The French FMCG market is slowly recovering from the shock of new legislation. After a 10% drop in both value and volumes during Easter week, the market has rebounded to +1.2% in value but remains negative 1.6% in volume. Why?
Unsurprisingly, the supermarket format is growing as the limit on promotion and maximum margin on farmers goods remove all insentive to drive to a periphery for overstocking. E-commerce is in a fall (-5% versus last year). As mentioned earlier, a few weeks ago, the last pure quick-commerce player have shut their doors in France. What is wrong with E-commerce in France? Wasn’t it the future of retail?
Thanks to new legislation that limits promotions, home and personal care categories are down about 10% in both value and volume.
This is a slightly better performance than the -15% seen last week, but there is still no promise of recovery on the horizon.
On the other hand, the annual inflation rate has slowed down to 2.2%, which is likely linked to the consumption drop. However, the risk of deflation and subsequent recession is obvious if things remain unchanged.
Several retail CEOs and VPs have requested an audience with Emmanuel Macron. Let’s see if that bears any fruit (meat or cheese).
You wait in the lobby, but Mr. Labrador is late. You wait a bit more, but no one comes. You ask the receptionist to remind Mr. Labrador of your presence. Finally, after 40 minutes of waiting, you are moving into the meeting room with a friendly chap.
You present yourself, fresh from the top business school, just being promoted from the category position. Mr. Labrador is at least 20 dog years older than you and completely overwhelms you with anecdotes of the great times he had with your pre-pre-predecessor.
He knows the job, he knows your company, and he knows how to help you influence your superiors in order to get what he wants. You chuckle politely, thinking of the German Shepherd ready to shred you to pieces if you yield.
You come with bad news for Mr. Labrador. You must raise your prices and cut the marketing budget at the same time.
Select your strategy:
Strategy 1: Don’t shoot the messenger.
Mr. Labrador knows Hoof & Bone rather well (in fact, better than you). It makes no sense to hide things from him; let’s be as straight to the point as possible. So, you explain the VUCA, the Red Sea, the viruses, and wars. In fact, you have a slide for each of the four horsedogs of the apocalypse. Finally, you announce that the firm gave you no choice but to protect its very 150 years of existence by simultaneously raising prices and cutting promotions. Take it or leave it; the decision is from the top dog, and even the market-leading retailer Nile.com has already accepted the new tariffs and thus reaps the increased profits.
Strategy 2: Veni, vidi, vici.
Remember, you are a pure-blood descendant from the now-extinct wolves. You have never been tamed. You are wild and ambitious. You want to use the old chap as a trampoline in your career. So, you tone up your presentation: the VUCA, the Red Sea, the plagues, and the wars.
But you show another slide at the end, where the prices must rise even higher and the austerity is almost complete. Surely, the old Labrador will not be able to sniff the foul game and will collaborate fully. But the German Shepherd might shred some other account to pieces and maybe give you a raise and promote you to a better account next year…
What is the best strategy according to you and why?
Imagine a planet where the dominant species are dogs. The world is just as similar to ours, yet instead of humans, there are dogs. Building skyscrapers, driving Maseratis, and negotiating deals, ok?
You are a professional key account manager of Hoof & Bone, a 150-year-old market-leading conglomerate, and you come down to visit an ordinary customer—nothing special, just a “meh,” let’s call them “MeowMart”.
But that’s all you’ve got as a job. Your career depends on this one. You are a straight-to-the-point, no-nonsense Husky. Your boss is a German Shepherd, she demands higher than the market revenue growth, sits tight on your trade marketing spendings and can calculate ROI faster than MS Excel.
Imagine at the MeowMart reception you learn that there are two buyers who negotiate with suppliers in your category of goods, and in fact, you are free to choose any one of them as your key negotiation contact.
Whom would you choose?
Buyer 1: a Labrador – loyal, friendly, and cooperative. Buyer 2: a Pit Bull – mean, ferocious, and unpredictable.
Write below in the comments who and why would you choose!
While reading “The Art of Strategy” by Professors Dixit and Nalebuff, I’m once again reminded of the Game Theory classes we’ve so much enjoyed during our MBA program at Solvay.
Game Theory has revolutionized understanding of negotiation and decision-making, proving that rational human beings tend to make irrational decisions that lead to suboptimal settlements (Nash equilibria). The most famous and widely publicized example of Game Theory is called the “Prisoner’s Dilemma”. I’m sure that most of you know the story perfectly well. While it is a good and illustrative demonstration of the non-cooperative game, it is oversimplified, inaccurate, and somewhat naive. Reality is non-binary, as we all perfectly know.
Negotiators often inherit the weakness of such a binary approach, while the spectrum of options is virtually unlimited. Just as logs are thrown into the fire, negotiators must throw new perks into their ZOPA (Zone of Possible Agreement).
The classic negotiation theory instructs us to make the smallest concessions for the biggest gains while adding low-valued perks to the high-value deal. Each iteration should never be linear but ever diminishing (1%, 0.9%, 0.895%, 0.8945%, etc.). Thus, the real prisoner could have demanded: all charges to be waived, witness protection for him and his family, lifelong government support, and immunity for all past crimes in exchange for cooperation. Each of these demands could be secured against every diminishing bit of information.
Asymmetry of information: In real life, people’s choices are influenced by a multitude of factors, both rational and irrational. During some very difficult negotiations, I’ve asked my opponent what his BATNA (Best Alternative to a Negotiated Agreement) was, “I will be fired” was the answer. Understanding and respecting the person is the only way. No successful agreements are reached by intimidation, lie or extortion.
Both prisoners could have hired the same lawyer to avoid asymmetry and outplay the police…
Static game: In the Prisoner’s Dilemma, both prisoners are given one single choice (confess or remain silent) and must decide quickly. In real life, negotiations take weeks, months, and even years. The pieces on the chessboard move all the time, and the window of opportunity can open or close at any moment, and not necessarily at the end of negotiations. I witness over and over the same mistake in the negotiations between the supplier and a buyer, where both tend to ignore the law of demand and supply, visualizing the game and its outcome as static. The optimum outcome must include milestones that automatically trigger a revision of the deal during the contracted period, thus protecting both parties and allowing corrections.
While the prisoner’s dilemma provides valuable insights into decision-making and cooperation, it is essential to recognize its simplifications and limitations when applying its lessons to real-world scenarios.
Summer is a great time to disconnect from digital media and appreciate the feel and touch of paper books, deep diving into the thoughts, analysis, experiences, and beliefs of their authors, who relentlessly dedicate their own time to their future readers.
Personally, I like to combine educational, business and recreational literature, reading several books in parallel and listening to their audio versions when driving.
Here is my summer shelf:
1. “Good Strategy/Bad Strategy” by Richard Rumelt (finished)
2. “The Silk Roads: A New History of the World” by Peter Frankopan
3. “How the World Really Works: A Scientist’s Guide to Our Past, Present and Future” by Vaclav Smil
“Good Strategy/Bad Strategy”, 2011.
Richard Rumelt has vast academic and consulting experience in strategic management. In his book, he provides definitions of strategy and gives multiple examples of various business actors’ challenges to define or re-invent their strategies and organizations.
According to Dr. Rumelt, true strategy is not a simple collection of goals or a “shopping list” type set of actions, but rather a coherent and focused plan that addresses the fundamental challenges and opportunities a person or an organization faces. Many companies lack a clear understanding of their underlying problems and a plan to overcome them. He identifies this as “bad strategy,” which often leads to wasted efforts and missed opportunities.
Here are some quotes that stood out for me:
“A strategy is, like a scientific hypothesis, an educated prediction of how the world works.”
“Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.”
“The most basic idea of strategy is the application of strength against weakness. Or, if you prefer, strength applied to the most promising opportunity.”
Recently, I have been asked about the most effective leadership style in today’s world and the style I personally practice.
First and foremost, a leader should be someone whom people can trust, someone who actively listens and demonstrates empathy. It is essential for a leader to lead by example, possessing a clear vision and the ability to enable, defend and empower their teams.
The COVID-19 pandemic has changed our work dynamics and our perceptions of life, family, and commitments. It is crucial to adapt the leadership style to this new reality.
Traditional autocratic leadership is no longer effective, whether in military settings or office environments. Disengaged teams are a ticking time bomb for any organization.
On the other hand, I am also skeptical about the efficiency of democratic leadership. When every stakeholder has equal power, reaching a consensus can be challenging, which would result to unsolved issues, loss of productivity and competitiveness. Mistakes must be alowed and tolerated, they contribute to the famous “learning curve”. As Mance Rayder (The-King-Beyond-the-Wall in the “Game of Thrones” TV series) said, “The freedom to make my own mistakes was all I ever wanted.”
There are numerous other leadership styles, each with its own advantages and disadvantages and a great leader is able to use a variety of them in different circumstances. However, in my current context, I would like to emphasize the importance of Transformational leadership.
Considering the tectonic shifts in the retail industry, an exceptional leader is someone who inspires and motivates their teams to surpass expectations and achieve remarkable results through changes and sacrifices for the good of organization. Transformational leaders invest time in the personal growth of their teams, providing support, offering a clear vision and direction, and challenging the status quo.
I would recommend “Transformational Leadership” by Bernard M. Bass and Ronald E. Riggio to those who wish to study this subject further. Activate to view larger image,
So we are in the second year of an incredible roller coaster, when the bills continue to rise and the economy is staring into the abyss from the top of the ride.
Food retail is one of the industries where inflation is most obvious.
A quick example: an average price of a dozen of grade A large eggs in the US (Source: U.S. Bureau of Labor Statistics) in January 2022 was $1.929 and in January 2023 already $4.823. An increase of 250%!
Yet, as one might intuitively guess, consumption of eggs did not decline. It is stable.
In an imaginary world of economics, this means that an egg’s price is “inelastic”.
In the graph above you can see a very small factor of elasticity of eggs, equal to 0,1 (elasticity index below 1 means that an additional 1% price increase results in a less than 1% quantity decline; elasticity index above 1 means that an additional 1% price increase results in a higher than 1% quantity decline).
So, groceries in general are inelastic, as they represent a commodity that we cannot live without and would need to purchase anyway.
Often times, these products come from local farmers, who rarely can have an upper hand in negotiations with professional buyers. Thus, in most countries, governments grant farmers extra protection. It exists in several forms, from an unconditional price acceptance by retailer, to the strict regulation of both buying and selling prices and in some extreme cases, to establishing caps on the profit margins of the “essentials” food basket.
Last year several EU countries removed Value Added Tax from grocery products to limit the inflation burden on their citizens.
On the other hand, most of FMCG products, like home and personal care are elastic.
Source: https://www.euromonitor.com/
Not only HPC producers must avoid inflation if they want to grow their sales, but what is more, they need to constantly sell on promotion (elasticity index >1)!
In some categories, sales with discount represent from 50% to 80% of total sales.
Business models of FMCG suppliers are built on higher than average margins, offset by the volume of discounted products.
Raw materials and energy inflation represent a small increase in the cost of the final product and can be mitigated by
(a) direct and often disproportional price increases;
(b) lowered discounted/promotional activities;
(c) shrinkflation
and notorious and most famous (d) cost cuts.
Needless to say that all top FMCG manufacturers are the experts in this game and have managed to grow both their top and bottom lines last year, declaring record breaking results while paying the biggest ever dividends to their shareholders.
Highly recommend Noam Chomsky’s “Profit Over People” if you want to understand better this broken system.
Here is a random fact for you. Snails are the 2nd most populous species on earth after insects.
There are at least 60,000 known species of snails. They live in both fresh and salted waters as well as on land. For comparison, humans are only one species – homo sapiens and we share our preferred habitat with snails.
What makes snails so populous is probably the fact that they can reproduce both with and without partner. Snails can combine both solitary and social behaviors. Studies showed that the snails deprived of the social group interactions would prefer to stay solitary the rest of their lives and never return to society.
Humans, on the contrary are the social beasts. Our ability to dominate all other life forms and nature is not due to our large brains (in fact they are 25% smaller than of Neanderthals), nor our longevity (Hydras are known to be immortal and whales can live more than 200 years), but of our ability to create social links, form groups, organizations and governments.
One of the oldest human projects was probably Göbekli Tepe – an 11,000-year-old ritual site, built by stone age people, erecting 5-meter-tall pillars weighing up to 10 tons. It is located less than 200 km away from the city of Gaziantep, in the region where on February 6th 2023 two consecutive earthquakes took place, destroying countless number of homes and killing tens of thousands. Since then, more than 40countries have sent their rescue workers to help save as many people as possible. Same governments pledged to support the rebuilding efforts financially.
In the turbulent times some of us act like snails, hiding in their shells, sealing the door shut and ignoring the outside storm. Others prefer to act. And it is this act of bravery, solidarity and compassion that moves humanity forward, pushing our horizons, changing our lives for better, achieving unprecedented results.
Being snail is easy as long as you have your shell…
I flew next to one of the major bank’s regional head recently (imagine, they fly economy too! :)).
After a small talk we introduced ourselves. He was fascinated by the retail industry and the tectonic shifts in both retail and consumption behaviors. It reminded him of the old days when the ATMs transformed the retail banking. Everyone those days was afraid of losing jobs to machines. Manual retail banking operations have indeed dramatically decreased, but so did the space they had to occupy. Thus, the need for smaller space and the lower cost pushed competitors to open much more “proximity” banks, greatly increasing the number of staff needed, growing the retail industry thanks to the ingenious automation.
Retail of 2023 is about sense. Seamless flow, automation and digitalization, mixed with smart cost management and nature preservation are the key ingredients in the recipe of success.
