Fourth floor. Homewares, electrical and the blue pill

The way people can buy stuff changed this week. A Virtual Reality shop opened. VR shopping is an amazing concept... even better than what would happen if the Matrix looped up a Danoz Direct infomercial.

The retail sector is significantly exposed to the risk of digital disruption, and traditional retailers know that new developments will come quickly and be highly impactful.

Australian department store Myer has got on the front foot in a big way, partnering with eBay to roll out the world's first VR storefront. It's a really smart and important development.

As in the previous blog post, I still maintain that bricks-and-mortar will for a very long time be more important by volume than online transacting simply because of human nature. But digital technology will impact on how consumers behave and how companies approach offline transactions.

For years now, social trends have pointed to a couple of things that big brands need to do to stay highly competitive. They need to ideally not look like big brands and not act like them. Consumer expectations for a while now have been developing towards expectations of localised and community-centric brands that provide an experience rather than just a transaction. The challenge is that personalised service is difficult to scale without technological assistance.

The VR store is an amazing development getting towards bridging the difference between walking into a store versus opening up a PC browser. But does it mean physical retail is less important?

Well, also this week, some prime Melbourne CBD retail space was put up for lease. The space became vacant as exiting tenant Telstra focuses on its flagship store just a block away, where customers are handled through a merged digital and standard physical service.

$700,000 p/a rent is the going rate for the empty store. A market accepting this ask is clearly one with demand for actual floorspace. For that price though, a tenant would be well advised to be doing something extra special to draw in passing foot-traffic.

As the VR store unveiling shows, the key to bricks-and-mortar retail success will be increasingly dependent on the use of complementary technology to enhance the underlying physical shopping experience.

Traditional stores will keep going and online only stores will too. It's not a case of either-or.

Real innovation will straddle both at the same time.

Recommended for you: A fashionably shapeless plastic poncho

... because shoppers who bought those shoes also bought this ugly acrylic smock.

Online shopping from offshore providers can provide a good lesson in 'buyer beware'. In the past little while many cases have come to light of people buying fashion items online from overseas sellers, and receiving goods that didn't quite match the photos depicting them on the buying site.

What looked like it belonged on the Oscar's red carpet in the photo turned out to be a really cheap and nasty knock-off when it arrived in the mail.

Some might say it's not overly surprising that $45 doesn't buy an haute couture evening gown. I'd agree, but still there must be some degree of consumer protection.

I don't want to wade into an ACCC investigation so I won't show the actual garments, but to demonstrate the differences apparent, the photos of the display items and the photos of the actually received items show a level of similarity kind of like how closely this [1] mirrors the original. Behold the bargain.

(I will never get tired of looking at that restoration).

Usually, the costs involved in these transactions were so low that people just considered it a lesson learnt so it took quite a while for any complaints to be raised.

What this does show is the importance of a physical engagement in retail.

Emotional triggers to buy are effective online, and in fact can be interesting to observe as they are often exaggerated in this setting. The subsequent sensory factors are largely missing though. Generational differences in attitudes and social preferences can be used to explain how this has been of relatively low importance to date, but the cyclical nature of many social trends makes me wonder whether this might not continue forever.

Statistics usually show that online retail is surging. Sure. A little baby can zoom up and even double in size fairly quickly. Such increases to an adult's size are unlikely. If I'm twice my height or twice my weight next year please pray for me and my thyroid.

This is not to say that online channels aren't important. They are. But bricks and mortar retail volumes are far higher than online sales and I'm not convinced online will catch up.

A level of comfort is essential in any substantial transaction. In many retail settings buyers reach this level of comfort through actual interaction with the goods in question, as well as with the seller. This interaction, though still possible, is diminished when online.

In the near future a convergence of several factors may chip away at online sales volumes: a cyclical renewal of interest in lower-tech engagement by younger consumers, issues of online financial security, and the spread of internet connectivity in previously isolated regions and the subsequent increases in small-businesses and micro-businesses active in trading with customers around the world.

As global connectivity increases and the potential for low-level retail trade is opened up for millions of people, cultural differences will be seen in cross-border customer relations.

Surging online sales volumes will be accompanied by surging rip-offs.

Too many cases of girls buying dresses that turn out to be plastic drop-sheets with flowers printed on them may remind people that shopping used to always involve leaving the house, going to a shop and looking at what was on offer. Sometimes that isn't such a bad thing.

Links:

[1] Conservation-restoration of Ecce Homo by Elías García Martínez

Price Right: Profits Right

IN CONVERSATION: JON MANNING & MICHAEL HARDIMAN

Jon Manning is an expert in pricing, and has used his knowledge to generate millions of dollars in incremental revenue for clients around the world. Getting pricing right is essential to maximising profits. Jon's business Pricing Prophets provides strategic advice in this area. His work is something we find fascinating since pricing is such an important factor in how businesses perform, and that performance is exactly what we also help direct with our economic and demographic insights.

We sat down recently to discuss the world of pricing.

MICHAEL: CAN YOU TELL US EXACTLY WHAT YOU DO?

Jon: What I do is advise companies on their pricing, monetization and business model strategies. Pricing is the most powerful profit improvement lever any company, large or small, has at their disposal, and I assist in monetizing the value they provide via optimal pricing strategies.

A lot of people don't realise that when you take a deep dive into pricing, it's more than just the dollars and cents on a price tag. A pricing model is at the heart of every business model, and we all know what happens if your heart is not in good shape, don't we?

MICHAEL: WHAT IS SOME EXCITING WORK YOU’VE DONE RECENTLY?

Jon: I've done some work with FinTech and eHealth start-ups recently, and what has excited me about this work is the paradigm shift towards pricing that is happening in the start-up space.

There are so many start-ups founded by know-it-all under 25's who don't believe in investing in professional services (such as accounting, legal or coaching / mentoring services, or pricing advice for that matter), and are so emotionally attached to their product that they are blind to outside opinion that they might not be the world's next unicorn.

The start-ups I've been working with recently understand how important pricing is. They know that one of the first three questions they are going to be asked when pitching to investors is "what's your pricing strategy", and they seek assistance earlier, rather than later, plus they listen, embrace and act on that assistance and guidance.

MICHAEL: WHAT ARE SOME CHALLENGES THAT YOU SEE OFTEN, AND HOW DO YOU HELP CLIENTS TO GET PAST THEM?

Jon: One of the common things I see is businesses not creating the right environment to support their pricing strategy. Put simply, if you want to charge five star prices, you need to have a five start environment, regardless of whether that environment is a retail space, a website or a one-on-one meeting or sales pitch.

An accountant I know recently said to me that he thought one of his clients, the operator of a health food shop, would benefit from some pricing advice. Rather than hound the accountant for an introduction, I decided to drop into the store and see for myself. The environment was very confusing, to say the least.

As I walked past the front windows of the store, I noticed the very ordinary, gluten-free chocolate Easter egg promo, featuring some pretty cheap crepe paper and not much else. _"OK…this store is playing the price game"_ (like JB Hi-Fi or the Reject Shop), I thought to myself.

But then three feet down the first aisle I'm surrounded by beautiful products on wood-panel shelving. I could almost be in David Jones rather than JB Hi-Fi or the Reject Shop. But looking up, I see yellow and black signage telling me what products are in what aisle. Now I feel like I'm in IGA.

Maybe the price points will clarify what space this store is playing in. There's a one litre bottle of camel's milk left in the camel milk fridge. It's $25 a litre. Now that's pricing! But there's also dried Juniper Berries (an essential ingredient for a Gin & Tonic Tart, which I've been looking everywhere for) for the bargain basement price of just $3.50.

At the back of the store, in one corner, a door resembles the entrance to a Godfathers office in the back of a Brooklyn restaurant, rather than the entrance to professional services suites upstairs. In the other corner is the ramp coming in from the car park…which would be great for 'click-and-collect", yet despite this store having a considerable inventory available to purchase online, there is no sign of omni-channel retailing here just yet.

MICHAEL: WE’RE OBVIOUSLY BIG ON USING DATA HERE, HOW DO YOU SEE BUSINESSES CHANGING TO TAKE ADVANTAGE OF BETTER INFORMATION AVAILABLE TO THEM? HOW DO YOU HELP OUT IN THIS?

Jon: Let's stick with the health food store, for the time being, to answer that question. They will have point-of-sale data and they will have eCommerce data from their website. They'll be able to identify slow-moving and fast-moving items. They'll be able to identify products they can increase the price of, as well as products that might benefit from a price decrease.

They may find similarities or differences in slow and fast-moving online items. They'll be able to develop new metrics (e.g. look-to-buy ratios) and eventually they may be able to establish a loyalty program as a stepping stone to personalized pricing.

"Personalized Pricing", is one of the hottest topics in pricing circles at the moment, and it is facilitated by big data. We're probably going to see this materialise in air travel or insurance first, before we see it in health food stores though.

Let's look at air travel first. For many years now, airlines have had these sophisticated black boxes called Revenue Management Systems (RMS) that have ensured their inventory was optimally priced to minimize the consumer surplus (aka money left on the table) and maximize occupancy.

The problem was this was all about the inventory and had nothing to do with the passenger. Now, the airlines realise if they match their booking data with their frequent flyer and website data, they can start to provide a more personalized service to their passengers, including pricing. Now (finally), it's not about bums on seats, it's about who owns those bums.

In insurance, thanks to the proliferation of Location and Navigation (L&N) data and services, as well as the internet of things, expect to see house and contents insurance policies priced not just by suburb, but by side of the street and maybe individual property address.

MICHAEL: ARE THERE CHANGES IN YOUR INDUSTRY THAT ARE COMING ALONG?

Jon: I think the biggest change we're seeing is the end of the era of fixed prices. Prior to the 1860's, everything was dynamically price, because price depended on how well you could haggle with the store owner.

Then the Bon Marche Department store in Paris put all its goods on tables (rather than behind counters) for shoppers to inspect, as well as adding a price tag (so shoppers didn't have to go back to the cashier and ask how much something was). This marked the start of the era of fixed prices.

Today, the internet is facilitating the return of dynamic pricing, not only in aviation, but also in accommodation, car rentals, adverting, ride-sharing, concerts and sports, toll roads, public transport, fast moving consumer goods…this list just goes on and on.

 

Feeling rich

In our latest quarterly reports we noted a nice lift in sentiment measures, both for overall consumer sentiment and for sentiment within the retail sector.

Whether these lifts are sustained remains to be seen, and there are a couple of risks which could hamper future rises. In particular, the volatility in global markets can have impacts on short-term consumer psychology.

The wealth effect is an important component in the current 'recovery' from the global credit crunch. (Yes, we will keep putting the word recovery in quotation marks until further notice... or until we don't have to refer to it at all, such as when the US Fed starts discussing even just the possibility of negative rates). When people see asset prices rising, they tend to feel wealthier and spending changes as a result. People do more shopping in bull markets.

There are some businesses that will not get the full gains of wealth effect spending however, such as low-cost stores and fast-food outlets. When people feel wealthier they'll go for higher priced options than they otherwise would have.

There's some argument over the relative contribution that various asset classes make to the wealth effect. Some say stock market prices don't matter, some say equities bubbles are intentionally pumped up specifically for the wealth effect. Some say home prices are the most important factor.

(Rising residential property values in the early-mid 2000s saw US homeowners borrowing against equity in their homes and spending this cash. We know how that ended and obviously people are better off not treating their primary residence as an ATM).

So whilst consumer confidence is up right now and retail sector conditions are positive too, it is worth keeping an eye on the ASX and overseas markets. The balance sheets of big-4 banks and home prices matter too. There are lots of reasons not to expect either a great year for equities or boom-level gains in home values. This would impact consumer psychology, even amongst people who are not invested in the stock market and who do not own property.

The general vibe matters.

Whilst some of this post may have come across as a little glass-half-empty, don't worry.

We're still optimistic about the local economy in general and think retail will be ok.

Our fundamentals and supporting demographics here in Australia are quite good. If you want to know more about either and how you can take advantage of these - drop us a line.

The year ahead

As we start 2016, it's a perfect time to look at what is likely to affect business over the next year. Let's start with big picture issues and then look at what these will mean on the ground.

Three of the most important macro issues that will show across 2016 are:

* The global recovery
* Inflation versus deflation
* Slowing Chinese growth

The global and US "recovery" is the big one. It's a tenuous recovery but it (or the general perception of it) has has been sufficient to get the US Fed to start raising interest rates. The shift up last December by 25 basis points is generally taken to be the first of multiple increases. One effect of this is continuing strength of the USD and relative weakness in other currencies including our dollar.

Whilst the world is currently caught in a deflationary environment, higher US rates and money exiting other markets to take advantage of positive US returns could spark inflation there. For us, this obviously means higher costs of imported goods and problems for exporters.

Offsetting this risk are demographic profiles (aging populations with restrained spending behaviour) and advances in technology (reducing costs for many products and services) which will continue to add deflationary pressure to advanced economies. Adding to this are continued drops in commodity prices matched with oversupply at the same time. Trade indicators such as the Baltic Dry Index - a measure of global shipping costs now at multi-year lows - also suggest no quick turnaround.

2016 will probably be the point where we see which of these competing pressures gets the upper hand for the next few years.

In the first few days of 2016 China has made headlines and affected markets globally. The risk of a 'hard-landing' has really come to the fore. We continue to be a little perplexed by reactions to Chinese data. When official government numbers are released suspiciously quickly, are amazingly close to official targets, or literally do not actually add up then those numbers should never be taken to be the truth. Yes, there are problems but we expect China to manage them. We can't see any scenario where the Chinese government will allow years devoted to opening markets and internationalising the Yuan to be squandered.

All in all, we think the Australian economy is still fairly positive and consequently businesses should be aware of how lucky we continue to be.

Here's how the issues noted may affect retail business on the ground.

We spent 2015 predicting a good year for the retail sector and increases in consumer confidence. That's how it turned out. An increase in discretionary spending was seen, and the drop across 2015 for the AUD was a factor in increased domestic retail spending rather than international purchases. Continued weakness in our currency should see this continue.

If deflation persists, then continued reduced input costs could help businesses which are not reliant on import components maintain healthy margins. This can help the smaller guys.

Major retailers utilising currency hedges are likely to have expiring contracts unwind into AUD softness and consequently may seek to pass on higher costs. Alternatively, margins could be under pressure for these retailers if they seek to maintain sales volumes.

This will affect the overall competitive environment in retail and could be beneficial for smaller retailers better able to take advantage of flexible input structures.

The deflation-inflation tussle will obviously impact consumer behaviour in terms of spending patterns. Deflation has been highly noticeable in groceries and buyers are accustomed to $2 bread and milk. Lower grocery prices tend to see people make more visits to the supermarket, even if they spend relatively little each time. A low basket-spend leaves consumers willing to spend on a few additional goods on the way out each trip, whether these are in-store promotions or on products elsewhere.

If inflation comes, this will change. Businesses need to be aware of consumer psychology and how this affects buying patterns. Of course, wages growth needs to be factored into this.

Consumer confidence will obviously be important and at the start of the year it's being tested with concerns around China and its impact on global markets. We still think this concern is exaggerated. That said, some of the structural problems there (just like in the US, Europe, Japan etc) will need to be fixed one day, and this won't happen in a way that will keep everyone exposed to those problems happy.

Property markets are not expected to be as vibrant as the past 12 months. Australian property - particularly higher value residential markets in Sydney and Melbourne - have been driven by Chinese capital more than many would care to admit. Efforts by China to fix the economy in China are not likely to involve allowing continued capital flows to various property markets around the Pacific Rim. Prices will likely come off and this will affect consumer sentiment and spending propensity. Late-cycle demand will still flow through and drive sales for goods like furnishings and appliances though.

There are plenty of risks out there but our economy seems well placed to handle the macro issues 2016 will present, and consequently we think businesses will be able to achieve some good results for the year.

At ZenBus Advisory we provide guidance on industry outlooks and more importantly we can work closely with you to show you where your best business opportunities are and how you can take advantage of them.

Trend data and a bride's nightdress

Up, down, up, down is great for some things but not others.

You know we focus on quarterly data in our retail projections. Here's why.

These are some headlines on recent monthly retail data releases:

June data "Australian retail sales smash expectations" Business Insider August 4 http://www.businessinsider.com.au/australian-retail-sales-june-2015-2015-8 [1]

July data "Concerns over Australian economy as retail sales go backwards" ABC September 3 http://www.abc.net.au/news/2015-09-03/concerns-over-australian-economy-as-retail-sales-backward/6746828 [2]

August data "Retail sales in August..meeting expectations" SMH October 2 http://www.smh.com.au/business/the-economy/retail-sales-rise-in-line-with-expectations-20151002-gjzpfv.html [3]

September data "Retail sales soar in September" The Australian November 4 http://www.theaustralian.com.au/business/economics/retail-sales-soar-in-september-abs/story-e6frg926-1227112003542?sv=6be6af23938aceeb8e1515c8b96b5f75 [4]

October data "Spending pushes retail sales higher leading into Christmas" ABC December 4 http://www.abc.net.au/news/2015-12-04/australians-spend-up-big-at-department-stores-christmas/7001828 [5]

All these headlines are reporting ABS monthly trend data, the data that is treated to remove short-term volatility.

Up, down, steady, up. Really insightful.

We prefer to take a step back and look at a bigger picture. Paying too much attention to every bit of data and not putting it in perspective is like trying to tell the time by only looking at the minute hand. So we focus on quarterly data.

We've been saying all along to expect a really good year end for retail. It's turning out that way (though we think that the September data is ripe for some revision down).

