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Amazon Go

The future of convenience shopping is here and its called Amazon Go.

Amazon is one of our top technology holdings and we continue to be very bullish about the future of Amazon.

Amazon Go allows the vision of the future with no checkouts, no baskets, no staff, just great technology. All you need to get access is a simple barcode on the app. Everything else is done automatically.

Grocery shopping will never be the same – launching in Seattle in early 2017 this leapfrogs most other convenience retailers.

Bertrand Russell on Investment

Back in my youth I did a course on philosophy and one of the books we read was Bertrand Russell’s The Problems of Philosophy. This is a quote from Chapter 6 – On Induction:

Domestic animals expect food when they see the person who feeds them. We know that all these rather crude expectations of uniformity are liable to be misleading. The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken.

Philosophical induction is of course a very different beast from mathematical induction. In our home town, Edinburgh University have created a programming language Haskell which can be proven correct by proof by mathematical induction. Mathematical induction is based on proofs rather than the slightly flimsy enumerative deduction in philosophy which is based on observation.

Going back to Russell he creates a severe problem for the Chartist. This is a very common investment mistake and I will admit that I have fallen for it myself in the past. It’s very easy to look at a graph for a stock and assume that this has some link to the future.

An individual example would be Enron which of course won many awards before collapsing to zero. A bigger example would be the pre-revolution Russian stockmarket which outperformed all of its competitors for a whole century before total wipeout. Both these examples are very negative but the failure of proof by induction also applies in the other direction. An obvious example would be Walmart which went for a few decades in a fairly flat way before completely taking off.

So next time you are looking at a graph and expect it to continue on its happy trajectory remember the story of Bertrand Russell’s chicken. The past is not a predictor of the future – good or bad.

5 Vital Brand Attributes

One of our advisors has five things he believes a brand has got to get right in order to succeed:

  1. Show expertise – In the old days the only space available to show expertise was on the label which was limited to put it mildly. But customers now expect content (on web, apps and in print) that shows that a brand knows what it’s talking about.
  2. Personalisation – The day of the mass market brand has gone. Consumers now expect something unique for them such as Tails, Moonpig or Diet Chef with our unique recommendations and 360,000 combinations available for the diet.
  3. Trust – This is particularly important in food where the industry has generally got quite a bad reputation. Innocent would be a great example of a brand who have worked for deep levels of trust. Trust is of course earned over years but can be lost overnight.
  4. Care – This is quite a deep one covering production of the product, impact on the environment and the community and of course care of the customer.
  5. Innovation – It would be fair to say that the food industry has not got innovation deep in its DNA. Even heritage brands needs to innovate while preserving their provenance.

Vertical Integration in Grocery E-commerce

This is quite a hot topic in the sector. In general I’m not a fan of vertical integration, I much prefer a tightly focused business. However I think there are two specific instances where vertical integration makes sense:

  1. Customer experience – Certain processes are vital to the customer experience and are a true differentiator such as the website, mobile apps and fulfilment. However backend systems such as accountancy and warehouse management should just be bought rather than owned. Historically processes that were differentiators have become commoditised so it may be that outsourced options will emerge for the current differentiators in the future (but no doubt other differentiators will emerge).
  2. Using unique technology – Nespresso have (literally) hundreds of patents on their technology and use a very complex process to create their capsules. This is not something that could be outsourced as they would be risking their intellectual property and in addition the only possible customer would be Nespresso which would prevent the manufacturer from sharing costs with multiple customers.
  3. Provenance – Guinness or Perrier would both be good examples. Indeed Guinness did experiment with brewing outside St James’s Gate, Dublin but that beer was considered inferior and production was shifted back. Equally Perrier could not be outsourced to another water company. It is a key part of the respective brands that these products are made in a particular place under the control of the company.

I think there are some quite bad reasons for vertical integration:

  1. Margin/cost – Unless there is a market failure margin will typically land at cost of capital. Margin in UK food manufacturing is very low and it is almost certainly not a good use of capital for an e-commerce business. Committing to larger volume is or outsourcing to a lower cost country is nearly always a better way of reducing price than vertical integration.
  2. Reliability of supply – This is quite often given as a reason. I would accept that in certain locations (e.g. Tata running their own electricity supply in India) this may be valid. But with careful sourcing reliability is rarely an issue in a developed country.

Move Fresh’s core competencies are management of brands, sales, marketing and creating a great customer experience. Outside of these areas we are keen to find high quality partners to fill in the gaps.

