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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.

Professionalism in Marketing

The founder of modern consumer research was George Gallup who set up the eponymous Gallup in 1935. One of his early studies for advertisers showed that when a consumer is reading a magazine, headlines in BLOCK CAPITALS are read less often than headlines in Title Case. With identical adverts, simply changing the font of the headline would increase readership of the whole advert.

David Ogilvy, one of the founders of modern advertising, makes this point in Ogilvy on Advertising which was published in 1983.

In 1963 Margaret Calvert along with Jock Kinneir were given the task of redesigning British roadsigns to make them easier to read for road safety. Of course part of her work was moving from block capital to title case, in the process becoming the first person to earn an OBE for services to typography.

The Americans finally caught up and in 2010, New York began the $27.5 million process of changing their signs from capitals to lower case for safety.

In short, there was been nearly a century of research that has constantly shown that Title Case is more effective than BLOCK CAPITALS for headlines and this research has been widely covered in the media and in the literature (if you Google you will find many more articles I could have mentioned). Why then do most adverts still use block capitals?

It’s a very good question to which I’m not sure I have a complete answer. I do think a big part of it is that marketing is simply not perceived as being a serious profession. Recently I came across a company where the Chairman’s son had been given a vital marketing role despite having no experience in the subject. It would be hard to imagine this happening in accountancy or law. We really do need similar standards being demanded for marketing as for the other professions.

What’s the point of an acquisition?

There are many, many reasons for acquiring companies. Roll-up’s to save costs, taking out a competitor, financial engineering and vertical integration to name four common strategies.

At Move Fresh we have only one reason for acquiring a business: to grow it.

More specifically to at least double the size of the business within a few years.

Frankly the idea of buying a business to try to save a little bit of money is pretty ridiculous. However one of the things we are very good at is growing direct to consumer FMCG businesses very rapidly and indeed Diet Chef was in the Fast Track 100 as the 3rd fastest growing company in the UK.

The trick? Spending very large amounts of money on marketing. Well, there is a bit more to it than that, we are investors in a leading marketing analytics business and spend a lot of time with numbers. But we find it hard to see how a business can grow rapidly without spending millions on advertising in an effective way.

So our acquisition strategy is really very straightforward: to find businesses with a great product that just needs a big marketing boost. We’re delighted if the shareholders are willing to join us on the journey.

Being caught in the middle

Sales at Tesco and Sainsbury’s fell by 0.2%, according to the latest Kantar Worldpanel figures for the 12 weeks to mid-July, while Asda sales fell by 5.6%.

The discounters (Lidl & Aldi), however, soared by 12.5% and 11% respectively, while on the other end of the spectrum, Waitrose grew by 1.6%.

The nation’s average shopping basket is 1.4% cheaper than a year ago, but it remains to be seen if the Brexit vote will bring about any price rises this year.

It’s not a great place to be stuck in the middle as a retailer!

Sainsbury’s offers 1 hour delivery

Sainsbury’s has become one of the first UK multiple grocers to move to compete with Amazon – as reported on Friday by Reuters

There are some fundamental issues around this strategy. One company I would not have a price war with is Amazon! 

Amazon traditionally operate on around a 15% margin from suppliers. Not all categories work within this margin structure but in comparison with UK retailer margins of between 30-40% a price war at this level would only suggest one winner.

Some interesting stats within this report though also point to a doubling of the online grocery market by 2020

Britain’s online food market is expected to nearly double to 17.2 billion pounds in the five years to 2020, according to industry research group

Supermarket Price War

Asda has started a new price war to become more competitive as it loses over 5% market share historically.

As Amazon Grocery enters this market there is some big structural issues to deal with. Amazon operate on a 15% margin model in most areas while typically major retailers in the UK run on 40%.

This structural shift isn’t going to end well for the UK’s largest retailers. 

Retailer shares fall as Asda signals supermarket price wars

Shopping Habits in the UK

Everyone is blaming BREXIT but really shopping habits have been changing quite dramatically for a long time. In my own household we have moved from weekly shops in multiple retailers (typically Sainsbury’s or Tesco) to discounter (Aldi or Lidl). In addition our convenience purchases have increased. We have moved some of our spend into local convenience retailers and some to speciality retailers such as Waitrose.

We never got into online retail from Tesco or Sainsbury’s – we wanted to choose meat, fish and veg by sight not just by price. I am sure we are not alone.

Our online purchases have skyrocketed not just in grocery but in most areas. There is a disconnect in consumer recognition that doesn’t make me count these purchases as grocery purchases. Traditional measurement platforms linked to checkout data and club card information (Kantar) won’t pick up this move either.

Over half of all retail spend in the UK is in the grocery category and only 5% of it is online. Doesn’t this strike you as something that will change?

A new name for Melville Street Investments

We’ve changed our name from Melville Street Investments Ltd to Move Fresh Ltd. We think Move Fresh makes it clear that we are a food e-commerce business.

Also Melville Street Investments is quite a mouthful and our new shorter name saves a lot of typing!

Art v. Move Fresh

I was recently speaking to someone into art investment and was comparing it with e-commerce.

According to WikiPedia King Francis I bought the Mona Lisa for 4,000 écus in 1519.

What is that in today’s money? A tricky question but someone’s had a good go of working it out here over at Yahoo Answers.

So let’s say the King paid about $270,000. We don’t currently have a value for the Mona Lisa and as far as I’m aware nobody has taken it to the Antiques Roadshow. Let’s just give it a pretty ridiculous valuation of $1 billion.

On that basis the Mona Lisa returned the King’s investment 3703 times over 497 years. Diet Chef returned our investment 899,999 times over 3 years. Therefore Diet Chef as an investment was 24,304% better than buying the Mona Lisa.

So if you are certain that you can identify the next Leonardo da Vinci then the lesson of history would seem to show that it is not a great financial investment.

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