You may have missed it this week, but Australia’s largest online retailer Kogan put the gloves on for a fight with Coles and Woolworths with the introduction of their new grocery website Kogan Pantry. And while at first thought Coles would crush Kogan with the online retailer having only 0.9% of Coles revenues last year, there are 5 reasons Coles executives shouldn’t dismiss Kogan so quickly. Moreover, Ruslan Kogan has a proven strategy along with the experience and courage to legitimately challenge these giants, as he did with Harvey Norman, a (then) $5B market leader. And incredibly with as much as 80 cents of every dollar spent in Australia going to a Coles or Woolworths owned business, the duopoly is ripe for the picking.
Speaking at the National Press Club in August, Wesfarmers (Coles owner) CEO Richard Goyder said that the main competitive threat Coles faces is Amazon rather than rival grocery player Woolworths.
‘‘I think Amazon is the biggest threat that we’ve got to our business model at the moment,’’ Mr Goyder said. ‘‘[Amazon is] a $150 billion company that finds its competitive advantage through cheap labour, low tax and highly innovative supply chains.”
But Coles doesn’t need Amazon to bring online grocery to Australia to encounter a significant threat, and here’s why.
1. Coles pricing must support its Brick and Mortar presence
The strategy for Coles and Woolworths is to capture as large a share of the weekly spend as possible. We see that through loss leader advertising with milk and bread under $1, knowing that people will then go on to spend hundreds of dollars on other items in store, thus recouping profits in the ‘basket’.
Coles Online department don’t pay retail rent, they don’t pay for staff to run stores or store fitout and maintenance. They do need to have a functional website and significant logistical capability to get local deliveries on time. It shouldn’t be news to anyone that the cost to run an online store is significantly less than a brick and mortar outlet. Yet Coles are charging typically 5-10% more for online grocery shopping as shown here and here. This is in the midst of a 70% growth in Coles online customers.
Coles has a legacy investment to protect in stores and whilst it wants to offer the convenience of online shopping, it does not make sense for a shopping basket to be cheaper at Coles Online than it does a Coles store. As Kogan puts it during his war with Harvey Norman, ” If your online prices are cheaper than in-store, people will stop going to your stores. Harvey Norman isn’t playing towards its competitive advantage when it sells online, and that’s why that part of the business will never be viable.”
2. Core Competencies are highly refined in separate areas
Coles Core Competencies include having a highly optimised supply chain and being experts at retail presence with these two Core Competencies being honed throughout the Wesfarmers group (including brands such as Officeworks, Kmart, Target & Liquorland). Coles must get items from the supplier to distribution centres, then to stores and on to shelves in a manner which keep the food optimally fresh, and presents in a manner to have the highest likelihood of purchase.
An example of Wesfarmers supply chain in competition is the estimated $500m loss from Woolworths owned Masters trying to play catch up with Wesfarmers owned Bunnings. According to Business Spectator, “The problem… (leading to the $500m loss) has been in the execution… … adding sites as they became available rather than creating a network that optimised supply chain efficiency”
So whilst Coles leverages the Wesfarmers systems and processes and deep knowledge to create these Core Competencies, Kogan has developed Core Competencies to support an online business model which cuts out the middle man and gets individual products from the factory to the consumer at the lowest possible price as well as mastering online retailing and the demands of getting people to buy via the web.
3. This means Kogan must be cheaper to be in the game – half price groceries anyone?
If the competitive advantage that Coles brings is large retail stores, conveniently located with a wide variety of items, will it be very difficult for competitors to win against this given Coles market share?
Stores such as IGA are more suited for a local convenient shop than a large weekly shop for many people and so offer a legitimate alternative as they are sufficiently different to ensure their survival. Simple evidence of this is found when arriving at Coles you are offered a shopping trolley, at IGA a basket.
Also Australia’s number 3 supermarket ALDI has 361 stores across the nation and has driven it’s success with alternative brands and low prices – claiming a 25% weekly shopping bill reduction. Again sufficiently different to thrive, but with a 25% cheaper claim, weakening Coles reliance on lower price advertising.
But for Kogan, the disadvantage is convenience with several items currently listing on the site as days or weeks for delivery. So customers must substitute the convenience of a readily available product for a significantly cheaper product.
Currently Ruslan Kogan is promising to reduce the average grocery bill by half – the deep discounting along with each items comparison to an “Australian retailer” on the site is certainly playing to this strength making this seem possible.
4. Kogans play will fragment the customer
Whilst the strategy of Coles is to capture 100% of the grocery spend in person, Kogans strategy is to compete online by delivering the lowest price on select items as mentioned. Over time, Coles and Woolworths must evolve their strategy to come away from pricing and towards service, fresh food or items which are unavailable online as it does not make sense for Coles to promote pricing which plays to Kogans competitive advantage.
In the Harvey Norman vs Ruslan Kogan battle, Gerry Harvey claimed that everything from the GST to the Australian Dollar and poor quality imports were unfair, yet he continued advertising on price – his new competitive disadvantage. The result? Revenues organically migrated to Kogan as his was an effective strategy. When the environment changes, one must adapt to the new environment in order to thrive and Harvey Norman kept the playbook that served them so well and built their legacy. The same legacy then prevented them from adapting and it fragmented customers. People used to go to a store to buy a TV, now some go to a store and some buy online.
