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    Published on: January 15, 2016

    Walmart announced this morning that it plans to close 269 stores around the world, including 154 in the US. The US closings include 102 Walmart Express stores, 23 Neighborhood Market stores, 12 Supercenters and four Sam's Club stores.

    CNBC writes that Walmart "is closing 115 stores, including 60 recently shuttered, unprofitable stores in Brazil, which represent about 5 percent of that market's sales. The remainder of the stores are primarily small, money-losing stores in other Latin American markets."

    The company says that this is part of a general retooling and re-evaluation of its business, eliminating unprofitable stores and units that may have been cannibalizing sales from other Walmart stores. The company says it plans to open more than 400 stores in the coming year, with CNBC characterizing this as a shift "toward Supercenters and Neighborhood Markets in profitable locations."

    CNBC also notes that 2016 has begun with a raft of store closings announced by retailers that include Macy's and Sears/Kmart.
    KC's View:
    In a business climate that does not reward waste and inefficiency, it makes sense for Walmart to make these moves, which yet again illustrate the degree to which CEO Doug McMillon is willing to make tough moves to position the company for long-term success.

    It isn't mentioned in any of the coverage to this point, but I think that the natural next step will be for Walmart to announce the degree to which it wants to integrate its bricks-and-mortar business with online operations ... and getting rid of inefficient stores may be the first step toward expanding click-and-collect and delivery operations chain-wide in the US.

    Published on: January 15, 2016

    by Kevin Coupe

    So much for a harmonious, self-organizing, non-hierarchical business environment.

    The New York Times had an interesting story the other day about how Zappos' Holocracy experiment is not going as hoped. The story says that eighteen percent of the company, or about 260 people, have left the company since the new organizational approach was adopted.

    The story notes that "the exodus began after the chief executive, Tony Hsieh, announced that the company was going to adopt Holacracy, which is supposed to promote collaboration and abolish hierarchy. Anyone who did not accept the change could take a generous buyout, Mr. Hsieh said at the time. Within weeks, about 14 percent of the company, or 210 employees, had left the company, an Amazon subsidiary known for its playful corporate culture, convivial atmosphere and ample perks." And now, the number has grown to 18 percent.

    Even those who stayed remain confused, asking questions such as, "Who did they report to if there were no bosses? What was expected of them if they did not have a job title? How would they be compensated?"

    Company COO Arun Rajan tells the Times, "While we have lost a number of folks, it is important to note that we have a significant group of highly talented individuals who will be staying to help move Zappos forward.”

    And, the Times writes, "Zappos isn’t at risk of closing shop. But the latest departures represent another blow to Holocracy and to Mr. Hsieh’s vision of a harmonious, self-organizing company."

    I do think it is important to keep the numbers in perspective. If 18 percent of the company cannot handle Holocracy, that means that 82 percent of employees are willing to give it a shot.

    None of this should be a surprise. The vast majority of us have been trained to exist within hierarchical, bureaucratic organizations ... these systems serve as security blankets for most of us. Yank away the security blanket, and we don't know what to do.

    I think that what Hsieh and Zappos are trying to do is admirable, and I'm glad they are persisting. Hierarchies and bureaucracies, especially in the 21st century, can be the very things that get in the way of innovation.

    Remember what retired Gen. Stanley McChrystal said on "The Daily Show with Jon Stewart" last year when he plugged his book, "Team of Teams: New Rules of Engagement in a Complex World." There is a chart in his book that is relevant to this discussion, showing the current military-political structure in the Middle East. The chart had two figures. One was "what we were designed for," and the other was "what we were facing."

    We have to think differently if we are going to innovate differently, and then executive those innovations effectively. That's the real Eye-Opening lesson from Zappos.

    (See the chart below ... and you can click on the graphic to see the entire interview.)



    KC's View:

    Published on: January 15, 2016

    Amazon, which has been expanding its presence in the shipping business, has been approved by the Federal Maritime Commission for shipping ocean freight for other companies, according to a story in the Seattle Times.

    The paper writes that "the online retailer’s Chinese subsidiary registered to operate as a freight forwarder. That means Amazon.com is now authorized to sell ocean-freight services."

    The move comes as Amazon, which already has trucks all over the country, is negotiating to lease 20 Boeing 767 cargo jets, and is looking to buy 75 percent of a French package delivery service that it does not already own. While Amazon does not talk about these various moves, the broader strategy seems to be to take control of as much of its delivery logistics operations as possible, with the possibility that it could offer those services to other companies, getting into competition with FedEx, UPS, DHL and the US Postal Service (USPS).
    KC's View:
    Amazon is already two-thirds into becoming the Steve Martin-John Candy movie, Planes, Trains and Automobiles. I wouldn't be surprised if we find out Amazon is negotiating to buy a railroad somewhere ... and maybe even a fleet of bicycles.

    This is an approach to dominating the e-commerce "last mile" that I'm not sure a lot of us would've seen coming ... but it could make a lot of sense in the long run. (More about this in "Your Views," below.)

    Published on: January 15, 2016

    The Los Angeles Times reports that "Amazon.com is temporarily chopping the price of its Prime entertainment and shipping subscription service to $73 from $99." The deal is only available this weekend.

    The move is seen as a way for Amazon to offer a little bait to consumers who may be choosing between a variety of online services offering differentiated entertainment options.

    The Times writes that "Amazon is waged in an expensive video battle against fellow streaming competitors Netflix, Hulu and HBO. Each service has its own perks -- Prime, for example, gives you free two-day shipping when shopping on Amazon, while Hulu provides on-demand access to shows soon after they air on television. But Amazon and Netflix are also rapidly producing high-quality shows that are exclusive to their own service. Subscribers are key to the companies’ fortunes, and unique video has become a main attraction."

    Amazon has experience with using bait to attract new customers. Investors's Business Daily reports that Amazon Prime "has penetrated nearly 40% of the U.S. market, with some 41 million members, according to a Cowen survey ... In December, membership had risen 32% from the previous December, said Cowen, bolstered by Amazon's shopping 'holiday' over the summer dubbed Amazon Prime Day. The one-day promotion drove thousands to buy the $99-a-year loyalty program, which includes perks such as free two-day shipping, access to streaming video content and free e-books."
    KC's View:
    I would note that Showtime also is offering a free trial to cable users this weekend, timed to coincide with the premiere of two new series, "The Circus" and "Billions," as well as a big boxing match. It would appear that everybody is feeling the heat...

    While, as the Investor's Business Daily story says, Amazon did not invent the loyalty program, it certainly seems to be bringing new dimensions to the concept.

    Published on: January 15, 2016

    The New York Times has an intriguing column by Farhad Manjoo in which he talks about media competition and suggests that traditional competitors (content suppliers, cable companies, broadcast networks) may not be worried enough about Netflix and its long-term potential.

    While "Netflix is still a tiny frigate in the global sea of the content business," Manjoo writes, there is a "scarier proposition" that traditional companies ought to consider.

    "What if Netflix is the Amazon of the entertainment industry — the embodiment of a slow, expensive, high-risk effort to consume the entirety of your business?"

    The good news, for the moment, "is that there are lots of reasons that Netflix’s strategy won’t work," Manjoo writes. " The bad news: So far, it just keeps working." And, "like Amazon before it, Netflix’s business is so daring that it seems like it shouldn’t work — and yet the company keeps surprising everyone."

    It is a column with lots of metaphors for every business ... and you can, and should, read it here.
    KC's View:
    I know it seems like we have a lot of Amazon stuff today. It isn't by design ... but somehow that's just how the stories break.

    Published on: January 15, 2016

    • The Business Standard reports that Walmart is "exploring ways to tie up with leading e-commerce companies in India, including Flipkart, Snapdeal, ShopClues, Grofers and Bigbasket, to tap the growing online retail opportunity" that it sees there.

    Walmart has been in India for eight years, but this is the first time that it has actively pursued such partnerships. The story suggests that this is at least in part a response to Amazon, which is seen as willing to make a major investment in competing with those Indian e-commerce companies.
    KC's View:
    Oy. More Amazon.

    Published on: January 15, 2016

    • Ahold and Delhaize this morning announced what is called "the filing of the common draft terms of the cross-border merger," described as "one of the required steps ahead of convening the companies' respective Extraordinary General Meetings of shareholders, which are expected to take place in the first half of 2016."

    The merger proposal originally was made in June 2015, and is expected to be concluded by mid-2016.


    • The Buffalo News reports that "Ahold USA plans to close its warehouses in Lancaster and Cheektowaga, eliminating 600 jobs by August ... The company, which used to own Tops Friendly Markets (in Buffalo), is shifting its warehouse operations to C&S Wholesale in Pennsylvania and Massachusetts."

    Ahold said C&S warehouses in Bethlehem, Pa., and South Hatfield, Mass., are more centrally located to its Giant Landover, Stop & Shop New England, Stop & Shop New York Metro and Giant Carlisle chains than the Buffalo facilities.
    KC's View:

    Published on: January 15, 2016

    Reuters reports that Walmart has named Guilherme Loureiro, most recently the CEO of its Brazil business, to be the new CEO of Walmex in Mexico.

    According to the story, "He will take over from Enrique Ostale as CEO for Mexico and Central America, while Ostale will continue in his role as chief executive of Wal-Mart Latin America."

    Walmart has been restructuring its Brazil business, and recently shuttered 10 percent of its stores there.


    • Hy-Vee announced yesterday that it has named Mike Agostino, who has been president of Amber Pharmacy/Hy-Vee Pharmacy Solutions, to be its new vice president of pharmacy innovation and business development, a new position at the company.
    KC's View:

    Published on: January 15, 2016

    The annual National Retail Federation (NRF) "Big Show" is scheduled to take place next week, from January 17- 20, in New York City's Jacob Javits Convention Center ... and I'm planning to spend some time there next Monday, January 18.

    If there are any MNB readers who'd like to get together, I'll be camping out from 1-3 pm at the MyWebGrocer booth, #4452 ... I'll have some copies of my books to give away, and I'm always happy to catch up with members of the MNB community. Hope to see you there...
    KC's View:

    Published on: January 15, 2016

    The other day, we posted an email from MNB reader Joe Elledge, responding to our stories about Amazon getting into the package shipment business.

    He suggested that despite my enthusiasm for Amazon, he believes that it may have an unsustainable business model:

    I am a logistician.  Could it be Amazon’s speed, innovation, and executional excellence are indications of a frantic effort to make an unsustainable business model viable?   Amazon’s core operating model is the business equivalent of defying gravity.  Exploring an expansion that would have it competing with UPS and FEDEX smacks of desperation to me. You have consistently refused to look beyond Amazon’s speed, innovation, customer focus, and executional excellence to the persistent failure of its core operating model to deliver competitive levels of profitability.  Until it delivers competitive levels of shareholder profitability, Amazon will be just an experiment as opposed to a viable business.

    I responded that I thought he was viewing Amazon through an old-world prism:

    First of all, Amazon's lack of profitability can be traced directly to its constant and persistent investment in innovative technologies; they believe that they cannot let up on the gas for even a minute, because to do so is to risk being overtaken by the competition. If you invest in Amazon stock, you have to know that going in. It is a long-term play.

    I think it is sort of ironic that in saying that Amazon does not deliver "competitive levels of profitability" (an analysis that depends, I think, on your definition of "competitive"), you concede the existence of "Amazon’s speed, innovation, customer focus, and executional excellence."

    I've said this before, and I'll say it again. Realities of the modern world may demand a rethinking of how companies and investors define the balance between innovation and profitability.


    Not surprisingly, Joe Elledge had some thoughts:

    I want to respond to your response about my comments about Amazon being an experiment versus a sustainable business.  A sustainable business must recover its costs plus make a profit – Amazon has not done this.  Let’s talk specifics as noted by Dan Gilmore, a fellow logistician, in his Supply Chain Digest blog:

    • At the end the third quarter Amazon’s had a net loss of $1.22 billion with shipping costs of 2.72 billion exceeding shipping revenues (Prime Now revenues plus shipping charges) of $1.49 billion.

    • If you divide Amazon’s loss on shipping costs into its merchandise sales of $17.7 billion you get 6.8% loss on net sales.

    • Fulfillment costs (not including shipping and not withstanding robots) were $3.23 billion or 18% of merchandise sales.

    • This means that shipping and fulfillment costs combined were 24.8% of merchandise sales versus a gross profit margin of 34%.

    • So…there are only 10% of merchandise sales remaining to cover administrative and other costs after fulfillment and shipping costs.

    Does a net profit somewhere south of 10% justify Amazon’s current stock price?  I think not. For perspective, the railroad Union Pacific has a net profit margin of 22%.   Could that be why Warren Buffet paid $34 billion to buy another railroad but he has thus far not paid a nickel for an e-commerce retailer?

    Let’s take it down to an individual bottle of shampoo.  Someone like Wal-Mart or Kroger is probably paying around $.30 to deliver a bottle of shampoo to a store.   Shipping the same bottle to a home via FEDEX or UPS will cost you $4.00.   That means I must pay an additional $3.70 for the convenience of having that bottle of shampoo shipped to my home.  Since shampoo costs around $5.00 a bottle, I submit that not many people are going to pay the $3.70 mark-up to get it from Amazon.

    Let’s get specific again and talk food.  As you have often said, Amazon is about making things easier to buy.  When you are talking staple food items like milk, eggs, rice, and such, Amazon can only offer convenience of home delivery because these items are available almost anywhere.   How much is the general public willing to pay for the convenience of home food delivery?   Yes, there are a few consultants and bloggers like you who have can pay for convenience, but I submit you are part of a very small segment of the overall population.

    And yes – Amazon is just experimenting with food and CPG.  But these bulk staple items are the core flow that delivers efficient supply chain operations and low operating costs for traditional brick and mortar retailer like Wal-Mart or Kroger.  Someone like a Wal-Mart, if you will, is surely riding flat screen TV’s and other high margin items on these staple flows for little to no net increase in overall shipping costs.  Amazon’s distribution system lacks this core, highly efficient, high velocity stream from its warehouses to its customers.  That’s why it cannot recover its shipping costs.  Of course, to see a sack of potatoes slung under a drone someday would be a wonder to behold.  Or perhaps Amazon will learn to digitize potatoes and deliver via the internet?

    Given the above, is it any wonder that Amazon is exploring getting into the parcel shipping business with FEDEX, UPS, and the US Postal Service?  Good luck with that!

    When they start paying a dividend, then I will say Amazon has transitioned from being an experiment to being a business.  It’s been over ten years.  The clock is ticking.  At some point, Amazon’s holiday from history will end.

    All that said, there is much to be learned from the Amazon experiment – even if it is what not to do!


    First of all, I'm not smart enough to respond to all Joe's points. But let me offer two quick thoughts.

    First, I don't equate "sustainable business model" with "stock price."

    Second, you're right about Warren Buffett investing in railroads and not e-commerce businesses. (Though I'm not sure he's never done so.) But he also invested in Tesco, describing it as an enormous mistake. So he's hardly infallible.

    But as I say, I'm not smart enough to respond in detail. But, as it happens, I know someone who is - Tom Furphy, who launched Amazon into the CPG business, started Amazon Fresh, and who (in what I'm sure he will describe as the pinnacle of his career) does "The Innovation Conversation" on MNB with me every other Wednesday and on the road here and abroad at conferences.

    And so I asked Tom to respond, with his greater knowledge and experience, to what Joe Elledge said:

    Much of what Joe states is absolutely true. And taken without the context of Amazon’s vision makes good sense. However, I would not underestimate the idea that Amazon is in complete control of where the model is heading.

    Amazon employs hundreds of the top logisticians in the world, from all the top schools and all the best employers. They perform their work fully schooled in Amazon’s vision to one day have inventory deployed in local markets, available to serve the vast majority of its volume same day. That will ultimately mean local route delivery for a high portion of the volume, delivered with a drop density that is economically viable (they know the number necessary). It means delivering the bottle of shampoo not alone, but along with a basket of goods that has a contribution margin sufficient to cover the cost of the pick and delivery. It’s been modeled in depth, is more than possible and will be achieved when Amazon reaches a market penetration that enables a volume where they can achieve the required delivery density.

    To date Amazon has invested in becoming the go-to place to find anything at a great price, delivered free or inexpensively. That has meant building a massive assortment, but only of SKUs that it can profitably ship. To ship the shampoo that Joe mentions, today the customer has three choices: 1 – buy it in a bundle of two or three where the dollar profit can cover the cost of free shipping, 2 – order it from AmazonFresh within a basket of goods that covers the delivery cost, 3 – order it from Prime Pantry within a box of goods that is optimized for value, cube and weight. It would be hard to find the SKU available and purchasable as a single unit from Amazon. But if so it would be up to customer to pay the delivery fee.
     
    When I got to Amazon, a unit had to sell for $15 to have a chance at profitability. Today that number is below $10. And it will keep dropping as Amazon moves more inventory forward into more markets.


    It seems to me that it is important to remember that while Jeff Bezos may have audacious plans, he's hardly a guy who ignores numbers as he constructs his business. That's why, as Tom says, he employs so many logisticians, and why Amazon is a business built on an ocean of algorithms.

    Not everybody is going to believe, and not everybody is going to see what Bezos sees. Ten years from now, we'll know who was right.

    I'd bet on Amazon. But here's the really good news, at least form my perspective: however it turns out, I'm going to have a lot to write about.

    Logisticians, it seems to me, depend on logic when they draw conclusions. But as Spock says in Star Trek VI: The Undiscovered Country, "Logic is the beginning of wisdom ... not the end." And so I would suggest that while Amazon is using numbers and algorithms and formulas on which to build its business, it is its vision of how to move beyond logic and numbers - seeing what is possible, not just what has been done before - that makes it so formidable and disruptive.
    KC's View:

    Published on: January 15, 2016

    Sunday night always has been a good night for television, going back to the days of Ed Sullivan and "Bonanza" when I was growing up, to more recently, when one has been able to count on programs like "Homeland," "Downton Abbey," and "The Sopranos." (Mrs. Content Guy has a thing for 'Madam Secretary," and I must confess that she's drawn me in on this one. Me, I can't wait for John Oliver to come back to HBO in February, at which point he'll apply needed sanity and sarcasm to a crazy world.)

    We may live in a time when we all can watch what we want whenever we want, but there's something to be said for "appointment television," which prompts one to find a television when a program is first aired. People still go to work on Monday morning wanting to talk about this program or that, and it is tough to be left out of the conversation.

    "Billions" debuts this weekend on Showtime. I'm pretty sure we'll be able to add it to the list.

    The show is essentially a battle of two heavyweight actors - Damien Lewis and Paul Giamatti - playing two heavyweight characters, hedge fund billionaire Bobby Axelrod and Chuck Rhoades, the U.S. attorney for the Southern District of New York (which used to be Rudolph Giuliani's job). Axelrod's wealth may be ill-gotten, and Rhoades wants to prosecute ... though, because he has his eye on higher office, he only wants to do so if he can be guaranteed a win.

    Complicating their lives is Wendy, played by the wonderful Maggie Siff, who is married to Chuck but works for Bobby in a high HR position. And I suspect that her role will become ever-more pivotal and interesting as time goes on.

    The writing may be a little soap opera-ish, but the talent in front of and behind the camera is first rate, with what appears to be a real understanding of what makes people like this tick. I suspect that as episodes go by, the plot will thicken and the context will deepen, and we'll all get involved with this political, financial and emotional battle.

    And Sunday nights will continue to offer us what NBC used to call must-see TV. "Billions" has the potential of being a new "Sopranos," populated by characters just as repulsive and irresistible.




    I wasn't entirely displeased by yesterday Oscar nominations, and I'm always happy when I've seen most of the Best Picture nominees; in this case, there only are two I haven't seen, Room and The Revenant. I do have some catching up to do when it comes to the performance nominees ... I've only seen two out of five Best Actor nominees, one out of the five in the Best Actress contest, and one of the five Best Supporting Actresses. (I've done better in Best Supporting Actor - four out of five.)

    I do think that the film industry has to be concerned about the general lack of diversity, with only white people nominated in the major categories. (I can only imagine what Oscar host Chris Rock will have to say about this.) Few businesses can survive in this day and age if they have that lack of diversity, and the film business isn't an exception.

    On the other hand, it is important not to make too much of the Academy Awards. They are, to a great degree, a popularity contest that doesn't measure real excellence in a meaningful way. I loved Rocky as much as anyone, but in 1977 was it really the Best Picture when compared to the other nominees that year - All The President's Men, Network, and Taxi Driver? (It was probably better than Bound for Glory, a largely forgotten but underrated biopic about Woody Guthrie.) The Oscars are fun, and that's enough.

    That said, last year was a pretty good year for movies, with The Big Short and Spotlight my personal favorites so far. I'll make my picks when we get closer to Oscar night, February 28.




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

    Slàinte!
    KC's View: