Matthew Fist, Portfolio Manager

Terms such as big data, artificial intelligence and machine learning are being used more frequently by companies around the globe. While many are talking technology, in our experience, the winners will continue to be focused management teams using data to drive shareholder returns. This research insight outlines the case for the use of data and then considers what to look for, and what to avoid, when it comes to companies using technology.

Technology offers risk and opportunity

To paraphrase Mike Cannon-Brookes the CEO and co-founder of enterprise software business Atlassian, “every company is on the way to becoming a software company or being disrupted by one”. No matter how traditional the industry, management teams are now expected by investors to guard against becoming another case study in disruption alongside the taxi and camera industries. There is real pressure to keep pace with peers from a productivity and customer experience standpoint. According to a recent survey by PWC 73% of Australia’s CEO’s see the speed of technology change as a top threat to growth.

But it is not all threats. The effective use of data through technology can be one of the greatest competitive advantage in business today.

What to look for

Many companies embark upon large and small-scale technology projects to reshape the business. Some deliver tangible results, others fall into obscurity and are never talked about again. We have a clear list of the ingredients for success:

  • Continuous in nature – investment in technology is not something that can be turned on and off depending on the amount of free cash available. Ongoing investment is a part of the cost of doing business. Beware large scale projects with fixed end-dates!
  • Core focused – investment should be focused on improving what the business does. Investment in non-core areas is better outsourced to smaller, more agile companies that are not distracted by an operating business.
  • Modular – a modular approach means that a system can evolve over time to meet changing needs. Parts of a system should be able to be taken out, tested and improved without causing disruption to the operating business.
  • Use external inputs – specialist technology companies should be used to gain access to the best products on a user pays basis. Technology is not a strength for many businesses and building expertise is costly and time consuming. Why build a Customer Relationship Management (CRM) when you can use Salesforce?
  • Driven from within – The whole business must buy in to the technology. Alarm bells ring when front line staff haven’t heard of technology that head office is launching. Technology must sit in the hands of operational decisions makers to make a difference.

Bringing data back to basics

There is hardly anything high-tech about a pizza business and a fast fashion jewellery retailer. Yet both Dominos (pizza) and Lovisa (jewellery) are facing disruption from online competition. Both businesses have used data driven strategies over a long period of time to improve the core business. This focus is evident in the same store sales growth which has averaged in the high single digits for each company over the last five years.

Sources: Lovisa, Dominos, Factset, Firetrail

Lovisa – fast fashion, fast data

Lovisa is a vertically integrated global fashion jewellery retailer with ~320 stores in 10 countries. The company uses data to drive a bottom up focus on unit and store economics. Each ~50sqm store carries around ~2,500 stock keeping units (SKU’s) per store. The performance of each SKU is analysed in detail with a purpose of maximising profit in the limited foot print.

  • Basket size optimisation: Lovisa uses SKU level data to feed into store layout and bundling plans to optimise profit. Nearly 50% of ranging is altered each week! If something is working or not working in-store, Lovisa knows quickly and makes changes.
  • Supply chain management: Product innovation is crucial for any fast fashion business. Data capture enables fast feedback. Lovisa’s product development team can deliver a product to market in as little as 6 weeks. Effective use of in-store space means that only a minimum amount of warehousing space is required, and many products are shipped directly to store.

Source: Lovisa Presentations

Lovisa’s ranging and product positioning in-store is optimised to maximum basket size, gross margin and inventory.

Domino’s – innovation isn’t just hot dog crust!

Domino’s operates over 2,200 stores in 7 different countries and is the largest franchisee for the most famous pizza brand in the world. The company is known for innovation, and it is not just the hot dog crust. We believe Domino’s investment in IT systems has provided an unassailable advantage in the Australian market.

  • Pizza checker: A key driver in the Quick Service Restaurants (QSR) business is, unsurprisingly, food quality. Domino’s pizza tracker which is being rolled out across Australia currently, ensures that each pizza has the correct toppings, the correct distribution of toppings and even the right temperature! The checker takes a photo with a camera that sits above the cutting board in store and uses artificial intelligence to assess if the pizza is up to scratch.
  • New product testing: Testing new product can be expensive for retailers and gaining reliable data to predict a products likely success is also a challenging exercise. Dominos uses the app to test the profitability of new offerings without the expense of rolling out into stores.

     

Source: Dominos Presentations

Dominos innovation goes beyond hot dog crust – the live pizza checker will be rolled out across Australia during 2018 and uses software provided by third party Dragontail Systems.

Conclusion

Many companies are trumpeting their technology credentials with claims of big data and AI. While most have a strategy, we find that the true winners will be the ones with focused managed teams. The common traits of the winners include a continuous approach to technology driven within the business, rather than a big bang investment solely directed from head office. Lovisa and Dominos are two businesses that have delivered outstanding returns by using technology in their day to day operations.

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Firetrail Investments Pty Limited ABN 98 622 377 913 (‘Firetrail’), Corporate Authorised Representative (No. 1261372) of Pinnacle Investment Management Limited ABN 66 109 659 109 AFSL 322140.

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