Internet shopping won’t suit everyone, and it will be a while before Kogan Pantry stocks fresh food or even a significant percentage of the weekly grocery basket. But what it will do is attract the price conscious shoppers to buy the products which strategically suit Kogan. Think more shavers and soap and less soft drink or bread initially. Over time this will fragment the customer with more people buying the cheapest items they don’t mind waiting for at Kogan and heading to Coles, IGA, local markets or even online fresh produce providers for extensive range, local and fresh produce. The fragmented customers will be those who need a local and human touch, and those who need low prices.
5. Coles employees are speaking to customers less
According to Coles, Amazon is their biggest threat. I will also throw in Kogan and other online retailers for the reasons above. Therefore the competitive advantage against online grocery retailers for Coles is;
- a large local store
- with an extensive range of popular items
- where customer service can improve the customer experience.
And yet Self Service checkouts appear to be taking up more and more space and infuriating more customers. Whilst I am sure the return on investment for a self service checkout compared to a humans wage would be a matter of months, this is weakening their competitive disadvantage as dealing with a robot in a supermarket can be just as infuriating as dealing with a robot at home (online shopping). The one thing that an online store can’t replicate is the in store experience and dealing with happy, friendly people. For many people this weekly ritual is a one of the few things they do to get out into the real world.
Just like Gerry Harvey fighting Kogan by advertising prices which are still significantly higher than Kogans, Coles must confront the brutal facts sooner rather than later. Online grocery is coming and it represents a significant threat to revenues, the evidence is all around and industries such as printing, entertainment and advertising have seen a changing of the guard where leaders did not adapt to the new environment as they were wedded to their existing legacy.
So what can Kogan do?
Kogan is playing to his strengths with a longer term strategy that we would call #23 “Exchange the role of a guest for that of a host” in our Outthinker program which uses the 36 ancient Chinese stratagems to uncover a new strategy for businesses to grow. This means that Kogan will start with small deeply discounted items and transition to a larger part of the weekly shopping spend by adding new lines over time.
Suppliers to Coles and Woolworths have had a difficult time in previous years with many product lines being replaced with private label (i.e Coles brand) and to then find that the private label products obtain a prominence on shelves. It is logical that Kogan would befriend these suppliers and use these to promote a Kogan line of groceries similar to Dick Smith foods. This would use stratagem #5 “Befriend a distant enemy”.
Using stratagem #34 “co-ordinate the uncoordinated” Kogan could partner with local fresh fruit and vegetable delivery companies to white label Kogans service.
Also expect to see Kogan publicly calling Coles on the lower prices they are advertising. Using stratagem #9 “Trouble the waters to catch the fish” in much the same way that he obtained media attention through his fight with Gerry Harvey, Kogan would be wise to seek publicity around the significant price differences between Coles and his selected items. I am certain the media have an almost pre written story for this exchange.
So what can Coles do?
Despite the significant market share enjoyed by Coles, and an approximate 7% profit margin, Australian customers are actively seeking lower prices as a result of the Global Financial Crisis and increasing cost of living pressures. Trying to resist this will be like trying to stop the tide coming in. Also if Coles continues to use advertising such as “Prices are down” Kogan only needs to respond with “and down by a further 50% at my website” Coles will not win a head to head price battle with an online retailer and in fact that war will only drive price seeking customers to the online retailer.
Coles currently has the luxury of time to develop a response strategy. But this window will not last long. Coles must answer the question “how could we improve customer service and customer experience by a factor of 10 in order to prevent revenues and margins falling in 5 years?”
The problem is that an effective strategy will organically drive revenues to you from the competition, because it meets the customers need. And today, customers need lower prices yet competitors speak of prices 25% to 50% lower. To advertise bread for 85 cents is not effective when I go on to spend $200 in store and a competitor is saying I could spend $100 or $150 if I was to shop with them for the same items.
To embrace customer service Coles must increase the number of interactions it has with customers on a human level. Online stores will be able to replicate almost all items and aisles in store but not the human interaction. This means highly trained staff in store doing things like Masterchef workshops, organic food training, knife sharpening, aided shopping for elderly / disabled, and gluten advisory services. This utilises Stratagem #10 “Remove the firewood from under the fire” meaning that Coles won’t fight the battle of price, but build new compelling reasons to visit store that play to its strengths. It has already a very successful example of this with the Masterchef sponsorship.
If Coles do want to go head to head with online discounters, establish a new online business to be a separate part of the Wesfarmers group, with autonomy which selects its own products and sets its own pricing. Wesfarmers could consider buying Kogan in order to do this using stratagem #35 “to catch bandits, capture their leader”. It doesn’t mean that there won’t be other online players, but they will be buying Australia’s number 1 online retailer to retain market share as the market changes.
Ruslan Kogan isn’t the only player in online grocery, but he is Australia’s number 1 online retailer and even if he is not successful, there are many other players in the market working very hard to take market share. Blockbuster and Kodak once had a window of opportunity to implement a new strategy, however the legacy of their existing success prevented them from acting. As the market leader in a rapidly changing environment Coles has this same opportunity, however it will not last long.
Brad Giles works with CEO’s and management teams to develop & execute a winning strategy at offsite planning sessions. Learn more at www.evolutionpartners.com.au