The real-world consequences of not transforming

Disruption Theory is not just theory

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Today, a tale of missed opportunity through short-sightedness and a story of a late starter on the digital journey which is most likely too little too late.

Read on.


Thomas Cook and the impact of not transforming

From the Sunday Times:

“Thomas Cook bosses will hold a crunch meeting today as the fate of the world’s oldest travel company hangs in the balance.

The board, led by chief executive Peter Fankhauser, has been battling to secure an extra £200m of rescue funding to keep the tour operator flying. It made a last-ditch appeal for a state bailout this weekend after its lenders threatened to pull out of a proposed rescue deal, but ministers are believed to be wary of propping it up.”

The outcome of that meeting I guess you already know is that Thomas Cook has is in administration, the worlds' first travel company being the victim of pressure from competitors with very low to no marginal costs.

Thomas Cook is additionally the victim of its decision not to transform into an agile, Internet-savvy business with consequences that run into thousands of job losses around the world and an estimates 150000 British holiday makes stranded unless the UK government can step into charter planes for the rescue, at an estimated cost of £100m.

Founded 178 years ago, Thomas Cook is a giant in the tourism industry, with a breakdown of its sales as 67.8% for flights, holidays, accommodation and insurance and 32.2% in airline services. At the end of September 2018, they owned 186 hotels and had a fleet of 100 aircraft. Its sales breakdown is split between the UK at 24% and the rest of Europe at 66% with Germany alone counting for 37.8%.

As you are no doubt acutely aware, the Caribbean is one of the group's leading destinations and many companies in the region are exposed to the risk of Thomas Cook's impending failure.

Thomas Cook failed to seriously take its business in the direction of digital, instead strategically opting to open and run 563 high-street sales shops, financing much of the expansion in debt that was in-part attractive due to historically low-interest rates in Europe, but servicing that debt, now at around £1.7bn, is expensive, even if it is relatively low, running at around £150m/year.

While the world was transforming digitally, Thomas Cook took the opposite route and is now paying the price with an impending doom unless they can finance their way out of the current hole.

Unfortunately, not not the first time for the group, in 2011, they found themselves in £1bn of debt with a restructuring plan and strategic plan was drawn up to transform and save the group. Fast-forward to 2019, and they are still having difficulties with their transformation.

The fault lies at the very top of the organisation, as is always the case in Digital Transformation. If the top of the tree doesn't get it or doesn't put in place the structure and culture to transform, no amount of effort will allow an organisation to implement and profit from digital technology.

Peter Fankhauser was brought on board in 2001 as CEO promising to use his experience in transforming companies:

"The reality was I knew a lot about transformation, a lot about restoring brands and transforming to the web."

Those words look like puff today, and a look at the board structure reveals not a single manager specialised or experienced in digital.


A failed merger and the digital opportunity

Sainsbury's, the UK supermarket giant, was unable to obtain regulators' accord for a merger with Asda, owned by the US mega-giant Walmart, and as a consequence has decided that now is the time to transform digitally.

Like most Supermarket companies, the pressure to sustain growth in the originally non-digital world has forced them to seek out multiple revenue streams. As such, most of today's supermarkets are no longer distribution and retail businesses, they are that of course, but they are also providers of fuel, insurance, banking and luckily for them, collectors of data.

Since the dot-com era, supermarkets were one of the first businesses to understand the value of data collection and deriving value from it. They quickly implemented loyalty cards and tied offers to the sustained use of them when purchasing groceries. Loyalty cards worked exceptionally well in the beginning, and it is hard to find a supermarket today that doesn't have some form of loyalty scheme.

Like most successful ideas, there are usually many people that have the same idea at around the same time, and as a result, multiple loyalty schemes appeared around that period. Again, like always, various differing implementations lead to a consolidation opportunity, which is precisely what happened when Nectar was founded in 2002 with a value proposition of centralisation of loyalty schemes and hence increased value to users by saving on multiple purchases in many locations simultaneously.

Nectar currently boasts 14 partner companies and over 400 online retailers amongst its offer and was initially conceived to replace four loyalty schemes, of which Sainsbury's was one. In 2018 Sainsbury's purchased Nectar seeing an opportunity to capitalise on the detailed data collection loyalty systems afford.

The problem for Sainsbury's is two-fold; the debt is crippling their opportunity to invest in digital transformation in a meaningful way that stymies reduced margins from its food distribution business. Bear in mind that food counts for 98.2% of its earnings, and like Thomas Cook also stuck in a bricks-and-mortar mindset, owns around 1400 retail locations with high fixed costs.

It is rumoured to sell off its banking arm to help finance digital initiatives, but that only counts for less than 2% of sales and is unlikely to fund a wholesale and profound transformation required to turn the ship around. Most suggest the strategy will be to transform slowly; however, it is unclear how much time is left.


Epilogue

These once giants of the retail industry, have found themselves in deep trouble in a digital world that they are finding challenging to navigate. With one falling in to administration today, with real-world consequences for its employees and customers, the other being pinched on both sides (from more nimble and digital competition and from users increasingly using digital-first services) it's hard to wonder why they didn't understand the inevitability of digital technology and disruption theory on their businesses.

Unfortunately, Thomas Cook and Sainsbury's are not the first, and they won't be the last.


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