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    Published on: May 25, 2016

    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.

    Content Guy's Note: I was unable to attend the ShopTalk "next gen commerce" conference in Las Vegas last week, but Tom Furphy was there, along with his business partner Justin Leigh, who is the co-founder and CEO of IdeoClick. So I asked them to take over the Conversation this week and chat about what they saw and heard and what the implications are for retail.

    And now, the Conversation continues...

    Tom Furphy: ShopTalk was billed as “an unprecedented gathering of individuals and companies reshaping how consumers discover, shop and buy.” It sought to provide “a unique comprehensive platform for brands, startups, tech companies and investors to come together in an open and friendly environment.” Put together in roughly six months, it attracted 3,000 attendees from over 20 countries. All in all, we would conclude that ShopTalk lived up to its billing. More than 1,000 companies attended, including over 350 CEOs and over 200 venture investors.

    In addition to a number of keynote speeches, all of which were 30 minutes or less, there were four, robust, concurrent session tracks. Track 1 - Disruptive Startups and Pioneering Brands, Track 2 – Physical Retail Goes Digital, Track 3 – Evolving Trends in Marketing, Track 4 – was split between Search & Discovery and IoT and Sensors. Each breakout session had room for hundreds of attendees, with overflow rooms for those that were filled.

    The event also featured exhibit and meeting spaces where a few hundred companies set up shop to show their wares and to have meetings with potential customers, partners and investors. We had several meetings with retailers and manufacturers at ShopTalk who were all looking for new ways to serve the changing shopper.

    Justin, were you struck by any common themes at the show?

    Justin Leigh:
    I was struck by an impressive array of forward thinking companies, most with the common goal of giving the customer more.  More personal experiences, more convenience, more speed, more options. Dollar Shave Club is going to put dudes’ personal care on cruise control, Drizly will fetch you a beer, and Enjoy will hand-deliver your new laptop and set it up for you – for free.  In this new world of commerce you can source everything you need from wherever you are. At work, on the go, or on the couch. It is clear that this utopian future is here and it requires retailers be data driven, with distributed technology organizations and short product development cycles. It also requires more than a little faith that these customer conveniences can eventually return profits.

    Tom Furphy: One of the first keynote speeches was delivered by Jerry Storch, CEO of Hudson’s Bay Company, which owns such retailers as Lord & Taylor, Saks Fifth Avenue and online pure-play GILT Group. Much of the session, which defended the importance of stores, felt like it was from ten years ago. In fact, Mr. Storch admitted that many of his slides had been carried forward throughout the last decade. He quoted statistics such as almost 90% of shopping still involves stores and that Amazon only controls a few percent of retail sales. It sounded a lot like the denial we hear from many tenured executives in the food and grocery business.

    The trends are fairly obvious. Amazon and online retail are taking significant share. Kevin and I always say that we are not anti-store, but we are pro-relevance. I think Mr. Storch was trying to say that stores play an important role, which is true. But he seemed to go too far in trashing the economic viability of the delivery model. Justin, what struck you about his argument?

    Justin Leigh:
    I think he went a little overboard in questioning the economic viability of the delivered model. I completely agree with his point that it’s not only about delivery. There is an important role for stores and many shoppers want the store to be a key element of their retail experience. However, convenience is mandatory and having a delivery option is a necessary element of convenience.

    Tom Furphy: I agree. At the end of the day, stores have a different economic model than e-commerce and delivery. It’s not like stores are minting cash. They are expensive to run. Advertising, labor, supply chain, inventory, and the cost of physical assets – it all adds up to a lot of cost. Their sensory experiences and near zero cost of fulfillment are their advantage. We’ve talked a lot about the importance of the sensory experience in stores in this column. We know there is value in using that to draw customers into the store so they can experience products, purchase them and bring them home, without a delivery cost. There is an economic return on that. But how should stores think about delivery? Do they have a chance to see a return on investment?

    Justin Leigh:
    One thing to keep in mind is that is far less expensive for an online retailer to generate traffic (customer visits) to their pages and convert them to a sale that it is for a retailer to bring a customer into a store. A key differentiator we had at Amazon came from the platform's control over the cost of a sale. The inputs are simple - the cost to put a product in front of a customer divided by the conversion rate equals the acquisition cost of the sale. Our Amazon traffic and assortment strategy yielded a much lower cost per sale than any other online or offline retailer. That savings largely offsets the higher delivery expense.

    I think that a common mistake that retailers make is to underestimate the importance of the average cost of a shopping session.  Amazon’s dominance in product search, Subscriptions, Dash, Kindle, Echo and expansion into content is giving them an enormous lead in this area.

