Why the future belongs to the ‘convenience kings’

Wherever I go these days I see young people and old hunched over their gadgets.

Talking, texting, watching and working on the move is the new norm. The phenomenon has even given rise to a new health problem – ‘Silicon Valley Syndrome’ – which manifests itself in eye strain and neck and back pain.  And this change is here to stay – in fact, when Google Glass comes along we’ll all be wearing some form of face appendage to link us constantly to the virtual world.  Even technophobes like me should probably be considering an e-watch, or something similar.

You don’t need to be an expert to see that time-saving gadgetry is on the up. And it’s more than just time-saving, isn’t it – what it really comes down to is convenience. It’s very convenient to be able to chat on the move or check your emails or read your favourite investment newsletter.

Today, I want to show you how the never-ending quest for convenience is shaping our lives, and why in a world where we’re all squeezing so much more into our day, we demand ever better services from those we do business with.

This is important stuff. If you have any consumer-facing investments at all, you’re going to have to be on top of this phenomenon.

For punters today, convenience is key

It used to be that businesses competed on three main things: price, quality and convenience.

But increasingly convenience is taking over as the prime factor in this matrix.

I mean, just look at the biggest new kid on the block, Amazon. This week Amazon UK announced that its ‘Prime’ service (where customers get free next-day delivery on products) will now include free video streaming too. Well, I say free – but of course, customers pay for the service.

Amazon reckons that people are willing to pay a certain price in order to get convenience. I think they’re right. Nowadays for many punters next-day free delivery is a must, and certainly long gone are the days when you had to trot down to the video store for a movie. Sure, price is still an issue, but there are plenty of budget outlets from which we can buy cheap goods.

What separates Amazon from its competitors right now is convenience.

Ryanair finally sees the light

Heck, even no-frills airline Ryanair has picked up on it. These guys used to make it part of their business plan to make travel as inconvenient as possible. They figured that this way, punters would pay  for premium services like allocated seats and priority boarding. And by severely limiting carry-on luggage, Ryanair could charge passengers half a fortune for the convenience of putting their luggage in the hold.

But in the meantime the rest of the industry dropped its prices and began to compete on convenience. Ryanair lost business, and in a stunning turnaround Michael O’Leary has now changed tack. Ryanair has taken out full page ads in the press apologising for past indiscretions and promising a better service for the future.

O’Leary is not exactly known for his humility, so what’s happening here? Well, the following chart shows exactly why the Ryanair boss was forced to repent…

Easyjet leaves Ryanair on the runway

Ryanair & Easyjet share prices

Source: Digital Look

EasyJet, which consistently comes out on top in customer polls and has successfully made cheap air travel convenient, has simply left Ryanair behind.

Aldi and Lidl lead the way

So we’ve seen how convenience is key both in e-commerce and air travel. But where it really comes into its own is in the food retail sector.

Unfortunately for us, the two big winners in the UK grocery sector are privately-held companies Aldi and Lidl. Most commentators suggest that these guys are winning market share because cash-strapped Britons are going on the hunt for bargains… but to my mind, this misses the point.

You see, what Aldi and Lidl really offer is convenience. The number of product lines is massively reduced, meaning stores are smaller and more easily navigated. It’s also less confusing for the punter – there’s no need to compare a multitude of complex offers to see what the ‘real’ price of the product is. And, of course, these smaller and more focused stores help keep prices down too – and in today’s world, low prices are expected.

Tesco cottons on at last

This week Tesco CEO Philip Clarke made a volte face every bit as epic as that of Michael O’Leary. He admitted that it’s been taking customers for a ride for far too long now. He promised that Tesco will do away with all the complicated offers. He’ll bring down profit margins too… all in an effort to compete with budget retailers.

What’s more, any growth will now focus on convenience stores. Well, will you look at that… convenience again.

Tesco read the market wrong. Having done brilliantly out of up-sizing to mega-stores over the last couple of decades, it missed the shift towards convenience. And there’s going to be more pain to come too. Tesco will have to invest a lot of more in small, local stores as customers shift towards a regular online ‘large shop’, together with many smaller ‘top-up’ shops at local branches.

The great way to play this change would be to invest in Aldi and Lidl. But because they are privately held… we can’t.

As for Tesco, its share price has now suffered enough. Remember, these guys still take nearly 30p out of every UK shopper’s pound. And under CEO Phil Clarke’s guidance, I see a decent prospect for a turnaround.

Tesco’s recovery strategy looks good. So-called dark stores, where store employees pick out ordered items for customers to collect, bring its online offering to the customer, while local stores add convenience.

Could Tesco be the one to watch?

In the past my favoured play on the UK supermarket sector has been Sainsbury. And it’s been a good call. Over the last couple of years, Sainsbury has been all over Tesco. But just now I think Tesco is starting to look more interesting.

Next week I’m going to run the slide rule over Tesco’s business and we’ll look at Clarke’s new strategy in detail.

In the meantime, you may want to look at any customer-facing stocks in your portfolio. Have a good think about whether or not that business really offers the consumer convenience. Remember, price and quality is now the baseline expectation – it’s the convenience factor that really separates competitors.