What leaders think
MARK ESSEX, Director Public Policy, KPMG
Mark has a background in strategy and explains specific policies, policy
trends and global / mega trends to their clients and the future impacts to
their businesses and sectors.
When it comes to basics, like food, wine and clothes, the very wealthy pay experts to make choices for them. Do you think AI and robotics will democratise those services?
I observe that very wealthy people take a different approach to the problem of “How do I best match what is available in the market with what I want and what my needs are?” There are two ways we do that; In the 1920’s you would have had a grocer who knew you by name, would get goods in and keep them aside for you and you’d get a curated selection of goods. Food was a lot more expensive then, not least because that grocer’s livelihood was paid for by a smaller number of people. The alternative was the supermarket, who said “we don’t have time to invest in all of this curation energy, we are going to provide enormous amounts of choice….you can browse it without our assistance and by maximising the number of choices, we increase the probability that we offer something that you want.”
It is a different heuristic. Both achieve the goal – you come away with the thing you want. One was because your grocer, understanding the market, found the thing that was best suited to fulfil your needs and with the other model, you did that work yourself. The shop in the supermarkets takes a bit longer but you are exposed to more choices. The advantage of being exposed to more choices is that if you change your mind in terms of what you want, you discover new products whereas the grocer didn’t know about the exotic things we discovered in 70s. The supermarkets have advantages in terms of discovery, but it takes more time.
In the ‘new world’, with AI, can we have the best of both? Imagine you have AI where you say “Computer…. I am planning a dinner party, give me 5 menu selections” and your computer replies, “Yes and I see you have two vegetarians and one kosher and three drivers. Would you like matched wines as well?” Overtime, loyalty leads to greater knowledge and most people who enter into such a partnership eventually manage to educate each other on ones’ tastes and preferences.
The advantages of replacing someone with AI are enormous. The grocer comes once a week and they know what you do and don’t like. Packaging could be reusable, and all the information dispensed with, as they know about my allergies, so you don’t need that on the label. Calories and fat content could be on a QR code that I could scan if I’m interested.
Most people think I am wrong on this. Including almost every retailer I suggest this to! So much of human endeavour is invested in the idea that we need to make transactional choices in real time with the shelf in front of us. Once you take away the choice, so many things become possible around sustainability and packaging – less frequent delivery, less food waste etc. The supermarket is not gambling on whether you are going to pick it out, they are telling you what you are having. If courgettes are good this week and aubergines are in short supply, unless I am making moussaka, I don’t care so just send me what is good. My decision as to whether to adopt this model will be based on whether it works for me. Will it be more convenient, cheaper and better for the environment? The challenge and unpredictability comes from whether you can get enough of a network effect of people who say “Yes I want that” to justify the fixed costs of investing in the AI.
People talk about the digitally disenfranchised so how inclusive will this ‘new world’ be?
Until a few weeks ago I would have said that’s a real problem. It would be a bit of the tyranny of the majority if so many people moved online, there was no longer the customer base to keep the physical shops open. That wouldn’t be good for someone who does not have broadband because they’d then have no supply.
In effect, the lock-down has said that essentially the vulnerable must shield and they cannot go to the shop. There are people who thought they could cheerfully live their whole lives without ever going online who have now had to buy a device and been shown how to use it, possibly virtually. They’ve now done it! They have paid the money and overcome the barrier to learning. I don’t think all those people are going to go back to their old ways, so one of the upsides of the corona virus is a one-time boost in digital inclusion.
Technology costs money to develop so, when we look at older people now being included online; do you think this will speed up or be slowed down because of the cost and state of the economy?
I am pretty sure it is going to speed up because it is not just about older people, as those who are digitally excluded are less likely to be economically active, so it is not as if they are moving from economically active to economically inactive. Older peoples’ incomes, whatever their previous levels, ought to hold up. I’m, therefore, not sure they will be the first to be affected by any downturn and there are advantages for all sorts of agencies to get people digitally included.
It will probably require some sort of intervention. There are some people who are incentivised to make that intervention, for example local authorities. One of my ideas, which I’m thinking about for a future edition of my ‘Re-imagine Public Policy’ thinking, was – could we get the sort of door-to-door field sales force that used to ask you to change electricity provider, to knock on your door to give you a tablet and your first email and then ask the council for £100 for every person they get online? I think recruiting people to that channel is in the interests of organisations that spend a lot of money serving people face to face.
Pertaining to High Street and Hospitality businesses, how do you think they can viably be run during the unlock phase and how might they develop in the near future?
The High Street is one of the most affected parts. It is not just retail but casual dining and co-working office spaces as well. Anything that uses and sells physical space, when you have to be further apart – the maths says this is going to be harder and it may be impossible. For example, having fewer covers in a restaurant may make this restaurant unviable. You have half the covers and half the variable costs, that doesn’t mean you make half the profits as you are still paying your staff and fixed costs such as rent. There are lots of businesses looking very hard at whether they will re-open at all at this time, as their economics just don’t work.
Internationally, there are some examples of roads being shut so that restaurants can put tables across the street thereby giving the necessary spaces to distance tables. This might work better in the Mediterranean than in Britain. It is pretty difficult and the way around this is, with testing and certification. For example, if you can demonstrate your restaurant is free of disease. Complicated until the testing regime gets better.
Those places which don’t rely on intensive footfall in the same way, where the ticket prices are higher and where through-put is less concentrated, will be less affected. Places where you can serve people behind a counter, the DIY stores that already have large footprints will be less affected, so it is not going to be one size fits all. If you are on a High Street or in a shopping mall and some outlets have chosen to open and others not to open, the shopping experience is going to be quite difficult. So another thing to think about in any re-opening strategy is “Are my neighbours open?” There is no point being the one place that is open if all the coffee shops and all the surrounding infrastructure, which makes shopping a pleasant experience, isn’t there. It will be complicated and very difficult to predict.
There have been some quite mainstream projections about the High Street becoming more about ‘an experience’, how do you see them developing when we are unlocked?
There are some people who think that ‘experiential retail’ will be the saviour of the High Street, I think improving the face to face experience is the best way to differentiate a physical retailer from an online retailer. Of course, I don’t think the answer is to take us back to the high point of retail occupancy. Some retailers will be enhanced, think about flag ship stores such as those on Oxford Street, bringing some of that theatre into the store makes sense. I am not persuaded we can support that level of physical space for the purpose of showcasing the physical product. Do we need as many High Streets as we have today?
I’m not persuaded that the location for displaying products is always a shop. Some shops are no better than brightly lit warehouses, others almost don’t look like shops because the experience is so seamless. But if you want to try out a golf club, the obvious place to do it is on the golf course, if you want to try out a new camera lens the obvious place to go is a bird sanctuary. Will we have a selection of retail agents showing the product and you then scan the QR code and it’s fulfilled, and that person gets the commission?
When people say, “I love shopping”, they’re normally thinking about the farmer’s market where they go six times a year to squeeze avocados for their dinner party and aren’t thinking of the 52 times a year they go to the supermarket for staple produce. We might get a farmer’s market experience fulfilled by an app. You could do your discovery in a retail food showroom, perhaps looking a bit like a restaurant, where you might get a tasting menu, your preferences are fed into your AI meal plan and it is delivered home. If that were the case, it may help your casual dining establishments find an alternative market because they basically cook someone else’s food and it helps your retailers bring the theatre, without the pain of the storing and replenishing of the stock. Maybe we’ll see a split between the display and the fulfilment, which still gives you a reason for the physical visit.
That could fuel more of a vertical integration between casual dining and retailing. We’ve seen some of the trends, for instance an Italian restaurant where you buy some olive oil on the way out, probably because you’re in quality discernment mode and you’ve had a few glasses of wine. It’s a great time to try and sell you something a bit different. I’ve often thought about the buy and build opportunity; buy a restaurant, a good consumer data set and some food manufacturing. Could somebody with a very good algorithm ensure customisation and fulfilment and build a supermarket business with no shops?
How do you see online grocery shopping in terms of customer acquisition, experience and overall service, during this time?
This is a very personal preference about whether one values human interaction or not. For instance, if I’m lost, I’d rather have a transactional, anonymous experience with Google Maps, without giving away my failure as opposed to stopping someone and asking for directions. So I would probably prefer an equally anonymous click and collect transaction that involved me staying in my car while someone put my product in the boot for me.
The answer as to how do we solve this, is to have both preferences recorded. Think about an airport, I’m all about absolute minimum friction. When I’m standing in that security queue, I’m thinking that I know the speed of a queue is proportional to the length and inversely proportional to the square of the speed of the operator. I’m looking for the best inspector not the shortest line. I do those sums in my head. I’m all about reducing my friction, my iPad and my toiletries are already out of the bag before I get in the security queue and I see it as personal failure if the security scanner pings as I walk through it. If my needs can be satisfied, I’ll happily give away lots of information in exchange.
