Doing Business at the "Last Train Stop on Earth"

Robert Murray, CEO of Lion, a leader in Australia's food and beverage industry, discusses growth, leadership, innovation, collaboration, and what it takes to compete on an island that, in Mr. Murray's words, is the "last train stop on earth."

Rob Murray has been with Lion for seven years. Based in Sydney, Australia, the company has a portfolio of market-leading products that include many of Australia's and New Zealand's favorite brands—in beer, spirits, wine, milk, fresh dairy, juice, cheese, and soy beverages. Today, Lion employs close to 8,000 people and is not only the region's largest purchaser of agricultural goods but also an integral component of Australia's retail, hospitality, and tourism industries.

Simon Mezger, a partner in A.T. Kearney's Melbourne office, met with Mr. Murray to discuss the company's success to date and his plans to increase growth and market position in the future.

Simon Mezger: What are your perspectives on growth and what do you consider the most important ingredients for successful growth?

Rob Murray: Growth in the end comes down to the atmosphere and culture that you create in the business, and the attitude that pervades. We use a balanced business strategy that makes us consciously think about what we want in terms of growth and the cycle we are trying to create. It is a combination of strategy and culture—a virtuous cycle where we invest in our people and we invest in our brands. We in turn think our people will build great trusting relationships with customers, and we know that our customers, who trust us more and are highly engaged in our business, will do more business with us. In its most simple terms, that is our growth strategy.

When we develop our strategy, we are conscious that we must pull all of the levers at once. So in a balanced business strategy, we break our major strategic choices down into marketplace, workplace, and people. We always put people and culture at the center of our strategy. We force ourselves to make the nine big choices—three in each area of our business. We have limited resources so where will we deploy them? Then from these nine, we ask what are our key goals and what is that one breakthrough goal? Interestingly, in our business, that one breakthrough goal is finding multiple pathways to growth.

Because we realize there is no magic bullet to growth, that we need to innovate and to explore new channels, we explore what we call "blue ocean" adjacent markets and new businesses that we are currently not in.

Simon Mezger: What is Lion's philosophy on leadership? What aspects of culture or behaviors do you consider vital to a top performing company?

Rob Murray: Flexible thinking is what we try to develop in our leaders. We believe leaders drive culture and behaviors drive culture. We spend a lot of time with our leaders to help them be the best versions of themselves they can be. And within that we focus on agility, resilience, and optimism—some of the things that leaders need to exude. Just like a sports team where the attitude of a coach and a captain will often pervade, in our business, the essential attitude of our leaders is: Be optimistic. Let's be resilient when we get setbacks. Let's believe in our ability to do it and then let's go and do it.

It's been well documented in a few books that we have been on a cultural journey since 1996 where we have measured our culture using the LSI and OCI tools.¹ We've run those surveys every two years and have measured the engagement of our people every six months right through that period. We have not changed the way we do them, we have not changed the surveys, and we have not changed the way we count. We know what we've achieved in our culture over time.

Interestingly, as we've conducted these measurements over time we've seen an overt correlation between improving culture and improving return on invested capital in our business. With every step into the blue, our return on invested capital improved. And with every step into the blue our share price (when we were a public company) went up—going from $3.30 when the journey started, to $12.22 when we eventually sold the remaining shares in Lion to Kirin. Our case study proves that constructive behaviors are good for business, they drive engagement with customers and consumers, and they drive business performance over time in a sustainable way.

Simon Mezger: How do you foster creativity and innovation in the workplace? Do you see the results in your products?

Rob Murray: Innovation is the outcome. The behaviors are things such as being open to new ideas, seeking to understand before being understood. They are the types of behaviors that lead you to work in teams, consider the opinions and ideas of others, and be keen to explore new territory. We work on the behaviors behind innovation to drive outcomes.

We have a leading-edge innovation approach called "Stage Gate," which is a structured internal approach, and we have people focused on innovation as their jobs. So if you think about that, we've lined up behaviors and behavioral attitudes in the business, we've lined up capabilities within the business, and we've lined up resources and structure. If you do those things, and have really bright people, which we have, then when you look at the other end of the innovation pipeline in a classic sense—certainly in a product sense—it comes out of the pipeline.

If you're really lucky and you do your job well, you get more than that. You get innovation in processes and lots of cost-saving ideas because people work out how they can do things smarter. But it's really building that inquiring culture. That is the job of our leaders and I think they do a really good job in driving that.

Simon Mezger: Fear of failure is often a factor that limits innovation. How do you encourage people to take risks?

Rob Murray: We measure our people on behaviors multiplied by results, so it is not just important to us what results you achieve but the way you achieve them. In that way, there is a clear balance. People are allowed permission to fail in our organization. We want our people to experiment at the edges, and to try new things. We talk to our leaders all of the time about this: How do you contain risk? How do you give people permission to fail and to learn in areas where the risk is manageable? Don't gamble the whole company on it, but give people freedom, give them autonomy, give them trust, and let them have a go.

We spend a lot of time saying that it's okay to lose; it's certainly okay to lose the first time you try something. But if you lose the lesson then you've really stuffed up. Lose but don't lose the lesson. Come back next time, be resilient, be agile in your thinking, and do it better. I've seen people in our business get exceptional review ratings when on the surface a large part of what this person worked on did not work out. Yet, we still recognize that these people have had an exceptional role. Not all of the time, but I hope there is sufficient trust in our organization for people to fail occasionally.

Simon Mezger: What are the advantages of collaboration between customers and suppliers in the grocery industry? What are the biggest obstacles to collaboration?

Rob Murray: Collaboration is obviously desirable where you generally have a shared objective, when success looks very similar for both of you, and when you can genuinely construct a win-win outcome. We have some big customers that dominate the Australian grocery landscape, in particular Woolworths and Coles, that have enormous capability. They are, for instance, able to put a brand on the shelf in every supermarket around the country and give us a kick start with a new brand or a new initiative. And where we have a shared agenda, our relationship can work really constructively and positively.

In the past four or five years in particular, the line between customer and competitor has blurred. Private label has grown strong in certain categories; our customers have vertically integrated in certain categories. One of those two big customers will own shares in a brewery, own their own brands, own the bottle stores that they put their brand into, control the shelf space that your brand and their brand sits on, determine where it goes in the store, and how those brands look to the consumer. It is difficult at times in this situation to genuinely find a win-win. That's just the reality. In the end, the absolute best defense in that scenario is to own brands that the retailer must stock. This goes to brands the consumer absolutely loves and believes are different and better—and, in a perfect world, is prepared to pay a price premium for.

Simon Mezger: What impact is the private-label versus brand-label debate having on the grocery segment?

Rob Murray: Our two biggest retailers (Woolworths and Coles) are trying to apply global success models to this part of the world. One of the strategies is to develop a strong private-label presence, a strong branding of private labels through their stores to build an image of their own brand as a trusted product.

The broader challenge is that this is a different part of the world. The reality is, in Australia at least, we live on a big island, which with the honorable exception of New Zealand, is the last train stop on earth. We are many thousand miles of ocean away from viable supply alternatives. This is not like a retailer sitting in the middle of Europe with abundant sources of supply. We have a unique piece of geography where 20 million people live, 13.5 of them in five cities. And there are enormous distances between the cities. The reality of product supply and supplier alternatives in this market is very different from European or U.S. markets.

Some of the focus on private label over the past year in particular has been on household essentials such as milk and juice. This concerns me because I am not sure that the retail model applied to this market is in the long-term interests of the consumer. In the short term, the consumer might get some very cheap milk pricing, but it's totally unsustainable versus the cost of production. It destabilizes the chilled supply chain as more volume moves into grocery. Is it really in the long-term interests of the consumer if farmers in parts of the country move away from milk? Certain states may end up drinking UHT (long life) milk, and certain regional areas may not have a chilled supply chain, as farmers struggle to make a return.

Where you get really strong private-label growth is in products the consumer sees as commodities. If what the consumer sees is just milk, then private label will succeed. It's our job as a branded supplier to make sure the consumer doesn't think of our products that way. But if categories like juice, milk, and bread, in the consumer's mind, are no different, then private label will be very successful.

Simon Mezger: What role does corporate social responsibility (CSR) play in large corporations? What does Lion do in terms of CSR?

Rob Murray: We will do the right thing for the long term just because it's the right thing to do. Once we work out what is the right thing to do, we don't have a big debate about which is the best outcome for us in dollars and cents; we just get on with it.

If you look at the history of our company over the past decade in terms of, for example, greenhouse gas emissions, water usage, and waste, we've made radical reductions in all of these. We did not need regulations to tell us to do it, or ask us to do it, or compel us to do it; it is just the right thing so we've been doing it.

Some of our initiatives—around high at-risk groups in terms of alcohol and potential misuse of alcohol—have been in place for years. Our charitable giving and community engagement programs evolve around strategies to minimize harm from alcohol. If we have issues with customers misusing a product, we won't sell that product. If we have issues in certain communities, for example, and we know that consumers are at risk in certain categories of drink, we won't sell them that product.

Simon Mezger: There is a lot of debate in Australia about putting a price on carbon to reduce emissions. What do you think of the carbon tax, and what impact will it have on your business?

Rob Murray: We have a consumer under pressure and an economy under pressure, albeit not as much as some other economies in the world, but still under pressure. Do we really need to impose extra burdens on ourselves in an international sense? I'm all for imposing those taxes when the two or three big emissions countries do the same, but it is a bit frustrating, the timing of it right now.

In our business specifically, I do not think any of our individual facilities meet the criteria, so our emissions are not high enough to be taxed. But obviously we need a lot of raw materials packaging, and we expect our providers to be hit with a tax. We have worked that out and think broadly that the cost pressures on our business could be as high as $30 million a year—and that's a pretty significant cost burden in the current environment. We have to recover those costs through pricing, which we will do, and in some cases our customers will resist that pricing as they are loath to pass on prices to the consumer. There will be a volume consequence in those categories, and there is going to be a cost.

It's a great initiative, and I understand the theory. But I don't understand the timing—why do we have to be in the vanguard of this change when we are probably responsible for 1.5 percent of the world's carbon emissions?

Simon Mezger: What impact is commodity volatility having on your business?

Rob Murray: The simple answer to your question about commodity prices: The more exposed your category is to both the global market or to the commodity itself, the less added value in that product versus the commodity, and the more you as a company are exposed. Clearly we're exposed in milk and juice. The juice market in the past 12 months has been incredibly difficult. There have been crop failures and climatological issues domestically and around the world, and supply issues have only added to the challenges. So, there is no doubt we are exposed but we've seen these things before and know we can't panic; you've got to stay focused on multiple pathways: How do we deliver value in a difficult environment? I've been around for a long time, and know it will turn around. There will be days when you're at the other end of the cycle and the commodity pressures are different and maybe even less.

Simon Mezger: What are your views on import versus export and global versus local products?

Rob Murray: Certainly a lot of the products we produce are completely domestic affairs and are likely to remain that way. We are going to see increasing usage in our categories. In a market like beer, you clearly can parallel import.

Our job is to convince the consumer that great beer is produced locally. For instance, we brew Heineken here, and we've won awards from Heineken for having the best Heineken in the world. So the notion that you get the really good stuff—when it has sat in a combination of dock side and the bowels of the boat for three months at a time—in reality, it is probably in a pretty poor state by the time it gets here. Compare imported beer to drinking fresh beer locally. We need to get consumers to understand that great beer is locally produced fresh beer. And we need to get a quality price for that. So, we have a few communication challenges there.

Simon Mezger: What do you think will be the biggest challenges for food and grocery manufacturers in the next five years?

Rob Murray: I'm not sure any of these things are incredibly new, but clearly I think we're going to be in a more challenging low-growth environment looking forward. We can debate about when the global financial crisis is going to be over, but we are going to see a much more subdued decade ahead than we saw in the low-cost-of-money, high-debt decade that preceded it. I think that's going to pervade the attitudes of a generation that grows up in that environment. They are going to be different consumers. Just like generation X and Y are very different from the generations that preceded them, so too we will inevitably see different attitudes, which we will have to work through.

The retailer environment will get more challenging; it's not going to get easier and they will not suddenly go away. Our big customers will continue to get bigger and possibly global perspectives will be brought to our market. I suspect the volatility financially will continue to be seen in exchange rates and in commodity prices and that is going to be an ongoing backdrop to work against.

The important thing for us as a company goes back to our behaviors, and how we respond. You stay constructive, you stay solutions focused and achievement focused. Be agile, be resilient, work through these things with a genuine intent to try and solve them, and you will be the ones that succeed in this tough environment.

Simon Mezger: You've been in business a long time. What do you consider your biggest accomplishments? What are your biggest challenges and failures?

Rob Murray: You're going to make me feel like an old man now looking wistfully back in time. I'm going to kind of fudge both questions if you don't mind, but I am answering them truthfully.

I am genuinely not vain enough to believe that this is all me here. I am just a part of a great business that's created a great culture and our people have achieved remarkable things and I'm very proud of that culture. And I think when you look at things like the shareholder value that our people created over the past seven years or so, there's a lot there to be proud of. But it really is our people. I am blessed in the sense that I work with great people, a great team of leaders, and even when we've lost we haven't lost the lesson. So in that sense, if I say to my people that you can fail occasionally, then I've got to believe that ultimately I can fail occasionally. And it's okay as long as I've learned from it and set out not to do it again.

My private objective was to do this in a way that wouldn't turn me into what some people see as the typical CEO. I think I've done it and stayed true to the kind of three "Fs," if you like, that make me what I am. I've stayed true to my faith, I've stayed true to my family, and I've stayed true to my friends—in that order. And I hope that I'm pretty much the same bloke at the end of it that I was at the start of it, though maybe with a few more gray hairs and a bit more accumulated knowledge. I'm proudest of this, to be honest. That's a very personal thing but if it doesn't change who you are, and you feel you've been authentic and true to yourself through this journey, then that's good.

Interviewer

Simon Mezger, partner, Melbourne