PRODUCTIVITY SPECTATOR: How to win a food fight

Coles' use of personal data to revolutionise food marketing will likely transform the way it handles stock, and suppliers who translate the data into closely predictive orders will reap the benefits.

Productivity Spectator

Soon you’ll be opening a letter from Coles, offering you a 10 per cent discount on your five favourite products. As I wrote in my piece Coles places faith in data revolution (April 20), this is much more about Coles getting your data than it is about finding another discount lure to get customers through the door.

But there may well be some suppliers who will be dreading this prospect of another price squeeze as Coles continues to take the fight to Woolworths for the remaining 20 per cent of the market the pair don’t yet dominate. Coles and Woolworths can, and do, leverage their market power to drive supplier pricing down.

Suppliers like CC Amatil, Heinz and others have been unusually vocal about how much this is hurting their profits. But grocery retailing is low margin game – and when you have margins that low you need two things: high volume and constant turnover. Predicting stock levels down to the nearest unit is the best way to do that.

Coles, of course, already has massive amounts of data on purchases and with the revamped FlyBuys program it will become far more adept at predicting exactly who to market to, when and with what products. Think of the latest circular delivered to your house. This scattershot marketing message is filled with thousands of things you would never buy, and is designed to appeal to every possible audience.

From a productivity standpoint, it’s an obsolete approach. Marketing spend will become more targeted and as a result, more effective. And as marketing campaigns become more predictive, the precision of stock purchases by Coles will likely also improve. Predictive stock purchases is one of the reasons Coles is able to continue to drive price decreases.

On the suppliers' side, the video above shows how one of Coles' suppliers used data to grow business 700 per cent over four years.

Bread Solutions makes baguettes, ciabatta and rolls from its factory on the outskirts of Melbourne. It's one of the most hi-tech food manufacturers I’ve seen and, using extremely efficient machinery from Germany and France, is able to deliver huge volumes of bread at a quality nearer to artisan bakers than the traditional bulk products supermarkets used to serve. One of the machines it uses is able to turn out 24 thousand Kaiser rolls in an hour.

Bread Solutions is a success because it can offer Coles exactly what the supermarket chain is looking for: consistent supply of a consistent product. At Bread Solutions there is a lot of access to Coles’ data and this is able to be used to drive down costs inside the business. Chief executive Deyrick Upton says Bread Solutions is able to forecast Coles’ demand with almost 100 per cent accuracy.

That has allowed the company to almost completely reduce cash tied up in inventory, a big factor in generating free cash for further investment in machinery. With that consistency, it is also able to plan and allocate staff across shifts far more efficiently. Upton says this is a big factor in Bread Solutions’ excellent staff relations.

An extremely likeable chap, Upton himself has a lot to do with staff relations. Touring the bakery, he knew every staff member’s name and introduced me to many. As someone who left high school to take a baker’s apprenticeship, Upton knows what it’s like to work the breadmaker’s graveyard shift. It can play havoc with work life balance. So Upton has done a lot of work on optimising staff shifts.

By running the operations 24/7, he can absorb changes in demand without having to put further pressure on his people. And Upton says that because workers are always aware of when they’ll be working, they are far more satisfied than if they are thrown into extra, or longer, shifts. They too appreciate consistency. His staff is non-unionised, with 50 per cent from migrant backgrounds, and is amongst the best paid in the sector.

Where Bread Solutions really is going to see the benefit of the revamped FlyBuys program is in Coles’ new predictive technology. Once FlyBuys gets going, Coles will be able to create far more effective marketing campaigns and will be able to test them over time to ensure they are as accurate as possible. It will likely be experimenting with many types of grocery products and will need suppliers who can provide goods in a timely manner.

The more vertically integrated Coles is with its suppliers, the better it can achieve that. Bread Solutions is already adding more machines, and it looks like part of Coles' battle will be on artisanal bread. That reflects consumers' continued interest in quality food and our aspirational desires to become gourmet hosts, a la Masterchef.

If Coles can get the data right, you'll soon find that the food you buy will say so much about your personality that your marketing circular will look at lot more like a foodie magazine, created exclusively for you.