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    Published on: September 7, 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.

    This week's topic: We look at several of the summer's e-commerce-related stories, including Walmart's acquisition of Jet, Unilever's purchase of Dollar Shave Club, and Procter & Gamble's flirtation with retailer disintermediation.

    And now, the Conversation continues...


    KC: So, since the Innovation Conversation has been on hiatus, a number of things have happened that are worth laying attention to.  Let's start with the acquisition of Jet by Walmart, which some commentators have suggested almost immediately makes Walmart.com more competitive with Amazon, and others have suggested is a desperate move that doesn't really address Amazon's advantages.  I suspect that the reality is somewhere in the middle … how do you assess the deal and its broader implications?

    Tom Furphy:
    The Jet acquisition by Walmart certainly was big news. At $3.3 billion, it is the largest private sale of an e-commerce company in history. While I understand Walmart’s rationale for buying it, and they may have had little choice, I think they paid too much for what they got. I also don’t think it will materially move the needle in their quest for e-commerce relevance, much less in their battle against Amazon.

    Walmart purchased a company that just recently reached a $1 billion annual run rate in sales. That doesn’t mean they are doing $1 billion yet. It means that their subsidized low prices and massive marketing expenditures (some say they were running $20 million per month) have gotten sales to a recent level that, when projected forward a year, equals $1 billion. To put that in perspective, Amazon did $59 billion in gross merchandise sales in the second quarter of 2016, a $236 billion annual run rate. Walmart did about $3.3 billion in e-commerce sales in Q2. So, at their current run rate, Jet would contribute about 8% to Walmart’s e-commerce top line but wouldn’t even register in Amazon’s world at less than half a percent.

    So that means they paid primarily for the potential of a team and a model. About $750 million of the purchase price will be going directly to Marc Lore, Jet’s founder and CEO. Marc will take over North American e-commerce for the company, running it out of their offices in Hoboken, NJ. They are making a big bet that he can right the ship and lead them to growth.

    Marc’s first hit was selling Quidsi (parent of Diapers.com) to Amazon. They followed Amazon’s innovation lead (in my opinion, of course, we were his competitor) and were heavily reliant on venture capital investment to keep their prices low and to cover operating losses. The model was not yet self-sufficient when Walmart tried to acquire them back in 2010. To keep them out of a competitor’s hands, Amazon swooped in and snatched them up.

    Jet was recently in need of another round of capital. The unofficial word in venture capital circles was that it was going to be difficult for them to raise more money unless they were willing to lower their valuation expectations, perhaps substantially. They had raised $565 million over the last two years, starting in mid-2014. That is a massive amount of capital to get to only a $1 billion annual run rate. But thanks to Walmart’s willingness to pay up, the investors will all realize a handsome return. One thing we can conclude for sure – Marc knows how to raise capital, power through losses with capital, quickly build up a business and realize a great return.

    On the platform side, Jet is building a formidable marketplace of sellers and partners, which allows them to offer a large range of products across a range of retail partners. Walmart has struggled to get their marketplace ramped up. Also, Jet.com has an interesting cart algorithm that allows shoppers to save money by adding items to their order, paying by debit card or forgoing the option to return. However, all of these levers are very well understood by Amazon. They just choose to leverage the levers underneath the model, striving to offer the lowest prices possible.

    Ultimately, I’m not convinced that the Jet.com acquisition will make a difference for Walmart. Amazon is massive, faster-growing and profitable. They have dozens of US fulfillment centers to Jet’s two. Walmart will need to quickly integrate and scale the Jet model through their site and stores to have a chance of yielding a positive outcome. In my estimation, they would have to pump $10 billion or more per year, for the next several years, into their platform, infrastructure, team and marketing to close the gap with Amazon. Do they have the stomach for that? I’m not sure they have a choice.

    KC: At around the same time, Unilever purchased Dollar Shave Club … an acquisition that seems like it was more designed to help Unilever understand the importance of data and new realities of grocery distribution, rather than just selling more razors and blades.  Can you talk a little about how this deal reflects the modern way of doing business, and what it means for more traditional models?

