid and selling prominent shelf space to suppliers. While the story is illustrative of the business model rather than a statement of fact it does help understand the model.

If we look at the cash from customers as a source of of revenue then inventory turnover is important. The faster the inventory turnover the more money the supermarkets get in before they have to pay their suppliers.There are various numbers available for supermarket inventory turnover rates. The Inland Revenue Department of New Zealand reports median turnover of 14 times with a range of 10-19 for large supermarkets and grocery stores). The ratio of sales to inventory in the Woolworths annual reports 2011-2015 vary from 12.46 to 14.81 although these are affected by their non supermarket sales. Because this is not an investment analysis I think that it is safe to assume that the inventory turnover for Woolworths and Coles supermarket business would be at the higher level of the IRD estimates. If we use 16 x turnover that is equal to turning over inventory every 22.8 days. If the average payment terms to suppliers is 90 days (personal experience) that means that on average the supermarkets have customer cash for 67 days before they have to pay suppliers. With daily sales of  Australian Food and Liquor of $115.4m that is a whole lot of cash in the bank. Of course lower interest rates will have damaged the revenue the supermarkets receive form having that cash on hand.

When we look at paying for products to be on shelves and supplier rebates it was reported in The economist last year that In Australia supplier rebates had boosted margins for the major supermarkets by 2.5% point to 5.7% over the past five years (Buying up the shelves)

The other part of the business model puzzle is that the supermarket business is generally a low margin business once all costs are taken into account, although margins in the Australian market have been higher than the rest of the developed world. The Woolworths five year financial summary  to 2015 shows that margins for the Australian Food, Liquor and Petrol operations have been between 6.63% and 7.20% before interest and tax. While this is generally a low margin for businesses it is 30-42% higher than the margins in the Woolworths New Zealand supermarkets in the same report.The margin before interest and tax for 2016 fell dramatically to 4.43% as Woolworths lowered prices to compete with Coles and Aldi. The margins before interest and tax for Coles supermarkets in 2016 and 2015 were 4.73% and 4.67% respectively ( http://www.wesfarmers.com.au/docs/default-source/Quick-guides/2016-full-year-results-shareholder-quick-guide.pdf?sfvrsn=2).

While this net margin is quite low the gross margin is much higher For example the gross margin for Woolworths was 25.37% and 26.19% for 2016 and 2015 respectively ( Woolworths Financial Reports (pdf )) .

The gross margin is essentially sales minus the costs of purchasing goods for sale. This means that the difference between gross margin and net margin is all the other costs such as property leases, energy, staff, etc. This is a critical point because it means that the contribution to profit of the last customer or the extra sale is much higher than the average across the business. What this means is that if I drive down the road and turn left to shop at Woolworths or turn right to shop at Coles the loss in sales to the one I do not choose is very high. Whether I turn right or left both those businesses still have to pay their staff, pay their energy bills, pay their property leases, etc. That means that if roughly 18% of customers disappear and they cannot adjust their costs then their profit disappears, and adjusting high fixed costs like leases, staff and energy is very difficult.

The same applies to sales volumes. If the same amount of customers go through the door but buy 18% less in volume the supermarkets do not make 20% less profit, they make virtually nothing if the same costs structure remains in place.

So the supermarkets run a high turnover, low margin, high fixed cost business where they make lots of money on inventory turnover and payments/rebates from suppliers. This gives is the basis to look at their strategic future. Attacks to their profitability can come from primarily three points:

  1. Lower margin business forcing them to reduce margins as Woolworths has done in 2016 to combat the threat of Coles and Aldi in particular. This may be extended further in a major Amazon push into fresh produce.
  2. Customers being drained away so the high costs structure causes problems for profitability.
  3. Customer numbers staying the same but buying less every time they go to the supermarket.

Lets look at each of those individually:

Customer numbers staying the same but buying less every time they go to the supermarket.

This is the most serious threat to the long term viability of the supermarket businesses. The threat is analogous to guerrilla warfare or asymmetric warfare. Only some of the attacks need to be successful for the supermarkets to be in trouble. People will still go to the supermarket but there purchases will be reduced.There have been lots of efforts to look at direct delivery models with varying success but we are now reaching the point where multiple models are developing that have a good chance of being successful. This is devastating for the supermarkets because if 40% of people reduce their purchases by 30% that is a 12% reduction in  overall sales. But the supermarkets will still have to operate their existing business model to retain the other 60%of customers  as well as to be able to retain the people that have reduced their purchases but are still coming into the store. Lets look at some of their threats:

Dollar Shaver Club

dollar-shaver-club

These guys run a direct delivery service for razors direct to your door. They combine an irreverent marketing attitude with social marketing that gives you free blades if you recommend a friend.  They promise to reduce your costs of shaving and take all the friction out of the process. I don’t use a razor any more as I use clippers to manage my George Clooney like designer stubble, but if I did use razor I would sign up today – no longer buying that product from the supermarket. A small individual purchase perhaps but they start to add up.

