Friday, April 20, 2012

Why We're So Screwed: Santa's Magic Space Monkeys






Watch the until you're a little unmoored from reality, and who knows: you could be a great business mind like the crack minds at Frito-Lay that came up with the idea of competing with themselves in the lucrative jalapeno-and-cheese-flavoured-premium-potato-chip market. And I'm not kidding about the "competing with yourself" thing. There are supermarkets in my neighbourhood where those two products are shelved side by side.

Does that sound stupid? Walk into the back room of a supermarket this last Christmas season, and you would have seen many of these:

From here
  At many stores, you'd run into them in the front, too. That's because these are often "prebuilds," stacked at the warehouse according to a delivery plan instead of being ordered at store level. Marketing figures out what you need, and you get it.

"Figured out." Hah! I'm hilarious. I should have taken a picture of it, but all last Christmas, we routinely stripped excess 12-pack cases of Sprite off our Coke orders and sent them back to the warehouse. I assume that at the warehouse, they took the returns, put them on new rebuilds, and shipped them back to us. I don't know why, although my working theory is that the prebuilds were planned in the United States, where, unlike up here in the True North Strong and Free the bottler doesn't have the Canada Dry  contract. The software spits out a quantity of Sprite based on expected sales in an American store, and the Sprite sloshes back and forth between store and warehouse all over Canada.

I haven't been to business school, so this is only a theory, but, from what I've seen, it's a good theory. It is this: that on the first day of class, they share the Great Secret of Business Management: "If you ignore a problem long enough, Santa sends magic space monkeys to fix it." Like I say, it's only a theory, but it's strongly empirical.

But I've wandered off topic in talking about Coke. Let's get back to Frito-Lay so that I can illustrate an important point. In the middle of last year, Frito-Lay introduced another product:

Artisanal Tostito chips! Because if there's one thing that snobbish foodies love, it's mass market brands! Look, I'm not saying that it's a bad idea. What I'm saying is precisely this:

Pardoning the photo quality, that's a bag of Tostitos Recipe Black Bean and Salsa chips on the shelf. Yay for it. Only that's not where it goes. It's where this goes:

You see, that's one of the two top sellers in the Tostitos line. As you can eyeball from the picture, there's space for two facings of them, about 10 bags of chips, $35 retail, approximately. And they've sold out.

Well, of course they've sold out. This is a store that does north of half a million a week in sales, and Frito-Lay Brand Tostitos Hint of Lime tortilla chips are a very important part of those sales.

But the Recipe Black Bean and Salsa haven't sold out. That's why there's one on the shelf. Now, you business executives, try to stay with me, because this is where it gets complicated.

 Hint of Lime sells BETTER than Black Bean and Salsa. Therefore, 10 bags of Hint of Lime will sell out BEFORE 10 bags of Black Bean and Salsa. Then you will have bags of Black Bean and Salsa not selling (because no-one is buying them) and bags of Hint of Lime not selling (because there's none on the shelf.

You know what would stop this from happening? If you delisted the Black Bean and Salsa brand, and made it four facings of Hint of Lime. But you don't do that, because out of stocks aren't your problem. They're the supermarket's problem. If the supermarket would just make sure that the shelf was stocked, Frito-Lay would capture the large amount of money that people want to spend on Hint of Lime, and the much smaller amount that they want to spend on Black Bean and Salsa.

This looks like a business case problem, so we could use some magic space monkeys. Fortunately, they're on their way.

Let's imagine a universe in which there's no inflation, or, at least, very low inflation. In this nigh-unimaginable world, supermarket year-over-year same-store sales net of costs would climb very, very slowly by historic standards, because historic standards assume that sales are being carried aloft by inflation.

Now put yourself in the place of a supermarket executive. (No, not a store manager. You can't trust those guys to make these calls. They might make a mistake.) Imagine that you had to deliver increasing sales net of costs, and sales aren't likely to increase at the stores that you're responsible for. What do you do? Reduce costs! And how do you do that? By reducing labour costs!

And how do you do that? By reducing the amount of hours of labour available to the store. Here's your new target, Store manager dude!

So how does a store manager deal with this? the manager will drive sales down to meet hours. That sounds bad! How do you get away with something like that?

He doesn't need to, because we're doing it for him. Replace Hint of Lime shelf space with the Black Bean and Salsa, and, because people don't want them, fewer will sell. Santa has come through!

Oh, you're saying; but doesn't this mean that I won't be able to buy the groceries that I want, and that I'm prepared to pay for? Well, yeah, I guess that it does. Doesn't it mean that Frito-Lay is selling fewer chips? Yes, it does. On the other hand, this isn't exactly complicated, so it must be part of their plan. Doesn't it mean that the grocery store is selling less product? Again, yes, but they wouldn't be cutting labour hours if that weren't in their plan.

It does mean that there's spare money around, but fortunately you can always sock it away in a savings account.

We have a problem here, is what I'm saying, and there's all kinds of hysteresis in our culture and economy that is making it worse.

Also, whoever is paying the current Frito-Lay board needs to stop and think about what they're getting for their money. Because, seriously, dudes, this is just stupid.

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