Published on: October 21, 2015
"The Innovation Conversation" is sponsored by ProLogic: Leading the Industry in Loyalty Marketing Services for Independent Grocers.
Content Guy's Note: The goal of "The Innovation Conversation" 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 one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently 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.
And now, the conversation continues...
KC: Tom, let's talk about Walmart's announcement last week that it plans to invest $2 billion in e-commerce over the next two years. First, I have a possibly stupid question … but I honestly don't know the answer. In this context, is $2 billion over two years a lot of money?
Tom Furphy: It sure sounds like a lot of money. But when you break it down, an average of $1b per year is not all that impressive. To put it in context, by reinvesting its profits, Amazon is spending $5b-$10b per year on e-commerce innovation. That represents smart money being deployed by a smart team into a proven model, on things like faster shipping, better technology, new businesses and programs, and more capabilities for their customers. Amazon’s investment level will only expand their lead over the market. Walmart’s investment will struggle to put a dent into Amazon. It certainly will not disrupt them.
I would hope that the $2b represents incremental spend on top of their current investments in e-commerce. They should also be re-appropriating significant budget from traditional programs to build out e-commerce and also to improve their stores to enable a better, more compelling shopping experience for the changing consumer. They need major changes in their business model, their technology, their physical infrastructure and their team to thrive into the future. $2b represents only about 1% of their market cap being invested. That’s hardly a bold bet.
Another way to think about it – Wal-Mart has about 11,000 stores globally. Let’s consider each of them a local “market”. $2b works out to less than $200k per “market” over two years to support infrastructure, technology, training, etc. That doesn’t seem like much to me. Especially given the transformation that they need to make to compete into the future.
This is a prime example (pun intended) of old company thinking. Making incremental bets that won’t rock the boat, nor will drive truly transformational change. Why are they investing so little when the overall market shift to e-commerce is so obvious?
KC: I had an MNB reader wrote in to make the following observation: that the successful retailers of the future are the ones who are best able to figure out a strategy to morph from being grocery companies to technology companies that happen to sell groceries. Would you agree with that?
TF: To some extent I do. It comes down to knowing your customer and serving them in a way that meets their needs, solves their problems and delights them. That’s always been critical to being a good retailer. Given where the shopper is today, serving them requires extensive use of technology. Shoppers are glued to technology, and they are using technology throughout many aspects of their daily lives. This means that technology must become a key enabler of the retail experience.
The demand for retailers to deploy innovative technology to the website, mobile, in-store experience and back end processes is significant. To meet that demand, retailers need to develop a deep technical proficiency. They need to do this to some level internally, but they also need to develop a robust partnering strategy. For so long retailers, especially in the grocery business, have built their own technology to suit their unique needs. Technology changes so fast today that is difficult for retailers to develop and implement technologies well on their own. They should own the technology roadmap, but should be open to partnering with outside firms to get the work done.
KC: Is format a factor in whether one makes this decision? By this I mean, is it more critical for companies like Walmart to make this transition than for companies like, say, Wegmans … which from all reports to this point does not seem to be identifying Amazon as the competition and isn;t making moves in that direction?
TF: Any retailer, regardless of format, should be extremely careful to not identify Amazon as the competition. I do feel that Amazon will have a hard time taking meaningful share from the store perimeter. But they can absolutely decimate the center store. And they plan to. Dash buttons are just the beginning. Prime Pantry will continue to grow as Amazon opens more fulfillment centers and the customer experience improves. If you look at where Echo is going and where Dash Replenishment Service is looking to transform the way the orders are passively triggered, the center store as we know it will change forever. Amazon’s goal is to keep people out of stores. Retailers need to fight hard against that.
This is particularly troubling because center store is where retailers generate most or all of their profit. A 10% or 20% share loss there can kill a company.
We’re doing a lot of work around replenishment here in Seattle. It’s very exciting. Our team would be happy to host a call or visit for any retailer or manufacturers out there who want to learn more about where the space is going. Companies shouldn’t be in denial and they don’t need to roll over. But they do need to actively address this.
KC: It has been my contention that Walmart needs to go big or go home when it comes to e-commerce … that at some point it will (or should) drop clock-and-collect stations into the parking lots of 2,000 of its stores just to make a statement, cram all the pain into a short period of time, and disrupt the way middle America thinks about e-commerce. Am I nuts?
TF: Either they shape the way middle America thinks about e-commerce, or Amazon will do it for them. They should absolutely do this. But it’s not that simple for them. They need to nail the basics of e-commerce, optimize their store and click-and-collect processes and enable a good customer experience. Even offering a barebones experience would be a great start.
KC: At the risk of offering Walmart a little free consulting, if they gave you $2 billion to create a national and functional e-grocery business over the next two years, what three things would you do first?
TF: Since it’s not a ton of money, I would be laser focused in how I invest it. I would direct the investment into three main areas – personalization, replenishment and fulfillment.
First, I would make sure that across my digital experience I am able to connect with shoppers as individuals. Good personalization places relevant products and compelling offers in front of customers, prompting them to buy and engendering their loyalty. I would make sure that my personalization systems are self-learning so that they improve as they are used more. It will be difficult to be as good as Amazon here, but I’d want to see them working at it to have a chance.
Second, I would make sure that I have a strategy to provide for effective replenishment of household consumables. Center store is too vulnerable to new models and Amazon’s efforts, to leave it exposed. I would develop a platform that allows me to lock a good portion of my customers’ regular purchases in. Provide them a level of service that blows their mind. We know which products they use, how and when they use them, and when it is time for replenishment. The potential here is significant.
Third, I would also invest in fulfillment infrastructure and experience. I would optimize my store pick processes so that I can put together orders economically. I would also invest in lower cost local fulfillment facilities (be it dark store or dedicated centers, using manual picking). I would make sure my pickup experience was smooth and value-added for shoppers and I would aggressively partner with last mile delivery providers on delivery for customers that want products delivered to their door. The fulfillment experience can make or break an e-commerce effort. I would make sure it is a great experience, while doing my best to optimize the economics.
KC: Finally, I think that all the current pain that Walmart is going through only means that when they come out the other side, they could be more dangerous … and that traditional retailers should not take any solace from last week's headlines. Agreed?
TF: I agree as long as they are able to execute. I’m not sure that is bad news for Amazon as their e-commerce lead will likely continue to grow. But if Walmart is able to build effective e-commerce capabilities and leverage their store base into a new, stronger model, it could be bad news for other less progressive store-based retailers. They became the current market leader by offering mass merchandise at lowest pricing. That differentiation is basically gone now. However, e-commerce will enable them to become more personally relevant to more shoppers, while still offering great prices, with a pickup or store location just down the street. That would be a powerful combination if they can pull it off.
"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: