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Harnessing Dynamic Capabilities

Unearthing Resilience for Growth

Jason Pohl
Jason Pohl

The macroeconomic landscape faces escalating costs, high inflation, low employment, and dwindling consumer demand. However, investors must focus on business resilience, competitiveness, and strategic planning, instead of being swayed by these fleeting macroeconomic trends. Our trip to the US and the UK offered valuable insights into the microeconomic climate, spanning travel, housing, education, manufacturing, and consumer sectors. While industries are exposed to similar trends in business cycles, yet with diverse rhythms, those harnessing Dynamic Capabilities will unearth resilience capabilities that will accelerate future growth. 

We recently journeyed abroad, delving into the complexities of industries as diverse as travel, housing, education, manufacturing, and retail. In our travels across the US and UK, we noticed varying challenges, including evolving regulatory frameworks, changing competitive landscapes, and an unexpected resilience in consumer health.

As the year of normalisation progresses, many companies are proactively cutting unnecessary expenditures, discarding unprofitable ventures, targeting high-value customers, establishing efficient operations, and honing a clear value proposition to bolster competitive strength.

Businesses that previously rode the wave of favourable macro-environmental factors are now experiencing contraction phases. To counteract this, they are reducing debt, sharpening their value propositions, and focusing on their most profitable customers.

The timing of these contractions varies across sectors. While the travel industry experienced this transition two years ago, the housing sector appears on the tail-end of its cycle, while retailers and consumer-related industries are now in the throes of transformation.

Despite where they currently stand in the cycle, companies are preparing for future success. They proactively ensure resilience, customer focus, and growth acceleration. Prepare for the worst, be resilient, and focus on the customer to accelerate growth in the coming year. 

Building Resilience: Streamlining Operations and Reinforcing Value

At the core, the ability to change and operational efficiency are pivotal to business resilience. Streamlining operations enhances productivity while streamlining costs. By continuously refining processes, businesses maintain agility and quickly adapt to market changes.

By boosting overall efficiency and productivity, these measures position businesses for market share gains and expedited growth in upcoming years once the macro-environmental factors stabilise, creating a competitive buffer. 

Flight Center (ASX: FLT) has streamlined operations amid the pandemic, reducing physical stores and staff numbers significantly. This focus on cost efficiency and productivity has fortified their competitive stance, paving the way for client growth and expected margin expansion.

Companies are prioritising operational efficiency and resource utilisation to navigate economic uncertainties. By proactively preparing for an economic downturn, businesses are positioning their organisations to weather any storms.

Implementing Enterprise Resource Planning (ERP) systems and addressing procurement challenges are among the initiatives to improve outcomes. Companies are reassessing their capital projects and considering workforce reductions if necessary, all in the name of operational optimisation. 

Domino’s UK (LSE: DOM) is currently working on their ERP system, aimed at supply chain benefits and efficiencies. On the other hand, Domino's AU (ASX: DMP) closed Denmark and unprofitable corporate stores to reduce costs and enhance profitability.

Challenges within supply chains are gradually ameliorating, and companies are trying to address these issues to achieve normalisation and spur margin expansion. 

Freight rates are decreasing, though they remain higher than 2019 levels. Additionally, the prices of raw materials are starting to normalise, sometimes even showing deflation. Nonetheless, most businesses grapple with labour issues, including availability and wage inflation.

Companies are reaping the benefits of these positive shifts slowly. Adjustments to inventory levels and operations are releasing working capital and mitigating lingering accounting effects. In this journey, businesses stay dedicated to delivering value to their customers, strengthening resilience, and securing market positions amidst economic uncertainties. 

FeverTree (LSE: FEVR) is experiencing the gradual unwinding of significant supply chain issues. Over the coming year, as the company releases inventory, the effects of these accounting issues, particularly energy and glass costs, will gradually subside, driving margin expansion. 

