Amazon's takeover of Whole Foods might not work

I don't judge business events by stock market reactions, as stock markets can be absurd and have a logic that I can't fathom. That is why, I am questioning the logic of Amazon's buy-out of Whole Foods in spite of the seemingly massive stock market approval and also the jubilation among the proletariat. Stock markets have loved Enron till the day before the scam was disclosed and the general population beliefs have been massively wrong before. I don't claim that this marriage WILL fail, but I think there are many risk factors that are not being considered and because of them this COULD fail.

The Amazon and Whole Foods marriage, to be successful, would need to create synergies. Maybe if a few Amazon or Whole Foods warehouses can be closed without an impact on sales, the buyout would make sense. Or, if Amazon could push its products through Whole Foods (or vice versa) without an increase of cost, it would also make sense. In both these scenarios there has to be some level or merging of strategies or information between the two firms. Not withstanding the study from Harvard Business School that said that 70 - 90% of mergers and acquisitions do not achieve their goals, I raise some questions on the ability of Amazon to create synergies with Whole Foods. 

Let us start from the general business strategy. One of the reasons Whole Foods works is that they are essentially 'local'. So, a store manager can make purchasing decisions without head office approval - like buying potatoes from a local farmer. Their distribution is very decentralized because of such local buying. There are large regional teams with significant autonomy. Of course such operations cost more and so Whole Foods ensures a 30%+ gross margins. Amazon by contrast is centralized, regimented and highly synchronized. The key skill of an Amazon manager is being able to follow the process and not independent thinking. So, the first set of questions - is there any possible synergy between Whole Foods and Amazon? Can the people of these two companies work together? Would a Whole Foods store manager be okay to give up his autonomy? Would an Amazon manager have the competency to be autonomous? 

It is not just about the managers' autonomy. Whole Foods is known to have have 12 different inventory management systems -  they also have autonomous inventory management systems. Whole Foods is trying to reign this in by creating a cloud based solution with Infor, but such attempts in previous firms have had limited success. Whichever ways, Amazon will either inherit a blind system or an Infor based system about which it has very little expertise. Will it be possible to seamlessly integrate Amazon and Whole Foods inventory systems? Will Amazon ever have the same granular level information about Whole Foods stores that it has about its own DCs?

Let us look at it from the customer front. Whole Foods is essentially a bit like a cult. Because of local buying, Whole Foods has fresher produce. Also, such local buying is good for the community. These two differentiators have created a following among a specific class of consumers who are ready to pay the high prices of Whole Foods. What happens to this 'cult' if Whole Foods centralizes the produce? Will consumers still be loyal to Whole Foods? 

The list of questions can go on. Whole Foods has only around 400 stores in the USA. Walmart has more than ten times as many. Will it be possible for a small specialty store to compete with the might of Walmart? Let us say Whole Foods goes on a store opening spree - will it still be able to create the cult among customers with that high rate of expansion? 

I don't have answers to my own questions. But, I do have these and a few more questions. In such times of a general jubilation I know there is a danger of me and my questions being labeled as cynical or old economy, and I am fine with that. I just hope to trigger a few thoughts among some people who can go beyond the general jubilation and think of an alternate - even if for only a few minutes. 

Flipkart eCommerce valuations

I am not against eCommerce. Just that I am confused by the real business of Flipkart and its lot. I am writing this blog hoping that some intelligent reader will enlighten me. Okay, to start, the total investment in Flipkart has been around $2.3 billion dollars. And yet the value of the firm is supposed to be more than $15 billion. If we create a time value for the various investments the rate of return would be astronomical.

Where has all the 2.3 billion gone? Assuming Flipkart has leased 3 million sq ft of warehouse space, and a lease rate of Rs. 20 per sq ft the costs come to around $12million per year. Assuming they employ 16000 people at an average of Rs.15000 per month the salary bill would come to be $48million per year. The company has been in existence for 8 years and it has grown rapidly only in last couple of years, so you can do the math of the total expenses. Ohh yes, this is expense as (to the best of my knowledge) Flipkart has leased all its its warehousing space and not invested in creating its own infrastructure.

In May 2014, Flipkart bought Myntra reportedly at $320 million. Myntra had 2014 yearly revenue of around $160 million and probably no profits at all. Interestingly Tiger Global and Accel Partners are involved with both Flipkart and Myntra. So its like this, the two investors invest in Flipkart, who then buys Myntra, who then pays off its investors. Amazing circle of life. Note that the total investment into Myntra has been only around $100 million.

(All my numbers are from internet based magazines and newpapers and could be completely wrong)

Hmm.....my confusion. Whats happening here?

Okay....let me predict the future. Flipkart will indulge into more acquisitions at astronomical rates. And by coincidence both Flipkart and the acquired company would have the same set of investors (directly and indirectly) .

Customer service through operational metrics

The first thing business mantra that we are supposed to learn and believe is that “Customer is the king”. Unfortunately in real life customers are those set of beleaguered individuals who are forced to wait infinitely for their service and make do with inferior products. In most cases there are no ways for customers to formally complain, no individual manager would lose a KRA point because of customer mistreatment or no CEO would ever have a customer service as a metric in business dashboard. 

Take the case of HDFC Home Loans. It is very easy to get a new loan as the sales personnel would probably visit your office or residence at your convenience. For a query on an existing loan you would have to wait for around an hour at the firm’s office.  The firm’s message seems to be that new customers are important and existing customers are not. Same is the case with all mobile service providers. Most of these places also do not have a formal complain mechanism where a customer gets a tracking number and thus be able to trace the resolution.

It is clearly the CEOs who are to blame for this. So, Mr. Deepak Parekh is the culprit for the case of HDFC bank. Sales is a metric that I am sure he would be measuring. Am assuming that sitting in the head office Mr. Parekh would routinely examine the achievement of weekly or monthly targets of disbursements. Thus it becomes imperative for his managers to achieve the numbers. Like the entire household gets interested in humouring the tantrums of an cranky child, the entire HDFC structure would probably be fixated on achieving Mr. Parekh’s obsession with sales numbers.

Now think, the waiting time for customers at the HDFC Home Loan branches is not at all measured. Nor is the satisfaction of customers with the resolution process. Essentially these are toys that Mr. Parekh would most probably not be interested in playing with. Hence the entire rank and file of HDFC Home Loans deems it unnecessary to work on and improve these parameters. Faster and better service at branches would definitely be possible. But, no manager would ever get a carrot or a stick for performance on service to existing customers. There is thus a completely lack of action and existing customers are forced to meekly accept shoddy service.

Point one of the blog is that customer centric behaviour is to a get extent dependent on the metrics that the Chief Executive uses to control and manage the organisation.

Why should Mr. Parekh even think of improving service to existing customers? For all my criticism, HDFC is probably a lot better than its competitors and among the more humane financial businesses. Every delay is a mark of inefficiency in the organisation. Every customer who comes into the branch with a query is a pointer to a flaw in the process. All these weakness create costs in terms of excess manpower requirements, reprocessing, lost documents, etc. These activities are shrouded within routine work and their horrendously damaging impact is rarely uncovered.

Fast process dictate that the firm be devoid of all wastes. They force efficient performance. A 20 year old wooden bodied truck can easily be driven on the highway where there are no minimum speed parameters. That one truck can easily delay the movement of many other vehicles. Now image that the highway has a minimum speed limit of 60 kmph. Suddenly all vehicles on the highway would be forced to be efficient. The fuel efficiency would go up and all other operating costs reduce. For those who feel that high speed could cause more accidents, well, India with among the lowest average highway speeds has among the highest accident rates.

Point two, business heads should invest him time in monitoring these operational metrics as it will create an overall much leaner and better organisation.

A simple way to achieve excellence on any parameter would be to continuously measure them. Branch level operational metrics need to be given importance at the corporate level. HDFC could start with measuring the average turnaround time for customers. They could also have a simple metric of how satisfied the customers were with the interaction. A best Branch Manager award could be instituted on the basis of performance on these parameters. At a back end level a simple Pareto chart on the nature of complaints and queries could generate a good understanding on where the improvements are to be directed.

One of the easiest ways to control crime rate is to not register complains or make the task of registering complains difficult. Mr. Parekh needs to avoid such behaviour to keep a tab on the operational issues before they blow out of control. (Even now, I am pretty certain that HDFC Home Loan has high costs of managing Branches and the firm is pretty unhappy with their ability to get data from Branches). There has to be an easy way for customers to communicate with top management. Not only must the complaining be easier, a better way would be to motivate customers to give feedback.

The last point, CEOs could well include the Branch level operational metrics in the corporate dashboard and allow customers to reach out to them.