Different people have different imperatives; privacy, sustainability, choice, those things trade off for different consumer groups. Therefore, those businesses who have the capability to segment, basically the smartest businesses with the most technology, have got an advantage over businesses that segment in an analogue way by knowing their customer, especially if their customer can’t visit as often. That strikes me as a real threat to the analogue business.
Another example, my mobile phone service provider has not done a good job for me this lockdown, I’ve been without a phone for 8 weeks. I’ve got very cross. I’m sure their performance is similar to the others but I’m a human being and I’m going to sack them the minute my contract finishes. We can extrapolate that, and this means, we ought to see higher churn. If they are competing with each other they will all ‘win’, but churn costs. Whatever happens we’re going to see cost of churn, because people will try new things. That’s good for people who are looking for growth and bad for market dominance. Probably not good for the dominant market player.
How do you see global supply chains evolving as a result of the pandemic?
Evolving is the right word; I don’t think they’re going to change really quickly but I think there’s pressure building to change them. We have optimised our supply chains (perfectly sensible thing to do in normal times), thinking, let’s get the last penny by making that thing in some far-flung part of the world. When you think about fashion supply chains and whole loads of the summer season wardrobe arriving in Britain and filling up warehouses for a market that isn’t going to go abroad much this year, that’s the cost of having a long supply chain. Those who could switch that off or have them make winter garments instead, have got an advantage.
Every year you get that 1p margin benefit but every so often you’ll have some real pain and I just think that the memory of this pain will last for a while. In the immediate future, we might focus on resilience a bit more than that last penny of margin. That means some near-shoring and it may even mean on-shoring.
Through automation it might be possible to make things in this country that we haven’t made here for a long time. If you increase the automation involved in manufacturing, you reduce the human labour component and that means there’s less incentive to make it in a low- cost economy. A robot in a low-cost economy doesn’t cost any more than a robot in a high-cost economy.
Whether those pressures turn into real change depends on lots of other factors which are quite individual to the particular supply chain. One example is, a lot of outdoor clothing is made in places in the Far East. Even if you near-shored some of that manufacturing, a lot of the fabrics are still all made in the Far East. So even if you did move some of the supply chain, if a particular country closes and they make a key component part, it doesn’t matter where everything else is. So you have to look at individual, critical parts of the supply chain.
Take a car assembler, with the ‘just in time’ supply chain, there’s no point in opening the assembly line, if the sub-contractor in another country are still in lockdown. Then you are just paying your workers to stand around and wait for parts. It could mean much more international collaboration to keep those supply chains open or it could mean we strategically decide to move things closer to home, so we’re not reliant on international collaboration. It’s too soon to tell which model will work but those are the pressures and we’ll have to see how it develops.
Given the role China played in this, will the mindset of the consumer be affected by the geopolitics of the pandemic?
There are pressures from national leaders towards the protectionist end of international collaboration, and that rhetoric is definitely out there. We know from enough centuries of economic theory, overall that approach has a net cost to society. Trade is better for the common good. So that is a tension. Consumers now have the power to almost go around their national leaders through their buying decisions but an individual consumer’s power in the face of a manufacturer or retailer is small. However, if consumers worked in herds, and would not buy things unless there was an assurance that the supply chains were ethical, then someone would start assuring those audits and consumers would make decisions because of that assurance, a bit like Fair Trade. It’s not there yet and consumers don’t have the power but if there were a way to aggregate that consumer demand or motivate that action in herds, then that is power that is arguably bigger than national government.
Technology and home automation could help a great deal here. Think about the current debate about food imports from the United States and some of the products that people have concerns about. If you could tell your digital assistant you don’t want certain products in your grocery basket, it doesn’t matter what the tariff is.
People are herd animals and can voice strong opinions together on social media, such as Twitter, that can make a brand quite fragile.
Brands are powerful but they can be targeted by malicious actions. We know organised cyber-crime is one of the fastest growing sectors in the economy and (of course!), unregulated. It will often be ahead and may look for ways to exploit herd mentality. So not always a force for good but it is a powerful force. Brands need to pay a lot of attention to reputation. On fake news and critical thinking, that is something I don’t think we have cracked yet as a society. We’re only just figuring out how to make email work and that’s quite an old technology; we still haven’t got the etiquette quite right!
