February 2023

Retail Results

We have seen the retail results for Q4 in the last month and as always they're of great interest not just to those in the UK but those working in retail around the world. The UK market is one of the most mature in terms of every facet of the industry and thus continues to provide great insight into consumer behaviors at a macro level.

The headlines were around further market share gains from the German discount retailers Aldi and Lidl in a market still dominated by heritage brands Tesco, Asda and Sainsbury's.

This tells us a lot about the consumer response to high rates of inflation and uncertainty around employment and other economic metrics. They're hunting value, but value beyond price. If they were simply chasing price then basket spends would have dived further and the 'basic' brands of the big 3 would have picked up more volume than they have.

In the detail you will see a significant move towards own label products and some switches out of fresh produce into frozen.

What does this mean for those of us who aren't in the UK?

What is clear is that the response to rising costs is different in each country but there is a commonality in that the 'squeezed middle' in economic terms are indeed feeling squeezed but aren't as prepared to sacrifice their overall experiences in favor of cost.

Another good indicator of this is the performance of streaming channels and coffee chains. If you overlay the behaviors of shoppers with the performance of Netflix (and other streaming services) and Starbucks you will see that this starts to pain a picture of discretionary spend being channeled towards experiences.

This is further evidenced by two other data points from the market. Mid-market and value fashion far outperformed luxury, even over the Christmas period which typically sees higher spend levels in luxury. Added to this was the fact that bricks and mortar sales in most retailers outperformed online performance suggesting again that the experience of shopping was driving behavior.

Of course, this data doesn't just transverse borders but there are similar signs emerging in mature APAC and Middle Eastern markets and in South East Asian markets such as Thailand, Philippines and Malaysia we're seeing a big bounce in domestic consumption around experiential activities including domestic tourism and eating out of home.

As we continue to face headwinds into Q2 of 2023 we will need to continue to focus on experience as the key to success. How do we build experience in the face of these growing input costs and a shortage of skilled labor?

We look at experience across three main areas

Physical

The physical design of stores and venues continues to play a big part in the overall experience but this also attracts the biggest commitment from an operator whether it is the procurement of new equipment or refurbishments. Those in big brands like KFC, Tim Hortons & Subway will need to keep their foot in on the refurbishment plan because kicking the can down the road will only lead to more pain in the future. For smaller operators you have to be ruthless on decisions, does this purchase materially improve the customer's experience or does it materially make you as an operator more efficient? If you're not achieving either of those two things it's probably worth a second thought.

Digital

I love the hospitality industry but I continue to put my head in my hands when it comes to embracing technology. This is probably the single biggest area of opportunity at the moment and the best route out of the labor shortages.

A full omni-channel experience might not yet be an area independent restaurants can go but consumers are ready and the adoption rates are very strong and the performance metrics even stronger. The cost of deployment of digital solutions has dropped significantly in the last 24 months which makes the digital experience even more simple to deploy with strong ROI and relatively low initial outlays now could be the time.

Human

The most important part of the experience. Human experience is often the most expensive in terms of operational costs but it is also where you get the biggest bang for your buck in terms of elevating experience.

We monitor hundreds of data points around service in hospitality and corporate environments and without question a positive human experience has the biggest impact on the overall service experience for visitors, guests and compliance.

So whilst 'big tech' are slashing at their wage bills and finding their shareholder happiness in the misery of thousands of unemployed humans, the hospitality industry doesn't really have the same choice.

An industry with a chronic labor challenge can't risk trying to withstand short-term employment insecurity, roles will get lost to adjacent and emerging sectors, never to return. Additionally, the shortage means that there isn't as much to go at. We still have numerous hotels having shorter operating hours and restaurants only opening Thursday to Sunday to try and cope with the shortage. This is a picture that is being painted across almost every market.

These converging challenges need to be met with a degree of confidence in your customer experience, make it efficient as possible but overall double-down on experience. A recent survey of diners by Unilever Food Solutions showed that out of the top 5 factors, 3 of them were driven by human experience. Location and Menu variety being the other two.

It sounds simple but the best way to measure this is to mystery shop your establishment, either yourself undercover or your friends or a professional provider. This door-to-door assessment of the customer journey and experience can be mapped to find the weaknesses and low points and develop solutions.

Deliveroo bows out of Australia

Not exactly shocking news, although the British born firm might have an Aussie feel to it, the delivery company has shuttered it's Australian and Dutch business units as it searches for a thus far elusive path to profitability. Underlying performance in Q4 was as anticipated and the bizarre position of the business breaking even due to making less deliveries came through. However, Q1 started off with further cost cutting and 350 job losses (9% of employees) as the focus on profit exists. This is an important tipping point for delivery companies. The path to profit goes something like this

1. Get into as many markets as possible and burn through cash on driver support and customer acquisition in the hope of becoming number 1 or 2 in the market
2. If achieved, you slowly but surely increase delivery costs, safe in the knowledge you're in, most likely, a duopoly where your competitor is doing the same
3. If not achieved, get out quickly

This might all sound fair enough but there are only two parties that will feel this more than those losing their job in the last few weeks. Restaurants will potentially lose revenue from departing businesses, depending on which wagon they're hitched to, and possibly lose their delivery solution altogether.

Secondly, consumers will be faced with less choice and more expensive delivery. Deliveroo increased their delivery fees by over 20% in the last quarter and this usually unseen or less noted cost will start to prompt consumers to reconsider their orders. Expect to see less choice and higher costs throughout 2023 and in many cities you'll see delivery disappearing completely.

South East Asia - Hold on tight

Whilst colleagues and friends in Europe continue to face headwinds of inflation and input cost increases the outlook is quite different in South East Asia. Although the impact of the pandemic was felt acutely in these markets the rebound has been strong driven by domestic consumption and increased service exports. I'm not a huge fan of using GDP as the single indicator of growth but for benchmarking it provides a illustrative view of how things are evolving.

Philippines & Malaysia seeing the advantage of a burgeoning employment rates and the reopening of important tourism revenues. Thailand appears more on the backfoot, perhaps as a result of political instability negatively impacting inward investment. Vietnam is another one to watch, product exports seeing the largest growth not least due to the fact that European and US manufacturing look at component switches out of China.

For the hospitality industry in more mature markets this will also have a knock on impact on labor markets. Although still significant, the labor cost gap in hospitality between Malaysia and Philippines and Hong Kong and Singapore is much lower than it was two years ago, this further restrictive impact making hiring in the latter markets more challenging than ever.

There is also an impact on supply chains, whether it is the harvest of coconuts in Philippines or the supply restrictions made on Chicken into Singapore the region as a whole is likely to have a big say on how hospitality looks for mature markets in the US, Australia and Europe.

How to cook an egg

Properly. Would be my first thought.

As a well known restaurant discovered to it's cost, its reputation in tatters, an egg needs to be looked after carefully. As a restaurant that served 700 Spanish Omelets a day you would have thought that they'd have it nailed.

However, 100 people fell ill to salmonella poisoning and 13 of those were sick enough to need hospital care.

It was a timely reminder about eggs and complacency

Eggs themselves can contain salmonella and in mature markets the egg itself can often be the source of salmonella, as seems most likely here in the Madrid example. However, in emerging markets the most likely source is from the feces of the hen on eggs where the shell hasn't been effectively washed and sanitized.

However you like your eggs there is no reason to be sick from them as cooking the yolk to a temperature between 65 and 70 degrees Celsius will kill the bacteria that would make you sick. So if it is that simple to stay safe what went wrong?

1. Complacency likely played a part. A restaurant serving 700 of these dishes a day probably thought they had it figured out and in addition to that the supply chain is mature and so through the supply chain they probably thought it wouldn't happen to them
2. Culture also played a part, Those of us who've travelled to Spain will be familiar with and fond of the big lumps of ham that are kept at ambient temperature as they have for 100s of years before. Likewise, the traditional Spanish Tortilla will have runny eggs, some like it baked so its solid, some like it super runny. It is possible to keep an egg runny and still hit 70 degrees Celsius but it needs a very precise thermometer and a very focused chef team
3. Controls. I've never been to this restaurant so I wouldn't want to make any comment as to their controls but somewhere there is a control point that has been missed. Even with salmonella in the egg, correct storage pre cooking, correct cooking and correct storage post cooking would avoid it being able to cause illness to humans

It will be fascinating to see how the economic situation pans out in the next couple of months, we certainly haven't seen a 'recession' like this one, the changes to the way we're working and enjoying leisure time that accelerated during the pandemic ultimately mean whatever business we're in there'll be some challenges to face but more importantly some opportunities to grasp.

Q1 earnings calls are going to provide our first, clearest sight of what is to come for the rest of 2023.