Blue Apron

blue-apron

Blue Apron promotes direct delivery of all the ingredients you need to prepare a healthy great tasting meal. I met with one of the Nokia trends scouts in Austin Texas a few weeks ago and she is an avid fan. As Blue Apron delivers the exact amount she needs to make a meal there is no waste and she said that the service is not costing her any more money than shopping for the ingredients. It is estimated that Australians throw away about $8 billion dollars of food a year (fact checked by the ABC) so certainly there is a cost saving there. While they are not yet in Australia the business model is one that is easily transferable here.

Youfoodz

youfoodz

Youfoodz is a company that will deliver a week’s worth of fresh (non frozen) meals direct to your door in Australia. You can choose all meals or a proportion of meals and snacks. I have done a cost comparison on their service and while they are slightly more expensive than making your own food for quality meals the difference is not large. Again there is no waste and for the time poor there is no shopping or preparation to be done. For people working long hours or running their own businesses where more time means more money this is a very viable alternative.

Amazon Dash

amazon-dash-button-washing-machineAmazon Dash is a programmable button that you can put in your house. The example here is one of putting one on your washing machine so that when you run out of washing powder you just push the button and washing powder is delivered into your house. It takes all the friction out of buying and I imagine them building in services integrated with Alexa (the interactive home system) so that rather than just buying your normal brand the system can queue up order requests and talk to you about special offers, etc at your convenience. Once adoption gets high enough then Amazon can use its considerable logistics and information system to package up multiple orders, supply weekly orders based on your usage, and give you special offers.  It has not really caught on yet but the system is adding more and more brands and Amazon is pushing it out to more countries (Amazon triples Dash Button brand lineup, orders surge 75% in Q1  andAmazon brings its Dash buttons to the UK, Germany and Austria for ordering staples with one touch). It has the smell of a long term strategy to harness all of their capabilities into an offering that makes sense, especially for dry goods.

So if we think of an example household of an above average income couple (the most attractive customer) that are busy with work or their own business you can imagine a combination of all of these services. They use a service like Youfoodz to have a couple of meals pre-supplied on their two busiest days of the week when a combination of work and commitments for kids activities have them stretched. They use a service like Blue Apron once a fortnight for a lunch or a dinner where they want to cook but want to eat healthy and not think about recipes or shopping. They use Dollar Shave Club for monthly supplies of razors. They install Amazon Dash buttons for washing powder, toilet paper, paper towels, dish washing liquid, and cereal and it all gets delivered. Gradually Amazon influences them through their Alexa to buy more dry goods because the marginal cost of freight is so low the system is cheaper. Convenient and lower cost is a killer combination.

They still go to the supermarket they always went to but slowly but surely the amount they buy there until it is down to 50%. Some families at that level then start questioning the trip to the supermarket and start changing their total shopping habits.

The problem with all this from the major supermarkets point of view is that they don’t really have a strategic response that makes sense because of their legacy model. They cannot abandon the majority of their customers so their model stays the same and their margins get steadily eroded.

If they reduce stock lines then they slide more towards an Aldi/Costco model and they don’t want to go there. If they move to more and more online systems they can sort of compete but they still have to supply their standard customers and that model is based on big stores based in solid catchment areas. If they close one of them or move to a small store model a lot of customers probably end up with their competitor who did not close. So neither wants to be the first to do that. It is a little like the banking branch model problem. Less and less transaction are being carried out in branches but people will not travel far to conduct those less frequent transactions so banks keep branches open for fear of losing customers.

At every step of the way their business model is eroded:

  • Lower customer traffic/less spend per customer reduces cash held in the money market.
  • Lower customer traffic/less spend per customer erodes margins as there are less customers/customer dollars to spread non cost of goods costs over.
  • Lower customer traffic erodes the capacity they have to charge for shelf space. It is a bit like television advertising rates. If you have less eyeballs watching your shows you cannot charge as much for advertising.

The final straw in this nightmare scenario for the major supermarkets may be Amazon moving its vision to applying its impressive logistics and intelligence systems to support a national network of independent specialty shops. This is where the high margin customer of the future, who has already reduced their supermarket purchases as described above, may be headed. If that is the case then the major supermarkets are caught trapped in a legacy business model they cannot get out of and assailed on all sides.

Only 5% of each attack has to be successful. No-one has to destroy them.