At the moment, key workers, many of them on zero hours contracts, are being applauded for delivering our groceries, taking care of our sick and elderly and working on the front line. Is there thinking that they may want a better deal when this is over?
I think they’re going to get a better deal or a lot of them will. If we think about care workers, they have not had a high level of salience (unless one has people close to them in a care home). They would call themselves the ‘Cinderella service’ compared to the NHS. It is a private activity being done within those homes. It’s not like Fire Officers, Police Officers, Civil servants also doing very difficult but much more visible jobs. Theirs is a slightly hidden activity that is absolutely, enormously important, that maybe hasn’t had the status it deserves. It may not be the career of choice for lots of people and consequently commanded a lower wage but it has now had that recognition.
Another profession is teaching, a lot of people have an enormous newfound respect for teachers and what they do. I think there are quite a few professions whose status has risen. The idea that they go back to a one-way flexibility for some people and very low wages compared to the national minimum, is difficult to imagine. It doesn’t mean every person on minimum wage is going to see a wage rise but some will, then the minute some wages rise, where labour is fungible, i.e. they can switch from a warehouse operative to become a carer, you could see vacancies in warehousing. So those wages are going to go up and so it doesn’t matter if every sector has got a reason for a pay rise, the fact that some are getting it in a labour market, means it ought to spread. I see upward pressure on wages.
At the same time, we have a short-term effect where we might see more vacancies as a result of the disruption from Covid but that will work its way through in a matter of months. In the medium-term, businesses whose operating model relies on zero hours contracts, maximum flexibility and modest amounts of hourly pay, have got a little bit of breathing space to look at that operating model and test whether it will still work.
Some sectors might need to look at pricing, clearly if we are all prepared to pay more, that gives some flexibility. If we think about productivity, one area is delivery drivers. If delivery drivers want to get paid more, we can’t have four different parcels arriving from four different carriers every day because drivers have to make more drops per route, which means probably the last mile needs to be consolidated. We might have micro hubs where effectively my town has one provider that does all the last mile deliveries, and everybody delivers to the hub. That is a technology play and there are all sorts of questions around who is responsible when for the package in terms of carriage and freight insurance. It’s complicated but the pressure is towards automation.
Given there will be a reduced airline industry, what is the knock-on effect for leisure, travel and tourism in how you see economies re- opening, and the speed with which they can get up and running?
Our chief economist thinks the travel sector as a whole is going to see a 50% contraction this year and depending on the progress of the disease, it might bounce back quite quickly next year but people aren’t likely to catch-up the holidays they have lost. So, the area under the curve has gone and gone for good. That is really difficult, and those industries have got to cut their costs as much as possible this year but not so much they can’t participate in the growth that is coming.
It has ripple effects for other sectors; no summer holiday, no bikini, no sunglasses, suntan lotion etc and clearly for in-bound tourism, potentially less eating, drinking, casual dining etc. That’s a big dent in retail. Some of the department stores in London are basically export businesses; 60% of their output goes abroad in tourists’ suitcases. Social distancing is pretty difficult on aeroplanes, breathing the same air and a bit easier on different forms of transport like buses and trains where some segregation is possible. Behaviourally, we might see people travel less often but for longer periods, particularly if there is any kind of testing or onerous restrictions or quarantine when you arrive. This may be good for hotels but not so good for airlines. I think that change in our working behaviour might reduce business travel, but I don’t think it destroys it. We haven’t yet proved we can run our businesses online; we have proved we can keep them going for a couple of months.
With conferences, there are the stage presentations, but the value is all in the networking. I think we are going to see much more of the face to face networking because that is the bit you can’t do online but possibly more broadcasting of the talks digitally. Perhaps viewed on the plane there and back instead, with conferences stretched pre and post with digital interactions maximised. With more online activity, do you put the same premium on arriving at a particular time and will you be so keen to travel business class to arrive at 9am and rested? Or do your first things digitally and not mind if you arrive later at 1pm? I don’t have answer to any of those questions as there is no data.
There is absolutely zero data, but I have a sense of where the risks might be and why. The minute that data starts to flow, I know the hypotheses I want to test!
About Mark Essex
Mark has a background in strategy. He translates political and business mega trends for KPMG’s clients and edits KPMG thought leadership on a range of subjects, as well as being an experienced keynote speaker and live broadcast panellist and presenter.