A disclaimer here: I repeat that HDFC is probably among the better of all private financial institutions in the country. I am using the name of HDFC and Mr. Parekh as this idea of this blog came from a poor interaction with their branch.     

Analytics - a tale of two movies

The first movie is of course 'Moneyball' and the second is 'Trouble with the curve'. Both movies are about recruitment of players in baseball. But both movies take a completely different route for this. This article seeks to point out the extreme difference and I seek views of all of you readers.

In Moneyball, Billy Beane (Brad Pitt) is a the General Manager of a poor Oakland Athletics team. He develops a statistical model for player selection with a Yale economics graduate. The focus of selection is numbers and not intuition and experience of the scounts. Gus (Clint Eastwood) is an aging scout for Atlanta Braves in Trouble with the Curve. He has a very weak eyesight. He rejects a star prospect based on the sound of the bat hitting the ball. This is in spite of his amazing statistics. In the end Gus is proved right.

The debate is between using analytics and individual insights for decision making. In the movies both seem to work. In real life a lot of importance is given to the brilliance of an individual manager who seems to be able to make better decisions. Books by Kahneman and Taleb negate the role of intuition and seem to suggest a role for random luck. They support the decision making with numbers view.

What would you do? How much importance would you give to decisions taken on the basis of analytics versus the gut based decisions of an experienced manager?

The Mumbai dabbawallah myth

The Mumbai dabbawallahs seem to be a stuff of fantasy. Every supply chain conference and training seems to be incomplete without a mention of their supposedly fantastic performance. Their par six sigma performance is a dream achievement for every supply chain professional. They have seemed to have achieved an iconic level of excellence with 'uneducated' operators and no technology.

Let me make my position clear. Yes, the dabbawallahs have surely achieved operations excellence. But, they have been able to do so because of some benign business conditions. Most other business are not blessed with the simple and stable pattern existing in the dabbawallahs business. Thus the dabbawallahs are able to excel in Operations without strategy, technology or any type of documented processes.

The same dabbawallah visits the same houses every day at the same fixed time. He collects the lunch box (dabba) and relays it through the same train to the same office at the exact same address. The dimensions of the products are also more or less the same. This 'same' based operation continues every single day. The only variation is that a customer may not have a lunch to deliver on some days. No business enjoys such luxury of stability.

The arrival of customers, the time taken to serve the customers and the type of service or products demanded by the customers all vary in 'normal' businesses. Without variation, or with low variation, business is easier to plan. With stable conditions a business can easily avoid all excess inventory, excess resources and product stock outs.

Let us assume that a beauty salon has exactly one customer coming every ten minutes for exactly the same style of hair treatment and that the treatment takes exactly 30 minutes. In this case the salon can easily employ a staff of 3 people and deliver excellent customer service with very high level of resource utilisation - leading to six sigma operations with high profits. 

An average FMCG firm would have hundreds of SKUs for customers to randomly choose from. The distribution network with multiple independent profit making entities would also have their own buying pattern and behaviour. And, of course, the customers have no compulsion to order in a stable pattern. Thus these businesses are considerably more difficult. The dabbawallahs do the same thing every day. Thus they can easily work from memory. Since businesses have a high number of variables, they need the support of technology to make decisions.

The dabbalwallahs would be very praiseworthy if they were picking up lunch from different houses every day as per some random pattern and also if the delivery addresses were different. To add to the fun it would be wonderful to have the trains running at varying time tables. What the dabbawallahs have achieved is good but nothing incredible. Their model of operation may be a benchmark for abnormal conditions of stability, but is absolutely useless in normal business conditions.

Stampede - an Operations failure

Operations failures that cause a loss of lives and are avoidable without much difficulty are very painful. Here lives are at stake and not merely excess stocks or breakdowns or some other performance metrics. Take the lastest stampede in Madhya Pradesh: http://bit.ly/1p7f9yf. 

As of now 10 people have been reportedly dead.

The number of temple stampede deaths in India are unprecedented. Take this data:
October 2013: Madhya Pradesh, 115 dead
February 2013: Allahabad, 36 dead
November 2011: Haridwar, 16 dead
January 2011: Sabrimala, 102 dead
March 2010: Kunda, 71 dead
August 2008: Himachal Pradesh, 162 dead

The list can go on. These are all stampede events with relation to some religious activity. The data has been sourced from wikipedia.

