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    Published on: September 23, 2015



    Content Guy's Note: "The Innovation Conversation" is designed to be a new regular MNB feature, prompted by the positive reactions that Tom Furphy and I have gotten after having done live and customized versions at a number of industry and corporate events. Our goal in each edition is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and I'm thrilled to have Tom Furphy engaged in the effort.

    In case you don't know Tom, I can tell you that he brings unique credentials to everything he does. Tom Furphy is CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers, who make CEP a regular stop during their Seattle visits. Prior to CEP, Tom was at Amazon.com as Vice President, Consumables and AmazonFresh, where he was responsible for building and running the company’s Grocery and Health & Beauty businesses on the Amazon.com platform, and was also responsible for launching and rolling out the AmazonFresh business. And before that, he held a variety of senior roles at Wegmans.

    So, let the conversation begin...


    KC: Let's talk about Jet, the e-commerce site launched with $225 million in funding last July by Marc Lore, the Quidsi founder who sold that company to Amazon for $545 million in 2010. My sense is that by making Jet a pure price-play ... that is, hinging everything on providing a lower price and providing levers through which consumers can lower their prices ... they are playing a dangerous game.  There's an old saying in retail that you can always be undercut on price;  is jet potentially putting itself in a situation where, if it is undercut on price, it has no other differential advantage on which to rely?

    Tom Furphy:
    It seems to me that Jet is “all in” on the lowest-price positioning. Their model is to break even on transactions, with the company realizing its profits only on the $50 annual membership fee, similar to the club model.

    Shoppers love to save money. Allowing them to control how much they save and how they save it may take root and be defensible for some period of time. But it will be a costly fight. To offer the lowest prices, you need to be a low cost operator. I understand that Jet is losing anywhere from a few points to upwards of 30 points on transactions today to establish their low price image. That is costing their investors a lot of money.

    Amazon has a more mature and extensive infrastructure of fulfillment centers which provides for lower logistics costs and allows them to sustainably offer lower prices. They will not give up their price image easily and they are sufficiently capitalized to fight for a long time. Also, I don’t see anything that would prevent Amazon offering a similar model if it wanted to. No company better tracks and optimizes the cost levers that underlie e-commerce transactions. It would not be a stretch for them to expose those levers to customers to offer an Amazon Prime version of the Jet model. And as they open more fulfillment centers closer to more homes, their cost lead just widens, which enables them to continue to lower their prices, either in the lead or in defense of competition. I don’t see how Jet can keep up with that long term and I don’t see what else is differentiating in the model.

    KC: Jet was forced to remove links to more than a hundred retailers and brands when they complained that Jet was using those links to drive traffic and sales on its own site through a kind of loyalty marketing program.  You dealt with a lot of suppliers and retailers when you were at Amazon;  is it your sense that these are long-standing competitive concerns that Jet just ignored at its own peril, or is this a reflection of how much more competitive the e-commerce world has gotten?

    TF:
    Retailers all want to “own” the customer. They love to work with affiliates that send them volume, and they are willing to share revenue and sometimes even customer information with their affiliates as long as both are benefitting. But most affiliate agreements explicitly state that referral commissions are not to be used as a customer discount or rebate to offer a better deal than published on the retailer’s site. That is, affiliates are precluded from using the commissions to compete against the site. For many of the sites that booted them, Jet was offering prices below the retailers’ price and was funding the discount with the affiliate revenue, which appears to have been in violation of the agreements.

    That said, the e-commerce world has gotten very competitive. By offering products across a range of most retail categories for sale via third party sellers and itself, Amazon is a big driver of that competition. Being a marketplace for sellers while also competing against those sellers is a bit of a balancing act. You want to create an environment that attracts sellers and brings more products to customers. But you also want to offer the best prices, and often that means offering the product directly in competition with those sellers, especially when your scale allows you to procure it at a lower cost. This can create some discomfort between the parties. Ultimately, all parties need to engage in e-commerce with their eyes wide open and make sure they are going to market through as many paths as possible, including marketplaces.

    KC: I tend to think that even if Jet does not have a sustainable business model - and I believe that the jury is out on this - the fact that it is spending so much money right now on marketing means that it has the potential of changing the game for everybody else, simply because it will change perceptions and expectations.  Would you agree?

    TF:
    Yes, I would agree. Jet will require everyone to be on their game. Shoppers continue to have more and more options available to them, and the data shows that they are willing to try new things. As new entrants and options emerge, it is important for retailers to deliver compelling value to their customers that clearly sets them apart from competition.

    KC: In the end, how big a threat do you think Jet is to traditional brick-and-mortar retailer?

    TF:
    I don’t think that Jet on its own is a significant competitive threat to existing retailers. I do think they stand a chance of taking share from center-store grocery, mass, sporting goods, office supply, apparel, electronics and other hardline categories. But the slice from each will likely not be significant. However, each of these formats has been getting sliced from the outside for years. A little share erosion here, a little there, and it adds up. For many of these categories, it is their bread and butter that is getting eroded. In Grocery, it’s the center store well ahead of the fresh areas.

    Amazon continues to double down on programs to make it even easier to buy center store items – Prime, Prime Pantry, Fresh, Subscribe-and-Save, Dash buttons and the Echo are all squarely positioned to keep shoppers out of stores. This battle will be fierce. Jet will take their piece of it, but I don’t see them as a significant threat on their own.

    KC: And do you think Jet has a sustainable business model?

    TF:
    As I get older, I am particularly sensitive not to become the curmudgeon that scoffs at new ways to do business. That certainly would not be in the spirit of the Innovation Conversation! However, based on what I’ve seen from Jet and what I know about e-commerce profitability, I don’t think Jet has a sustainable business model. Fulfillment costs are what make or break a model.

    To be able to maintain the lowest prices online, Jet will have to have an extensive fulfillment and partner network as well as a robust technology platform to enable transactions to be easily configured by customers. They have a fulfillment and partner network that is only a small fraction of the size of Amazon’s (and Wal-Mart’s, Target’s, Kroger’s and others for that matter). They have a technology platform that is not as robust as Amazon’s. And their value proposition based only upon price, which Amazon can crush at will. Wal-Mart, Target, Kroger and many other existing retailers are in a better position to succeed, and they can all do so without acquiring Jet. Maybe someone would give in and purchase them, but I can’t see who or why at this point.

    But this is a team that knows how to turn lemons into lemonade. In my opinion, the team’s prior win, Diapers.com (along with Quidsi, their parent company), wasn’t sustainable either. It was drafting behind Amazon’s lead into the diaper space with a more consumer-friendly experience, but with an inferior cost structure. The company was in need of further capital or facing death as a result of a price war with Amazon. Amazon overpaid to take it out and keep it away from competition, which was a great outcome for the investors and founders. Jet’s CEO has come out publicly and stated that Jet will break even in roughly five years, at $20B in annual sales. Even if that happens, how much will Jet lose along the way to $20B in annual sales? From the outside, it seems like the investors and founders are betting big to get acquired along the way.

    Maybe it’ll happen, but it’s a risky bet.

    "The Innovation Conversation" will return in a couple of weeks. If there are subjects you'd like us to chat about in the future, let us know.

    KC's View:

    Published on: September 23, 2015

    by Kevin Coupe

    So, let me see if I have this straight...

    Volkswagen has admitted - under duress - that about 11 million of its diesel automobiles were equipped with some piece of software that essentially allowed the cars to cheat on their emissions tests - meaning that cars they claimed to have "clean diesel" technology weren't nearly as clean as claimed.

    We all know that auto companies lie about miles-per-gallon ... but emissions? Horrors!

    Most of the cars probably were sold in Europe, but about 10 percent of them may be in the US ... where the emissions regulations are a lot stricter than in Europe. It also so happens that while the US is the world's second biggest car market, it is a place where Volkswagen is woefully under-represented ... and a place where the company had high hopes of growing sales, profits and market share.

    Good luck with that...

    I also gather that Volkswagen CEO Martin Winterkorn has pretty much denied any responsibility for the deception; the New York Times writes that he says it "was a result of 'the grave errors of very few' employees, and promised to cooperate with officials on a 'ruthless examination' of how vehicles were programmed to evade emissions tests." Of course, the Times also writes that Winterkorn has a "reputation for delving deeply into the minutiae of automobile design and construction," and became CEO two years before the software apparently was installed in the cars.

    Winterkorn reportedly is scheduled to meet with the top folks at Porsche Holding, which owns the majority of Volkswagen, today. It probably will not be a pleasant meeting.

    If I understand the story correctly, Volkswagen is saying it is putting aside about $7.3 billion (US) to upgrade the cars that were deceiving the emissions testers, and while that's a lot of money - half the company's annual profit - I have to believe that it won't be enough to defend itself from the inevitable lawsuits and settle with angry car owners and shareholders.

    The Los Angeles Times this morning writes that "the federal government paid out as much as $51 million in green car subsidies for Volkswagen diesel vehicles based on falsified pollution test results, according to a Times analysis of the federal incentives." Y'think maybe there will be some fines coming down the pike?

    It seems to me that there are certain sure things about the Volkswagen situation.

    There will be firings. There will be investigations. There will be lawsuits. And more lawsuits. There will be an enormous impact on the company's image. And profits.

    Volkswagen, it seems to me, has done nothing less than put all of its brand equity at risk by making stupid, irresponsible, short-term and small-minded decisions.

    Perhaps they'll learn, too late, the lesson from Jurassic Park ... that just because you can do something doesn't mean you should do something.

    And maybe they'll even change their slogan.

    It used to be "Das Auto."

    Now, it'll be "Das Arschlöchers."
    KC's View:

    Published on: September 23, 2015

    The Washington Post reports that People for the Ethical Treatment of Animals (PETA) is suing Whole Foods, charging that "the entire audit process for Whole Foods’ animal welfare standards is a sham because it occurs infrequently and violations of the standards do not cause loss of certification ... Standards that are not actually enforced create a false impression of ensuring a more humanely treated, higher quality animal product -- when in fact they ensure no such thing."

    The suit goes on to say that "when a grocery store’s standards for improved animal welfare are not actually enforced or do not require meaningfully better treatment for meat animals compared to the industry standard, consumers are deceived into paying a higher price for meat that fails to offer the benefit they seek."

    The Post writes that "PETA alleged that Whole Foods audits suppliers just once every 15 months; that violators do not face repercussions; that the standards 'barely exceed common industry practices'; and that Whole Foods extracts a premium from customers under 'false advertising'." And, the story goes on, "PETA’s broadside against the chain came a day after it released video - cited in the class action - of alleged pig abuse at a farm in Pennsylvania that supplies about 20 Whole Foods outlets in the Philadelphia area. The allegations hit a chain that is already struggling with disappointing earnings and the aftermath of an overcharging scandal."
    KC's View:
    I don't believe everything that PETA says, not by a long shot. But I also don't believe everything that Whole Foods says. I'm not inclined to think of this as a nuisance suit ... in this case, I'd like to see the evidence, and I'd like to see the matter adjudicated in the courts.

    Here's the thing. Whole Foods had better be in the right on this, and it better be able to deal with the charges expeditiously. No dissembling, to distractions, no legal maneuvers designed to obscure the charges rather than honestly discuss its policies and implementation.

    If it ends up that Whole Foods has been all about lip service to the values it has espoused, it may end up looking like Volkswagen. I don't think this will be the case, and I hope it won't be the case. But it has to be proactive about facing down PETA and dealing with these charges forthrightly.

    This isn't just one of the options. To my mind, it is the only option.

    Published on: September 23, 2015

    The Orange County Register has a piece about the Federal Trade Commission (FTC) approval of the sale of 146 stores - that needed to be divested as a result of the Albertsons acquisition of Safeway - to Haggen, which to that point was operating 18 stores in the Pacific Northwest. “This settlement will ensure that consumers in those communities continue to benefit from competition among their local supermarkets," Edith Ramirez, chairwoman of the FTC, said at the time.

    "But you cannot force competition," the Register writes. "Nor do you need to. The FTC’s anticompetitive assertions are particularly absurd for an industry that operates with razor-thin net profit margins, which typically average 1 percent to 3 percent – and are not helped by government policies such as farm subsidies, which raise the cost of food, and minimum wage laws, which raise the cost of labor.

    "Consumers have more grocery choices than ever. The FTC ignores competition from retailers such as Walmart, Target, 99 Cents Only, Costco and even Amazon, which offers same-day grocery delivery service in Southern California. Walmart is the top-selling grocer in the nation, and Target and Costco also join Safeway (Vons) and Kroger (Ralphs) in the top five."

