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    Published on: March 23, 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: So there's been a lot of Instacart news since last we talked.  Let's start with the story about how Instacart now is asking manufacturers to help pay for the act of delivering their products, essentially asking for promotional fees or discounts, or charging them to advertise on its website.

    It seems to me that one of the things that Instacart will have to be careful about is getting in between the retailers they serve and manufacturer allowances … it has been my impression that this is a dangerous place to me, like between a lion and a hunk of raw meat.  What do you think this tells us about Instacart's profitability and competitive issues?  Does it suggest weakness or strength?

    Tom Furphy:
    Instacart is a bit of an enigma to me. I’m sure they have a very smart team that has a vision for the model that gets it to scale and to profitability. And their list of investors is second to none. They’ve raised a significant amount of capital at progressively higher valuations. I would assume that these investors did their proper diligence and they see a path to true disruption and industry dominance. That leads me to think that there is more to the Instacart model that is yet to be revealed.

    That said, a fundamental challenge with the current model is that it relies on picking from stores, then has to cover the cost of delivery. Instacart’s supply chain / fulfillment cost structure starts at the retail shelf, where products are already fully burdened financially. By the time a product gets to the shelf, it has already gone through the manufacturing process, through manufacturer warehousing and distribution, through retail and/or wholesale distribution and has absorbed the labor of being stocked on the shelf. Even after 10-15% manufacturer funding, the item only has a few points of profit left. That’s why manufacturer funding is so important to retailers, even in a traditional brick and mortar environment. They cannot be profitable without it.

    To accommodate the additional costs of Instacart’s picking and delivery service one or a combination of the manufacturer, retailer or customer has to pony up. So it’s not surprising that Instacart is asking manufacturers for funding. To Instacart’s defense, they are providing a value-added service by marketing these products and enabling them to get into shoppers’ hands in the way these shoppers are asking. And it’s likely that manufacturers have a little more margin room than retailers do to cover the cost.

    Ultimately, Instacart has to get their model to the point where they can pick 4-5 orders per hour and then follow that with strong delivery density. That is, they need to get to the point where their “drivers” are delivering 4-5 orders per hour. Even at that rate, manufacturers, retailers and/or customers will have to pay to cover the costs. So, to answer the question, I’m not sure if that exposes any kind of flaw in the model. It just is what it is. That’s why I’d have to think there is more the model that we haven’t seen. If not, it will be a tough slog to make it work.

    KC: Agreed. I continue to think that the real play here for Instacart is to create enough volume that it looks attractive as a takeover target ... and that when retailers decide to go with Instacart, they are looking for a turnkey solution to an e-commerce challenge that requires a lot more than that.

    Which leads me to the other Instacart news that I found interesting. There actually were two headlines.  First, the news that Whole Foods is doubling down in its Instacart relationship, expanding the number of cities and stores where they work together.  And the other was the news that in Washington, DC, Ahold-owned Giant is going to use Instacart to supplement its Peapod offering in certain neighborhoods.  My reaction to the first is that Whole Foods has so many things on its plate that it does not want to get any more involved in e-commerce than it has to, and therefore is outsourcing this business to Instacart;  as for Giant, I have to wonder if this has to do with fast scalability once Ahold's acquisition of Delhaize takes place.  Your thoughts?

    From everything I’ve read, Whole Foods has been happy with their Instacart relationship. They are quoting that a strong and growing portion of sales are moving through the service, at basket values much higher than their average store baskets, showing shopper appetite for the convenience. That’s not surprising, given that their higher end customer has the financial wherewithal to pay a delivery fee to cover at least some of the costs. Also, Whole Foods does tend to be a higher margin operator than many in the grocery industry, so they can absorb a bit more of the service cost than others. In light of the factors we discussed in the question above, I’m not sure that the Whole Foods / Instacart partnership is profitable, but I can understand why Whole Foods would double down in store rollouts and make an investment in the company. It enables them to play in e-commerce in a way that appeals to their customer. It creates momentum in the space that they can build upon with different models like Click & Collect.

    Also, the investment allows them to participate in any financial upside that may result when the company is sold or goes public. Interestingly, as an investor they are likely granted certain information rights in the company. This would enable them to better understand and influence the economics of the model. It would also allow them to a view into the extent to which other retailers are using the service. Ironically, their investment may actually work against itself by scaring other retailers off.

    I admit that I was a little surprised to see the Ahold / Instacart partnership. But it does give Ahold a chance to see the model up close and understand how it might work for their stores and customers. It also is a potential way to participate in same-day delivery, which is difficult in a fulfillment center / delivery model like Peapod’s. And in the event that they like what they see, it does provide them a potentially fast-scaling model for e-commerce after the Delhaize acquisition. It will be interesting to watch how that unfolds.

    The Innovation Conversation will continue ...

    KC's View:

    Published on: March 23, 2016

    by Kevin Coupe

    BidnessEtc reports that China-based Alibaba Group Holding has announced that "the overall transaction volume on all its websites has reached ... $476 billion for its fiscal year ending March 31. The figure is perhaps a major milestone for Alibaba since it sets the company up to reach its long time goal of becoming the biggest retail platform in the globe leaving Wal-Mart Stores, Inc. in the dust.

    "For its latest fiscal year, Wal-Mart reported $478.6 billion in net sales, just $2.6 billion ahead of Alibaba’s total gross merchandise volume for roughly the same time period. Alibaba’s CEO Daniel Zhang has projected that in the next four years Alibaba’s yearly trading volume will hit $980 billion."

    It is important to remember that Alibaba is less a retailer and more a trading platform for other merchants, which is a very different business than Walmart's. But at the same time, the story points out that Alibaba's model seems designed to gain greater traction in developing markets like India that Walmart's is ... and that this could be a long-range advantage to Alibaba in the future.

    The Eye-Opener here is how non-traditional models continue to subvert and disrupt traditional companies, and how enormous the challenge is for established institutions to continue to thrive. You can't play the new game using the old rules.
    KC's View:

    Published on: March 23, 2016

    The New York Times has a piece this morning about how the certification of new and more secure payment terminals that accept debit and credit cards with digital chips has been moving very slowly, leaving retailers who have spent considerable funds installing the equipment frustrated by the delays.

    The frustration comes with an economic cost, the Times writes: "The cost of waiting, retailers say, is piling up. Until recently, banks covered much of the cost of fraudulent purchases. Since Oct. 1, though, merchants that cannot accept chip cards have had to shoulder the cost of fraud, and banks have not been shy about passing along the bill."

    The Times goes on: "The long delays are just the latest black eye for the deployment of the new systems. Some consumers have not yet received new cards. Many merchants have not bought the updated equipment. And even when the cards and the terminals have been updated, they have generated confusion and slow lines. Many of the complications were widely predicted, but the certification system has added an unexpected wrinkle — and lots of finger-pointing.

    "Banks say that retailers waited till the last minute to update their terminals. Retailers point to financial ties between the banks and the companies that provide certification, saying there is no motivation to move faster." Indeed, the story notes that a coalition of retailers is suing the banks, accusing "the major card networks of deliberately creating impossible requirements for merchants."
    KC's View:
    I think in this story I was most surprised to read a comment by Jason Oxman, CEO of the Electronic Transactions Association (ETA), a trade and lobbying group, who "dismissed the idea that processors might benefit from delaying certification" and said he had not heard of kinds of certification delays described in detail by the Times story. My experience is completely anecdotal, but I have to say that the vast majority of payment terminals that I use in retailers around the country seem to be a) equipped with chip card readers, and b) unable at this point to accept chip cards. I didn't realize until now that it might be a certification issue ... and the combination of the Times story and my own limited experience makes me believe that the ETA guy may be blowing smoke.

    My paint-with-a-way-too-broad-brush feeling tends to be that given a choice, banks and credit-debit card networks would prefer to pass off all responsibility for everything they can to other entities.

