Brexit

I’ve been asked by quite a few people to write a note on Brexit. It’s a difficult issue to write about as Move Fresh takes a completely politically neutral view and Brexit is a very political subject on which people have very strong views.

As a company, Kevin and I have taken a view that we should not get involved in political issues. This because a) taking a political view annoys a large number of customers and investors and b) although we are pretty good at running a business that skill is not necessarily transferrable into political subjects. Just because someone knows how to make a lot of money does not qualify them to make pronouncements on the big issues of the day.

Which also brings me on to the subject that what is good for business is not always good for society. A classic example would be the Equal Pay Act 1970 which required companies to increase women’s pay to being the same rate as men who were doing the same job. Nobody today would argue against this. However it was bad for business at the time as it resulted in an increased cost but clearly was a great thing for society as a whole.

Taking a view on Brexit is mainly about making a prediction about the future. As Yogi Berra, the baseball star for non-Americans, said “It’s tough to make predictions, especially about the future.”

It is even harder to make a prediction about the future when i) you do not know what the UK government wants and ii) you do do not know if whatever they may want is achievable.

However what we do know is that somewhere in the region of 70% of the UK economy is dependent to a lesser extent (tariffs) or a greater extent (being prevented completely from operating) on membership of the EU. If we assume for the sake of argument that Brexit will ultimately be economically a good thing we have the issue that we have to move from a situation where 70% of the UK economy depends on the EU to a situation where 0% of the UK economy depends on the EU.

So, if Brexit ultimately turns out to be a good thing then we still need to handle a migration of 70% of the economy away from depending on EU membership. It is very difficult to envisage a way this could happen without it being at least a short term negative, unless there was a very lengthy 5-10 year transition period which has been ruled out by both the EU and the UK government.

A way to think about this would be that the set of opportunities for business outside the EU may be greater than the set of opportunities for businesses inside the EU but the intersection between the two sets is small. Therefore many businesses may fail today, even if the future opportunity is better.

So in summary, Brexit looks like a short term negative with the long term being either negative or positive depending on what policy the government decides to adopt and whether or not that policy is achievable.

The only political point I will make is that for Move Fresh we would appreciate greater clarity on what the UK government’s position is so that we can plan the future.

Welcoming Parsley Box

This month we launched Parsley Box,  a new innovative food service for seniors in the UK.

Having researched the sector for a number of years, we believe that current providers haven’t thought enough about the consumer in this segment and what they want.

We offer next working day delivery throughout the UK and a great range of meals that can be served in 3 minutes.

The ageing population in the UK and the focus on care at home has increased this market significantly.

Early indications are very positive with some great reviews from new customers and significant levels of reorder.

 

 

 

Amazon buys Whole Foods

Amazon acquires Whole Foods Market

Amazon (AMZN) announced on Friday that it was acquiring Whole Foods (WFM) in a move to extend its reach into Grocery.

We have long said that Grocery is one of the last areas of e-commerce penetration and although many have tried (Ocado for example) most have failed with a pure play e-commerce offering. This is mainly due to the complex nature of the supply chain and the fact that a large part of the product base is perishable.

We have followed a number of “foodtech” businesses for the last 5-10 years and competing with the integrated nature of traditional store based retail has been very hard.

The market view is that Whole Foods give Amazon access to both local distribution hubs (historically called stores) and a very integrated and unique supply chain. Whole Foods has a strong presence in North America and a few stores in the UK but has great coverage in the US in demographically richer neighbourhoods (Whole Paycheck).

But for FMCG brands the creation of Amazon as a retailer and a potential competitor will be an interesting area to watch. We suspect a number of brands may have to increase there own technology investment and this might be based on so called “acquihires” of struggling startup in the sector.

Good news for brands – but not fantastic news for investors who have paid high multiples to fuel the burn within a number of these companies.

Long term we think this is great for the consumer, great for Amazon shareholders and fantastic for brands that have well developed e-commerce capability – allowing them to leverage the investment that Amazon is making in this sector. Not great for Walmart though!

