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Friday, July 29, 2016

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Friday Morning Eye-Opener: Amazon's Totally Unsustainable Business Model

by Kevin Coupe

Amazon yesterday, in yet another sobering demonstration that its business model is flawed, unsustainable, and doomed to collapse sooner rather than later, announced that its Q2 sales were up 31% to $30.4 billion, compared with $23.2 billion in second quarter 2015 ... that its Q2 operating income was $1.3 billion in the second quarter, compared with $464 million in second quarter 2015 ... and that its second quarter net income was $857 million, compared with $92 million during the same period a year ago.

And yes, I was being sarcastic with that "in yet another sobering demonstration that its business model is flawed, unsustainable, and doomed to collapse sooner rather than later" stuff.

In its story about Amazon's results, the New York Times writes that "for most of its life, Amazon sacrificed profits if it could build another few warehouses to ship orders to customers more quickly or find some other investment to fuel its growth. Now, it cannot avoid showing big profits thanks to the lucrative cloud computing business in which it has improbably become a leader."

And while Amazon's approach to business generally has been to sacrifice profit for the sake of making continued investments in technologies that it has felt would keep it relevant and ahead of the competition, the Times writes that "what is most striking about its recent habit of showing profits is that Amazon has not suddenly become stingy about making investments. In a conference call, Amazon’s chief financial officer, Brian Olsavsky, said that the company would open 18 new fulfillment centers — the warehouses from which it processes customer orders — in the third quarter of this year, three times the number it opened in the same period last year.

"Amazon plans to nearly double its spending on digital video during the second half of the year as it expands the offerings of its Netflix-like streaming service, he said. That spending increase reflects a nearly tripling in the number of original television shows and movies financed by Amazon."

Benzinga notes in its coverage that Amazon's market cap this week passed $355.5 billion, which is more that the market caps for Walmart, Costco and Target combined. Now, this story also notes that those three companies combined generate almost seven times as much revenue as Amazon, so one has to wonder if "Amazon being valued as a retailer or as a tech company?"

However, the fact is that it may not matter, especially to shoppers ... if Amazon is able to use its web services business to help support narrow margins achieved in its retail business, and use other facets - like original series - to expand and solidify its ecosystem.

By the way, just as a point of comparison, it is worth nothing that Whole Foods yesterday said that it just had its fourth straight quarter of same-store sales declines, as they were down 2.6 percent ... and that for the current quarter, same store sales so far are down 2.4 percent.

I'm not suggesting that Amazon will never run into business model problems, though for the moment its ecosystem approach to business seems to be working pretty well. And I'm not suggesting that Whole Foods can't and won't come back from its current issues, though to be honest, I'm not wild about the current iteration of the "365" concept that it is starting to unveil.

I am just saying that this is all an Eye-Opener.

I was talking to a friend of mine, Craig Ostbo, at the MNB get-together last night here in Portland, and he said that he's been using a new phrase to describe businesses that "get it" and businesses that don't.

You're either at the table or you're on the menu.

I think that's true ... and it is a metaphor that every business needs to think about when considering the short-term and long-term viability of their models.

Troubled Chipotle Plans To Open Burger Restaurant

The Associated Press reports that Chipotle, still reeling from the impact of a series of food safety issues that caused many customers to cut back on how often they patronized the burrito chain that claimed to specialize in food with integrity, plans to open the first in what hopes will be a chain of burger restaurants.

The story says that Chipotle's first Tasty Made burger restaurant, limited to burgers, fries and milkshakes, will open this fall in Lancaster, Ohio.

The AP writes that "after filing a trademark application for 'Better Burger' earlier this year, Chipotle had noted that it previously said the 'Chipotle model' could be applied to a wide variety of foods. Already, the company has an Asian food concept called ShopHouse, which lists 15 locations, and a pizza concept called Pizzeria Locale, which lists five locations."

KC's View: The AP story suggests that if the new concept gets traction, it could compete with McDonald's, which used to own a piece of Chipotle. However, it almost sounds to me like it may be trying to create an In-N-Out sort of model in an area of country that does not have In-N-Out.

The additional question is whether the consumer reticence about Chipotle adheres in any way to a new chain operated by the company.

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From MyWebGrocer...

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Patent Office Rejects New Whole Foods Slogan

The Washington Post reports that the US Patent and Trademark Office has rejected Whole Foods' application to register the slogan, "World's Healthiest Grocery Store."

According to the story, "The agency said it rejected the trademark because it makes a 'laudatory' claim, or is based on exaggerated praise that can't be proven or has not been proved true ... Whole Foods will have six months to update and refile the case and may choose not to do so, although that seems unlikely."

