I bet Bernie would like to work for Apple instead

The boss of Aussie department store Myer, Mr Bernie Brookes, was asked yesterday about increasing harmonisation of product prices across countries (presumed to be a response by suppliers and retailers to the exodus of customers to online commerce).

He said (with a delightfully Aussie oratory flourish):

“If you don’t do it the customer leaves you en masse. It is Darwinian shit: if you don’t do it you are not going to sell it.”

Damn the perils of actual international competition.  I bet he wishes he was in Apple’s big boots on this, as they seem very capable of selling the exact same song/app etc on iTunes for considerably different prices from market-to-market. See this link for a nice bit of comparative work – Aussies really get screwed.  I guess we’re the Easter Island of Darwinian natural selection.

e’s doing it, I’m doing it, we’re all doing it

It seems a price-war is breaking out in the electronic book market.  British retailer WH Smith halved the price of its entire e-book range last week.

This raises an important business strategy question: How can the e-book vendors avoid ending up in a downward price spiral?

Consider the situation: the actual marginal cost of selling each book is very close to zero for all vendors.  Sure there are a range of ‘lumpy’ costs in setting up the web interface, the transaction system, the relationships with publishers and developing a brand that consumers know and trust.

But selling the next electronic copy of any book is pretty much costless. The publisher needs to get their cut, but for the retailer there are no warehousing or inventory costs and no delivery costs.

Why chase a 100% margin in vain, while your competitor is selling the same title at a 50% mark-up?  And if you drop to 49%, why won’t they drop to 48%? And on it goes?

This becomes a classic low-cost wins scenario.  Can the retailers do anything to differentiate themselves?

And how to the retailers running both “clicks” and “bricks” stores cope?  How do they reconcile their pricing of physical books relative to the e-versions?

Raising the glasses bar

Almost eighteen months ago, I blogged about the trouble faced by Australian optometry chain OPSM (and their Italian parent Luxottica) from the challenge of low-cost newcomers such as Specsavers.

It would seem we’re finally seeing the strategic response of OPSM, a new, innovative store concept launched this week:

“The OPSM Eye Hub, which opened yesterday, is designed in the shape of a retina, and offers next best thing to augmented reality – a simulation machine so people can road test their choice in eyewear in action such as jogging, along with playback mirrors so people can view videos of themselves sporting glasses while not staring forward”

You can read more of the spiel at their dedicated website. This is a classic differentiation ploy, as the firm attempts to make customers willing to pay a premium for bells and whistles.

As spectacles (and sunglasses) are clearly fashion items, it certainly makes sense to try and build a brand and experience that moves away from solely price considerations.  Utilising technology and store architecture are both viable ways to create a clear point of difference from others.  Destination stores (e.g. Apple’s temples) and retail theatre may well be the next phase in once staid optometry market.

From an International Business perspective, it is fascinating to see that Luxottica is allowing subsidiaries to experiment in this manner. Might this be an innovation that gets rolled out around the international network in the future (a la McDonald’s roll out of the Melbourne-initiated McCafe concept)?

Have you heard of Anadarko? (Guest post from T.Osegowitsch)

My colleague Tom Osegowitsch suggested I write about this topic.  I countered with an offer to host him as a Guest Blogger.  So here is Tom:

Have you heard of Anadarko?

Chances are you haven’t. Yet Anadarko is a company currently involved in the largest oil spill in US history. The reason why you haven’t heard of them is because they do not have the iconic status and size of BP in the oil industry. BP (65%) and Anadarko Petroleum (25%) are co-owners (along with Mitsui of Japan, at 10%) of the ill-fated oil well presently gushing in the Gulf of Mexico.

BP is serving as the lightning rod for the public’s outrage. Its executives were hauled before Congress for a grilling. In the face of harsh criticism, the company has suspended its dividends, cut scheduled investments and liquidated some $US10bn in assets so as to establish a $US20 billion compensation fund. In an unprecedented move, BP has just been asked by the US Department of Justice to notify it of any “corporate restructuring, reorganisation, acquisitions, mergers, joint ventures, sales, divestments or disbursements” to counter the possibility that the oil giant could limit its liability.

In the meantime, co-owner Anadarko, a US-based company, has just paid out its July dividends and affirmed that it will continue to do so in September and December. And the company has by and large escaped the public and politicians baying for blood.

You might think BP was the operator of the sunken Deepwater Horizon rig which triggered the oil spill, and Anadarko, as the passive investor, should be spared. In fact, the rig was operated by neither. Transocean, a US company which recently relocated to Switzerland, was the owner and operator of the oil rig. Unless you have been following the disaster closely, you probably haven’t heard of them either.

In recent years, leading companies have had to shoulder a disproportionate share of the blame for misdeeds, acts of negligence or just bad luck. Irrespective of whether accusations are justified, the point is that they tend to hit industry leaders hardest, on account of these firms’ iconic status and market share. More generally, it seems that industry leaders are held to much stricter standards than the minnows.

This would seem to be an increasingly prominent yet largely overlooked source of diseconomies of scale, the notion that firm size – beyond a certain point – leads to an increase in average unit costs. Complexity is one frequently cited source of such diseconomies: as firms grow in size, managing a multitude of different operations and locations requires disproportionate coordination efforts which nudge unit costs upward. The higher standards expected of industry leaders (in the wake of a disaster or more generally) would seem to be another, growing source of such diseconomies.

Telstra has for a long time been viewed as the 600 pound gorilla in the Australian telecoms industry. The company’s dominant market share (mostly a legacy of its former monopoly status) make them a popular target of criticism from customers, suppliers, rivals and regulators. The same goes for Microsoft which in some circles is portrayed as a satanic force. Dealing with complaints, countering criticism and “setting the record straight”, as well as fighting law suits can be taxing on company resources and management time. Industry leaders are often singled out and held accountable for their entire industry. Activists of all kinds know that going after the “soft target” at the top of the industry is the quickest and most efficient way to affect change, thus elevating the leader’s costs.

Source: Frank Wright

Even companies previously embraced by the public are in danger of a backlash once they become sufficiently dominant in their industry. Google comes to mind. Even Teflon-coated Apple has recently come in for criticism in some circles for its powerful position on account of iTunes and/or its association with supplier Foxconn.

Market-leading size and position are often the ultimate objective of company strategies. Firms would do well to remember that such exalted positions are precarious. As Icarus discovered, the wings that allowed him to escape from his island prison also led him too close to the sun and, ultimately, his downfall.

Andre’s addition: I would throw in the disproportinate attention paid to Nike‘s (and, as Tom highlights, more recently Apple’s) outsourced labour practices as another version of this. Similarly McDonald’s seems to receive much greater scrutiny on the ‘healthiness (or not)’ front than do smaller (i.e. less successful) burger vendors.

Can anyone think of further examples (particularly Australian)?

Facing an inevitable bust?

I was a little alarmed by the comments from the head of the Australian operations of the Blockbuster video store operations this week.

In response to inquiries about the viability of the local concern in light of the likely bankruptcy of their US parent (well sort of parent – it’s pretty much an international franchising setup with the distinct Aussie entity using the US mob’s brand, systems etc), Paul Uniacke indicated (in effect) that he saw no significant threat from alternatives to his bricks and mortar operations. This is despite the US version experiencing a 16% sales drop in the last quarter.

His argument is that Aussie consumers haven’t embraced mail-order DVD delivery offerings from startup competitors, nor have they shifted to streaming/download options.

I would think the missing word there is “yet“.  Surely it is only a matter of time before wandering up to an understocked, inconvenient video store becomes as quaint and antique an idea as using a phone box or sending a telegram?

He is right that the actual decline in store-based DVD rentals hasn’t happened here yet, but I am certain growth slowed a while back, and that decline is just around the corner.

Mail order might not the threat its proponents hoped for, but streaming will be (as demonstrated already by the utilisation of illegal and legal download services).  The much vaunted upgrade in Aussie broadband infrastructure will greatly facilitate this.

The strategic lesson: just because technology and socio-cultural effects haven’t kicked in yet, don’t fob them off as irrelevant.  Learn lessons from similar and more advanced markets.

Blockbuster Australia should be looking very, very hard at web-based video delivery (although, I must say, I can’t see that much in their existing resources and capabilities that would see them out-perform Amazon, Apple or even Telstra on this front). Alternatively, they’ve got to find something interesting to do with all of the stores.

As an aside, my local Blockbuster has halved in floorspace in the past year, and still looks empty every time I walk past…