Episode #0024 - Can a consumer products business go direct?

In this episode - we look at whether a smaller consumer products business can say no to major supermarkets and retail chains and go direct. A move like this is a complete business shift and means you need to invest in distribution and shops. However - the upsides can be huge - and profits can follow! Okay so today I'd like to talk about a business model that I respect for many reasons and it's called Haigh’s chocolate, it is a competitor to Lindt and everyone knows Lindt may have heard of Haigh that's a conscious decision on their part and their business strategy. So today I just wanted to go through their business strategy, the pricing, and the distribution because I think a lot of fast-moving consumer goods can all learn from Haigh and what they've done, especially in terms of their choices to work with, or not Coles and Woolworths. Yeah, I think in many walks of life pricing managers their role is to go in and have a procurement meeting with someone whose job is to force them down a price, make them feel bad sometimes and get the product or services at a lower price. There's an old saying in any negotiation that the person who has the hand, or the power in that relationship is the one who is prepared to walk away. The issue in many cases when dealing with procurement is that they know that you cannot walk away, whether you're a major corporation, such as Unilever, Palmolive or someone like that, you still need to distribute your product and service, and of course, that applies also to chocolates. If you're trying to sell chocolates in Australia, clearly through the major retailer's Coles, Woolworths and IGA those are the companies that's how you get seen by most people. But because of that a lot of businesses get overlooked because maybe the supermarket retailers think they're too small, their staff won't be popular enough or they don't think that they should get the front shelf space that may be other biggest suppliers should get because they're known brands and they know people like so they don't get the small ones a chance. But really what Haigh showed us about their strategy, they decided that they were going to go a different route, that they weren't going to be distributed through Coles and Woolworths and they were going to own the distribution themselves. So, what was their business strategy from doing that? They weren't going for a market share approach, but I think their business strategy just wasn't simply thinking about market share and margin. I think they were thinking deeper than that, they were thinking about the value to their customers, what they represented as a brand? and how they could best do that on their own? Because as Aidan was saying, they knew if they went through Coles and Woolies they'd be a mass market. From there, they'd be forced to promote and ongoing promotions can destroy a brand, and they were very clear in their mind that they wanted to be high-value premium chocolate that everybody could afford. So, how do they do that with their pricing? we'll go on to that next. Speaking of promotions, one thing when I'm in Coles and Woolworths I'll often notice how chocolate and you have the major brands in the Aussie supermarkets. Lindt seems to be the certainly the biggest component and then secondly if you'd like green and blacks who at one point time were seen as a premium product but the discounting is almost predictable every month or two there will be huge discounts which will drive sales during that period and then I assume sales will drop off slightly. And what I ask is, what does that do to the brand image? the value of the brand? and also the profitability of that company? By going directly, completely changing the game, it gives you complete control over your distribution and you're taking on the capital expense of maintaining stores, etc. For example in Sydney stores, you've got prestigious locations such as the QVD  building and with that prestigious location, nice packaging that creates a very much a high-value image and offer. When I saw the Green and Blacks, yes they discounted and promoted quite regularly, what happens then is that customers realise that they can reload, they can anticipate the next promotion and that devalues the brand, the price points and overall the retail price point then gets lowered and you promote again, it's sort of a vicious cycle. But also what I've noticed is that Green and Black shelf space over the years got smaller as it's probably been through some tough negotiations with Coles and Woolworths. From that, they derange and then they’re given them smaller shelf space and they have put Green and Black higher up, so not in the prime location, not the middle shelf where everyone can see they've replaced Green and Blacks with some sort of Lindt, who's agreed across the board to promote everything.  There are so many different varieties of Lindt now and a very small space for Green and Black so you can see that Lindt is accommodating that mass-market share approach, but for how long? Because equally just like Haigh, Lindt was supposed to be premium, but what's happening with promotions now is people don't trust the promotions and people thinking, what is it really premium? or is it just standard milky chocolate?  so it's low the benchmark I think for Lindt. I'll ask you this yourself if you received a box of chocolates as a gift for a birthday or an anniversary, etc, and nicely packaged in Australia, obviously, people overseas do not know these brands but to be equivalent in your country as well I assume. So, if you received a nice nicely packaged box of Haigh’s chocolates versus a supermarket-bought major brand the impression that you receive will be very different and people will perhaps respond differently also. With something like chocolates, there’s a feeling to it, it’s more than just the actual product. There's the feeling, the image, the luxury aspect, how people package them up and the fancy bow put all around them etc, almost like a Christmas present. So there's the paraphernalia that associates the product and when you stack those on supermarket shelves, you shouldn't be surprised that the impression decreases and sometimes the buying experience is also important. In terms of what Lindt has done, I mean they've got that value proposition is to provide high-quality chocolate to as many people as they can but what it's done is owned its distribution and thought carefully about like, do we want to be a mass-market? I think they've decided it is not, let's think about Victoria, more people would know about Haighs and in Adelaide, than they do say in Sydney, the brand awareness for Haighs is not as high here. That's something they're fine with also they've gone into thinking about, what their value proposition is? They're sort of a very family orientated brand. So they've opened up their site to the public to visit the chocolate-making factories and they put a story behind it. They've shown the family history and they've given that sort of provenance and credence to it to just build that that image is an authentic one too. In terms of pricing, the price points range from about $15 to a maximum of $100 when looking at the store. So yeah, you can go as extravagant as you want and get that $100 box with all the bows, all the whistles and all the different assortments and truffles, or you can go smaller. But what they've done is they didn't want people that couldn't afford the premium chocolate to have anything less than premium. So they decided to go with a unit sort of weight base, a pricing metric. So, if you can't afford the $100 big box of truffles, you can still afford the smaller box, maybe one or two of the same truffles but just obviously less of them. But overall, everyone can still afford it. Whether that's right or wrong, there are other things they can do which they have. They have a great online website now that you can order customised boxes and things like that which is great during COVID, they've seen sales increase in chocolates through that. So they've always thought well ahead about online, securing their distribution, thinking carefully about their customer segments and their price segments so they've done a lot of things right. It's interesting to point directly to online sales because one thing I was conscious of is that through COVID these prestigious distribution stores that Haigh’s operate will be under a lot of pressure. The fall in those areas will be monthly reduced, and many of them wouldn't have qualified as essential service or essential distribution. So, without the online aspect there, the sales would have been under pressure. One thing I would say is we're not proposing this mechanism for every company, every retailer because, fundamentally, every product is different and every customer base is different. The idea of chocolate is a prestige product, it is a luxury product and it's not something you buy at least, not everybody buys every day, and it's often bought for a third party for somebody else. So that luxury aspect doesn't apply to all the things, you can't do this for tins of peas and tins of beans etc so we have to bear that in mind. I'll give you another example of what I used to work in a previous existence. We're visiting a chicken and egg farm, and I was there for one year. The number of eggs was huge and a huge number of employees. I went back a year later, and there were a tenth the number of employees, and hardly even saw that the business was in trouble. I talked to the owner. Instead, what they decided to do was to go upmarket, organic free-range eggs, much higher quality welfare for the animals, and that required much fewer people, what they told me was seals were dying, but profits went through the roof. So really if you look at what you're doing oftentimes, sales revenue and profitability, they're not always they don't always go in the same direction, and what drives one doesn't drive the other. I was reading recently about Nestle and their KitKat brands and they've done something similar to Haigh because they've had some, let's say, heated negotiation price discussions with the major supermarkets. They are trying to find different ways to deal with thinking about distribution, product innovation and pricing. One thing they have done like Haighs is that they've opened up a Kit Kat prestigious premium or Kitkat store. Now I know Lindt has done that KitKat who isn't considered to be in line with Lindt or Haigh's have decided to do that, Haigh’s could have done that and have been doing that for years and all three are doing it for what? Yes, price positioning, brand positioning, but Nestle has come out and said they want to do it for future product innovation and price positioning as well so they want to see and get more connected with their customers to see what type of chocolate combinations that customers like. Then sell it to them so give customers what they want, rather than just simply guessing and then giving them the old school sort of KitKat that everyone's used to that they know is year on year sort of decreasing in people's tastes have changed people are not buying it as much and this is happening quite a lot in FMCG across the board. Whether it's peas, whether it’s chips, or whether it's chocolate. You've got to protect your brands, not just by pricing but also by thinking ahead in the future and then aligning your price to changing markets whether that's online, whether that's distribution, whether that's product innovation and getting that together but only by looking at the market and segmentation of your customers and your prices. I have nothing more really to add for this to this one today. All I say is for any family members who are intending to buy me chocolates or presents just bear in mind that I am picky and choosy, and I will put my nose up at the wrong product so have a great day. All right, so that Haigh’s all the way. Well done Haighs.