Customer-Centricity: Nurturing Loyalty and Targeted Marketing

Companies are honing their customer-centric strategies to guarantee long-term competitive success. By focusing on their most lucrative customers and core demographics, they enhance customer experience and generate robust free cash flows.

St James Place (LSE: SJP) has rationalised its technology stack, implementing a new Customer Relationship Management (CRM) system to improve engagement while achieving seamless end-to-end operations to deliver better service.

The most noticeable shift toward customer-centricity is that companies, broadly across sectors, are now focusing on strategies to increase product value and service quality. The previous approach of growth for growth's sake has been replaced by a more targeted approach.

Zalando (FSE: ZAL) is placing a greater emphasis on profitable growth and evaluating customer segments to ensure rational and profitable expansion. Whereas, Take Two (private) focuses on long-haul travel customers with more significant service requirements, prioritising service quality to drive value.

Various tools and tactics are being utilised to enhance customer experiences and foster loyalty. These include innovative product development, the implementation of customer loyalty platforms, targeted rebates, and profitable value-oriented offerings.

Loyalty programs have proven beneficial, allowing businesses to minimise advertising costs while maintaining high gross margins and low SG&A expenses. Those with a deeper understanding of their customers manage the reduced market demand more effectively.

William Sonoma (NYSE: WSM) generates 3-4x more profit from loyalty members. In contrast, Ulta Beauty (NASDAQ: ULTA) with 41m loyalty members are 2-3x more profitable, and Dominos US (NYSE: DPZ) 30m active loyalty members deliver improved engagement and order frequency. 

Innovation plays a crucial role in this process. While ensuring greater value is provided to a more specific set of customers, companies seek to drive sustained growth and double down on their competitive advantage in the market. Again, identifying customers' pain points is driving renewed product innovation, and these benefits will be enjoyed in the coming years.  

Rightmove (LSE: RMV) prioritises product development to provide increased value to agents and enhance the customer experience, expecting to reap the benefits in the upcoming year. Apple (NYSE: AAPL) anticipates the release of their VR headset to drive growth in developed markets, diversifying away from the iPhone.

Strategic Positioning: A Matter of Luxury or Value

A concise and coherent value proposition is vital in the current environment. Businesses that effectively convey unique selling points distinguish themselves from rivals, build brand recognition, and attract and retain customers - fuelling growth.

Strategic positioning plays a crucial role in today's market. Affluent consumers continue to make purchases, albeit less frequently, while those with reduced purchasing power lean towards value-oriented offerings. Companies must carefully manage this process to retain existing customers and attract new ones. 

Consumer behaviour showcases variation due to country-specific macroeconomic impacts. Notably, US consumers seem less affected by rising interest rates, thanks to the benefits of 30-year mortgages, whereas the UK appears better poised than Australia. Defining a clear value proposition becomes imperative for companies in such a landscape.

Companies that neglect to clearly define their segment, including mid-tier ones, expose themselves to changing consumer trends. Conversely, firms operating in the premium or mid-market segments now utilise value strategies to maintain key customer relationships and volume efficiencies.

James Hardie (ASX: JHX) and Louisiana Pacific (NYSE: LP) have adopted value strategies, reintroducing lower-priced lines like Cemplank, Prevail, and Builder Series, targeting more prominent home builders with price reductions up to 30%.

The successful navigation of this process, aligning with consumer trends, opens doors to opportunities at the intersection of luxury and affordability. This delicate balance allows businesses to manage behaviours effectively and ensure sustainable success. This trend holds even if there's a slight adjustment in frequency for luxury players.

Ralph Lauren (NYSE: RL) has effectively severed its discount strategy, better aligning with its brand value. By concentrating on the luxury segment targeting affluent consumers while minimising discounting, they actively invest in brand storytelling to reclaim their relevance.

For companies experiencing a lower frequency of purchases, implementing value-oriented options may be a solution to capture volume. However, missteps could be disastrous, requiring careful management to retain existing customers and attract new ones. The strategic positioning of Luxury or Value is critical in the current market environment to align with consumer trends and secure sustainable success.

Domino's AU (ASX: DMP), positioned as a value offering, suffered significant consequences due to pricing missteps and failure to recognise the value perception of delivery versus carryout. The company's exposure to high purchase volume amplified the impact of changing consumer preferences.

Power Dynamics: A Changing Landscape

The changing landscape has triggered a power struggle among stakeholders in the value chain (consumers, employees, suppliers, distributors, etc.), which is squarely focused on who's delivering value. 

The ongoing tug-of-war incites changes in business models, drives industry consolidation, and other competitive measures, all aimed at preserving margins and fostering growth. The changing power dynamics focus on the economics of consumer value - who’s acted responsibly or who has reached the limits of their pricing power.

ARB Corp (ASX: ARB) and Restoration Hardware (NYSE: RH) have acknowledged limits to their pricing power. While ARB continues to benefit from a strong customer order book, RH noted that the gauging of the customer is now coming back on them. 

An observable shift is seen with more profitable brands moving towards direct-to-consumer models and entering the retail sector. While distributors grapple with challenges, retailers are thriving, and increasingly these consumer-facing brands are moving vertically.

American Airlines (NASDAQ: AAL) is pursuing a direct-to-consumer (DTC) strategy in response to evolving booking platforms. While Constellation Brands (NYSE: STZ) is battling declining demand through DTC models like wine or spirits clubs.

We no longer see growth for growth's sake, with the economic pie being redistributed between stakeholders. While industry consolidation is on the rise, changes in the economic split can be expected. 

Gamma Communications (LSE: Gamma) observed channel partner consolidation, while Rightmove (LSE: RMV) noted agent consolidation, which only enhances supplier power—conversely, Specialty Building Products (private) highlighted dealer consolidation, which has already impacted exclusivity arrangements.

However, a lack of consolidation in fragmented industries can create opportunities, as it may benefit those willing and capable of focusing on alternative strategies to the market. 

ARB Corp (ASX: ARB) is in its infancy to leverage a DTC strategy in the US (similar to their successes in the Australian market). Contrarily, William Sonoma (NYSE: WSM) has deployed a B2B strategy that leverages design, manufacturing and distribution capabilities. 

In terms of employment, various sectors face distinct employment challenges. For instance, technology sectors have over-hired, while travel industries are working to re-attract employees who've switched sectors. In contrast, industries like manufacturing are struggling to find necessary skilled labour.

CWT (private) faced labour challenges due to staff attrition and industry personnel moving away from travel sectors during shutdowns. In comparison, PWR Cooling (ASX: PWH) faces challenges finding skilled labour and has initiated grassroots talent development initiatives.

Interestingly, a shift in the balance of power towards the employer seems imminent, signalling potential setbacks for remote working. Once a significant focus, remote work isn't a top priority anymore. Many companies now require employees to spend 3 or 4 days in the office, with attendance exceeding expectations.

Turning the Tide: Securing Competitive Excellence

In the year of normalisation, it's crucial to remember that the temporary (pandemic) surges in business performance are the outlier, and comparing performance to 2019 levels provides a better understanding of a company's health.

While this year might see flat or declining growth for most, preparing for potential downturns will differentiate quality businesses from the rest. Strategic decisions made this year will lay the foundation for rapid growth in 2024 and beyond.

The insights from the US and UK underscore the importance of a company-specific perspective. Identifying companies with clean balance sheets, a loyal customer base, and a management team that understands their value proposition and the resources underpinning their competitive advantage will secure long-term above-average returns.


The article has been prepared by ECP Asset Management Pty Ltd (ECP). ECP is a funds management firm based in Sydney, Australia. For further information, visit This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for financial advice. ECP and the author own shares in ARB Corp, James Hardie Industries, Domino’s Pizza Enterprises, Rightmove, FeverTree, PWR Cooling, and Gamma Communications. ABN 26 158 827 582, AFSL 421704, CAR 44198.

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