Paul Wallbank – Brilliant Communications

Tag: hospitality

  • Revisiting the Lipstick effect

    Revisiting the Lipstick effect

    During the recession much was made about the ‘lipstick effect’ – the idea some businesses and products would survive because they’re little luxuries that cash strapped consumers will spend on while scrimping and saving in other areas.

    Some of those areas are ladies’ cosmetics (lipstick), chocolate, movies and coffee shops. All of them offering small pleasures for a few dollars.

    It’s a theory I’ve always been sceptical of and an episode of the BBC’s World Of Business where Peter Day travels to Cork to see how Ireland’s second city is recovering from the great recession illustrates the reality is a lot more complex than the theory suggests.

    “We really struggled to keep alive,” Claire Nash of Nash 19 restaurant says in her interview with Day on her business experience during the recession.

    “My turnover just absolutely took a spiralling tumble and it wasn’t that the customer weren’t coming in – those that had lost their jobs weren’t coming in – but those that hadn’t lost their jobs were really hurting and they were very careful with their spend.

    “So they started using us as a treat, which was a model I never wanted to enter into but we weathered the storm.”

    It can be argued that Claire survived because of the lipstick effect – she kept enough customers to survive – but it was tough and had she taken out the loans offered to her during the boom it’s unlikely her restaurant would have survived.

    The key point though is the lipstick effect turned out to be a very different, and much less lucrative business, for Claire and other businesses in Cork.

    So assuming a business will remained unscathed because of the assumption the lipstick effect is a big risk, if that’s the plan then Sequoia Capital’s infamous Powerpoint of Doom comes to mind.

    While the presentation was aimed at tech companies and investors, it’s a good overview of how the Global Financial Crisis happened and Slide 49 – Survival of the Quickest – is probably the best lesson for any business: Act fast to adapt.

    The lipstick theory is a nice way to justify unsustainable business models, particularly those that rely on consumer spending, in the face of a recession but the assumption spending will remain the same as customers will seek little luxuries is deeply flawed.

    A business that doesn’t respond quickly to changed circumstances and reduced spending is one that might not survive a downturn.

    Peter Day’s Cork story is a good listen on how Ireland and Cork have weathered the global financial crisis, the main question from the piece is how much have the Irish and the rest of the world learned from the mistakes of the boom years at the start of the 21st Century.

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  • Shops of doom

    Shops of doom

    “Location, location, location” is the mantra for real estate investors and property speculators, that rule is just as true for those setting up a shop or cafe.

    When you pay attention to the retail strips or malls in your suburbs you’ll notice how some locations are doomed to fail.

    The featured picture in this post is what should be a good location in the centre of a dining strip in an affluent Sydney suburb. Just fifty metres either side of the premises are successful and long running cafes.

    However this spot has had five different business fail in the last three years and in the past decade hasn’t had a single stable tenant.

    The question is what causes this? Is it because the landlord’s are greedy?

    In some cases it is, the featured premises had a stable tenant in a very nice and well priced fish restaurant for many years. When the landlord jacked up the rent, the seafood cafe moved out and the place has struggled ever since.

    Something many people have mentioned to me over the years is how difficult they find it to negotiate on price with landlords over commercial space with the owners very reluctant to budge on rents.

    Often, the letting agents are prepared to throw in sweeteners like fitout costs, rental holidays or paying utilities but it’s very rare that the headline rent will be negotiated down.

    Part of this could be due to the properties being valued as a multiple of their monthly rents; so if the leasing rate falls, so too does the property value which is bad news for the landlord and their bank.

    When landlords get too greedy properties lie vacant for a long time. A good example is nearby to the featured property.

    closed-bike-shop-in-bad-retail-location

    The bike shop that occupied this unit for about 12 months moved out over two years ago and before that it had been vacant for a long time. Despite being on a busy commuter strip in an affluent suburb, it’s a lousy location with poor visibility, truly awful parking and lousy amenities.

    In a genuine free market the rent should fall until a business that can operate in such a low turnover location can afford it, that no entrepreneur can make the numbers work indicates the asking price is too high.

    Although even the cheapest rents won’t help a truly blighted location which is why it might be a good idea to ask around the local shops and residents to see how a location has performed before signing that lease.

    It would be a shame to doom your business because of a lousy choice of location.

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  • Commoditising cafe Wi-Fi

    Commoditising cafe Wi-Fi

    Over the past decade the idea of offering Wi-Fi internet connections to customers has become standard in the hospitality industry, today it’s pretty well a commodity.

    Not so long ago it was difficult to find a cafe that offered Wi-Fi and many of those that did either charged for it or were part of a provider’s networks that you had to be a member of.

    Today, Wi-Fi has become pretty standard in cafes and places like airport terminals although interestingly the hotel industry has been slow to adopt it.

    In the hotel industry a perverse rule of thumb seems to apply that the more expensive the property is, the pricier internet access will be as backpackers hostels invariable have free Wi-Fi while six star hotels charge anything up toe $30 a day for a connection.

    While the hotel industry still has to be dragged into the 21st Century on this front, cafes seem to have reached a point where having Wi-Fi is no longer a commercial advantage but not having free internet is now a distinct disadvantage.

    This was the point made by Nicholas Carr in his 2003 essay IT Doesn’t Matter where he suggested that computers, and other ‘infrastructural technologies’, don’t offer a competitive advantage once they are widely adopted.

    For a brief period, as they are being built into the infrastructure of commerce, these “infrastructural technologies,” as I call them, open opportunities for forward-looking companies to gain strong competitive advantages. But as their availability increases and their cost decreases – as they become ubiquitous – they become commodity inputs. From a strategic standpoint, they become invisible; they no longer matter.

    Carr’s proposition also implies that businesses who don’t adopt these technologies once they’ve become widespread risk being irrelevant and marginalised.

    For cafes, this means that customers will be ignoring them unless they do offer Wi-Fi and it will be another cost of doing business for the proprietors of coffee shops.

    Which begs the question of how do cafes differentiate themselves.

    Perhaps the answer lies in the dog bowl shown in the photo, making a venue pet, or child, friendly may be one way to attract customers.

    One thing’s for sure, just having good coffee and tea might not be enough to cut it in the future.

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  • Solomon Lew and Australia’s perfect storm

    Solomon Lew and Australia’s perfect storm

    One of Australia’s leading retailers, Solomon Lew, joined the conga line of business whiners this week with complaints that the recently departed Labor government had been bad for his industry.

    Yesterday I posted an interview with Susan Olivier of Dassault Systemes about how the retail and fashion industries – Solomon Lew’s businesses – are being radically changed by technology and changing consumer behaviour.

    Lew, along with most Australian retailers, has completely missed these changes and instead remained focused on their 1980s model of screwing down suppliers while charging customers high prices for poor goods and substandard service.

    Now that 1980s business model has come to an end Lew and his other retailers like David Jones’ Paul Zahra, Myer’s Bernie Brookes and, most vocal of all, Gerry Harvey bleat about government taxes, high labour rates and almost anything else apart from the obvious factors they can fix themselves.

    Bigger storms ahead

    Along with the two factors Olivier identified, there’s two much bigger factors threatening Australian retail – the tapping out of the credit boom and the aging population.

    The aging population is simple, consumer tastes are changing as the population ages and the need for conspicuous consumption and the latest fashions tapers off as one gets older. The demographic boom of the late Twentieth Century is over.

    More immediate though is the tapping out of the credit boom, since the Global Financial Crisis Australians have swung around to be net savers which immediately pulls a large chunk out of the discretionary consumer spending pie which had kept the retail industry ticking along through the 1980s and 90s.

    Another aspect is the end of the home ATM – while Australian Exceptionalists deny this happened down under, it certainly did as banks sought to ‘liberate’ the equity householder had locked in their properties. This too fuelled the credit boom.

    Perversely we may be seeing the home ATM receiving a reprieve as Australian property prices accelerate from their already bubble-like levels, however that short term sugar hit for retailers and the economy is only creating bigger problems for the country’s merchants.

    Funding an uncompetitive economy

    Contrary to the bleating of Australian retailers, the biggest problem facing the sector is the nation’s high rents and property prices.

    For consumers, those huge rents and huge mortgages take money that could otherwise be buying more consumer goods, at the same time retailers are being slugged by some of the highest rents in the world, pushing up their costs and reducing competitiveness.

    That lack of competitiveness is affecting all parts of the Australian economy, particularly tourism, and the retail industry isn’t immune to those forces.

    Anyone who visits an Australian eating establishment will have experienced this, personally I had another experience last night at a pub that charged $4 (3.70 US) for a soda water.

    This wasn’t a trendy downtown bar but a pub in a lower middle class suburb with two overworked and under trained young bar staff. During the three hours there, our table of six was cleared once.

    no-table-service-in-australian-business.jpg

    Swiss prices coupled with service that would be barely acceptable in a 1970s outback Queensland roadhouse is not the formula for a successful economy.

    The business challenge

    Which brings us back to Solomon Lew’s whinge about the government, Sol handily overlooks the previous government’s  stimulus packages which kept the nation out of recession and put money straight into his and other retailers’ pockets.

    There’s a lesson there for the Australian Labor Party that the tweedle-dum, tweedle-dumber strategy of offering near identical corporate and middle class welfare policies to the Liberal Party is not going to win you friends with the nation’s business sector and its entitled leaders.

    For the incoming Liberal government, it is faced with the challenge of making Australia a competitive, high-cost economy along the lines of Japan, Switzerland or Germany.

    It’s hard to be optimistic about the Abbott government meeting this challenge given the bulk of its ministers are holdovers from the previous Howard Liberal government that was largely responsible for Australia flunking the transition to being a high cost economy along with institutionalising a middle class welfare culture into Australian society.

    Even if Abbott does genuinely attempt to address Australia’s lack of competitiveness, he can be sure he will get absolutely no help from the whingeing captains of the nation’s industries, as Solomon Lew has shown.

    While Solomon Lew and the Australian managerial class struggle with their perfect storms of economic, demographic and technological change, the nation also faces those headwinds.

    Hopefully for Australia there are capable leaders who can navigate those storm waiting to take the helm.

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  • Coping with Generation LuXurY

    Coping with Generation LuXurY

    Speaking at the recent ADMA Global Summit in Sydney, Starwood Hotel’s Phil McAveety described Generation LuXury – the changing hospitality expectations of Gen X and Ys.

    McAveety sees the new generation of travellers as being more diverse, younger, female and increasingly from emerging economies making them very different from the middle aged Caucasian male from Europe or North America which seems to be the focus of most of the hospitality industry.

    The lessons from McAveety’s presentation weren’t just for hotels, much of his message applies as to almost every other business sector.

    3D printing featured heavily, with McAveetry seeing the technology as delivering the personalised experiences demanded by Generation LuXurY, as an example he cited a concierge being able to create a pair of running shoes for a guest in exactly the size and style required for a guest.

    Big Data played a role too with McAveety illustrating how hotel managers used to watch for important, valued guests with hidden windows letting them see who was checking into their establishment, a role that’s now carried out by Big Data and social media.

    McAveety though had a warning about social media in the risks of giving away business intelligence and intellectual property to the services.

    The big risk though is in technology itself – that hotels treat it as an end in itself instead of tools to deliver better experiences to guests.

    “It’s not about tech,” warns McAveety. “If so, we are going to lose.”

    That’s a lesson all industries need to heed, that technology is a means to the end of delivering better products to customers. Understanding what Generation LuXurY perceive as a better product is one of those uses for tech.

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