Published on: November 4, 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 - is uniquely positioned to address.
And now, the conversation continues...
KC: Based on your experience, to what extent do manufacturers think differently about their various processes - ideation, sourcing, marketing, packaging - because of the growing importance of e-commerce?
Tom Furphy: These are all processes that have a chance to be significantly improved via e-commerce. We’re definitely seeing e-commerce influence these areas today, but it is not yet to the point where it is tipping the scales to become a primary driver. With e-commerce, the distance to the consumer is much shorter than it is in traditional retail. By that I mean that product and messaging reach shoppers more quickly and directly, and there is a tight feedback loop to the retailer and manufacturer. So, for example, a manufacturer that is considering a new product can produce a limited batch of it, market it directly to targeted customer segments, measure the uptake, monitor ratings, reviews and surveys to gauge consumer feedback, and quickly kill, modify or scale the product. This is a very tight process that works well for large and small manufacturers alike. Most large manufacturer businesses are based upon processes to support the scale required to sell through traditional mass retail channels. So e-commerce has been a bit of an adjustment for them, but they are getting there.
KC: Any examples you can think of?
TF: We had a great example of this at Amazon where a large manufacturer avoided disaster by using e-commerce as a testing ground. This manufacturer of a mainstream coffee product wanted to release a premium whole-bean version of their traditional mainstream product. They produced a small batch of the product (one pallet) and put it in the Vine program. (Vine is a program on Amazon used to get new products into the hands of influencers who use the products and post reviews.) For this product, the reviews were overwhelmingly negative. The brand learned that they had established too significant a mainstream/value image that consumers could not get past. Based on the feedback and the market’s bias against them being a premium brand, the manufacturer aborted rollout. All-in the lesson cost them tens of thousands of dollars. Far short of the millions that a bad product line would have cost if brought to market via traditional practices.
Even without producing products, brands can engage consumers directly through e-commerce to test efficacy of various marketing messages, products and programs. Through their websites or a number of engagement platforms, brands can test messages, engage shoppers and seek feedback much more effectively than they can through traditional market research.
Packaging is also an area that is ripe for innovation in e-commerce. We are definitely starting to see advancements made in packaging materials (to handle the rigor of shipping), content (less messaging is required on e-commerce packaging as it is not used to sell from the shelf), form factors and pack sizes (it’s important to get the weight, volume and cost optimized for the product to perform profitably in the channel). A great example here is Dollar Shave Club. Their product arrives in plain corrugated package, optimized for shipping and easy use at home. No finger-slicing, cumbersome theft-resistant clamshells necessary as the product is never at risk of pilferage. As more categories move toward more robust replenishment models, this will advance even further.
KC: Is the tendency to manufacture different lines of products for e-commerce channels and bricks-and-mortar stores? Or find pegs that will fit both round and square holes? (If the latter, do you think this is a mistake?)
TF: Generally, given that e-commerce represents a relatively small portion of a manufacturer’s overall sales, we’re still seeing manufacturers sell the same products through both channels. I don’t think that’s a mistake at this point. It’s not yet practical for most manufacturers to manufacture different products exclusively for the online channel. We are starting to see more product configurations developed that work for the e-commerce channel, such as pack sizes, bundles or combo packs that drive favorable economics. But these are using the same core products. The pegs are still fitting both holes. But this will change significantly as e-commerce grows, the Internet of Things and connected homes play a larger role and replenishment platforms flourish. I think consumers will demand it and manufacturers are ready to embrace that change.
KC: Are bigger manufacturers better or worse at this than small manufacturers?
TF: I think that smaller manufacturers have been better over the past decade, but larger manufacturers are definitely starting to figure it out. At first, when Amazon came onto the scene, it was a fantastic path to market for smaller manufacturers that didn’t have the muscle or financial clout to get onto retail store shelves at scale.
On their website and/or with Amazon, they could send a small batch of products into the network and be live nationally. We saw categories with a wide range of SKUs, such as natural & organic, coffee and supplements that would struggle for shelf space in traditional stores, flourish on Amazon. In many cases, brands like Bob’s Red Mill, Seventh Generation, Annie’s and Nature’s Best outsold the leading traditional brands. Part of that was because these brands weren’t widely available elsewhere, but it was also because all products stood on equal footing. These brands often had more compelling product content than national brands. And they were more responsive and more in tune with shopper preferences. They were scrappier because they had to be.
KC: Do you think there are products being manufactured or not manufactured because of e-commerce? Can you give me an example of a product that exists today that might not have existed if there were no e-commerce channel?
TF: Dollar Shave Club is a great example of a company that would not exist if it weren’t for e-commerce. They have shown that rethinking traditional channels can be very disruptive to certain categories.
As far as individual products go, there are a few examples. We worked with a company named Health Warrior that produced and marketed chia seeds as a “superfood”. That’s right, the same seeds that produce hair on Chia Pets also contain significant nutritional benefits. They may have been able to get to market through specialty stores and eventually through Whole Foods, then into traditional grocery. But would they have had the capital backing to endure the time and cost it would take to build out the channel? Probably not. By going direct and working through Amazon, they were able to build several compelling marketing programs and they were able to take immediate advantage of a New York Times article that featured their product. That enabled them to build a large following for very little capital. They were able to parlay that into traditional distribution into several chains. That would have been virtually impossible without e-commerce.
Another example might be k-cups. When Keurig / Green Mountain first released them, Amazon was the first retailer to offer them. They quickly grew to a significant category for us, which led to their distribution into traditional retail chains.
KC: Is there a danger that manufacturers will pay attention specifically to the logistics issues involved, as opposed to being as consumer-centric as perhaps they should be? Would challenging e-commerce costs cause them to not produce something that they might have otherwise?
TF: That’s an interesting one. It’s really hard to bifurcate customer centricity from logistics.
Take Amazon as an example. When we launched the business we made some seemingly crazy assortment decisions that were really driven by our desire to optimize the economics. Selling cases of Jello and packs of 2,000 Q-tips aren’t really the best shopper solutions. But it enabled us to get in the business, with reasonable unit costs to the consumer, albeit in pack sizes well above what they would prefer. That has improved over time and will continue to do so.
As the e-commerce supply chain further builds out, with more facilities in more local markets, the economics hurdles will lower allowing a much broader range of lower priced items to work. This will allow manufacturers and retailers to configure packs that better appeal to consumers. Eventually, most everything will work in e-commerce. We also feel that consumers will start to order and receive their products on more predictable schedules as replenishment shopping takes hold. This will further improve the efficiency of product flows to the home. At the end of the day, better logistics enable lower costs and a better customer experience. That’s a good thing for shoppers.
"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: