Wednesday, July 31, 2019

Retail Disruptors

Every generation there seems to be a new type of grocery store that comes up with a new way to lower prices, in the process lighting the business models of the incumbents on fire. It doesn't feel like it was that long ago that it was Walmart that was the disruptor. But today it is playing defense against another set of disruptors: the so-called hard discounters. Retail Disruptors is about the spectacular rise and impact of these hard discounters that are taking the industry by storm.

Aldi and Lidl are examples of this model that is gaining share in much of the West. They succeed by offering substantially cheaper prices than the incumbents. How do they do this? There are several business processes involved which serve to reinforce each other, including:

- Almost all products sold are private-label, many of which are high-quality
- As a result, the number of SKUs is way lower than the incumbents, leading to high sales per product and therefore economies of scale
- As a result, stores can be much smaller, leading to high sales per square foot and cost advantages

Incumbents try to be all things to all people. For example, for a given category, the incumbent may offer hundreds of varieties, across several brands from premium to store brand, with different sizing and packaging and flavors. By contrast, a hard discounter may present one brand in the most popular size with the most popular flavor. That product then moves way faster through the store than any one product of the incumbent's (even though the incumbent's total sales may be higher), giving the disruptor both a sales and cost per square foot advantage.

The book delves into the history of the format, and also offers ways for the incumbents to fight back.

This had the makings of a really interesting book to me, but I thought it came up short in a few ways. For one thing, it lost a lot of credibility with me when it defined COGS as simply the cost of purchases from suppliers. This leads to the erroneous conclusion that labour costs are not as big a proportion of overall costs as they actually are. In actuality, salaries from procurement to transportation to warehousing are often lumped in with "cost of goods".

Overall, it's a decent book that I would recommend if the topic interests you.

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