    Tom Furphy: Makes sense. Generating transactions is dirt cheap for Amazon. So they can afford the higher cost for delivery. So what does that mean for other retailers?

    Justin Leigh:
    In response, retailers and brands need to develop a scalable traffic, customer acquisition and retention strategy to stand a chance long term. With that in place, they can develop assortment, pickup and delivery strategies that will generate a positive financial return.

    Tom Furphy: We often talk about the importance of lock-in strategies and subscription models. What business at the show is best taking advantage of this strategy?

    Justin Leigh:
    Hands down it was Dollar Shave Club. They are a novel service for men, which serves all of men’s shaving needs. Founded just a few years ago, they are on track to do $240M in 2016 and are taking real share from the previously impenetrable shave category. They stated that they have very high customer retention. They are taking shaving customers out of traditional channels permanently. These shoppers no longer go to stores to solve these needs. As DSC moves from shaving, through personal care and into the rest of the bathroom it’s a clear signal that retailers need to defend against subscription models like DSC and Amazon Subscribe & Save. It’s imperative.

    Tom Furphy: Two common themes that I observed were that 1) Amazon is the 800 pound gorilla and 2) that speed of testing and execution was critical. When Stephenie Landry, VP of Amazon Prime Now and former member of our AmazonFresh launch team, spoke to the group, she underscored each.

    At Amazon, we would always write the press release for a service before we started the project. That would allow us to clearly understand its impact on the customer and allow us to maintain laser focus while scoping and building the service. Stephanie talked about the internal press for a service called “Amazon Magic”, which delivered products in as little as an hour. As Kevin wrote about earlier this week on MNB, she talked about how they conceived and launched the service in a total of 111 days – including writing the customer app, the courier-facing app, securing and outfitting a fulfillment facility, tuning the supply chain and stocking the inventory. That is longer than most retailers would debate whether or not to test pilot something.

    I always say that Amazon iterates in hours, days and weeks while other retailers iterate in weeks, months and years. As a retailer or brand, think about what you spent your last 111 days on. Can it really move the needle?

    Justin Leigh:
    I agree. I was also struck by the speed at which OfferUp is scaling. They are a service that is effectively a localized and mobile version of Craigslist. Users can list products for sale through easy us of their app, upload pictures and easily set prices. Because it is mobile, it is location aware and concentrates the user experience to local markets. That makes the entire experience more effective and, because users must register, it also eliminates the “creep factor” of Craigslist. In just a couple years they are already on a $14B run rate in transaction volumes. They move as much product volume as retailers such as Whole Foods and Nordstrom.

    Speed has always been the dominion of the start-up, but it is now becoming a prerequisite for all retailers. This requires the entire organization to be technology fluent and to be supported with distributed systems. We always see retailers get hung up on building consensus and on making sure that all internal groups are officially on board with a project. This is killing them without them realizing it. They need to be more nimble. The more they can work to enable innovation in specific areas of their customer experience with minimal dependency between functional groups, the faster they will be able to deliver value to their customers. The better they will be able to keep up with change.

    Tom Furphy: Jet also seems to be scaling well. Marc Lore, their CEO, reported that they have already cracked $1B in sales, still inside their first year. I still question the viability of the model. They have raised $550M in capital, are losing money while they scale and are trying to beat Amazon at their own game. But after chatting with Marc, I do respect his vision and gumption for trying. Perhaps there will be enough room for them to thrive next to Amazon.

    Justin Leigh:
    They were a major sponsor of the event. It seems that they are committed to being a big player in the space.

    Tom Furphy: There was a lot of discussion around last-mile delivery, store pickup and lockers. For the most part, companies are still trying to sort it all out. But every company touted the positive customer response to these new options. Everyone is now focused on getting the volume and drop/pickup density to the point of being profitable. Folks agreed that lockers and store pickup can be profitable quickly. Others felt that the solution to getting delivery to work was through using shared services or on-demand workforces such as Uber. But most everyone felt profitability was attainable.

    Justin Leigh:
    At the end of the day, no matter how much money can be saved using a distributed work force, it's still very expensive to meet customer needs on demand. That’s why we started Replenium. We want to solve this problem further upstream. Handling customer needs via subscriptions and predictive algorithms allows the cost to meet the customer need at their point of necessity to be dramatically reduced. This requires coordination across all digital touch points to increase actionable data, great customer tools and connected devices. I'm confident that these will all be hot topics in the coming months as the current models are increasingly under stress.

    Tom Furphy: We were able to spend a good amount of time with retailers and CPG brands at the show. Generally, those that were there are advancing well in their digital and e-commerce strategies. We had several great discussions on new tools and techniques to serve shoppers. To their credit, all of the companies we met with recognize the importance of e-commerce to their growth.

    Justin, given your chance now to reach thousands of readers in the MNB community, what advice would you give them when considering how to advance in e-commerce?

    Justin Leigh:
    Based on my past Product Management experience, I tend to look at it very pragmatically. At the end of the day, all retailers do the same thing - generate shopping sessions, convert those sessions to sales and convey the product to customers.  All of the new models are tweaking this formula by seeking low cost traffic sources, offering novel services to increase conversion and looking to lower the cost of delivery or pickup. Traffic and service are the inputs that create sales as the output. New models that are successful will expose opportunities to improve those inputs.

    Having spent last week looking at these new models, platforms and tools, the question I would ask retailers and brands to consider isn’t what models out there they see as threatening or complimentary. They are easy to find in a venue like ShopTalk, or through working with firms like us at CEP. The question you need to ask is what do you need to change in your organization so that you’re prepared to move quickly when you do see the right opportunity? Agility takes commitment. Without that commitment it will be increasingly harder to keep up.

    Content Guy's Note: Thanks to Tom and Justin for sharing for their thoughts about ShopTalk ... a conference that seems in some ways to be setting new benchmarks for what success means in the so-called "trade show" business.

    KC's View:

    Published on: May 25, 2016

    by Kevin Coupe

    The other day, in an Eye-Opener, I wrote about how Google has unveiled a new product - Google Home - which at its most basic can be described as competition to Amazon's highly successful Echo ... a voice-activated computer without a screen or keyboard that can be used to activate and access a variety of products and services. It is a new product introduction that reflects what is likely to be a new level of competition in the high-tech sector.

    And I observed, parenthetically, that it amazes me "how irrelevant to this whole discussion Apple's Siri seems to be - it only seems to be mentioned in this conversations when people describe the Echo as 'like Siri, but it works.' Talk about a missed opportunity."

    But Apple apparently is not satisfied being in anyone's parentheses.

    Seeking Alpha reports that Apple is working on an Echo-like device that will have at least some of the capabilities of the Echo, using its Siri technology to power the product by opening it up to developers, who will be able to add functionality in the same way that they create mobile apps.

    Better late than never? We'll see if it'll be an Eye-Opener.
    KC's View:

    Published on: May 25, 2016

    The first "365 by Whole Foods" store is scheduled to open today in the Silver Lake neighborhood of Los Angeles, with two more scheduled to open later this year, in Oregon and Washington State, and more than a dozen in the pipeline for various US markets.

    The coverage seems to agree that Whole Foods needs "365" to be a success, with some analysts suggesting that the company is "desperate" for it to move the needle on how the chain - commonly derided as "Whole Paycheck" - is perceived by consumers. Whole Foods doesn't communicate such desperation officially; rather, it is just says that it is looking to make the concept accessible to younger consumers by being less expensive, with more technology, and a hipper vibe.
    KC's View:
    Money lists the qualities that Whole Foods hopes will differentiate the "365" stores - that it is cheaper, smaller, with less selection and fewer employees, a more replicable cookie-cutter design, high-tech features, and without the fresh bakery and cut-to-order deli common to Whole Foods stores.

    A couple of questions that need to be answered, it seems to me, is whether the "365" format is wholly original, or somehow ends up seeming like a Trader Joe's knock-off, as has been rumored in some circles. If it is the latter, I suspect that the new format's ability to move the needle substantially on Whole Foods' performance will be limited, and the company could be left wondering if the revolution that it helped foment has left it behind.

    Published on: May 25, 2016

    Investor Place reports that Walmart "is removing its ad-matching policy in hundreds of stores around the U.S." While the policy is being discontinued in about 500 stores, it will remain in place in the rest of the company's fleet.

    The story says that "the stores are replacing ad-matching with lower prices for a number of products throughout the store.

    "Additionally, the company is launching a new policy called Savings Catcher that allows you to get a reduced price on some products in the store in a similar manner to its previous policy. The difference in price will not be returned to the customer in cash. Instead, the difference goes towards your Walmart Rewards eGift Card."
    KC's View:
    Just yesterday we had a story about how Amazon was adjusting its price-matching policy on many products. This may raise some short-term hackles, but I suspect it is inevitable because of all the tech tools available to allow customers to price-match. For a retailer to keep up may simply be impossible ... especially in a world where anyone can post any price online in order to create havoc for competitors.

    Published on: May 25, 2016

    The Cincinnati Business Journal has a piece quoting Kroger CFO Mike Schlotman, who, when speaking to the BMO Capital Markets Farm to Market investor conference in New York last week, said that the chain's "Simple Truth natural and organic store brand has won acceptance from consumers so fast that it’s solving a key mystery for Kroger executives."

    Schlotman said, “It’s always been a kind of a mystery to me why my (private-label) penetration of corporate brands in the edible part of the store has been higher than the non-edible part of the store, both consumables. I never understand why people are OK drinking my milk, but they want Windex to clean their bathroom mirror instead of Kroger cleaner for their mirror. Our share of wallet in those categories is a lot lower. I think the Simple Truth brand starts to unlock that mystery a little bit because of how strong the brand name is. Without any fear, the customer’s already attributing a high sense of quality to it and that probably solves part of the mystery for me.”

    In just four years, the story says, Simple Truth has become a $1.5 billion brand for Kroger.
    KC's View:

    Published on: May 25, 2016

    The New York Times has an excellent column by Farhad Manjoo entitled "Corporate America Chases The Mythical Millennial," in which he frames his thesis this way:

    "If you’re reading this article voluntarily, you’re probably not a millennial, because everyone knows millennials don’t read news. In fact, there’s a pretty good chance you look down on millennials. Perhaps you consider them entitled, indulgent, needy and a little too much to bear — or maybe you’re simply skeeved by their weird headgear, strange hieroglyphs and intricate courtship rituals.

    "I can predict all this because I work in the news media, and one of the primary functions of the media these days is to traffic in gleefully broad generalizations and criticisms of millennials, the more than 75 million Americans born about 1980 to 2000. Although millennials are now the largest demographic group in the country (sorry, boomers), and though they are more racially diverse than any other generation in American history, they are often depicted on TV, in movies and music, and in the news (including The New York Times) as a collectively homogeneous cliché.

    "Nowhere is this more apparent than in corporate America, especially in the technology industry, which has long been obsessed with the dubious idea that young people are in the cultural vanguard ... Yet there’s a glaring problem with these and other efforts to go after the younger among us: Millennials aren’t real."

    Really good, provocative piece ... and you can read it here ... and should, especially considering the continuing discussion about millennials that we've had here on MNB.
    KC's View:

    Published on: May 25, 2016

    The New York Times reports that American agrochemical and agricultural biotechnology corporation Monsanto has rejected a $62 billion takeover offer from German multinational chemical and pharmaceutical company Bayer yesterday, saying it was too low but also that it is “open to continued and constructive conversations."
    KC's View:
    As much as anything, it seems to me, Bayer is making a $62 billion bet that concerns about GMOs are going to subside and that this will end up being a major revenue source for the company. Which is interesting, considering that Bayer is based in Germany, where there is enormous antipathy about GMOs.

    But, as a friend of mine said yesterday, maybe this is as much a bet that climate change is real ... and that when growing regions begin turning into dust bowls, companies with GM plants that will continue to grow suddenly will be every farmer's best friend.

    Of course, this same friend is a climate change believer ... which was signaled by the fact that he drew my attention to a Politico story about how the presumptive GOP presidential Donald J. Trump calls global warming "a total hoax" and "pseudoscience," but recently applied for permission from local authorities "to erect a coastal protection works to prevent erosion at his seaside golf resort, Trump International Golf Links & Hotel Ireland, in County Clare." That application "explicitly cites global warming and its consequences - increased erosion due to rising sea levels and extreme weather this century - as a chief justification for building the structure."

    Which actually offers another important business lesson - that if you're not transparent and consistent, people will be transparent for you.

    Published on: May 25, 2016

    The Temkin Group is out with its annual experience ratings report, concluding that "Publix and H-E-B deliver the best customer experience in the supermarket industry."

    According to the report, "Publix took the top spot for the second year in a row with a rating of 81%, putting it in 1st place out of the 294 companies across 20 industries. H-E-B came in second with a score of 79%, while Kroger and Save-a-Lot tied for third place, each with a score of 78% and a 3rd overall ranking. Of the 20 supermarkets included in the Ratings, two more - Wegmans and Aldi - also made it into the top ten, ranking 7th and 9th respectively."

    The report goes on: "The ratings of all supermarkets ... are as follows: Publix (81%), H-E-B (79%), Kroger (78%), Save-a-Lot (78%), Wegmans (77%), Aldi (76%), Food Lion (75%), ShopRite (75%), Giant Eagle (75%), Wawa Food Markets (74%), Hy-Vee (74%), Winn-Dixie (74%), Trader Joe's (74%), Hannaford (73%), Piggly Wiggly (72%), Albertsons (69%), Stop & Shop (69%), Safeway (69%), Whole Foods (68%), and Vons (63%).

    "Wegmans (+1 points) was the only supermarket to improve its rating between 2015 and 2016.

    "Whole Foods (-10 points), Albertsons (-9 points), Hannaford (-8 points), and Trader Joe's (-8 points) declined the most between 2015 and 2016."

    To generate the ratings, Temkin Group says it "asked 10,000 U.S. consumers to evaluate their recent experiences with a company across three dimensions: success (can you do what you want to do?), effort (how easy is it to work with the company?), and emotion (how do you feel about the interactions?)."
    KC's View:
    I find it ironic that both Whole Foods and Trader Joe's saw declines in customer experience ratings, and yet Whole Foods seems to be thinking about emulating Trader Joe's with its new "365" format.

    Published on: May 25, 2016

    • Ahold-owned Peapod said yesterday that it is rolling out three new meal kits made in partnership with ConAgra and Campbell Soup that "each contain pre-measured, pre-cut and pre-washed ingredients and meet the growing need of families for mealtime solutions delivered straight to their doors." The new recipes include Buffalo Quinoa Chicken Skillet, One Pan Chicken Curry, and Zucchini Noodles with Fresh Veggie Primavera.

    Peapod says it now offers more than 15 make-at-home meal kit solutions in selected markets.

    KC's View:

    Published on: May 25, 2016

    • The Wall Street Journal reports that "in the latest dispute over the legal relationship between companies and their franchisees, New York’s attorney general on Tuesday claimed that Domino’s Pizza Inc. is responsible for its franchisees knowingly underpaying their employees ... The lawsuit against Domino’s and three of its franchisees, filed in state Supreme Court in Manhattan on Monday, claims that the company’s faulty payroll system led to workers being underpaid a total of at least $565,000 for 10 of its stores."

    According to the story, "Attorney General Eric Schneiderman, who is suing the company, said a four-year investigation revealed that Domino’s is highly involved in the hiring and firing practices of its franchisees and that the Ann Arbor, Mich.-based parent company mandated that they use a payroll software system that under-calculated gross wages and failed to fix it when problems were brought to their attention."

    • MNB took note the other day of a New York Times story about a company called Beyond Meat that says it has come up with a robust plant-based alternative to the hamburger - and that will go on sale this week in a Colorado Whole Foods, where it will be sold out of the same case that has beef, poultry, lamb and pork. " The burger bleeds (beet juice!) when cooked, and is said to have the same texture and smell as cooked beef.

    A quick follow up here .... because the Chicago Tribune is reporting this morning that when the Beyond Meat burgers became available - at $5.99 for a pack of two patties - the first batch sold out in an hour.
    KC's View:

    Published on: May 25, 2016

    We had a story yesterday about how CVS will allow customers to opt out of getting those feet-long receipts with coupons at checkout, and opt in to a digital delivery system.

    One MNB user responded:

    I join your Hallelujah chorus. I absolutely HATE their practice and grouse and get upset at them with  every single transaction. Without fail.  Tell me what marketing book wrote the best way to a customer’s heart is to irritate them every time you convene? In an age gearing at greening things up, these folks dither in an opposite pollute-it more world.  And I would bet these are BPA receipts to boot!  It is about time they saw the light!

    And from another reader:

    That’s great, as long as CVS doesn’t then sell your email address and you are not only bombarded with CVS marketing emails but those of the companies they sold your email address to.

    Good point.

    Now if CVS can just fix their system so my phone number doesn’t get lost in their rewards system. If I don’t have my rewards card on me and enter my phone number, it doesn’t work. I’ve updated it in their system 3 times, but it never works. I’ve now given up and buy everything, except beer from Walgreens, where my phone number works. If Walgreens starts selling a better selection of Goose Island, I’m afraid CVS will lose me completely.

    On another subject, from MNB reader Jeff Gartner:

    Kevin, I was glad to read that comment from the millennial rebutting that uncalled-for "snowflake" label. Obviously, the original commenter is not around that many millennials, apparently relying on hearsay from questionable news sources.

    We have 3 daughters age 27 to 33, and along with our 2 son-in-laws, and many of their friends, I have observed very few that warrant that snowflake label. They work hard, they're tough and resilient, yet still considerate and caring, and they're much more open-minded and tolerant than that original commenter. They don't need me to write this for them, but I just wanted to echo and support that millennial in today's column.

    KC's View: