Why Bunnings prices are so damn clever.

Bunnings is more than a gigantic hardware store. Its canyon-esque aisles whisper to you of self-reliance and ruggedness, if not quite suggesting a log cabin of your own construction then at least the sort of Barbecue a man can be proud of.

Once you’re over about 26 it seems to slowly turn into a refuge, a bit like Thoreau and his woods.There’s always a sausage sizzle out the front on weekends and it has become an Australian institution.

Nevermind that it is based on an American big-box retailing model, or that it has only been a national chain since 1994, after it bought out McEwans hardware, closed most of the outlets, then sold itself to mega conglomerate Wesfarmers.

The reason there are now around 280 Bunnings nationwide is that the store is so good. We don’t begrudge the many hours spent lost in its chasms and nooks.  It’s like that because it is cheapest. Right?

A tentative Google suggests, um, well, :

Image
At Bunnings, $34.99
Image
Online, $27.50!

There are three big tricks that Bunnings uses to reinforce the widely-held belief they are so cheap.

1. They often choose prices that to the first glance look odd. For example, they sell hammers for $8.45, $37.97, and $62. Apparently the theory is a range of irregular and specific numbers make customers think the price has been ratcheted down as low as it possibly can be.

Rather than having all the prices in the format $X9.99, the prices imply Bunnings takes the trouble to price everything at its minimum.

2. Using people from the stores in the ads. (I thought they might be actors but the internet says no. There are 33,000 staff so I guess some must be able to pass a screen test).

The point is, this is signalling. Bunnings has ads on during high-rating shows – they are not stinting on their marketing budget.

But if they deploy great cinematography and a highly polished vibe, like you might see in a car ad, it creates the impression they are wasting money on ads. Instead the ads look cheap and cheerful. The same motivation is behind The Good Guys using their staff in ads even though they too are a heavy-hitting national chain. (Baker’s Delight use their staff in ads to signal something else – that the bread is made by real people, not a factory.)

The signalling effect even flows through to the way stores are designed. Here’s Cotsco founder Jim Sinegal talking about his store’s budget vibe.

“We try to create an image of a warehouse type of an environment … I once joked it costs a lot of money to make these places look cheap. But we spend a lot of time and energy in trying to create that image.

3. “Lowest Prices guaranteed” / “Lowest Prices are just the beginning.”

This slogan seems to have moved away from using the word “guarantee” recently. But the claim is still a strong one. The only way Bunnings can get away with it is their price-beat guarantee: “Find a lower advertised price and we’ll beat it by 10 per cent.”

That is an extremely clever business plan. While anyone might think they could mock up an ad that offers something very cheaply and trick Bunnings into giving them a deal, the reality is the store would happily accept being tricked to get the benefits of such an offer. They would probably rather more people took them up on the price-beat guarantee.

Let me explain:

The effect of the price-beating offer is to permit price discrimination. They can sell things at a higher price to people that don’t bother shopping around, and at a lower price to those that care about price. That means they charge different prices to different types of people, just like a hotel or airline does, maximising yield.

But the real killer of a price guarantee is the way it discourages other chains from discounting and promoting. If I run Think Engine Hardware, why would I put an ad in the paper telling everyone Cordless Drills – Now 30 per cent Off!? I know customers can and will still go to Bunnings. Offering to beat advertised prices is very close to being anti-competitive behaviour, as it can cause all firms to raise prices.

From the great knowledge fount:

“While a store with price matching guarantees has no fear of losing customers to rivals’ price cuts, it has every incentive to raise its own price to charge a higher price to its loyal customers. It is an anti-competitive tactic that warns competitors not to attempt to steal market share by undercutting prices.”

So, Bunnings is like any other retail operation, playing clever psychological games to disguise healthy mark-ups.

It had earnings of $900 million on revenue of $7.7 billion last year, and contributed 26 per cent of Wesfarmers earnings before tax, etc. Wesfarmers is currently working on “conversion of the property pipeline into trading locations at a higher rate than historically achieved” in order to help Bunnings contribute even more to its annual profits, which were, last year $2.2 billion.

Time for a Mazdalanche!