Investment in the future

Although this is quite a heavy hitting title, many businesses say this but few actually believe it. Investment in the future sometimes is quite short term.

Building great brands takes a long time and investment sometimes takes years if not decades to recoup.

By building a balanced portfolio of brands that are at different lifecycles we can use the associated cash flows to invest in the future and for the long term. We are long term shareholders and our focus is to be measured in decades not quarters.

Marketing investment is frequently curtailed if immediate payback is not available (on your first order for example) but being able to take a longer term view allows you to really benefit from the long term value that customers see in a great product.

We see marketing as an investment – not a cost – and just like buying companies that require investment for growth – we want to ensure that marketing is measured as an investment. We are very analytical but don’t only listen to the numbers, we take multiple data points to measure our marketing investment.

A typical by-product of believing marketing is an investment is that we know that not every activity that we carry out will work, but we are relaxed as long as the majority work!

Amazon Robotics

One of the businesses everyone at Move Fresh respect (and invest in!) is Amazon.  The focus on growth and the vision of the founder Jeff Bezos is truly outstanding.

The entire company constantly thinks about the future and have convinced public market investors that long term growth is the best use of Amazon’s impressive cash flow.

The BBC just covered the robotics division that are rolling out in the UK.

Kiva the company that built this technology was acquired by Amazon in 2012.

There are approximately 30,000 robots in operation in Amazon warehouses!

The slide continues…

Asda has reported the worst quarterly drop in sales a massive 7.5% in the last 3 months.

Let’s just sit back for a moment or two and think about this. All the major “multiple” retailers are in decline apart from Waitrose. That is a seismic shift in consumer behaviour, multiple retailers are being attacked by discounters, convenience and online in one of the biggest shift in consumer behaviour since supermarkets first appeared and impacted local high street stores.

Change in market share

Change in market share

So if you are an FMCG brand trying to find growth the worse place to be is within multiple retailers. Your choice is the unpredictability of discounters (smaller range)  or stick with volume in multiples and expect exceeding price and margin pressure.

Deal & Dealmakers Finalist

We are delighted to announce that Move Fresh has been nominated for MBO/MBI of the Year at the Deal & Dealmakers Awards for our acquisition of Diet Chef.

Supporting Django

We divide our technology requirements in two:

  1. Backend systems such as finance or warehouse management which are commoditised. We buy these systems off the shelf.
  2. Customer facing systems such as mobile apps and our website which are key differentiators. These systems we develop ourselves.

Our own platform runs on Django which is one of the more modern frameworks (incidentally it is also what Ocado use). We are delighted to announce that we are supporting Django by sponsoring the Django: Under the Hood conference in Amsterdam, 3-4 November 2016. We do think it is important that commercial users of open source software put something back into the community.

Our E-Commerce Business Model

At Diet Chef we achieved a total return on equity of 8,999,900% over a three year period. If we had the same growth over the next three years we would be ten times larger than HSBC, the biggest company in the FTSE100.

Sadly, this is an outcome that will not happen. It’s just not possible to deploy the larger capital that we have today as efficiently as we did in the old days.

However it is worth looking at the business model we used as this is still very relevant.

First off, most of the funding for Diet Chef was not provided in the form of equity. Most of the funding actually came from suppliers who initially sold to us on 30 days while we received cash from customers within one day. This negative working capital requirement then scaled up as the business grew.

For our first TV campaign we requested that suppliers increase their terms to 60 days to fund it. They agreed to this and the result was that both our business and the suppliers benefited hugely.

This is quite a well worn path in retail, however in e-commerce there is less capital expenditure required to support growth (shops, etc) so the equity requirement is substantially reduced.

It is also a poor man’s version of Warren Buffett’s strategy of investing his insurance float, where the insurance premiums are invested over the years between receipt of the premiums and payment of the claims. Thus he makes a double profit: once on the insurance business and once on the investment of the premiums.

Back to Diet Chef, the other key was that we recruited customers so that they were profitable within 60 days. Generally, in direct businesses it will take a longer period for customers to become profitable which can result in a form of overtrading. This allowed us to grow the business to market capacity pretty quickly.

It’s not realistic in all e-commerce businesses to recruit profitably, particularly those in more mature markets. However these businesses should all have databases which will provide a profitable retention business which should then fund the loss making recruitment business.

There were of course a lot of non-financial reasons for the success of the business which I will cover later. But getting the business model right did allow us to scale the business up dramatically with no external equity funding.

Kevin and I have both spent a lot of time in Silicon Valley and one of the interesting things there is the focus on business models. But it’s something that is seldom discussed in Britain.

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