All places of religious importance have a significantly higher than average rate of human density. This makes the system highly susceptible to failures. An electric fire at home may at most cause a fire and in a worst case death of a few people. In a dense area, an exactly similar event can lead to very grave outcome. A small spark may ignite a chain of events leading to an enormous tragedy. The first point being made here is that tragedies of similar nature in domestic and public locations have a much greater impact in public places.

At homes, or even in offices the people in the system are more or less constant. All those people generally have a long term stake in the well being of that place. Thus, in a majority of cases, minimum safety standards are ensured. In public places, in spite of the religious connection, the situation is very different. Pilgrims may not always be as careful in ensuring a risk minimizing behaviour. That there are so many other pilgrims may create a condition where no individual takes the onus.

A third point is about the concept of risk probability. Say an office has 100 people and each of them is capable of causing a catastrophe with a probability of 0.01%. The chance the there will be a catastrophe in the office is still lower than 1%. In a gathering of 10,000 people the chance of a similar tragedy would be more than 60%. Simple statistical calculations point to the fact that the probabilities of tragedies caused by human failure are significantly higher in public places.

Some religious places have a spurt of pilgrims on some specific days of a year only. This spurt can increase the number of pilgrims by more than a thousand times. With pilgrims the entourage also includes shopkeepers, beggars and similar people. Most places are not designed to handle this sudden increase in the number of people. Thus the system is in a shock and very susceptible to failures. 

There can be more reasons. But, the point remains, that in places with high human density, like the places of worship, the probability and the impact of a tragedy are both very high. It thus makes sense that temple management and the staff of such public places give more than average attention to safety issues. There has to be some sort of paranoia for tragedy prevention.

One way to create such systems is of course by the rule of law. Temples and other religious places could be forced to have a set of safety based policies and the temple management could be made directly liable for any deviations or failures. The fear of punitive action might force attention on this ignored issue. However, it is common knowledge that forced compliance based system rarely result in intended outcomes. People would always find ways to subvert the rules and thus there would be no major improvement in the behavior.

I am not clear to the exact nature of the solution. But, I am clear that every place of religious gathering would have to evolve their own ways of safety procedures. Temple management and staff must be educated and thus motivated to create safety policies. A temple would never have a deity that is unclean. Something should be done so that unsafe practices are a similar anathema. Every human is an incarnation of the divine. Thus, ensuring safety of humans is probably as big as any other offering made to the almighty. 

Imagining the future of Retailing

Sunil Chopra and Aditya Jain had this article in the Economic times: http://articles.economictimes.indiatimes.com/2014-08-13/news/52768197_1_online-retailer-blue-nile-zales

They talk about merging the concepts of online and offline retailing with overall benefits for everyone, the consumers, retailers and etailers. As a concept no one can doubt on such win win scenarios. But, as a matter of practice, the article says nothing, and uses completely wrong examples to prove their point.

There is a comparisons of the costs of an online diamond firm Blue Nile with an offline firm Zales. Of course their cost structures are going to be different. For that matter the cost structures of Toyota and Mercedes Benz would be different, that of Walmart and Macy's would be different. To compare and then try and derive some relationships is perverse academics.

Online and offline are very different businesses. So an online business is bound to have higher revenue per dollar invested in infrastructure. But, the aim of business is surely not to maximise the revenue per infrastructure dollar. For all our enthusiasm for etailing, Amazon is still losing money.

In the Costco and Amazon example, Amazon's high transportation costs cannot be used to justify the better performance of Costco. The low variety model of Costco is great, but the profit margins of Wal-Mart are significantly higher than Costco. Here it seems that the authors have been selective in giving their pre-meditated examples so that they can prove a point.

Online and offline are very different models. As of now, 'touch' is an important part of shopping for many items. Who knows, the evolved customer may not need need to feel. Also, this concept may vary with the category of material. Last mile is surely a major cost for online models, but collaboration with offline for this may not be the only way. Online businesses may create mini warehouses inside cities. Similarly, offline businesses may not be limited to being a demonstration center for products that are ultimately bough online. They will have their own needs and create their own purpose. There also might be some form of collaboration, but not necessarily in the model that Chopra has proposed.

When I read an article by stalwarts like Chopra I expect articles with more imagination and not such mundane discussion that is part of every run of mill SCM seminar. But I guess the pressure to get something in print seems to be taking a toll of even the best among us.