    Published on: March 23, 2016

    The Seattle Times reports that Uber is expanding its restaurant delivery service in Seattle with "a new stand-alone version of its UberEATS app, launched locally Tuesday. Formerly offering only lunch delivery of specific items from five restaurants per weekday in a limited area, UberEATS now also brings 80-plus restaurants’ full menus to Seattle’s homes and desks, in neighborhoods from Phinney Ridge to Sodo, from 10 a.m. to 10 p.m. daily.

    For the time being, delivery is free, and the company has not said how much it will cost once fees are assessed. In addition, no promises are being made about the time frame within which deliveries will be made; Uber is only saying that it will be "very rapid," allowing customers to track progress via the app.
    KC's View:
    This is just another of the ways in which so-called non-traditional businesses are looking to capture share-of-stomach, and it ought to concern any business that is coming to market with traditional operations and offerings. It is not that one offering or another will devastate the competitive landscape, but that the growing availability of options will change expectations and habits, disrupting any business that does not understand the fundamental shifts taking place.

    Published on: March 23, 2016

    Fortune reports that Starbucks is "teaming up with the Food Donation Connection and Feeding America in a program known as FoodShare that will allow the company to donate all of its leftover prepared meals to food banks. With this program the FDC will pick up the food each day at 7,600 Starbucks-operated U.S. locations, and Feeding America will redistribute it."

    The story goes on to say that "according to Feeding America, 70 billion pounds of food are wasted in the U.S. every year. Starbucks says it aims to donate 100% of what is left over at participating outposts, estimating it will be able to donate almost 5 million meals at the end of its first year participating in the FoodShare program."
    KC's View:
    Interestingly, it was just last week that Tesco in the UK made a similar commitment to donate all leftover food to charities there, hoping to eliminate the tens of thousands of tons of edible food that it has wasted each year.

    This clearly is something that businesses need to pay attention to, and, increasingly, something on which food companies will and should be judged.

    Published on: March 23, 2016

    Reuters reports that in initial court appearances this week, the Federal Trade Commission (FTC) faced off with Staples over the latter's proposed acquisition of Office Depot, which federal regulators oppose on the grounds that it will reduce competition in the segment and create higher prices for consumers.

    According to the story, "Tara Reinhart argued for the FTC that Staples' $6.3 billion bid for Office Depot is illegal because the two companies sell 79 percent of the pens, paper, file folders and other 'consumable office supplies' sold to Fortune 100 companies. She showed emails, with company names blacked out, from firms that expressed concern that the proposed merger would mean higher prices for them. Staples announced its proposed acquisition of Office Depot in February 2015.

    "Reinhart argued that Amazon is not a true competitor to Staples or Office Depot and said not a single large business customer has contracted with Amazon as its primary supplier."

    Staples' attorney, Diane Sullivan, "argued that her client was 'like penguins on a melting iceberg,' referring to Amazon's 2015 announcement that it planned to enter the office supplies market in a serious way. Sullivan also said the FTC should take note of tough Internet competition that helped force retailers including Circuit City Stores Inc., Borders Group Inc., and Radio Shack to seek bankruptcy protection. 'The landscape of history is littered with companies who have been killed or bankrupt by digitized companies like Amazon,' she said."

    The court hearings are expected to last as long as two weeks.
    KC's View:
    Two things.

    One ... if indeed it is true that "not a single large business customer has contracted with Amazon as its primary supplier," then shame on those businesses for not reaching out to Amazon to see if they can save money. This would strike me as companies doing business the same old way they've always done business simply because it is the same old way they've always done business.

    Two ... I love the image of penguins on a melting iceberg. It is highly evocative ... and very accurate.

    Published on: March 23, 2016

    In Minnesota, the Star Tribune reports that Amazon has sued Arthur Valdez, its former vice president of operations, who earlier this month was hired by Target to be its new chief supply chain and logistics officer.

    The lawsuit charges that Valdez is violating a non-compete clause in his employment contract by going to Target, where, it says, Valdez could reveal proprietary trade secrets. That clause, Amazon says, prevents Valdez from working for a competitor for 18 months after leaving Amazon.

    According to the story, "Valdez spent 16 years at Amazon as a senior executive in the Seattle-based retailer's operations department overseeing the company's international supply chain expansion.

    "Target and other major brick-and-mortar retailers are aggressively investing in their e-commerce businesses as they try to catch up with Amazon, which revolutionized online retail through aggressive pricing and speedy delivery."

    Target says that it has "taken significant precautions to ensure that any proprietary information remains confidential and we believe this suit is without merit."
    KC's View:
    Former Amazon employees who have an understanding of the company's unique and distinct differential advantages are going to be able to get a premium in the job market. If they are capable of actually translating and implementing those advantages elsewhere, they'll be golden ... and so I suppose we can expect Amazon to play hardball about non-compete clauses.

    Published on: March 23, 2016

    TechCrunch reports that Amazon has created a new online site called the Amazon Cable Store, where it is "reselling Comcast’s Internet and television service on its site ... The Cable Store allows customers to browse a variety of packages, from Internet-only deals up to combined Internet/TV/phone bundles, complete a credit check, and then schedule an installation – all from Amazon."

    The branding, the story says, "implies Comcast may be the first of other cable providers yet to come."
    KC's View:
    Maybe this makes sense. But on the other hand, getting into bed with cable companies creates the risk of being associated with largely traditional, non-transparent entities that are pretty much loathed by US consumers. Amazon has to be a little careful of guilt by association.

    Published on: March 23, 2016

    • The Chicago Tribune reports that the US Supreme Court yesterday "upheld a $5.8 million judgment against Tyson Foods Inc. in a pay dispute with more than 3,000 workers at a pork-processing plant in Iowa. The court's 6-2 ruling rejected new limits Tyson asked the high court to impose on the ability of workers to band together to challenge pay and workplace issues ... The workers sued to be paid for time spent putting on and taking off protective work clothes and equipment before wielding sharp knives in slaughtering and processing the animals."

    The story notes that it is "the second time this year the court has ruled against business interests in class-action cases," though the first since the death of Associate Justice Antonin Scalia.

    • The Tampa Bay Business Journal has a story suggesting that Publix has picked a propitious time to enter the Virginia market, since it now appears that as a result of the likely acquisition of Delhaize by Ahold, a number of their stores could be put up for sale, including 19 Martin's stores in the Richmond market.

    Expectations are that Publix and Kroger are likely bidders for these stores; Publix just last month announced its first two Virginia stores, including one in Richmond.

    • The Sacramento Bee reports that "grocery stores, pharmacies and other retail stores will no longer be able to give out carryout plastic bags in unincorporated Sacramento County starting July 1.

    "The Board of Supervisors voted 4-1 Tuesday in favor of the ban, joining Sacramento and about 150 other communities in the state that have banned plastic bags that are not reusable. Supervisors said they wanted to end the use of such bags to protect the environment because they essentially last forever."

    The story notes that "the county law comes before California voters consider a referendum on a statewide ban in November. The plastic bag manufacturing industry gathered enough signatures to place the measure on the ballot, which suspended the 2014 ban approved by state leaders."
    KC's View:

    Published on: March 23, 2016

    • Kroger yesterday announced that Michael Marx, the company's vice president of people operations, will become president of its just-acquired Roundy's Supermarkets in Wisconsin.

    At the same time, Don Rosanova, Roundy's executive vice president of operations, has been named president of its Mariano's business.

    Both executives will report to Roundy's CEO Bob Mariano.

    • Kroger yesterday also named Zane Day, vice president of operations for its Smith’s division, to be the new president of its Nashville division. He succeeds Rick Going, who recently retired after 35 years with the company.
    KC's View:

    Published on: March 23, 2016

    Got the following email from an MNB user reacting to the death this week of Andy Grove, the iconic former Intel CEO who is one of the people who essentially created California's Silicon Valley:

    An immigrant. From Hungary, which, according to my Cruise Missile Atlas of the World, is somewhere in Europe, which is near Russia and all those dangerous and terrible Moslems.

    We should have had a wall. We should keep such people out. We don’t need any darn immigrants coming into our country, sucking down our resources living on welfare and doing things that ought to be done by real Americans, like totally transforming the world and building untold billions of dollars in value and competitive advantage for the USA for decades.

    Damned immigrants.

    KC's View: