Month: September 2016

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!

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