There are potential issues in 2016. There always are... that's just life. Still, we are more optimistic than most analysts out there seem to be. We expect even better results for the retail sector across next year.

Links:

[1] http://www.businessinsider.com.au/australian-retail-sales-june-2015-2015-8 [2] http://www.abc.net.au/news/2015-09-03/concerns-over-australian-economy-as-retail-sales-backward/6746828 [3] http://www.smh.com.au/business/the-economy/retail-sales-rise-in-line-with-expectations-20151002-gjzpfv.html [4] http://www.theaustralian.com.au/business/economics/retail-sales-soar-in-september-abs/story-e6frg926-1227112003542?sv=6be6af23938aceeb8e1515c8b96b5f75 [5] http://www.abc.net.au/news/2015-12-04/australians-spend-up-big-at-department-stores-christmas/7001828

5 things we use to forecast retail growth...

....and why it matters to your business

We all know the old saying. Making predictions is difficult, especially about the future! If it's so hard, then why do we try? Simply because we all need to use some degree of informed planning in any single thing we do.

This is especially important in business.

I've been involved in market and scenario forecasting for enough years to know that there is no such thing as a crystal ball. No forecast will ever be perfect. But forewarned is forearmed. Being prepared for likely eventualities will put any business at an advantage over competitors without that information.

This competitive advantage can be acquired through various types of forecasts. We work in macroeconomic forecasting, providing a high level view of the domestic retail industry, refined down to various market segments and geographic areas.

The forecasts that we provide can be used by businesses in a number of important ways.

First though, how do we come up with our numbers?

We start from a premise that sounds obvious: the economy is complex. It's complex because it's driven by people and people themselves are complex. The overall macroeconomic climate can be considered as the entire sum of all microeconomic decisions - that is, the sum of every spending decision people make, covering all household, business and government spending.

Since economic activity is the end result of all individual decision-making, it means that theoretically the economy could change as fast as people can change their minds.

In practice though, changes are slow. Momentum exists and consequently we like to keep this momentum as a key factor in our forecasting method.

So instead of working up from micro-level factors we work down from national accounts data and use a technique of trend projection with quarterly moving averages. Here are 5 key things we look at:

Item 1 - The biggest picture

Global growth prospects are important because our national economy fits into this overall picture. Factors which eventually impact on household purchasing decisions have impacts on global growth: things from offshore like currency values and energy costs alter the trade balances of national economies, and this is reflected in the growth prospects calculated by a range of agencies.

We keep an eye on global growth prospects to know what external forces our economy is exposed to.

Item 2 - The national economy numbers

Global GDP is of course the sum of all nations' GDP figures. Knowing how the world's overall economy is expected to perform helps our national economic performance to be estimated as a component of that. We've been fortunate to have experienced sustained growth across times when other similar economies have not been as robust.

The very first number we look at when actually crunching our numbers is national GDP.

This data point is important because forecasts for this take into account many factors that we'd otherwise need to put into downstream calculations.

This includes leading indicators which give early clues to changes in consumer spending. From step one then, variables such as inflation expectations, interest rates, oil price and construction data are built in to our forecasts.

Item 3 - The statistical relationship between all economic activity and the retail sector

There's obviously a positive correlation between these two sets of numbers, and applying that correlation is a vital part of getting our forward numbers. This bit is our secret sauce.

Item 4 - Key industry segments & different geographies

The same statistical approach that lets us isolate forward expectations for the overall retail sector within the overall economy is also used to separate key industry segments and locations. The similar approach means that our models can be used in different markets too, and we cover NZ as well as Australia. Sure, there are differences between the countries, but up this point in the process numbers are numbers.

Item 5 - The human element

All steps to here are simply based on data and numbers. As with any analysis of data though, the value is in the insights and this depends on the acumen that can be applied in reading what the numbers tell us.

To help us put our forecasts in the context of a business advisory message, we provide a qualitative assessment of the industry. To do this, we look at industry confidence and conditions survey data.

This data is collected monthly and we use a 3 month moving average that's less open to short-term fluctuations.

This element is obviously less precise, both in terms of the data that is reported and in the way it can be used in a forecast. It is important though because it gives a great indication of the psychology of the consumer and industry participant. Ultimately, economic performance all comes down to how people act, and this reflects what people think.

So to sum up, here's what we pay attention to:

  • Global growth prospects

  • National growth expectations

  • Retail industry relative contribution to the national economy

  • Relative contributions at industry segment level, and at individual state/territory level

  • Sentiment indicators to support or qualify what the numbers are showing.

Why businesses need this information

A common way of creating internal business forecasts is what we call the wishful thinking approach. Add 3% to the previous quarter's sales and there is the new target. Then, expect to hit the target. As a result, your forecast for the quarter is 3% growth. Easy. It pays absolutely zero attention to the likely purchasing decisions of your customers though. So if spending overall is likely to grow by 6% should a business be forecasting 3% sales growth? Alternatively, if spending is likely to drop to just 1% growth, how likely is a 3% expansion target?

A better approach is to know what the market is doing and match activities to take advantage of this.

With access to state-specific industry growth forecasts, a business can tailor the locations of sales activity to maximize sales where they are most likely to occur. It doesn't have to be random. This is just the same principle as using a calendar to find optimal dates for time-sensitive activities.

Looking at longer-dated forecasts enables some insight to be applied to more strategic decision making, informing decisions such as resource planning (capital expansion or inventory management) and pricing (discount cycles/ re-pricing).

All in all, keeping an eye on industry conditions forecasts helps remove the guesswork and trial-and-error approach that many businesses operate with.

The trend is your friend

When we construct our forecasts for retail industry sales we provide
output in two formats: trend data and original.

Each has its merits.

Trend data shows what you'd imagine it to... an underlying trend free
of irregular effects. Short term fluctuations are smoothed out. Any
spikes in data are removed so as not to impact the bigger picture. For
example in retail, the time leading up to Christmas sees a rise in
spending and in employment too, as temporary workers are added to
rosters. These are short term impacts so would skew data if left in
and treated as being as structurally important as normal spending
patterns and long term employment figures.

Trend data shows the bigger picture and is best for supporting longer
term strategic decision making, like capital planning.

Original data is the pure numbers, not factoring in any trend,
cyclical or seasonal effects. This data counts all the irregular
fluctuations that arise in data records. This is obviously a short
term view so is more suited to showing the tactical landscape.

These numbers are better suited to immediate resource planning, like
short term inventory planning.

Our forecasts indicate a pretty uniform strong current quarter across
all locations, except for the NT.

In original format, the first quarter of 2016 is also pretty uniformly
negative, as expected spending not only slows after the Christmas
rush, but general economic activity dips as people switch to holiday
mode. Our trend estimates smooth this out and show a nice growth
pattern into at least mid-2016.

Check out an overview of our forecasts here:
http://www.zen-bus.com/forecasts and if you want all the details just
leave your details to request a free sample report.

Both sides

At a fintech conference I was at this week, one topic was noted in a
panel discussion as a continuing impediment to new ventures – and not
only for businesses in this sector, but for any enterprises.

It's the corporate tax rate. Put simply, it’s too high in a
cross-border context.

In a local context only, well, it is what it is. If your choice is to
start a company in Australia or not start one at all, then the local
tax rate is what you’re going to pay. So if your company gets taxed at
30% that’s good. It means you are making money. It would be great to
keep it all but life’s not perfect.

As the discussion moved on to more technical elements including
analytics, I thought about the focus that analytics has on the
consumer-facing side of business.

A focus on the customer is good, but so is a bit of introspection.

Standard business analysis and looking at the numbers across all
elements of operations is always recommended for any business. Taking
an even closer look and applying some analytics (as we do for our
subscription clients) can provide even more advantage. Patterns will
exist in sales, but also in costs.

To get the best results for a business it's best to optimize not just
profit, but expenses also.

From a behavioural point of view, analysing one of the largest costs
components – staffing – is not always easy. We have experience with
time and motion studies and activity-based costing (ABC modelling)
plus we’re well aware of the Hawthorne Effect.

This states that people act differently when they know they are being watched.

Recently, Amazon has been in the news for tracking employee activity
in minute detail. Workers responded by acting like hyper-efficient
robots. That’s predictable, especially given the company was obviously
looking for high levels of productivity. Also predictable was that
workers eventually burnt out. Their productivity then dropped. Then
they were sacked.

We have experience monitoring performance in the public sector. Trust
us, the Hawthorne Effect can manifest in the opposite productivity
direction.

The point of all this is that it can be worthwhile to turn an
analytical lens on the expense side as well as the revenue side.

ZenBus can do this with our financial modelling services. In our
behavioural economics advisory services we can model the cost of gains
from a resourcing perspective, using ABC models as a foundation.

Just as we’ve stated in a previous post though, numbers with
inadequate interpretation are meaningless. Business acumen and
understanding of human behaviour are always paramount.

All aspects of a business can benefit from an analytical evaluation.
Just don’t lose sight of the context.

Data-driven & tennis ball-catchin'

It’s hard to find a business these days that isn’t somewhere along the
path of becoming ‘data-driven’. Very smart.

Being data-driven is the new paradigm. Using the word ‘paradigm’ is
the old paradigm.

What I mean here is that the term ‘data-driven’ risks being considered
an essentially meaningless business buzzword.

Every decision ever made was driven at some level by data. If data
doesn’t influence a choice, then that choice is not called a decision.
It’s called a complete guess. Businesses that run on guesswork don’t
stay in business.

Have you ever seen a dog catch a ball in its mouth? To pull the catch
off successfully, a dog needs to calculate the arc of flight the ball
is travelling on, its rate of descent, its speed through the air, and
then work out how to position itself to be in the right place at the
end of it all. Just some simple Newtonian physics... all worked out by
a dog.

All the decision making going on in pooch’s head is based on applying
current observations with knowledge acquired through previously
observed data points, from having seen things get thrown and from
trying to catch them. Once the dog figures this out, it’s done. No
complex equations are ever needed. The dog just uses experience. And
it works.

Some decisions that are based on experience are not optimal. But not
every decision made based on a plethora of numbers (ie. the ‘big data’
approach... buzzword alert!!) will be optimal either. Sure, running a
business is a bit harder than catching a ball but the point is that
the value of data will always lie in the interpretation.

Numbers are meaningless without interpretation. Data is meaningless
without analysis. The best insights and analysis comes from a position
of experience and contextualisation.

Data can drive a business in the complete wrong direction if the
analysis or application is faulty.

A ‘data-driven’ business should not be one where the numbers alone
rule. It should be one where data and information are used in
combination with business acumen and experience.

Any business that is up and running is already generating numbers.
Managing a business requires paying attention to the numbers... and
making decisions based on them. Taking an even closer look at some
data would likely yield insights that could strengthen and complement
the decision making processes already in place, helping to drive even
better results.

You have the numbers and data, you’re making the decisions. To make
sure those decisions are the best they can be you don’t need to
overwhelm yourself with stacks of new additional data but you should
see what fresh insights can be found in what you already have.

Greek capital controls, Shanghai margin loans, and your IKEA shopping list. Two of these things shouldn't really matter

One of the key sets of numbers that we track here is consumer
confidence. When we’re showing clients how the economy is expected to
go, this is an important factor. Especially for the retail sector.
After all, no matter what upstream industries like wholesale trade and
manufacturing are indicating, getting consumers to open their wallets
requires them to feel secure about their short-term financial future.

The most recent data for Australian consumer confidence shows that
it’s dropping. The major reasons given for this were turmoil around
Greece’s position in the EU and sharp drops on the Chinese
stockmarket. Both of these are apparently making Australians feel less
secure.

Two points: One, Greece has been in the same position for 5 years
straight now. Two, the Shanghai index was up well over 100% for the
year prior to the ‘shock’ drop.

We don’t think that either of these two factors should have a strong
material impact on Australian consumer spending in the medium- to
long-term.

Any short-term bumps need to be seen for what they are: short-term.

One reason why we provide quarterly outlooks is to smooth out these
fluctuations that aren’t structural.

Both the drama around Greece and the EU and the Chinese stock market
need to be seen as primarily political events rather than financial,
and the expected on-going market impact should be read in this light.
The EU is not necessarily about the euro. It is about member states.
We fully expect Greece to remain in the EU regardless of the currency
it circulates within its own borders. China is not a free-market
economy. Whilst this is the direction its government is taking, one of
the Chinese government’s primary concerns will always be making sure
its citizens are content. Governing 1 billion content people is much
preferable to trying to govern 1 billion discontent people. If market
intervention is required to achieve that, it will happen.

In business it’s important to keep your eyes on the horizon and not
get distracted.

Of course we are always looking to see what longer-term trends are
hinted at from short-term events, but presently we’re remaining
confident about the local economy.

Contact us and make sure your business forecasts use the most
comprehensive economic data and industry sales projections.

I'd love a $25 cup of tea

Tonight I flew back home after a few days in Sydney. Whilst up there I
stayed at the hotel I used to frequent in a previous corporate job. It
was nice to be back. On my previous trip to Sydney I booked a hotel at
the very last minute. It wasn’t the nicest place I’d ever stayed at.
Far from it.

That particular hotel was obviously a lower-cost option than the hotel
I checked out of this morning. Still, I felt it was not even close to
being worth what I paid for my stay. For one thing there were no tea
or coffee making facilities. Now despite the fact that for almost the
entire stay I was not in the hotel (the only times I was there I was
either asleep, about to go to sleep, or just woken up and about the
leave) and I had little or no chance to make a cup of tea in my hotel
room, I would have liked to have seen that I at least had the option
to. I would have been happy to pay a little more for that too.

I think I would have been quite happy to pay perhaps $25 more per
night. I was only there for two nights but that’s still $50 the hotel
could have got out of me just by supplying a couple of teabags and a
kettle. And a cup. All of which would have actually gone unused.

Nothing in life is free.

Everything has a cost, and a value.

People like it when things are offered to them for free. Free things
can be valued more than comparative items that are not free but which
are extremely cheap.

Being offered a free item makes people feel that they are the
recipient of a generous gesture. Being offered an extremely cheap item
can make people feel that they are having a low-quality piece of
rubbish offloaded onto them. Being the recipient of generosity stirs reciprocity. For a customer,
this reciprocity could be expressed as an increased willingness to pay
for something else on offer. Of course that other purchase just might
include the cost of the free offering. (It’s worth repeating: Nothing
in life is free).

Some teabags and the chance to make a cup of tea would have made me
feel a little more valued, and my stay a little more appreciated. I
would have responded by happily paying more and being more content
about the room rate. I might have even gone back. Instead, this time I
stayed on the other side of the harbour. Way out of my way but I was
more than happy. There were teabags and a kettle in my room too.

Business should always keep the power of “free” in mind when looking
to increase customer engagement.

Retail update

Last week the ABS released the latest trade figures which showed a
slow retail industry.

For April the sector recorded an absolutely flat result of 0.0%
growth, seasonally adjusted. The trend estimate result for the month
was 0.3% growth.

This month may have appeared to be slower than otherwise expected due
to stifled activity across the Easter holidays, when regulations
concerning staff penalty rates really cut into stores opening hours.

Also, this period covered the lead up to the release of the Federal
Budget and some purchasing decisions are always delayed until the
Government has provided direction on issues of saving and spending.

At the start of the year our forecasts pointed to good growth in this
current quarter. That was revised down when fresh monthly data came in
covering March but we still forecast growth over 0.4% across the June
quarter.

Importantly, we forecast a pickup in subsequent quarters and the
positive impacts of the Federal Budget for households and small
business supports the case for accelerated retail growth in coming
months.

Give yourself an advantage. Get a headstart on industry knowledge. Get
in touch to find out more about our quarterly macro industry forecasts.

Shuffle/ Repeat. Big picture/ small picture

By coincidence the random shuffle on my phone decided to play a
Nirvana song in the background just as I opened a Word doc to write
today’s blog post. It’s coincidental if you know where the title from
last week’s post came from, and coincidental because a conversation I
had a couple of days ago (which by chance got around to how weather
affects in-store retail sales) made me want to revisit the central
theme of that very post – how important the big picture is.

Weather changes moods. It changes GDP too, and during the past week US
GDP for Q1 was revised downwards significantly (from low growth into
contraction) and as usual the weather was partly blamed for slowing
economic activity.

Now, I’m not convinced that this is entirely accurate in this case.
Though I agree that weather is important I’d actually take a closer
look at trends in money velocity over periods longer than any
implicated weather cycles when looking at these GDP numbers. Still,
the willingness to fall back to weather as a factor in GDP results
shows there are many overarching external factors that influence
economic activity.

So today I want to explain just why we look at larger external factors
when advising clients on more micro issues.

Our last quarterly updates to retail spending projections indicate a
slight slow-down from recent quarters, before rising into the year end
(we forecast construction to be holding up ok next quarter relative to
recent past quarters, and even manufacturing to be comparatively
stable short-term).

This means that any short-term activities in retail need to be
evaluated against an expected broad-based dip in activity within the
sector.

Forecasting your results based solely on internal measures gives a
less complete picture. Even when internal measure forecasts are
detailed enough take a large range of data into account, from sales
probabilities based on customer engagement and product demand profiles
through to seasonality trends, it is really important to consider
external factors.

You need to consider where the next dollar coming in sits within the
context of the wider economy outside of the relationship between you
and your client.

A rising tide lifts all boats. When the overall sector you are in is
expanding, are good results the outcome of what you are doing or are
they largely just a result of you simply turning up and being open for
business? In such case, could you be doing even better? Conversely,
when the tide starts to drop, would you be ready?

Of course, the broader economy will impact not only the relationship
that you have with your clients, it will also affect what your
competitors do.

Being in a position to anticipate what your competitors may do in
future will obviously put you at a huge advantage. Within their own
competitive landscape, many small to medium enterprises are
reactionary though. Sadly, even some larger enterprises are too.

Anticipating competitive pressures is important when considering your
strategy on matters such as pricing. Again getting back to earlier
posts here, we’ve covered some of the micro factors of behavioural
economics that are important in pricing.

But also important is the fact that setting and altering prices
requires good timing and it can’t be done too often. It needs to be
done rarely and done right. This micro aspect that covers direct
interaction with consumers needs to be considered as an important
component sitting within the bigger macro picture.

Having an understanding of the big picture numbers is vital to
properly understanding your own numbers.

That’s why we construct projections for key industry segments.

Planning your activities is best considered a long game, and you need
to be aware of the moves your opponents may make.

That’s why deploying behavioural science into on-the-ground activity
must be done with consideration of just what will make an optimal
setting.

Nothing in life is certain or guaranteed. For example anyone in the
retail sector needs to understand that even the best attraction
strategy will fail to draw in customers if cold and rainy weather is
working to keep them away from the shops (or if nice and sunny weather
is keeping them away from an online offer). Unusually cold weather
maybe can even take a little bit off GDP.

We can’t provide meteorological advice but we can give guidance based
on macroeconomic trends.

Any actions you plan to make, or have taken and now want to measure,
must be considered alongside the broader external context they sit in.

Get it all aligned and your results are more likely to end up in bloom.

Weather changes moods

The draft of this blog post was written the old fashioned way today.
Pen and paper. Drafted whilst sitting on a rock at the beach - a
detour after a meeting out of town - on an unseasonably nice afternoon.

The weather guys probably didn't know this afternoon was going to be
quite as sunny and pleasant as it turned out to be. I'm pretty sure no
marketing department predicted it.

It reminded me that no matter how much data you use to predict
people's behaviour there is always the element of biology that will
affect what people do and how they act. Using data to time marketing
on a detailed individual consumer level sounds great in theory, but
will be subject to a heap of factors that no data can predict for.
Including biological responses to external factors. Miss these, and
you can end up misled.

Companies that send electronic marketing messages measure performance
and relate this back to the message and the offer, and the target
market details.

There are plenty of other factors though. Weather is one of these and
it's usually overlooked. On a sunny day, people will generally prefer
to be outside, doing things other than reading email.

Big data is being used to predict individual preferences, including to
help determine the exact time of day that individuals are more likely
to be receptive to advertisements.

Great in theory. Some behaviour is entirely predictable. An office
worker will be at his or her desk at 9am Monday. And again at 9am
Tuesday.

But their responsiveness will be different.

People operate on regular cycles of alertness, rest and sleep. It's
the circadian rhythm, the body clock. Our alarm clocks work on a 24
hour cycle. Our body clocks generally work on a 25 hour cycle... the
natural 24 hour cycle gets extended out by exposure to artificial
light at night. Some people prefer to operate on even longer cycles.
We're all different, and we're all different to our alarm clocks.

This means that at the same times but on different days, we'll feel
different. This means we'll act different.

Seasons and latitude make a difference too.

Timing behaviour predictions on a 24 hour clock will always make the
result a little inaccurate.

Using data helps business, and data-driven insights can be of enormous
value, but be aware that data doesn't drive behaviour and can't
predict all of it either.

There is only so much detail you can get into before you need to stop,
and recognise that biology is important.

At ZenBus we are all for market forecasting and consumer segmentation.
We know that economic trends affect business success so some element
of timing is important. We know that certain people can be prompted to
act in certain ways. Our business is based on this.

But we also think that making tactical marketing decisions based on
information such as an ideal customer being a 35 year old woman who
likes a,b and c and has previously done x,y and z can backfire if the
bigger picture isn't taken into account. The most highly refined and
targeted marketing can sometimes miss the mark.

The solution in such cases is not always a more complicated predictive
model or more complex algorithm. Sometimes all you need to do is look
outside. Is it sunny? It matters.

What goes up...

Following on from the last post which touched upon the tendency of
people to follow others, I want to bring this topic around to how that
can affect pricing. Given that involves money, let’s use a financial
example to begin with.

In financial markets, people can be more willing to buy as prices rise
and sell as they drop. Even if the fundamentals don’t support buying
or selling, that’s what they’ll do. Regardless of the objective
underlying quality, people will subjectively value expensive assets
more than they value cheap ones.

Add in people’s tendency to follow the herd and you understand why
asset bubbles develop on the way up and we get crashes on the way
down. This type of asset price volatility is one of the problems that
macroeconomists could not explain until they looked to behavioural
science.

Which brings us to Sir Isaac Newton.

One of the most infamous asset bubbles in history is the South Sea
Bubble of 1720, when stock in the company rose by 1000%. Sir Isaac
Newton was investor in the company just as its price began to rise,
buying before the bubble took off and exiting into it with a very nice
profit. Just a few weeks after he sold though, the price continued to
rise. It must have been frustrating to see those additional potential
profits he left on the table, so he bought back in heavily at a higher
price. The price soon collapsed. Sir Isaac Newton then sold and lost
an absolute fortune.

If even the guy who first described gravity couldn’t see this case of
‘what goes up, must come down’ coming, then you know it’s something we
all could get caught up in.

So that’s pretty good proof that rising prices can attract interest.

When it comes to pricing what your business sells, you don’t need to
follow the bubble trajectory but it is worth considering what items
might look more attractive if a premium was in place.

Some goods experience higher demand the higher the price gets. These
are called Giffen goods, and are commonly found in markets like high
fashion. Sticking with the European history lesson though, it’s worth
noting that during the Irish potato famine potatoes displayed the
characteristics of Giffen goods. As they rose in price people still
wanted them, and paid highly for them leaving less money to buy
anything else, including other food.