    The piece goes on:

    "While such large deals can always get messy, they are much more likely to do so when the government creates an antagonistic relationship between the parties by forcing one company to sell its assets to a competitor. So in an attempt to maintain an arbitrarily determined 'sufficient' level of competition, the central planners at the FTC forced grocers to sell to a competitor that went bankrupt and had to close stores, leaving consumers with less choice and less convenience."
    KC's View:
    The degree to which these regulatory moves have created unfortunate and unforeseen results can be seen almost every day in the news coverage. For example, there's a piece in the Arizona Daily Sun this morning about closing Haggen stores, laid-off employees, and empty shelves.

    I don't think there's any question that the FTC screwed up on this. (Though, let's not take the Haggen and Comvest folks off the hook ... there was a lot of hubris here.) What this situation suggests is that we have to start rethinking traditional approaches to regulation in this country ... not deregulating, but understanding that new paradigms apply because there is so much more competition coming from so many different directions.

    You can't apply old models to new competitive situations. Simple as that.

    Published on: September 23, 2015

    The Street reports that Smart & Final plans to open 100 new stores over the next four years in the western US, a region that has been marked by considerable competition.

    "The reason we can compete the way we do as a value retailer is because we have a really low cost structure," says CEO David Hirz. "Our stores are smaller than most at 25,000 feet, they're high productivity, no service departments, and we price really competitively in the markets, so we think value is the new normal."
    KC's View:
    Smart & Final actually has a firm understanding of its own value proposition and the values that it espouses as the company grows. There's no reason to think that these expansion plans won't be successful ...

    Published on: September 23, 2015

    City Wire reports that Walmart said yesterday that it is acquiring PunchTab, a Silicon valley company "known for building a software platform that helps brands like Walmart and Sam’s Club better understand and engage with customers in a unified way online, on mobile and in physical stores."

    “As part of the acquisition, six PunchTab technologists will join @WalmartLabs and we’ll also be acquiring PunchTab’s technology. We’ll use the technology to enhance our existing ‘customer relationship management’ tools, or the technology behind how we reach customers across e-mail, on our websites, on mobile phones and in our physical stores,” says Jeremy King, head of WalmartLabs.

    City Wire notes that "this is the 15th acquisition by WalmartLabs in the past four years as the retailer continues to build out its e-commerce team in San Bruno and around the world."


    City Wire also reports that a new survey suggests that 74 percent of those questioned said that they liked the new grocery pickup models being tested by Walmart, with "with 77% of the first time participants indicating they would at least moderately likely to use the service again. Among repeat customers, 69% said they will continue to use the pickup services for their grocery needs."

    However, the story also says that "just barely one in 10 of customers in the test markets have used the grocery pickup service."
    KC's View:

    Published on: September 23, 2015

    Tech Crunch reports that Amazon is celebrating its five Emmy wins at this year's 67th annual Emmy Awards by "dropping the price for Amazon Prime to just $67 in a one-day sale starting on Friday, September 25th at 12:01 AM ET, and ending at 11:59 PM PT ... By tying the Amazon Emmy wins to a sale on Prime memberships, Amazon has a chance to promote its Amazon Prime Instant Video service to customers who may now only be hearing about the company’s efforts in producing television thanks to the mainstream attention generated by the awards ceremony."
    KC's View:

    Published on: September 23, 2015

    ...with brief, occasional, italicized and sometimes gratuitous commentary…

    • The Chicago Tribune reports that Missouri Attorney General Chris Koster is accusing Walgreens of continuing "to deceive customers in Missouri with expired or incorrect price tags on store shelves." The AG, the story says, "has asked a court to hold the nation’s largest drugstore chain in contempt for not fixing problems uncovered in a previous investigation by his office. In a 2013 lawsuit, Koster accused Deerfield-based Walgreens of charging more than the advertised price on some items.

    "The company settled the complaint last year by promising to remove tags within 12 hours of their expiration. But Koster’s office found more than 1,300 expired tags in 49 of 50 stores during recent inspections. Koster said hundreds of the tags were weeks past their expiration date."

    Walgreens did not deny the charges, but rather said that it plans to continue working with Koster's office to resolve the pricing issues.


    • In Minnesota, the Star Tribune reports that Lund Food Holdings " has purchased Glen Lake’s Market in Minnetonka, a grocery store that’s been in the thick of a union dispute over allegedly unpaid benefits. The purchase, announced Monday, should calm that quarrel somewhat since Lunds is a unionized grocery chain. The sale also marks a continuation of Lunds & Byerlys expansion over the past five years, a time in which the company has already added six properties in the Twin Cities ... Glen Lake’s will become Lunds & Byerlys’ 27th supermarket, and will fill a gap in the chain’s geographic coverage."


    • The Chicago Tribune reports that Safeway has gone to court "to dramatically reduce the $8.9 million awarded to Michael Jordan by a federal jury last month for using his likeness without permission in a 2009 ad." The company calls "the $8.9 million verdict 'grossly excessive,' saying the jury 'improperly considered Mr. Jordan's multi-year, multi-million-dollar endorsement contracts, his subjective unwillingness to agree to deals less than $10 million, and speculative promotional value'."

    Jordan has said that the trial was never about the money, but rather about preserving his brand equity ... and has pledged to donate the money to Chicago-area charities.

    Hard to imagine that this is anything more than a Hail Mary shot from the wrong end of the court ... since the company already has been found guilty of using his image without permission, and it was pretty well established what it would cost companies to actually get permission.


    • Alimentation Couche-Tard, the Canada-based convenience store owner, has announced that it is calling "the creation of a new, global convenience brand, 'Circle K'. The new Circle K brand will replace Couche-Tard's existing Circle K, Statoil, Mac's, and Kangaroo Express branding on stores and service stations across Canada, the USA, Scandinavia, and Central and Eastern Europe. The new Circle K brand will also appear on licensed stores across Asia and will be a fundamental part of Couche-Tard's future growth," the company says.
    KC's View:

    Published on: September 23, 2015

    Internet Retailer reports that PepsiCo has hired Gibu Thomas, formerly walmart.com's senior vice president of mobile and digital strategy, to be its new general manager of e-commerce.
    KC's View:

    Published on: September 23, 2015

    Lawrence Peter "Yogi" Berra, one of the greatest catchers in baseball history as well as a Navy veteran who took part in the invasion of Normandy, and a remarkable (if sometimes accidental) wit and truth-teller who became baseball's philosopher king, passed away yesterday. He was 90.

    It is worth reading some of the voluminous obituaries that are appearing today just to get the sense of the depth and breadth of Berra's career. Among other things, he appeared in 21 World Series as a player, coach and manager. Here's a passage from today's New York Times:

    "Berra’s career batting average of .285 was not as high as that of his Yankee predecessor Dickey (.313), but Berra hit more home runs (358) and drove in more runs (1,430). Widely praised by pitchers for his astute pitch-calling, Berra led the American League in assists five times, and from 1957 through 1959 went 148 consecutive games behind the plate without making an error, a major league record at the time — though he was not a defensive wizard from the start ... On defense, he certainly surpassed Mike Piazza, the best-hitting catcher of recent vintage — and maybe ever. Johnny Bench, whose Cincinnati Reds teams of the 1970s were known as the Big Red Machine, and Berra were comparable in offensive production, except that Bench struck out three times as often. Berra whiffed a mere 414 times in more than 8,300 plate appearances over 19 seasons — an astonishingly small ratio for a power hitter.

    "Others — Carlton Fisk, Gary Carter and Ivan Rodriguez among them — also deserve consideration in a discussion of great catchers, but none was clearly superior to Berra on offense or defense. Only Roy Campanella, a contemporary rival who played for the Brooklyn Dodgers and faced Berra in the World Series six times before his career was ended by an auto accident, equaled Berra’s total of three Most Valuable Player awards. And though Berra did not win the award in 1950 — his teammate Phil Rizzuto did — he gave one of the greatest season-long performances by a catcher that year, hitting .322, smacking 28 homers and driving in 124 runs."

    When Berra began his career, his manager, Casey Stengel assessed him this way: "Mr. Berra is a very strange fellow of very remarkable abilities."

    Remarkable, indeed.
    KC's View:
    Berra famously said, "It ain't over 'til it's over." This is one that he actually got wrong ... because though he now has passed way after a long and full life, his good humor, spirit and passion for the game of baseball will long outlive him.

    Published on: September 23, 2015

    ...will return.
    KC's View: