Why Tiger Australia is so toothless

A couple of weeks ago I was contacted by a newspaper journalist seeking some comments on the troubles of low-cost airline Tiger Australia.

The reporter was specifically interested in the likely impact of the current grounding on the firm’s relations with its parent back in Singapore (with a particular focus on the cultural aspect of ‘losing face’).  I offered a few insights – that I couldn’t speak to any cultural dimension, but that HQ clearly was very worried given the group CEO was talking of basing himself in Australia presumably to kick some heads… and that the airline was clearly struggling well before pilots (allegedly) started flying a little recklessly.

These nuggets of wisdom never hit the papers, but I thought I should expand upon the latter point – namely why the firm hasn’t won the hearts or wallets of Aussie flyers.

Low-cost airlines have been a business revelation in the past decade or two.

Innovators like Ryanair and Easyjet, and copycats like Air Asia and Jetstar Asia have sliced enormous costs out of the process of offering international air travel.  This has both sliced into the market share of the older full-service airlines, and also expanded the pie considerably by bringing less wealthy passengers into the market (and also allowing greater frequency of short trips away).

In the typically moribund US domestic market (see Michael Porter’s excellent explanation of why US airlines are typically loss-making – from about the 2 min mark of this video), both Southwest Airlines and JetBlue have been very successful using a low-cost model.

Yet Tiger Australia has been a money pit since kicking off in late-2007. So what is Tiger doing so wrong?

It would seem this a combination of mis-reading the local environment and under delivering on customer value.

Air travel in Australia is an awkward exercise.  While there is little threat of substitutes due to the enormous distances between our major cities (other than Sydney-Canberra driving between mainland capitals takes >7 hours), the fact that there are single airports in pretty much every major city (other than Melbourne’s inconvenient Avalon option).

Low cost airlines typically seek to avoid the high landing costs (and associated parking costs etc for price-sensitive passengers) by using smaller second airports and secondary cities, especially to cross-subsidise those flights that must go through hubs.  In Australia that simply isn’t an option.  The two big local players have very stable and mutually beneficial arrangements with airport management, and upstarts like Tiger are burdened with either tin-shed outhouses or pricey general gates.

The concentration of Australia’s population into a small number of large cities, unlike the more dispersed US markets, has meant Tiger has developed no local monopolies, and struggled to find a niche of consumers willing to sacrifice certainty and convenience for the limited price savings on offer.

At an operational level the firm has also failed to deliver then minimum service required to develop any customer loyalty.  Too many flights are cancelled (and given the infrequent schedule, too long a wait ensues), and the airline is notorious for being close to uncontactable for assistance.

The current grounding of all flights could (and perhaps should) be the end of line for this failed business strategy.

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Why Not Blame the Parents?

I was very disappointed by the recent supposed exposé of the “secret world of Trader Joe’s” by Fortune magazine.

For those who’ve never wandered the aisles of this US supermarket chain, Trader Joe’s is a rather quirky purveyor of intriguingly packaged groceries that conjure up vague images of some exotic South Pacific trading post (see left) – if said trading post had access to goods and flavours from around the globe.

The chain has been spreading quickly across parts of the US in recent years, such that it now has 344 stores in 25 states. It is a very private business, with little to say to the finance press, or media in general. Fortune’s story makes much noise about the ‘secrets’ behind their success:

– a focus on private labelled offerings (i.e. about 80% of products are internally branded), that it turns out are often sourced from FMCG giants who are sworn to secrecy about these production arrangements
– tightly controlled costs
– small (often standalone) stores
– very limited variety within each product and narrow offerings generally (so around 4,000 SKUs per store vs 50,000 for typical supermarkets)
– a tiny head-office, and considerable autonomy for regional and store managers
– well paid staff at all levels in the very flat organisation
– low numbers of in-store staff who are expected to be very multi-skilled
– loyal customers who are not deterred much at all by the limited range…

Does that sound familiar to many of you? Bring to mind the Aldi model, perhaps?

That’s no surprise. German giant Aldi has owned Trader Joe’s since 1979 (Correction to initial version of post: it was Aldi Nord that acquired Trader Joe’s. Aldi Süd, the other half of the Albrecht brothers’ empire owns the Aldi stores in the US (and Australia) – See more in comments section below ).

While the article acknowledges this, the author implicitly dismisses any impactful level of involvement by the German hard-discount giant in Trader Joe’s practices.

