Published on: February 10, 2016
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: Tom, perhaps the biggest e-commerce news of the last week had to do with bricks-and-mortar, when the CEO of a mall management company said it was his understanding that Amazon planned to open 300-400 bookstores along the lines of what it has been testing in Seattle. Now, he walked that back pretty quickly the next day - I suspect because someone from Amazon headquarters gave him a call (or maybe put a horse's head in his bed) and made him an offer he couldn't refuse. But it's been my feeling all along that when people talk about Amazon opening physical stores, it tends to be wishful thinking on the part of traditionalists who would like to fit Amazon into a box into which it has no intention being confided. Would you agree? Is it inevitable that Amazon will become an omnichannel retailer?
Tom Furphy: Amazon’s physical retail moves are interesting. It is counterintuitive to see them opening physical stores, when the crux of their model – unlimited selection, a powerful platform and sophisticated shipping programs – flies in the face of physical retail. Further, traditional retail has been flat, but Amazon continues to grow well above 20%. So the Amazon model seems to be working based upon the votes of customers.
That said, they did open the store here in Seattle last year. It is a well-presented store, with a balance of physical and e-commerce retail rolled into one. I’m sure they are testing and learning fervently there and are using those results to model future stores.
If they are planning to open 300-400 more stores, it is because they have proven what they set out to prove and have used that data to model their future strategy. Are they looking to roll out more book-only stores? Or are they planning to expand into showrooms for additional products? Not sure. It is interesting to think about a series of showrooms or service centers, where customers can try products, pick up orders from lockers, return products, get demos for Echo or Dash, try a Kindle or meet with an AWS expert. If they can pack a lot of utility and a great experience into a reasonably small footprint, it could be a winner.
And it also could start to define what the next generation of retail might look like. I don’t believe the rationale for rolling out stores is because they feel they need physical retail to survive long-term. Perhaps they feel like enough of their customers are looking for the physical experience and that they have found something that works in the bookstores. Whatever the reason, I guarantee that it’s based on data, a thorough analysis and a calculated risk.
KC: I did see one idea for an Amazon store that was kind of intriguing … a sort of Amazon Outlet store chain (that would go in all these outlet malls that are all over the place) that would serve to sell the stuff that it needs or wants to get rid of, for whatever the reason. (I suppose it could also sell the week's top ten items.) But what sort of intrigued me about the idea was the suggestion that it would be for Prime members only … if you weren't a Prime member, you couldn't get in. Sort of like Costco. The idea was that not only would it give Amazon another selling venue, but also could drive even more Prime memberships. Now, I'm probably missing all sorts of problems with this model, but I'm intrigued … Thoughts?
TF: Hmmm. That’s a tough one to like. Prime members have declared their loyalty to Amazon, including its model of two-day, next-day and now same-day shipping. They know that Amazon gives them a virtually unlimited assortment of physical and digital products at great prices. They have more or less “sworn off” bargain hunting across stores because they know Amazon provides a great value. I’m not sure why, or even how, Amazon could offer close out items through a physical store. Given the economics of getting product to the stores and staffing those stores seems daunting. Amazon’s sophisticated inventory and pricing algorithms already move product through the system optimally. The “yield” of every product is optimized by balancing price, inventory & supply chain costs, fulfillment costs and customer demand. The cost of pulling this inventory from current stock, then trans-shipping to a physical, manned store just doesn’t add up.
The Innovation Conversation will return ...
- KC's View:
As a postscript, I wanted to point out that as dedicated as Amazon may be to algorithms, someone there apparently does have a sense of humor.
Witness the stories this morning about how, deep in the terms of service for a new game engine for developers called Lumberjack, there is a clause describing the circumstances under which the terms can be voided..."a widespread viral infection transmitted via bites or contact with bodily fluids that causes human corpses to reanimate and seek to consume living human flesh, blood, brain or nerve tissue and is likely to result in the fall of organized civilization.
In other words, a zombie apocalypse.
I do love a company with a sense of humor.