KC's View: Not only can't the slogan be proven, but co-CEO John Mackey has been blunt about saying that a large percentage of the products sold in his story aren't healthy, and he'd get rid of them if he could.

This is hubris, pure and simple.

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From ReposiTrak ... A New CEO Spotlight Series...

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Worth Reading: Rip-It-Up-and-Start-Again Thinking

Fast Company has a piece about Hampton Creek, which has a plan "to create a whole range of high-tech, plant-based products that use fewer resources from farm to factory to table, cost less, and are both healthier and tastier than traditional products.

"The company deploys a three-part process: identifying underutilized, low-impact crops (like sorghum, which requires little water); applying computer data to determine if any proteins they contain might be functionally useful in food (the way the yellow pea turned out to be a great emulsifier); and then using advanced cooking techniques (via a dream team of Michelin-starred chefs) to create tasty recipes for packaged products."

While the company is still small, Fast Company suggests that its "deep bench of prominent investors, expansion into an ever-growing array of products, global ambitions, and its strong food-service business" make it a company to watch ... and even be a little nervous about if you are a traditional food business.

You can read the entire story here.

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From ProLogic Retail Services...



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The MNB Walmart Watch

• The Tampa Bay Business Journal reports that Walmart plans to "expand its online grocery shopping service in the Tampa Bay region. The retail behemoth isn't yet ready to disclose which stores will offer the service but confirmed that it will offer it at more stores beginning next month."

According to the story, "Walmart first debuted online grocery shopping in this region in October 2015 ... More than two dozen Walmart stores statewide offer the service currently."

Walmart's online grocery service gives consumers access either via its website or a mobile app, with orders then available for pick-up at the store.

The Business Journal notes that "Walmart has struggled to keep pace with Amazon, but its heavy investment in e-commerce technology and logistics seem to be paying off, with online sales on the rise." That said, Amazon continues to grow, and Publix has been testing two different approaches in Florida, utilizing Shipt and Instacart in different markets to make deliveries.

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From Samuel J. Associates...Why Career Success Is Not A Shiny Car

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E-conomy Beat

CNet reports that Amazon has launched its Dash scanner technology in the UK, allowing consumers to use the and-like device to scan bar codes or use voice recognition to reorder products.

It is a technology that Amazon also tested in the US, but that has seemed to get a lot less push from the company compared to the Dash buttons and Echo-style voice-activated computers.

The story says that the introduction "follows the launch of AmazonFresh last month in the UK, which is currently available for customers in 128 London postcodes. AmazonFresh customers can get a Dash initially at no additional charge with their second AmazonFresh order, but that offer lasts only until 28 August."

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From the National Grocers Association...


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FastNewsBeat

• Associated Wholesale Grocers, Inc. (AWG) and Affiliated Foods Midwest Cooperative,Inc. (AFM) announced yesterday that they have reached an agreement to combine the two cooperatives’ distribution businesses.

AFM is a retailer-owned cooperative supplying members that operate over 800 stores in 15 states, while AWG is a retailer-owned cooperative supplying members that operate over 3,000 stores in 30 states. The members of both cooperatives going forward would be members of a larger AWG.

The deal is scheduled to close later this year.

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Executive Suite

Advertising Age reports that Starbucks has hired Under Armour marketing executive Leanne Fremar, senior VP-executive creative director at Under Armour's Women's and Concept divisions, as senior VP-executive creative director. The hiring is part of a broader senior team reorganization announced by CEO Howard Schultz.

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Your Views: Taste Not, Want Not

We had a story the other day about a genetically modified tomato that may last longer, though there is no evidence yet that it will be tastier ... and I said that if it doesn't taste better, what's the point?

Prompting MNB reader Lance Hollis McMillan to write:

Retailers should have what I’m having. Fresh from the garden this morning.
Thanks for tending to the MorningNewsBeat garden.


My pleasure. And I love the image, by the way.




We had a story about two identical restaurants in LA, except that one of them is in a poor neighborhood and features low prices, and what the approach says about convincing people that good food doesn't have to be expensive. One MNB reader responded:

I find it frustrating that many people seem to think that eating healthy is so much more expensive than fast food.  I do the grocery shopping for the family, and surely prices vary by region, but please see example below.

Average McDonalds Value meal: $6 for about a pound of food

Sample meal purchased at my local grocery store: chicken breast - $2 per pound, broccoli - $2 per pound, and potatoes - $1 per pound.

Even when you add in seasonings/butter/extras the average price per pound at the grocery store for a healthy, well rounded meal is about $1.80 per pound vs $6 per pound of food at a fast food chain.  It comes down to being a smart shopper and spending your money wisely.  It also comes down to making the right choice.




And finally, regarding Cal State San Bernardino's announcement that its Board of Trustees has voted to rename its College of Business and Public Administration for Jack H. Brown, executive chairman of Stater Bros. Markets, MNB reader Larry Ishii wrote:

Jack Brown is one of the most amazing people in the grocery industry and the communities that Stater Bros serves. Jack hired me to head up the GM/HBC department in the early 80’s and I immediately realized what a special person he is. I have to smile every time I think of him reaching into his pocket to pull out that box cutter that Billy Burke (or Market Spot) gave Jack when Jack started in the business. He is a pioneer, a great executive and community leader, but most of all just a down to earth good person.

OffBeat: Old Friends

I've always loved series, whether in books, on TV, or in movies. Maybe it goes back to when I was a kid and devoured the Hardy Boys mysteries ... I've always treasured the opportunity to go back and learn more about characters that I'd grown familiar with, to see them face new challenges and demonstrate new talents or insights.

In this vein, I found the new Quinn Colson novel, "The Innocents," by Ace Atkins, to be an absolute page turner, and perhaps the best in this series of six novels (so far).

Colson is a former Army Ranger who has returned to his family home in Tibbehah County in Mississippi, trying to figure out where he fits into the landscape. While he has served the town of Jericho as sheriff,it has been a complicated relationship because High Noon-type confrontations in which he has challenged a long-established power structure, and not always winning.

The new novel focuses on the the murder of a young woman who has been found staggering down a highway having been doused in gasoline and set on fire. While the task at hand is to find the killer, the search for truth takes Colson and the sheriff's department into the town's seamy underbelly, where little is what it seems. I always think of Tibbehah County as sort of "Our Town" gone bad, and Atkins serves as a kind of tour guide through the muck. There's even a little social and political commentary thrown in (see page 138), but Atkins really does what novelist Ross Macdonald used to do - write about how present events can always be traced to past sins.

"The Innocents" is a first class piece of writing, and Ace Atkins just keeps getting better and better. Buy it. Read it. Thank me later.




I'm also happy to report that Star Trek Beyond may be the best of the three new movies made about the crew of the Starship Enterprise since the original series was rebooted a few years ago with a younger cast replacing icons like William Shatner (with Chris Pine), Leonard Nimoy (with Zachary Quinto), and DeForrest Kelley (with Karl Urban).

Rather than tell an origin story (Star Trek) or go back to the well with an old villain (Star Trek Into Darkness, the movie plays out like an episode of the old series, except on steroids with a big budget. The Enterprise is three years into its five-year mission, and actors like Pine, Quinto and Urban have settled into their characters in comfortable, familiar ways. The plot has to do with an alien named Krall (Idris Elba) attacking the Enterprise - with plans to take down the Federation - because of some deep-seeded hatred of what they stand for. "This is where the frontier pushes back," he says ... and he seems to mean it.

There is punchy dialog, every character gets something to do, and lots of action ... and if Star Trek Beyond doesn't break new ground, it does make those of us who love the franchise feel like it is in good hands. There are also lovely callouts to Nimoy and Anton Yelchin (Ensign Chekov), who have both passed away and are missed.

And, there's a business lesson, as when Kirk says right before a mission, "There is no such thing as the unknown, only things temporarily hidden.” And, nothing to be afraid of, even when fear seems to be most natural response.

As it happens, this is a line from an episode of the original series, "The Corbomite Maneuver," except what Kirk said there was a little longer:

"Those of you who have served for long on this vessel have encountered alien lifeforms. You know the greatest danger facing us is ourselves, an irrational fear of the unknown. But there's no such thing as the unknown, only things temporarily hidden, temporarily not understood. In most cases we have found that intelligence capable of a civilisation is capable of understanding peaceful gestures. Surely a lifeform advanced enough for space travel is advanced enough to eventually understand our motives."

And that's Star Trek in a nutshell. I'm glad it's back.




Finally, I have a couple of Oregon beers to recommend to you today - the Oakshire Brewing Amber Ale, and the Alameda Brewing Rose City Red - Pacific Northwest Red Ale, both of which I enjoyed recently at the Altabira City Tavern with a spectacular fennel sausage pizza. Because, let's face it, I would have been foolish not to.

Life is good.




That's it for this week. Have a great weekend, and I'll see you Monday.

Slàinte!

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Topical, relevant, engaging, thought-provoking...Who could ask for anything more?

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Kevin Coupe uses his unique perspective as MorningNewsBeat "Content Guy" and more than 30 years writing about business, marketing and innovation to identify the ways in which consumers are changing, the reasons behind these changes (technology, the economy, culture, demographics), how new and unorthodox competitors are altering the marketing landscape, and what companies need to do to find and exploit differential advantages.

Want to make your next event unique, engaging, illuminating and entertaining?Start here: KevinCoupe.com. Or call Kevin at 203-662-0100.

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