This is very odd. While it may be the case that significant elements of the Trader Joe’s business model were the brainchild of the firm’s founder, to ignore the similarities in competitive advantage is to miss a big part of this story. It also ignores the exciting prospects for the future.

Surely Aldi bought these guys because they could see the crossover and scope to transfer knowledge and practices. The eventual expansion of the chain across the country reflects Aldi’s own experiences, as does the extent to which consumer behaviours have been transformed when these stores open.

The Fortune article asks some great questions – such as whether these quirky brands and perceptions of uniqueness and ‘small-ness’ can be retained as suppliers must service a bigger and bigger market, and as consumers become aware of the ubiquity (and perhaps the multinationality) of the stores. The answer may lie in Aldi’s sustained advantage in both supply relations and as a consistently well-regarded firm. But ignoring the parent makes such an answer unlikely.

The other unasked question (and lesson) is the transferability of this brand and model beyond the US grocery market. Would a higher-end, more gourmet-tinged supermarket chain, built around a relatively low cost private-label strategy, work in other markets (such as Australia)?

A new Tune for Aussie accommodation market?

Low-cost expert Tony Fernandes (the man behind Air Asia) is launching his Tune discount hotel marque in Australia.

This is no-frills, low-cost at a pretty spectacular level. All you get is a clean room with a comfy bed (according to the firm) and shower. Every single extra (i.e. breakfast, a towel, hairdryer, toiletries, air-con, wi-fi) have a price, none of which seem exorbitant.

The company saves big expenses by not wasting space on gyms, lounges, restaurants, pool, or varied fitouts (i.e. suites etc), and on excessive and unwarranted laundry and other services, and the consumers shares in some of those cost savings.

As the article argues, other firms (such as Accor) are in this domain (e.g. Formule 1) but it strikes me that this slight tweaking of the model might work better. If the price point is a little lower (say $40-50 a night) and the locations satisfactory (i.e. very central), this offering may well bridge the gap between:

(i) the hostel market (which is highly idiosyncratic and uncertain for the customer),

(ii) the motel market (ditto, plus with very car-dependent locations), and

(ii) the low-end hotel chains (which often seem poor quality for the price)

You’d also think that South East Asian brand awareness might also assist in attracting customers in Australia (both from Malaysian, Indonesia and around plus other international travellers continuing on in their journeys).

In a business strategy sense, you could argue that the challenge for Tune is to capture as much of the tightar$e traveller niche (i.e. Focused Low Cost dominance), or alternatively shift the Willingness to Pay algorithm for a big chunk of the broad market (i.e. a Broad Low Cost play).

Blue Ocean proponents will no doubt view this as a creating new market space, on the ground of the bridging above, although the existence of the three current competitor groups should call that into doubt.

As an aside, I’m curious as to whether Aussie councils will allow such a garish paint job… and what Coke thinks of the logo…

Stretching an advantage further

Low cost is a common option in the business strategy literature. Often we assume that a firm that dominates market share, has substantial economies of scale, and offers a very price competitive product relative to its main rivals most be pursuing such a strategy to a greater extent than differentiation. The recent acquisition of Anheuser-Busch by InBev demonstrates that such assumptions should be tested.

As reported in the Wall Street Journal, the Brazilian-run, Belgian-headquartered InBev has certainly made some sweeping changes in taking over the US brewing rival.

The new owner has cut jobs, revamped the compensation system and dropped perks that had made Anheuser-Busch workers the envy of others in St. Louis. Managers accustomed to flying first class or on company planes now fly coach. Freebies like tickets to St. Louis Cardinals games are suddenly scarce.

InBev eschews fancy offices and company cars, and groups of its executives share a single secretary. It uses zero-based budgeting — meaning all expenses must be justified each year, not just increases. The company says it saved €250,000 ($325,000) by telling employees in the U.K. to use double-sided black-and-white printing, spending the money to hire more salespeople.

The story also reports extensions in payment terms to suppliers and cuts in advertising spend and format.

InBev clearly saw a lot of fat in this business despite (or perhaps because of) its 48.9% domestic market share. And it seems to be working thus far, with retail share up almost another 1% in the last quarter. Presumably margins are increasing even more.

I guess this could also be dropped in the benefits of multinationality box, with an MNE prepared to make the tougher decisions and to transfer capabilities into a new environment.