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    Published on: January 27, 2016



    Content Guy's Note: The goal of "The Innovation Conversation" since we started it last year has been 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: I'm curious what you think of what seems to be an avalanche of companies getting into the meal delivery business, with Uber being just the latest example.  Based on your experience, to what extent do you think this trend is being driven by customer demand vs. venture capitalists looking for the next big thing?

    Tom Furphy:
    I think this trend is being driven by both. In areas of reasonably dense population, meal delivery can work. Our good friend Glen Terbeek would always say, “If a pizza can delivered for a few bucks, grocery delivery should be able to work.” The same logic could be applied to meal delivery.

    While there is enough margin, standardization and awareness that allows delivery to work for the local pizza shop, it has historically been more difficult for other types of restaurants to make the economics of delivery work. But now, the business model of thousands of customers being connected to dozens or hundreds of restaurants and connected to masses of drivers is compelling. Everyone with an on-demand app can decide what they want and order it in an instant. That kind of connectivity between customer, restaurant and driver is quite robust. It creates a large addressable market (anyone with a smartphone). It is instant and it can be fed into a logistics and routing system to optimize pickup and delivery paths.

    So, scale, marketing costs and logistics all have a chance at working. That’s much better than a traditional model where, if a single restaurant wanted to consider delivery, they would have to do their own marketing, hire their own drivers and work basically from an inefficient hub and spoke model. That’s expensive.

    That said, it is still a complex business that will face its share of challenges. Marketing is very competitive with many demands on customers’ eyeballs, it is hard to hire and retain good talent, coordination with the existing customer and product flows of restaurants is tricky, and pricing is competitive. I was speaking with another VC recently, who is invested in one of the fastest-growing meal delivery startups. He admitted that the business, while promising, is a tough battle. He feels that it’s a winner-take-all proposition where one, maybe two, firms will win in any market. I would generally agree with that. In most cities except the very largest, it will be difficult for more than one or two services to scale and make a sustainable profit.

    KC: My sense is that this is a lane that traditional food retailers could veer into … that they have the food, the expertise and the existing customers, and it isn't like they have to crate anything from scratch.  What do you think might be the opportunities and the obstacles for these traditional retailers?

    TF:
    I agree. Food retailers should be the incumbents to win in this space. At the FMI Midwinter Executive Conference on Monday, Danny Meyer talked about the trust level and emotional connection that shoppers have with their store and its staff. He talked about how food is personal and that supermarkets are in the best position to serve that personal need. I could not agree more. Sure, cooked meals can create some equipment, staff and training challenges at store level. But even stores that would struggle to offer hot meals could offer, assembled “heat and eat” meals or meal kits like Blue Apron or Plated.

    This should be squarely in the sweet spot of food retailers today. They have spent the last two-plus decades figuring out prepared foods. All that’s left is for them to get the customer connectivity figured out; to make it easy to answer the question of what’s for dinner with a solution that is at-hand in the app. Why not send an alert to your shoppers at noon, letting them know what will be tasting good tonight? Great food available for pickup or convenient delivery, perhaps along with a basket of groceries!

    KC: I sort of hinted at this in my first question, but I want to come back to it.  There have been some stories in recent days about how the problems in the stock market may cause a tightening of capital invested in startups, and how companies like Jet or Instacart could face problems when looking for additional rounds of funding.  How serious is this, and what do you think the impact will be?

    TF:
    I think it’s fairly serious. Venture capital tends to run in cycles of increasing investment levels (some may call that a bubble) and declining investment levels (some call that a burst of the bubble). In a period of increasing investment, such as the last few years, the market gets competitive in supporting what it thinks are promising companies. Capital is readily available to these companies, in large quantities and often at high valuations. The last time this occurred, in the late 1990s and early 2000s, VCs got hurt badly when the market turned on them. The companies they invested in, and thus their investments, became worth much less, sometimes worthless. That hurt many funds’ performance and several funds that sprung up in the bubble are now gone.

    This time around, VCs are investing with more preferential terms that protect them from dilution or “cram down” in their investment value if more money has to go into the company later at the same or lower valuations than when they invested. When these provisions kick in, the investors are protected more than the founders.

    For example, say that a company has raised $500M over its life and was last worth $1B. As that money has come in over time, the investors probably own 75% of the company, with 25% left for the team. If the next round has to be raised at anything less than a $1B valuation, under new terms the team gets squeezed first, before the investors do. In reality, everyone will take a “haircut”, but the founders will get hurt the worst. It will be up to the investors to decide if they want to keep a company afloat or if they want to force a sale or let it die.

    This is not to say that Jet or Instacart will face this, but their investors do hold the cards. Depending on how these companies grow and how favorably they are being viewed by investors, things could get interesting. Additionally, this overall market condition causes VCs to pull back on making new investments, so we will likely see a downturn in overall funding levels in 2016.

    The Innovation Conversation will return ...

    KC's View:

    Published on: January 27, 2016

    by Kevin Coupe

    The Tampa Bay Times reports that Gap is closing 70 stores this week as part of a broader move to reduce its North American fleet by 175 units over the next few years.

    The company says that the move is "part of a comprehensive strategy to position Gap brand for improved business performance and build for the future."

    Meanwhile, the Boston Globe reports that Staples has announced new streamlining efforts that have resulted in the resignation of Demos Parneros, who, the story says, "ran the company’s North American Stores and Online division and has worked for the company for 28 years."

    The story goes on to say that "Shira Goodman, currently president of Staples’ North American Commercial division, will become president of North American Operations. John Wilson, president of Staples Europe, will become president of International Operations and Transformation with responsibility for the company’s strategy and overall transformation efforts. He will continue to be based in Amsterdam."

    CEO Ron Sargent said in an prepared statement that Staples is “streamlining the organization and building a simplified structure that will speed decision-making," and that the "changes will help us compete in a rapidly evolving marketplace, either as a standalone company or in combination with Office Depot."

    Staples has proposed the acquisition of chief rival Office Depot, which itself acquired OfficeMax not that long ago. However, the Federal Trade Commission (FTC) is opposing the merger as anticompetitive.
    KC's View:
    Call it what you want. This is what happens when companies get disrupted and are casting about for a way, any way, to compete in a marketplace where old ways of doing business are less and less relevant and effective.

    Published on: January 27, 2016

    CNN reports on a survey conducted by BMO Capital Markets in which more than 1,000 Whole Foods customers were asked to evaluate the chain's new emphasis on lower prices - with more than seven out of 10 saying that they "had not noticed any changes in prices in Whole Foods over the past three months -- even though the company has touted its efforts to lower prices to be more competitive with supermarkets."

    In addition, "only 24% of customers said organic products at Whole Foods were 'definitely' higher quality than organic food at grocery stores ... Fifty-four percent of those surveyed said the quality of the food was 'sometimes' better at Whole Foods while the remaining 22% said 'not at all'."

    In other words, a significant percentage of Whole Foods shoppers say that the prices are high and suggest that the quality doesn't justify the prices.
    KC's View:
    I'm not sure this is quite the game changing event that CNN does, but I do think it reflects another way in which Whole Foods seems to be off its game lately. The company seems a little disconnected from its shoppers, and that's never a good thing.

    Published on: January 27, 2016

    Internet Retailer reports that a new estimate from Consumer Intelligence Research Partners (CIRP), which keeps track of such things, says that Amazon now has 54 million members of its US Prime program, up 35 percent over 2014.

    That number accounts for some 47 percent of all Amazon US shoppers.

    However, the report isn't all good news for Amazon: "As the number of Prime members increased, the average spending per Prime member fell. In Q4 2014, CIRP estimated Prime members spent an average of $1,500 yearly on Amazon. In Q4 2015, that dropped 27% to $1,100."
    KC's View:
    Average spending may be down, but I'm not sure this is necessarily a bad thing. As Prime membership expands, it is inevitable that new members are going to be less avid users than some of us early adopters. I also think that there are a lot of other Prime benefits, like streaming media, that may be as important to new members as shipping benefits.

    Published on: January 27, 2016

    Bloomberg reports that Christine Tacon, who is the UK's Groceries Code Adjudicator with responsibility "for ensuring Britain's big supermarket chains don't abuse the companies that provide them with products," has concluded after a long investigation that "Tesco prioritized its own finances over treating suppliers fairly, a breach of a government-backed code of conduct that mediates relations between supermarkets and their suppliers."

    While the report is highly critical of Tesco, Tacon does not assess any fines - because she cannot. Her office was only empowered in April 2015 to fine companies found to have violated the rules, but she cannot impose financial penalties on companies where her probes preceded that date.

    However, the story notes that the UK's Serious Fraud Office will have no such limitations if it brings criminal charges against Tesco. as noted here on MNB yesterday, fines as a result of that investigation could be as much as the equivalent of $700 million (US).

    Bloomberg notes that " Tesco has also spent much time and money trying to improve its relations with suppliers. Measures include simplifying the way that terms are calculated and speeding up payments to smaller ones. Tacon noted many suppliers had reported improvements in their relationship with Tesco."
    KC's View:
    To employ the metaphor that Michael Sansolo used yesterday in his column, this has to be a case where CEO Dave Lewis - who joined the company after the alleged violations took place and has spent considerable time and energy trying to put as much distance between Tesco and past misdeed as possible - would love to rip the bandage off as fast as possible and hope that the pain doesn't last very long.

    Published on: January 27, 2016

    GeekWire reports that Amazon has been quietly testing the sale of gift cards for individual Kindle book titles at 61 Bartell Drugs stores in Washington State.

    According to the story, the top row of the kiosk - which only takes up a few square feet - "features cards for three- and six-month Kindle Unlimited memberships, for $29.99 and $49.99 each. Below those are cards featuring the covers of 20 individual ebooks, best-sellers across both fiction and nonfiction, ranging from 'What to Expect When You’re Expecting' and Sheryl Sandberg’s 'Lean In' to Dan Brown’s 'Inferno' and 'The Martian' by Andy Weir.

    "On the back of each ebook card is a quote from an Amazon customer review and a summary of the book, along with an area for writing a message to the recipient and instructions for redeeming the book by scratching off the claim code and going to a dedicated Amazon url to enter it."
    KC's View:
    Amazon gift cards are nothing new, but this is an interesting approach ... I'm not sure it will be the most effective thing they'll ever do, but it certainly speaks to Amazon's willingness to try different things. Gift cards usually are an alternative to a specific present ... so it'll be interesting if this approach gets any traction.

    Published on: January 27, 2016

    AdWeek has a story about a new promotion launched by Walmart and Procter & Gamble timed to take advantage of Super Bowl 50 and "make a play for female NFL fans" - who reportedly make up 46 percent of the Super Bowl television audience.

    The initiative is described as "a two-part effort that's all social and mom-centric.," starting before Christmas and now "encouraging social influencers to post their own Super Bowl party hosting tips using the #GameDayTraditions hashtag. Thus far, participants (mostly moms, by the looks of it) have shared everything from cleaning tips to recipes for seven-layer dip. The social push continues to the end of this week."

    According to the story, "The centerpiece of the Walmart/P&G effort is a video produced by SheSpeaks, a media platform for female influencers that reaches 100 million consumers. The three-and-a-half-minute effort stars Mama McCourty, who knows a thing or two about Sunday football gatherings. McCourty's twin sons, Devin and Jason, both play in the NFL ... Harnessing the power of mommy bloggers has been a favored marketing tactic for several years, but what makes this effort notable isn't just that it's getting women to buzz about the Super Bowl, it's harnessed an army of ordinary moms to rally around a video starring pro football's most famous mom."
    KC's View:
    I like the idea that they're focusing on women, but I'm not sure that sharing recipes and offering cleaning tips is the best way to go. Hell, in my house it'll be me that makes the red beans and rice, and Mrs. Content Guy will get irritated if anything interrupts the game. I think she might find this to be a little condescending ... I just don't know if that'll be a universal reaction.

    Published on: January 27, 2016

    The Bergen Record reports that German discounter Lidl, which is preparing to begin opening stores in the US no later than 2018, "has identified New Jersey as one of the states where it hopes to launch its entry into the United States."

    No locations have yet been publicly identified. However, the story notes that Lidl's rival, Aldi, "has been in North Jersey for five years, and now has 36 stores throughout the state." Lidl stores tend to be about twice as large as Aldi, with a greater emphasis on fresh food.
    KC's View:
    When I read this, all I could think of was the scene from Casablanca in which Major Strasser asks Rick Blaine (Humphrey Bogart) if he can imagine the Germans in New York, and he replies, "Well there are certain sections of New York, Major, that I wouldn't advise you to try to invade."

    Same goes for certain sections of New Jersey. Though I do think that Lidl is going to find itself getting positive receptions in many parts of the US, and will prove to be a disruptive influence on many markets.

    Published on: January 27, 2016

    MarketWatch reports that Walmart management "is urging shareholders to reject an unsolicited 'mini-tender' offer from TRC Capital Corp. ... for 2 million shares of the company's common stock. The offer is for $59.88 per share, about 4.3% less than the closing price on Jan. 19.

    "Walmart is in no way associated with TRC and recommends that shareholders reject this unsolicited offer," the company said in a prepared statement.
    KC's View:

    Published on: January 27, 2016

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

    Time reports that "Walmart, Coca-Cola, Nestlé and PepsiCo will donate 6.5 million bottles of water to about 10,000 public school students in Flint, Mich., where the water supply has been contaminated with lead. The companies announced the donation on Tuesday, joining other celebrities and public figures who have stepped up to give money and water to the city plagued by a crisis that has drawn national attention."

    Nice to see that companies are stepping in to compensate for an appalling lack of governmental leadership on this issue. It seems clear, from my reading, that a decision was made to change water supplies for purely financial reasons ... and now the city and state will have to live with the consequences, perhaps for decades.


    • In the UK, the Telegraph reports that Tesco plans to shut down the two Food-to-Go shops that it created to compete with Pret A Manger in the sandwich market. Tesco went for what it believed was a more upmarket look and feel for its entries, but now is closing the shops, according to the story, because of insufficient customer interest and inadequate sales.
    KC's View:

    Published on: January 27, 2016

    Yesterday, I wrote that “Marketing Daily has an interview with Forrester e-commerce expert Sucharita Mulpuru in which he assesses the current state of online shopping. Among his insights..."

    MNB reader David Hegle wrote in to let me known that Sucharita Mulpuru, in fact, is not a he.

    My apologies. I should've checked.
    KC's View:

    Published on: January 27, 2016

    Tessio is dead. Again.

    Abe Vigoda, who played Tessio in the original The Godfather, meeting an ignominious end after he betrayed the Corleone family (for reasons that were business, not personal), has passed away at age 94. After The Godfather, Vigoda went on to television fame as Det. Phil Fish on the "Barney Miller" television series.

    The New York Times notes that Vigoda "outlived by about 34 years an erroneous report of his death that made him a cult figure."
    KC's View:
    I met Vigoda once, on the "Barney Miller" set, when I had a chance to spend time there as a film/TV student at Loyola Marymount University. My memory was that he had an enormously droll sense of humor, keeping the cast and crew in stitches during rehearsal. But for me, he'll always be Tessio ...

    Published on: January 27, 2016

    Yesterday, in a piece about a new form of genetically modified rice that actually helps to fight global warming, I commented:

    What's the over/under on when someone points to this week's snowstorm in the eastern US as proof positive that the world isn't really getting warmer? Just asking...

    MNB user Thomas Palmer responded:

    OK, I love alternative energy and have since I was a kid so I gotta make a comment. Some years back I went to the local CC to learn how to take the family farm off the grid and took a Meteorology course. It complemented many of the environmental studies and alternative energy courses I was interested in. What an eye opening course for me – this is some really complicated stuff.

    My "scientific" understanding of global warming is that as the planet begins to heat up, increased moisture is present in the atmosphere which actually causes more rain and snow. You would think just the opposite, but if you can remember studying the water cycle in middle school (aka junior HS when we were kids), the increased heat in the lower atmosphere causes the humid air to rapidly rise into the upper atmosphere and condense (clouds). Once the condensation level reaches saturation, rainstorms. The snow storm that hit the Carolinas over the past weekend actually had thunder and lightning; which thoroughly scared me to death when I first heard it. I thought the roof was coming down.

    As crazy as the weather is, the planet is definitely getting warmer and we have temperature records to show this. And whether from man-made causes or not, if the planet heats up  it will cause many problems and probably impact crop yields. Anything we can do to prevent warming is better for us earth dwellers.
     
    I know you see the trends in upcoming generations to eat better from articles you have written and this same level of attention by them to be responsible includes the planet – recycling, reduced driver's license applications as kids (yeah – this one really surprised me), organic food chain, and more.
     
    As Bob Dylan said, "The times they are a changing'."


    But MNB reader Scott M. Huff wrote:

    I must point out that your blithe references to “global warming” as if it is a fact rubs a lot of us the wrong way.  Global warming, or Climate change as the new popular term goes, is an extreme political issue that should not be addressed as fact by your publication, imho.  I am not suggesting that it should be debated in your pages, just be careful about assuming the rest of us are aligned with this belief.  The 1/24/16 WSJ Opinion piece, The Climate Snow Job, nicely addresses that this issue is not resolved (at least not the way you think) and it remains a political hot potato, better addressed in other forums that are not about Retail.

    Nothing blithe about it. And for the record, rubbing people the wrong way on certain issues is sort of what I do for a living. I like hot potatoes, often write about things that I know will be controversial and that some folks think are not appropriate for a forum like this.

    (BTW...If you think MNB is just about retail, then you haven't been paying attention. Though I do think that in the email above, Thomas Palmer actually makes the case for why global warming will have an impact on food retailing.)

    I suspect that even more people disagree with me about my oft-stated opinions about the designated hitter than disagree with me about global warming. I also believe in gravity ... but some people might disagree with me about that, too.

    I found that WSJ opinion piece to be utterly unpersuasive and far more political than scientific. You are actually entirely correct when you say that global warming is a political hot potato. It shouldn't be a political issue, but it is.

    But you are certainly entitled to disagree with me and to tell me so ... and I'm happy to post your email. Just as I'm happy to post emails from those poor, misguided souls who believe that the designated hitter rule does not make the American League inferior to the National League.
    KC's View: