I’M STILL STANDING

In the text-book we looked at franchising as a mechanism for expanding a retailer’s operations both in a national and international context.

One of the most challenging aspects of retail strategy revolves around the issue of how to achieve a critical mass in terms of the scale of operations. How quickly can you grow the business in terms of the number of outlets?

We are all probably aware of the potential benefits. The larger the scale of operations then the more likely it is that a retailer can benefit from getting better discounts and deals from suppliers. A retailer can also spread the cost of doing business across the outlets and benefit from synergies and so on.

Franchising is seen as a quick and relatively low-cost way of achieving such a position.

The traditional franchise model is based on two key features: an initial “up-front” payment by the franchisee (the individual who wishes to become a partner / member of the franchise arrangement) and an annual percentage of sales that is paid to the franchiser (the company / individual who has established the original business idea and developed it into a successful investment proposition). The success of the concept is based on the belief that the franchisee benefits from the established brand proposition and the expertise of the franchiser in terms of help and support provided by the latter. It also works on the principle that it gives the franchisee the opportunity to own his / her business and a clear incentive to work hard to make it work. The franchisor benefits from gaining access to a wider geographic region and thus begin to benefit from a larger scale of operation.

I was brought back to this topic recently when reading an article about Majestic Wine: the largest specialist wine retailer in the UK. Originally established in 1980, it has expanded to over 200 stores in the UK and two in France. In 2015 it acquired Naked Wines to enable it to expand its operations.

Let me stress that it does not currently operate a full franchise model: none of its stores are franchised out.

However it has begun to introduce what its CEO Rowan Gormley refers to as a “franchise – light concept. Gormley was previously the CEO of Naked Wines and when this was acquired by Majestic Wine he subsequently became its overall CEO.

In his new role he embraced the philosophy of putting the customer and his staff first.  In response to the customer he developed a multi-channel strategy with “click and collect” and online sales, simplify the pricing strategy and improve the design of the store to make it more “customer-friendly”.  In response to the staff he felt that it was necessary to create a climate which could better incentivise his store managers.

Motivating store managers was seen as a particular challenge. In 2015 around twenty-three per cent of them left: mainly due to the restrictive nature of bonuses (they could only earn up to a maximum of £1000 and were earning a salary of £28,000.

This raises a more general question of the challenges of retaining staff in a sector which is pressurised to manage costs and salaries in order to remain competitive, particularly in the face of the ever-present threat of discounters.

The traditional “command and control” model is predicated on the practice of everything remaining in the hands of top management: where decisions on strategy are passed on to middle and junior management for implementation with little or no consultation.

Gormley challenged this approach by introducing what he termed the “Majestic Partners Programme” in 2016. This is based on the principle of allowing store managers to take responsibility for more control over the management and day-to-day operations of the business.

This is reflected in the store managers making decisions on issues such as staffing levels, opening hours, which product line to carry, discount levels and tasting products for use within the store.

Such a strategy can potentially allow them to earn around £50,000 based on performance. This is a significant improvement on the average earnings of £30,000 for the typical store manager.

This “franchise light” approach buys into some of the underlying features of a traditional franchise model. For instance it passes over some of the operational decision-making to individual store owner. By taking responsibility for areas identified earlier the manager is in a position to directly influence his / her income from the business.

While not having any responsibility for overall strategic decisions, never the less it can be argued that such responsibility can act as a major incentive and provide a strong indication that the store manager has an influence on the future of the individual store and by implication the overall business model.

It also provides a major incentive to stay with Majestic Wine and grow the business.

More importantly (for the store manager) it means that no up-front fee is required in order to participate in the business model. Thus one key element of the traditional business model is ignored.

One of the criticisms of the traditional franchise model is that there is conflict between what the franchiser wants and what the franchisee gets.

The franchiser does not want an entrepreneurial individual who typically likes to take some risks and above all resents being told what to do. In short they want someone who will diligently follow and embrace the underlying value proposition that has been embedded in the business.

However people who might invest in such a business (particularly if they have some independence and flair) find it difficult to operate in a situation where there is no “wiggle-room” for introducing new ideas or behaving in an innovative way.

The “half-way house” approach introduced by Gormley at Majestic Wines possibly overcomes this dilemma. It enables store managers to increase their income levels while at the same time broadening their range of management and customer service skills. In the longer term this arguably makes the overall business of Majestic Wine more profitable and sustainable.

As against that it can be argued that some of the successful store managers will most likely move onwards and upwards or even establish a rival business proposition.

On balance I like the approach adopted by Majestic Wine as it avoids some of the pitfalls of the typical franchise arrangement. It should certainly improve the qualities of the store manager.

Gormley expects to have around fifty to sixty per cent of the store portfolio operating the “franchise-light” model over the next year to eighteen months.

He recognises that not all store managers would be keen to participate in such a framework and be burdened with the responsibility for such decisions.

Successful managers who improve the business are likely to seek further reward by gaining promotion. If such a procedure or opportunity is not available then they will move to another company.

Gormley’s overall philosophy revolves around the “test and learn” model. Let’s keep an eye on this business over the coming years.

Advertisements

THE PRICE IS NEVER RIGHT

THE PRICE IS NEVER RIGHT

We have examined the issue of retail pricing strategy extensively in one of our chapters in the text. I was drawn back to this topic recently when I read an article recently (True cost of Amazon pricing revealed: The Times; 9th September 2017, p7, Andrew Ellson).

This article addressed the general issue of dynamic pricing, something which I hasten to add is not new. Service sectors such as airlines and hotels have used the practice for a number of years in an attempt to get the balance between supply and demand more in their favour. Where a company is selling a perishable product (i.e. it cannot be stored or inventoried), such a strategy, based around changing the price of the service constantly – sometimes upwards, sometimes downwards, can help to optimise sales and the margins.

Amazon, our old friend, which is usually in the forefront of pioneering endeavours, has arguably taken the practice of dynamic pricing to another level. This is reflected in the practice of changing the price of items much more frequently than is the case with hotels and airlines. The author of the article mentioned above cited a study which suggested that the price of an item could change very dramatically over a period as short as a week or a day. In the case of one item the price varied by as much as forty-five per cent over the course of a week.

Further details of this study revealed that over the course of a one-year period and based on a random selection of one hundred items including books, DVD’s and so on, prices fluctuated by up to as much as two hundred and sixty per cent between the highest and lowest price points.

As we might expect prices changes tended to be linked to certain events that related to the items. For example if a film was a success then the price reflected that level and degree of popularity. Seasonal events such as the onset of summer, Halloween and Christmas also played a significant part in the re-formulation of prices.

In essence it is the disparity in the price changes, the frequency of such changes and the scale of the change (on a wide range of items) that has taken dynamic pricing to a new level. You might say that such bewildering change only serves to confuse and potentially annoy shoppers. Ellson quoted the example of a Waeco fridge that featured on the Amazon website. On August 3rd 2017 it was priced as £400. On August 6th it was advertised at the price of £580. A week on from that date it had dropped back to a price of £398.

On average the one hundred products that featured in the study changes price every five days and in the case of one item the price changed by as much as 300 times during the year.

What are we to make of this from the perspective of retail marketers and as shoppers?

From the perspective of businesses in general and retailers in particular the ultimate challenge is the charge the maximum that people or companies are willing to pay for the product or service. Reality intrudes and suggests that this is not always possible or indeed desirable at certain times.

For instance retailers entering new markets or new product categories may have to engage in some promotional or discount pricing in order to make inroads in that market. Some retailers target a particular segment such as the low-income sector. This inevitably means that high prices are a “no-no” and low prices / high volume is the order of the day in terms of the cornerstone of the retail strategy.

However dynamic pricing in the context of changing prices frequently on the basis of market conditions and on the amount of data that is captured on an individual’s purchasing and demand patterns can enable retailers to maximise their revenue and margins.

As mentioned earlier we see this with airline tickets and hotel rooms. Uber, the taxi company bases its business model on charging customers what they think they are willing to pay, weather conditions, time of day and driver availability to name but a few influences.

At music festivals, where people are dehydrated and suffering in the heat, you can charge as much as £5 – £10 for a large bottle of water and not too many will complain. The need to quench their thirst overcomes any misgivings about paying such a high price.

For the shopper one inevitable conclusion is that they have to become more “savvy” and more precise in terms of how they go about monitoring prices on the web. If you lean towards this type of practice then it can be argued that you can benefit from the effects of dynamic pricing. If you can identify the occasions when prices are likely to drop then you can take advantage of such market conditions to benefit from lower prices.

However human nature and consumer behaviour suggests that many of us at best do not have the time or inclination to engage in such disciplined practices. Many of us are lethargic about such matters and only engage in purchases when we need to. By that time the price will most likely have taken a hike.

Think about how you purchase an airline ticket. How many of us plan ahead and buy a ticket three to four months ahead of the flight time? I thought so. In my case I tend to leave it to a week or so before I intend to fly. The software and algorithms used by airlines to analyse demand patters will ensure that prices are on an upward trajectory at this stage in the purchasing cycle.

Again we see the confluence of big data and technology. Amazon has long been the pioneer in this area and once again we are witnessing it driving forward the boundaries.

While many commentators argue for clarity and transparency in the area of pricing, it can be argued that Amazon’s approach is opaque and confusing.

In the fields of sport and entertainment, organisations are embracing dynamic pricing with some degree of enthusiasm. Fans are faced with a bewildering rate of change as they are presented with differing prices by the day and by the hour.

It can be argued that price leaders such as Amazon are in the ideal position to develop dynamic pricing strategies. I would make the observation that they are no longer applying such a strategy indiscriminately. Using big data and sophisticated software they are adopting a more targeted approach to individuals and with product categories. Analysis of shopper interest metrics such as sales performance and online abandonment rates, can provide retailers like Amazon with prescient data upon which to activate focused dynamic pricing strategies.

There is no doubt that shoppers will have to “acclimatise” to further and more extensive applications of this pricing approach. Those of us who remain in the lethargic and disinterested category are likely to end up paying more for items than those who adopt a more disciplined approach.

We can debate (and we have done in earlier blogs) the efficacy of dynamic pricing. As retailers equip themselves with ever-more sophisticated software and gain access to increasing amounts of big data, it is likely that they will be able to further improve their profitability.