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dan murphy's: a cellars market?
Today, you’re the new CEO of Endeavour.
Endeavour includes retailer Dan Murphy’s, plus a pubs and gambling empire (350 pubs, 12,000 pokies), an own-brand wines business (Pinnacle), plus vineyards and wineries (so you’re in the agriculture business, too).
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You joined Endeavour after Woolworths spun it out to keep the super funds happy. They wanted Woollies to be rid of the evil pokies. And Dan Murphy (the man) was a convicted tax evader and had even spent time behind bars! So, all together, not the right vibes for the Fresh Food People.
So now you are on your own, but you have a problem. Apart from the cash pouring from your fleet of one-armed bandits, sales are flat. Australian wine is having a bad time thanks to the impact of Chinese export bans, consumer preference changes, overproduction, labour costs...
Now you're in the hot seat, and your board wants to know your plan to make your investors happy.
What’s it going to be?
Do you keep the current model and slash costs OR sell off parts of the business and give your investors a nasty shock?
the strategy standoff
Strategy A: Hold the Vintage
Keep the integrated model, cut costs and ride out the cycle. Own brands earn better margins and work well for other big-box retailers like Bunnings. The bottom of a downturn is a bad time to sell assets, and you are experienced in cutting costs in a capital-intensive business. You’ll profit when the cycle swings back.
On the flipside, complexity might be making it hard for your team to focus on the basics of retail. And if the downturn turns out to be permanent, shareholders' capital will be tied up in the least valuable parts of the business.
Strategy B: Retail Therapy
You’re new so you can blame the old leaders and put the emphasis back on your retail basics and customer experience. You’d sell your wineries, take the write-down, and end up with a simpler business. You'd still get good margins while suppliers still have millions of litres sitting in tanks.
But if you sell your vineyards and operations right at the bottom of the market, you’ll risk annoying your investors and you’ll lose the extra margins from vertical integration.
so, which did they choose?
Cast your vote to find out!
better luck next time, strategy b was chosen!
good job, strategy b was chosen!
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But how did this work out for Endeavor...
outcome: facilitator commentary
Matt Braithwaite-Young
Managing Partner
t +61 2 9002 3100
Endeavour just reversed its vertical integration and went back to basics.
Pouring Out for Vertical Integration
In May, new CEO Jane Hrdlicka unveiled a plan to get out of vertical integration and focus back on retail. But last week investors were slapped with $311 million in write-downs.
Endeavour is selling most of its wineries and vineyards including Chapel Hill and will also go from 7 production sites down to 3. They're really only keeping the remaining assets like Cape Mentelle because now no-one would buy them at anything near their purchase value.
Sour Grapes, Sunk Costs
Was it right to sell at the bottom? I think so, because when Endeavour was setting up to be spun off, as a customer you could feel their store experience slip as they stopped caring about wine retailing and started behaving like a manufacturer, pushing its product through its own sales channel. Which is what their strategy was.
This is a long way from where Dan Murphy started. My university job in the early 90s was working for Philip Murphy, Dan's son. Phil and Dan weren’t on speaking terms because Philip had gone out in competition with his dad.
But both Philip and Dan were great retailers and spent a lot of time on tastings and staff education. To give you an idea, at the end of a shift we were allowed to choose any bottle (at any price) from the shelves and do a blind tasting with the rest of the staff.
Customer experience, ranging and staff training like this are always important in wine retailing because most people are confused by wine and want to buy brands they’ve heard of, have had recommended, (or tried) at the store.
Under the Endeavour vertical integration, unknown own-label brands took over the store (especially in the $20 and under-pricing). Well-loved brands disappeared and staff training slowed down.
Most analysts see falling wine consumption as a structural problem that has no short-term solution. Thanks to shifting preferences and overproduction the solution is probably Euro-style subsidised vine-pulling. But that will never happen, so it will probably be a long and painful correction and you may have seen some recent media stories about long-standing vineyard owners deciding to pull out 100-year-old vines. Not an easy decision for them.
In time we’ll see if the Hrdlicka reset restores Dan Murphy’s fortunes. Hope so, because I like the idea that simplification and customer focus is the way to win back customers.
How to Avoid Bottling Your Strategy
A Turning Leaf strategy planning workshop helps your leadership team create a plan together. If you use our Scenario Planning module, your team can spot “no regrets options” and see which of your company assets are likely to give you a competitive advantage no matter what the future holds.
Our facilitators make sure your leadership is clear on the plan, aligned as one team and committed to getting results.
To learn more, call our office on +61 2 9002 3100 or visit our website.
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