In Nauru, half the cars on the roads are Hilux Surfs – a kind of old 4×4 sold in Japan. In New Zealand, half the cars are Nissan Sunny’s – a kind of car sold in Japan. I have driven both and they have been some of the happiest times of my life.

The prices for these cars are terrific. The  reason why starts far, far away..

Japan has very strong vehicle quality rules. Cars have to be inspected after the first three years, then every two years, and every year after they are ten years old. The inspections are not cheap, running up to $2500. This means Japanese consumers like to get rid of old cars even though they still run well, to buy new cars. The Japanese government wants to encourage that because Mitsubishi, Nissan, Toyota and Suzuki are all Japanese.

Japan ends up with a lot of used cars and exports them very cheaply.

Japan drives on the left, so there are not too many markets they can sell second-hand cars to. NZ and Nauru – both countries without car manufacturing – snap them up.

But, unlike a bunch of other smart countries, Australia doesn’t permit the import of normal second-hand Japanese cars!

Now we are losing Ford, Holden and Toyota, we no longer need this consumer-hurting import limitation. It is time to take advantage of Japan’s crazy policy. 

For comparison. Here’s some options from the Australian website carsales.com.au that are indicative of price range for a 2007 Maxda CX-7

Screen Shot 2014-02-22 at 9.28.37 pm

Here are the results from japan-partner.com.

Screen Shot 2014-02-22 at 9.27.58 pm

Big savings. Thousands per car.  Shipping costs can be very reasonable, in the region of $2000.

As our car industry fades into nothingness, this can be our compensation.

The Productivity Commission’s recent report on the car industry recommended getting rid of the limits on importing Japanese cars, so it’s a possibility it could happen soon.

The only reason to act cool on the issue is that I bet DFAT would like it too as a handy bargaining chip.

The Japanese government would probably be delighted if we started bidding up the prices of this category of export. All those Japanese consumers would find their second hand cars were worth a bit more. Perhaps we could even use it to encourage them to cut out their “scientific” whaling program?

I Love a Services Country; a Land of Sweeping, and Flying Planes

There’s an idea out there, that Australia is built on primary industries and manufacturing. That we are first and foremost a country that “makes things.” And that we should be proud of it.

This view of history must not stand.

This is a country that depends on services. Always has, always will.

People who go on and on about how we are about to turn into a nation of burger-flippers and/or door openers reveal themselves to have bugger-all understanding of the true history of Australia.

Services, mate. Since day dot. Each one building on the last, to make this great nation you see before you:

 

1. Pre- European Australia.

Story-telling services, decorating services, etc. [no photos available, sorry]

2. Cpt J.Cook

Captain Cook
Exploration and mapping consultant.

 3. Arthur Phillip

Arthur Phillip
Colony commencement consultant.

4. Burke and Wills.

Burke and Wills
Checking out what’s up there and failing to come back consultants

5. Governor Macquarie:  

Governor Lachlan Macquarie
Governance consultant with a sideline in financial services innovation.

6. Banjo Patterson

Banjo Paterson
Poetry and myth-making consultant.

 7. The Man From Snowy River

The man from Snowy River
Horse retrieval consultant. 

8. Ned Kelly

Ned Kelly
Funds liberation consultant / flamboyant headwear designer. 

9. Simpson and his Donkey. 

Simpson and his Donkey
Casualty retrieval consultant.

10. Royal Flying Doctors Service. 

Royal Flying Doctor's Service
They don’t call it the Royal Flying Doctors Manufacturing Industry.

11. Don Bradman.

Sir Donald Bradman
English despair and dismay consultant.

 12.  John Bradfield. 

John Bradfield
Water crossing/tourism icon construction consultant. 

13. Sidney Myer

Sidney Myer
Retail services guru

14. Dennis Lillee. 

Dennis Lillee
Moustache consultant with a sideline in high-speed leather propulsion services

15. Road train drivers.

Truckies
Logistics consultants

 16. Bob Hawke.

Bob Hawke
Worker organisation/national leadership specialist

17. Professor Peter Doherty

Peter Doherty
Cure guru

18. Cate Blanchett

Cate Blanchett
Pretending to be someone else professional

This nation is not just about things.

It’s about people and the things they do for one another. If the Colt from Old Regret had got away and the owner went and bought another one, while the Man from Snowy River worked in a factory, it wouldn’t be much of a story, would it?

Next time you hear a politician say they don’t want to live in a country that doesn’t make things, remember that living in a country that didn’t do things would be even worse.

Get rid of the Winter Olympics

The Winter Olympics should be abandoned. Take away its rings and its eternal flame. It is polluting the concept of Olympics – Sport for All. Only 26 of the 200-something countries in the world got on the medal table.

Image

The games are so hopelessly skewed to the richer and/or more snowy bits of the world that most countries cannot compete.

Three African countries were able to send representatives to Sochi. That’s not so bad, you may think, til you dig a bit deeper and find they are “representatives” in name only.

Zimbabwe sent 20 year old Luke Steyn, who was coming 59th in the Slalom after his first run, and it only got worse from there, ending in a DNF. He has lived in Switzerland for the last 18 years.

Morocco sent two Alpine skiers, who performed perfectly credibly.

Kenzo Tazi: “When her family moved from London, England to the French Alps in 2007, she was able to begin skiing competitively.” and

Adam Lamhamedi: “I was born in Quebec and I grew up there, and I went through the Skibec alpine system. I’m just like any other kid from Charlesbourg. But I am lucky enough to have a Moroccan father.”

Togo sent a skier who had long competed for France, Mathilde Amivi PetitJean

“In May 2013 she was contacted by the Togolese Skiing Federation via her Facebook page with an offer to compete for the west African nation. “If I was told I would one day compete at the Olympic Games, I would never have believed it would be in the colours of Togo.” 

The second Togo athlete is 18 year old Italian Alessia Afi DiPol. “My father has a factory in Togo that specialises in sports clothes. He has a feeling for the nation, and I have an opportunity to run for Togo, and I am proud of this.”

Yep.

There is not much Africa in the Winter Olympics. A billion people without a medal. Here’s a graph that compares that result with Norway (population 5 million.)

Image

Norway won 26 medals, coming third on the medal tally, behind the hosts, Russia, with 33, and the US, with 28.

Its Scandinavian comrades were not too far behind. Sweden snagged 15. Finland got five. 

Here’s another way of looking at how narrowly held Winter Olympic glory is. You could go through those four adjacent countries – that won 27 per cent of the total medals – in one day, stopping for petrol maybe once (and getting caught in some Swedish roadworks apparently).

Image

Now, the Summer Olympics is not fair either. Rich countries win most of the medals. But poor countries at least have a chance. India wins a medal or two. So do Brazil, Iran and Indonesia. And Kenya. Especially Kenya.

Image

In 2012, There were 86 countries that medalled in the summer Olympics, or as I call them, the real Olympics. All continents were represented. That’s a result worthy of the five Olympic rings.

But, but, but… winter?

No.

Countries are on the equator don’t really get a winter. Winter, snow, ice and the Winter Olympics along with them, are geographically specialised concepts in a way the Summer Olympics isn’t. You can run 100 metres at minus 10 degrees or plus 40.

Not to mention the equipment. I bet you ten dong that people in Vietnam look at skis, snowboards and ice-skates with the sort of skepticism I reserve for bobsleds and skeletons. I just googled and there is nowhere in Nigeria, Africa’s most populous country, to buy a snowboard. The Winter Olympics are just a fantasy realm of preposterousness for billions of people. 

I feel qualified to say all this because I love winter sports. But I love AFL too, and I’m not campaigning for a special Olympics for sports played inside ovals. I think the Olympics should be about giving as many people as possible a chance.

Sports being excluded from the summer olympics for being insufficiently popular include baseball, with 35 million global participants. They almost cut wrestling out too. Meanwhile, the winter Olympics carries on with Biathlon and four versions of ski racing: Downhill, Super G, Giant Slalom and Slalom. 

Amazed? I’ll tell you why we get a winter Olympics despite most of the world’s population living near the equator.  Most of the world’s wealth is located far from the equator.

Is that right?

The Olympics is a special thing. An inclusive thing. The Olympic Charter says:

“The goal of Olympism is to place sport at the service of the harmonious development of man, with a view to promoting a peaceful society concerned with the preservation of human dignity.”

It’s a shame the populations of Africa and South America are excluded from that every four years.

We talked about bad brand extensions the other day. The winter Olympics is one. They drag down what the Olympics are supposed to be all about. 

I bet Norwegians and Canadians are getting all upset round about now. Don’t worry. I do believe you should still be able to put your tuques on for a big winter sports party every four years. But you should not be allowed to call it the Olympics.

Rapid growth of WhatsApp should actually make Facebook frightened.

Ever since Facebook swapped the GDP of a mid-sized nation for a simple messaging service, the chart below is getting a lot of attention.  But I fear its main point is being missed.

Screen Shot 2014-02-24 at 8.53.57 am

Facebook got so excited by this sort of user growth that it spent $US19 billion buying WhatsApp. But it should be cowering.

Facebook’s biggest single virtue now, is that it’s the social network your friends are on. Facebook’s entire $175 billion market value hinges on the idea that this “network effect” is enough to lock you in and make sure you never leave. Is it?

The first person to install WhatsApp had no way to use it. The second person to install it could only contact the first one. The thing had no real value until a decent-sized circle of your contacts was on it. Despite this, despite the presence of other perfectly good options, like email, SMS, Viber, and despite its terrible IT-developer’s-idea-of-a-pun name, the application has grown faster than anything the web has ever seen.

WhatsApp’s growth shows people are now damn comfortable in the app store. Nobody is worried about hitting install, checking something out, and deleting it later. That represents an important – but predictable – change in consumer behaviour. And a major threat to the apps we already have installed.

Facebook perhaps recognises it could be gazumped. It is trying to make our commitment to Facebook a virtue, with, for example, recent videos reflecting our history on Facebook, etc. But if its major selling point is that it stores your old memories, will that be enough? If we all keep our Facebook – like we all keep our old school photos – but use something else for day-to-day use, then Facebook loses.

Screen Shot 2014-02-24 at 10.34.09 am

There’s another even bigger point to make here about the lesson of WhatsApp’s incredible growth.

When I wrote about Facebook’s acquisition of WhatsApp a few days ago I mainly just goggled at the incredible price. $US19 billion in cash and stock, or about $A21 billion. Since then I have had a very constructive argument with someone I respect greatly in the tech space, about what the point of the acquisition is.

I argued you could have lots of customers but no good way to monetise them. Twitter was a really good example, I said. The old-school capital market guys that floated facebook and were currently propping up their shareprice would, I reasoned, have to learn the hard way to not rely on their old-world model that says a successful business is one with lots of customers.

But I got an eye-opener in response.

“Don’t get me wrong, I wouldn’t buy FB shares at the current frothy prices either. Nor would I pay $19 Billion dollars for WhatApp. But the long-term play is a little more interesting than “monetise internet service”. The aim as I read it is to eliminate the existing rent-seeking middlemen (in this case, telcos) by undercutting their service. Then, once you have sufficient user lock-in and network effects, you can *become* the rent-seeking middleman, but at an unprecedented global scale! Not exactly a glorious ambition, but it may just work out that way.”

That made me think about the way I look at the internet.

There is one company that has created “sufficient user lock-in and network effects” to be considered the backbone of the internet. Google. Revenue of $15 billion and profit of $3 billion in one three-month period in 2013. Google is to the internet what the state-owned telecommunications companies were to the early days of the communication by wire. A behemoth.

Screen Shot 2014-02-24 at 10.36.04 am

The question then becomes, is Google a model for the rest of the net? Can Facebook et al do that too? Or is Google an outlier?

The telcos became rent-seeking middlemen by owning a network that could not be replicated. They had physical wires that they controlled. Competitors needed to make huge investments to beat them. There’s an analogy to Google there.

Google’s search results are so good not just because of its smart Page Rank algorithm, but because of its expensive web-crawling. Its competitors, like DuckDuckGo, use third-party results in their search results, because web crawling is expensive to do right:

“While our indexes are getting bigger, we do not expect to be wholly independent from third-parties. Bing and Google each spend hundreds of millions of dollars a year crawling and indexing the deep Web. It costs so much that even big companies like Yahoo and Ask are giving up general crawling and indexing. Therefore, it seems silly to compete on crawling and, besides, we do not have the money to do so. Instead, we’ve focused on building a better search engine by concentrating on what we think are long-term value-adds.”

Google’s core products, search and ads, are protected by both being smarter than the competitors, and expensive to replicate. They look safe.

But its various add-ons, like Maps, Gmail, Youtube and the play store could in theory be beaten. It has happened before. See: 10 Google services that failed and why.

Facebook’s offering is not necessarily expensive to replicate.  Open source social networks are out there. Market leaders diaspora and Movim both make privacy a big feature. Who knows what the spark will be that sets them, or something like them, on the path to exponential growth.

Goldman Sachs and JP Morgan take note. The Google model may prove to be a once-off. The internet will continue provide a lot of terrific services, but will not necessarily continue to provide a lot of money. The economic rule that price equals marginal cost of production in the absence of market power has not broken. And marginal costs online are often very close to zero.

Just to emphasise this point, I’d like to finish this piece by introducing you to an app called Telegram. It does everything WhatsApp does, but cheaper. There are no ads. There are no fees. And it is run by a not-for-profit.

Add me when you join. :)

 

Why I’m not a union member

Is it because I’m disgusted at union corruption and waste?

No?

Is it perhaps because I harbour a distaste for collective action?

No?

Is it a lot simpler than that? Is it simply that being a union member seems awfully expensive?

I was a union member once, but not any more. My last job I made between $70,000 and $80,000. The union fees at the Media Arts and Entertainment Alliance are $12.65 a week, just under 1 per cent of wages, at $658 a year.

If I had to make a list of things I spend more than $658 a year on, it’s a) short and b) full of things that are extremely important to me.

1. rent.

2. food.

3. holidays.

4. charitable pursuits.

5. coffee.

A former colleague at the Fin Review once tried to convince me to join. (Yes, there are union members at the Fin …at least in the Melbourne bureau…). He compared union membership to a gym membership  He was trying to make it sound reasonable, but gym membership is exactly the sort of expense I try to avoid.

Value is subjective, and it could be I just don’t understand the merits of membership. But if so the union hasn’t done enough to communicate it to me. And I’m clearly not alone.

Screen Shot 2014-02-21 at 12.07.02 pm

Footy clubs have much the same incentives as unions to maximise their memberships, and they are creative about it. You can get all sorts of packages that meet your needs.

Geelong offers a membership for $50 and one for $407, with a swathe of options in between.

Collingwood is even more creative, with pet memberships.

Screen Shot 2014-02-21 at 12.21.58 pm

I’m not aware of unions doing the same, even as membership in Australia has collapsed.

I am not ideologically opposed to unions. I was a member of the National Union of Workers while I was a student doing telephone market research at DBM consultants. We had great pay and conditions and I know for sure that was not a coincidence.

I might even join a union in the future. But the value proposition has to be there for me. That means I need to feel good about the price, what I get for my money, and about the union in question.

At the moment news about the amazing places nurses unions fees ended up after they were paid to the Health Services Union makes me wonder if unions are being run as cleanly as they should be. That makes me even more reluctant to part with my hard-earned.

A fair start for unions might be to choose to submit themselves to the full responsibilities of companies. The recent ACTU study into union governance looks, to me, about as fierce as a wet lettuce.

Unions are going to face a lot more bad PR under the current government.

It might be smart for the movement to outflank the criticism, and commit to the highest standard of oversight and probity, before Tony Abbott runs them through with the rusty blade of his Royal Commission into union corruption. If they can prove they are protecting the union dues of existing members at the same time they think about offering value to potential members, they might even win a few new ones.

The value of Whatsapp, in perspective for Australia

WhatsApp will be bought by Facebook for $19 billion. That would make it the 14th most valuable company on the Australian Stock Exchange, more valuable than Fortescue Metals, more than Macquarie Group, two thirds as valuable as Rio Tinto.

Image

The deal puts the $1 billion Facebook paid to buy Instagram firmly in the category of forgotten history.

Whatsapp, for those of you not in the know, is just another way to send text messages.

Whatsapp

It has been downloaded over 100 million times, but it is free for the first year, doesn’t sell ads and costs $0.99 a year thereafter. So yes, it is a graveyard for investors capital.

The internet economy is great for consumers. But the expected monetisation of all this time spent is just never going to happen in the way companies seem to believe. Time spent online is not like time spent walking around a mall.