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: