Strategy and the internet – the sting is in the tail

The story of the evolution of the Cadbury chocolate company from its humble beginnings in 1824 to its emergence as an iconic global brand carries with it one single event that was a problem then, and is also a problem for many business entities today – how to deal with the emergence of a redefined and disruptive supply chain infrastructure?

The specific event was potentially one that had the greatest impact on Cadbury throughout its history. It occurred in the mid 1960s, during a period of unusually poor profitability for the company, and appeared in the form of a new and powerful shopping format – the supermarket.

Much of Cadbury’s poor performance at that time can be attributed to the US based Mars Corporation who chose to enter the UK market just before the supermarket model took hold. Apart from the success of their innovative Mars Bar, which offered an enticing alternative to Cadbury’s tiring plain chocolate block, Mars adopted a differentiated distribution strategy to Cadbury that relied on wholesalers to distribute their products.

Up until the appearance of the supermarket, Cadbury had built a dominant market share in the UK through the success of their direct sales model, which saw their highly efficient production capability support a distribution channel that gave them access to nearly every corner store, grocery shop and other similar outlet across the country.

Supermarkets were also based on the wholesale model, but in cutting out the “middle person” were able to reap the benefits that come with a direct interface and relationship with the consumer. Supermarkets represented an ideal solution for Mars, but were less attractive to Cadbury, who stood to lose their nurtured and most loved customers – the corner/grocery stores.

Fast-forward to 2012 and we can again see a continually emerging requirement for businesses to prepare for and respond to the inevitability of technologically driven change. A “category” view of the transformation underway sees the internet appealing to resellers who have a global reach and products that fit the characteristics of, 1) ease of transport, ie. items that are small in size; 2) items that are high in per unit cost, ie. items that make it worth the wait required when buying online, and; 3) non-perishable goods; ie. ones that are easily packaged and shipped at low cost.

The sting in the tail is of course margins. Cadbury experienced this phenomenon also as their selling price was crunched by supermarkets, but their margins were better protected. Cadbury was already a low margin business that relied on high volume sales for profitability. To maintain volume following the emergence of the supermarket, Cadbury increased their advertising spend and altered the mix in size of chocolate bars to redirect pressure on price. They also introduced new product lines which had the added benefit of increasing pressure on the competitive Mars Bar.

In responding to the impact of internet based supply chain business models, firms today have far less options to protect margins than did Cadbury. To compete in an online business, participants must be prepared to accept a considerably lower selling price and offset margin loss through innovative ways of increasing sales (hence the attractiveness of a global “online” presence) while also finding ways to compete against those with very low operating costs.

Ironically, supermarkets are better placed than most to take control of an internet based future; Coles Group is an example. As a purveyor of small sized, but low value items and a product mix that is characterised by high volume and mostly perishable goods, their margins are also very low; they do not yet face any life threatening pressure from the internet. They are therefore in an ideal position to adopt a neutral approach to transformation, buying time to introduce an online capability, but one that is highly integrated with its existing bricks and mortar infrastructure.

Through the recent relaunch of their Fly Buys loyalty program, Coles is evolving an online presence that will allow it to balance a potential threat of a reduction in store traffic volumes by ensuring its customers are introduced to its online service; while at the same time, using advertising and reward points to ensure customer “leakage” is kept to a minimum. Coles is positioning to manage a slow, but increasing drift towards online shopping while retaining the bait of the continual availability of freshness, accessibility and immediacy as a means of attracting customers to continue to physically visit stores on at least a semi regular basis.

For other retailers such as Myer and David Jones the variety and size of the product range makes the solution a lot harder. For non-retailers such as Sensis (Yellow Pages), News Limited and Fairfax the reality has hit home with a thud. It may be time for everyone to start strategising along the same lines as Coles?