Giffen goods aren’t all that common. Most things are subject to
standard price elasticity. Increase price and you’ll sell less.

But it’s really important to consider where you want to position your
business in terms of volume and margin.

Don’t be afraid to increase price if what you’re selling is good
enough. It would be great to find that you end up selling more. Even
if you sell less though, you’ll obviously make more per item. If the
fundamental value supports the desire of buyers, there need not be any
subsequent crash – just make sure that what you’re selling delivers,
whatever the price.

Remember the tendency of people to follow others and see value when
it’s highlighted to them.

Discounts look attractive but a race to the bottom never ends well.

I'll have what she's having

Last week I was lucky to have the chance to present a talk in
Melbourne about some basics of behavioural economics. It was a great
night and lots of fun.

Many of the questions at the end were about how to use these basics in
business. I thought it might be worthwhile to revisit here some of the
really important ways to do that.

When it comes to making choices, people are generally very willing to
copy others. We all like to feel comfortable and know that we aren’t
too different from everybody else. So, if a bunch of other people
decided on a particular choice, we’ll feel that it’s ok to follow them
and make the exact same choice. Provided the choice worked out well
for them, that is.

For your business, that could mean that you might highlight how
popular a particular item is. Or a website could highlight that other
people are online purchasing at that exact moment. Demonstrating that
other people are willingly buying from you, and that some items are
really popular increases the level of comfort that people will
instinctively feel as they browse. This taps into the power of social
proof.

And when it comes to decisions, people are always willing to receive
help. The easiest decisions that people ever make are the ones that
have already been made for them.

Here is where a default choice can really help.

Consumers today have a massive amount of options to choose from. This
is true in pretty much any market. Competition is fierce and consumers
benefit. One way they benefit is by having more choice.

However, more choice can lead to confusion.

Information overload can actually restrict the ability to make a
choice. Present too many options to a person and it’s quite likely
that they will want to take some time to evaluate things rather than
make a quick choice. They’ll rather go away and think, and probably
end up doing nothing. Paralysis by analysis.

Instead of laying all options out, presenting a default choice
increases the chance of that same choice being accepted. This is due
to a couple of reasons.

The default can be presented as the most popular option, taking
advantage of the social proof factor. Also, once the default choice is
put at the front of someone’s mind they feel a degree of ownership of
that choice. The default option has then become subjectively a
‘better’ choice than it might otherwise have been, simply because of
that small degree of ownership. Some loss aversion is also at play
too, making drifting away from that default choice less likely.

Next time you’re shopping on-line, pay close attention to the way that
any options are presented.

You’ll definitely see these principles at work.

It always comes down to demographics

In business you need a reliable customer base. It doesn’t matter what
you are selling. To stay in business, you need buyers.

Plus, you need to understand those buyers and stay on top of how that
market of buyers might be changing.

This is where demographics comes in.

When people look at demographics however they usually don’t look
closely enough. Age bands are usually as far as they get.

The reason Zen-Bus Advisory looks at macroeconomics and behavioural
science is because we believe that the big picture gives clues about
how to best position even the smallest of businesses. So before we get
to some on-the-ground implications here's a big picture view of what
you need to know about demographics and why.

To predict how well a business or industry may run, it's important to
know the context that it operates in. That context is the general
economy.

To understand the general economy, you need to look at the factors
that are most important in driving its performance.

There’s no shortage of data to look at to measure the economy but in
the big picture, to properly understand economic growth you need to
look at demographics and include these key three factors:

• working age population • labour productivity • labour utilisation

Age is simply one characteristic in a huge range of variables and
differences in an otherwise similar population group that affect all
the above issues.

(Plus although age structure is considered in labour market
composition, health expenses, education, and pension costs, it is
usually not factored in enough when looking at inflation and discount
rates and the impacts these have as they circle back on economic
activity).

Even within groups that are generally similar, there will be very
different behavioural patterns. For example spending patterns will
always vary amongst people who otherwise seem similar. Behavioural
economics can help demonstrate and explain these differences.

We’ll be releasing reports soon that describe some important
demographic factors that will impact on all economies, and of course
we’ll be explaining why it matters to small and medium enterprise.

Some of these factors are the differences in investment styles and
asset demand across demographic segments. We’ll get into what the
inverse dependency ratio is and why it’s important. And we’ll discuss
what’s been called the ‘demographic shock wave’ and how this will
affect business.

For now though, back to macro demographics and how small and medium
business can take advantage of what it shows.

Some big picture trends are relatively easy to spot: age structures in
many economies are tipping heavily towards older populations. This
means the pharmaceutical and biotech sectors will continue to grow as
more people live longer. Financial services will do well as they cater
to the exact same market with pension products. The need to diversify
those pensions will in turn help alternative asset classes —
infrastructure, real estate, and natural resources. Also, growing
inequality will drive demand in high-end leisure and luxury markets.

Whilst these are all big picture trends that large organizations and
big money are positioning for, there is nothing stopping small
enterprise from taking advantage of the very same opportunities.

Is your business tapping into these bigger trends?

Or is it in place to benefit later, when slow-moving trends eventually
make reactions necessary?

Beyond the simple factor of age, issues of productivity and
utilization indicate that current retirement ages and benefits are way
too generous to recipients. So, that is likely to change. What
services exist for the specific needs of older workers?

As sections of the population do eventually retire, how will the
workforce replacing this older segment look?

What does the labour force participation rate look like in the markets
you cater to? Is there a significant gender gap, or is it closing?
What services can take advantage of this?

A well-run business plans ahead and ensures it offers what the market
wants and needs.

Make sure the road ahead for your business is clear (our macro
industry reports can help here).

Then once you’re on the right road, make sure that you maximize the
interactions you have with consumers.

Optimising the way consumers act when they come to your business can
be simple.

Join our mailing list to receive our free report detailing some
behavioural economics fundamentals that you can easily apply straight
away to enhance the profitability of your business.

-- Michael Hardiman

Director ZenBus Advisory 0401 610 626 zen-bus.com