Blue Apron files S1

Blue Apron

Blue Apron (www.blueapron.com) one of the US leading meal kit companies filed its S-1 on Friday giving us some insight into the burgeoning meal kit delivery market.

Although we like the sector, in general, we still feel that churn is the major enemy within this area. Working on around 30% gross margin is fine but 3-year cohort data shows $939 of LTV.  This offers around $280 dollars of contribution before marketing costs.

2016 marketing costs seemed to come in around $144 per customer making a post-marketing contribution (before overheads) of $136. This is spread over 3 years so the cohort is delivering $93 per annum, giving marketing payback at around 18 months.

Everyone in this sector has raised vast amounts of investment and with around $745m in revenue in 2016 Blue Apron is definitely a business of scale. Losses have narrowed but to keep the churn rates in check the business needs to keep investing heavily in marketing.

You can read the full S-1 here.

Online Grocery sales reach 7.3%

Kantar Worldpanel have released new research about the level of Grocery e-commerce adoption both in the UK and worldwide.

The UK hass grown from 6.7% to 7.3% in 12 months,  we alsso see evidence of both higher value basket sizes online compared with similiar offline purchasses.

We expect to see this continue. Interestingly, South Korea is at 19.7%, so plenty scope to grow within the UK.

Full article: https://www.kantarworldpanel.com/en/PR/UK-online-grocery-sales-reach-73-market-share-

Digital first?

There are an enormous number of marketing job adverts that say the prospective employee should have a “digital first” outlook.

This is something we disagree with quite strongly. The approach should be “cost per customer acquired first” which may well result in the choice of a digital channel but that is a completely different thing from starting with a prejudiced view that the digital channel will work best.

Nowadays the main digital advertising channels are based on Generalised Second Price auctions. In an ordinary auction (called an English auction) a product will be sold to the highest bidder at the price they bid. In a GSP auction, the first place will go to the highest bidder who will pay the price of the second bidder and so on. (Bids are adjusted by Google based on Click Thru Rates as of course the highest bidder may not receive clicks and will therefore not have to pay for their bid.)

The good news is that the GSP is sightly less prone to the Winner’s Curse than the English Auction (as we need more than one bidder to get their bid wrong). But it is still the case that the number of participants in the auction will tend to increase the price per customer acquired.

At Move Fresh we have found that many of the PPC auctions have now increased so much in cost that we are much better buying more conventional media (such as inserts).

The point is that we are not a digital first marketing company: we are an acquisition first company. We are completely agnostic on media. We think “digital first” is as dangerous as suggesting that a company should focus purely on traditional marketing.

It’s what works.

Shakespeare on Copywriting

I am very pleased to be spending much of my time now teaching copywriting and marketing to our very talented team.

How does one write copy for Google Adwords or for the other e-commerce channels we use?

Looking back over the course I’ve been teaching I’ve realised that the vast majority of it has been quotes from William Shakespeare, followed by William Blake.

There have been questions about why e-commerce marketing which started in 1995 has been almost entirely covered in my course by Shakespeare (1564) and Blake (1757). Am I not at least more than two centuries out of date?

The answer of course is that human beings haven’t changed that much. And indeed some of the course has even gone back to the Ancient Greek Rhetoric.

If you understand anaphora, anthimeria, archaism, assonance, asyndeton, brachylogy, chiasmus, diacope, epanalepsis, epimone, epistrophe, hyperbaton, hyperbole, irony, malapropism, metaphor, metonymy, onomatopoeia, paradox, paralepsis, polysyndeton, simile, syllepsis, synecdoche, tautology and zeugma as well as Shakespeare and Blake then you are well on your way to writing a great Google AdWord advert even if you are 200 hundred years after the masters.

Why is Amazon so successful?

Amazon

At Movefresh we are obsessed by Amazon – they are a great role model for thinking long term (this isn’t that popular in the current economic environment)

I am still amazed that sophisticated investors can’t get their head around Amazon as a business and investment opportunity. Firstly, having been born around the dot com boom, it is certainly associated with the many businesses that failed within this cohort.

Secondly, investors really struggle to understand businesses that can continue to find ways to effectively invest their cashflow/profit. Many investors look at Amazon as a business that is “marginally” profitable, I see a business that can actively invest in the future and give bigger returns to shareholders who are willing be part of that.

I always recommend reading the Amazon letter to shareholders that have been published annually. The 2015 shareholder letter makes some interesting reading.

1. “The fastest company to reach $100 billion in annual sales”
2. AWS reached $10 billion pretty quickly too
3. “Customer obsession rather than Competitor obsession”
4. “Willingness to fail”
5. “Patience to think long term”

All of this is contained in the first paragraph – it is totally clear that that the business knows how to invest its cash flow.

They also included a copy of the letter from 1997 (reprinted from the 1997 Annual Report). They haven’t really changed their strategy since this original letter – something that I admire greatly.

Monty Python on Statistics

I was reminded today of my favourite Monty Python sketch on statistics. I had a look for it on YouTube but sadly couldn’t find it.

The sketch was set on election night with a reporter who did a vox pop and asked a lady in the street how she was going to vote. She said “Conservative”. They then went back to the studio and extrapolated this to their swing-o-meter which predicted a 100% swing to the Conservatives and all seats in the House of Commons switching to that party.

It was very funny. But like the best comedy it was also very true. We’ve all been in situations in business were very small datasets are extrapolated.

Interpolation is of course much more accurate. But to interpolate my experience of statistics in business I can say that interpolation is something that is much less common that extrapolation.

Michael Fish

Michael Fish announced on TV on 15 October 1987 that there was no hurricane on the way. That evening the worst storm to hit South East England caused record damage and killed 19 people.

Andy Haldane of the Bank of England recently said that the failure to predict the 2008-09 financial crash was a similar moment for economists and has resulted in economics forecasting being “in crisis”.

It is true that the record for prediction of economists, financial analysts and accountants is very poor. When we look back over the last half century it is indeed true that all three groups failed to predict the big crashes in US public companies.

But conversely they also failed to identify the ten days over the last fifty years which accounted for roughly half the return of the same US public companies.

In other words, out of 18,250 trading days just 10 days accounted for half of the return. So surely it was a failure of economists, financial analysts and accountants that they did not identify these days in advance? Or identify the days in 2008-09 that resulted in dramatic reductions in market value?

I would disagree with Andy Haldane on this. I don’t think it is reasonable to expect economists to identify in advance the 0.05% of days in which markets move dramatically.

My favourite book on this subject is A Treatise on Probability by John Maynard Keynes who wrote in Chapter 3:

Is our expectation of rain, when we start out for a walk, always more likely than not, or less likely than not, or as likely as not? I am prepared to argue that on some occasions none of these alternatives hold, and that it will be an arbitrary matter to decide for or against the umbrella. If the barometer is high, but the clouds are black, it is not always rational that one should prevail over the other in our minds, or even that we should balance them, though it will be rational to allow caprice to determine us and to waste no time on the debate.

Keynes understood that some probabilities are measurable. He gave an example in the book of pulling red and black balls out an ern of which half are red and half are black which is clearly a system that can be easily measured but many probabilities are inherently unmeasurable such as his example of the requirement for an umbrella or his discussion of an ern where the the proportions of red and black balls are unknown.

However although there are many probabilities that are not measurable but are comparable. The example Keynes gave was the possibility of surviving a walk home in a thunderstorm: this is not measurable but it is clearly less safe and therefore comparable to walking home during good weather.

So to get back to our trio of economists, financial analysts and accountants. It is unreasonable to expect them to expect any of them to predict a dramatic period of recession or growth however it is reasonable to expect them to suggest that a situation is more or less comparable i.e. more or less likely to result in a period of recession or growth.

I do not think that it is a failure of economics to predict the ten best trading days of the last half century. I do think that economics is useful in producing data that makes the best trading days comparable with poor trading days or the best investment opportunities comparable with the worst while accepting that neither are measurable.

So in my investments I accept that I cannot make predictions as to when it will rain. But I can see clouds in the sky as Micheal Fish did successfully over his career at the Met Office from 1962 to 2004.

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