    TF:
    While some argue that they may have overpaid (although the deal looks cheap next to the Jet acquisition), the DSC purchase by Unilever was smart on many levels. First, it gets them deeply into the shaving category that they were not in, with an instant double-digit market share. Also, with very little risk of cannibalization of existing product lines, they can now extend the DSC platform into a range of men’s personal care products that they do carry. Then, they could easily move into women’s shave. Is it a stretch to think of the Dove brand in the women’s shaving category?

    It also gets them into the direct-to-consumer business at scale. As technology has opened the dialogue between brands and consumers, brands now have an opportunity to engage directly with shoppers and can reduce their reliance on retailers and the restrictions and rules they impose. Buying DSC enables Unilever to own a subscription technology stack and understand the nuances of this very complex technology. It also enables them to more deeply understand the consumer engagement potential of subscription commerce as well as understanding the economics of direct-to-consumer shipping, which are often challenging in CPG, but work well in the shaving category, thanks to the high value and margin of the products relative to their low weight and shipping costs. They can take these learnings across their portfolio and build direct models where it makes sense.

    KC: I love the idea of Unilever extending the subscription model into brands like Dove. Parenthetically, we're big Dove users in our household, and have several Dove SKUs on order through Amazon's Subscribe and Save. If they can figure out a way to connect with families like ours directly, it'd be very interesting and could have a lot of potential.

    Now, shortly after the Unilever-Dollar Shave Club deal, it was reported that Procter & Gamble has been testing a distribution model that essentially disintermediates traditional retail when it comes to its Tide Pods.  It is a small scale test, but is this something that retailers need to be concerned about - major manufacturers looking for ways to sell direct to consumers?

    TF:
    This is further proof that manufacturers are looking for more direct access to shoppers. The internet and direct-to-consumer business models enable manufacturers to circumvent the restrictions placed on them by retailers. Getting shoppers to sign up for automatic replenishment of their frequently purchased items is nirvana for a brand. Brands will look to forge these direct paths wherever they practically can.

    Brands have tons of research that shows shoppers want solutions. They want their needs solved in logical ways. The category management, traffic and merchandising flow of traditional stores does not solve problems. Whether it’s helping clean the house, wash clothes, look better or prepare better meals, stores fall short. They present a sea of products and place too much burden on the shopper to determine what they need. Messaging is all about price. This does not make shoppers’ lives any easier or provide any richer experiences for them. So the gravitation to subscription solutions is completely logical.

    However, despite the enthusiasm for single-solution subscription programs, they ultimately break down once shoppers try to solve the bulk of their needs through the programs. Shoppers don’t want to manage dozens of boxes arriving at their homes every month. They don’t want to go to multiple websites to manage the contents and timing of their shipments. They get overloaded with products or they fall short and have to buy from a store anyway to fill the gap until their next box. All of this leads to attrition, which is a big problem for these programs.

    At Amazon we saw first-hand how much shoppers loved subscriptions. It was the major driver of sales in our CPG categories. Recently, we’ve seen predictions that Amazon’s Subscribe & Save program should eclipse $20 billion in five years. When you include Dash Buttons, Echo and the Internet of Things, the total would be much higher.

    All of this shows the potential for shopping automation. It shows that shoppers love to let technology and services take care of their needs. Retailers cannot ignore this. Thanks to Amazon, the shift is irreversible. Retailers now have a game-changing opportunity to take advantage of the consumer thirst for solutions and automation by developing their own automated replenishment capabilities. It’s at least a $200 billion opportunity in the US in center-store alone.

    Given the track record of both Unilever and P&G to accumulate institutional knowledge and then leverage and spread that knowledge, I would expect both companies to learn voraciously from these efforts, offer more direct programs and also be eager to help retailers develop their own subscription and automated replenishment programs. Whether working internally, with CPGs or with other service providers, shopping automation should be on every retailer’s 2017 roadmap.

    The Conversation will continue...

    KC's View:

    Published on: September 7, 2016

    by Kevin Coupe

    Amazon has launched yet another entry into the food business - this time with a six-part series on Amazon Prime that is a fascinating and compelling look at food cultures around the world.

    "Eat The World" is produced and hosted by chef Emeril Lagasse, who here does something completely different from the cooking shows for which he has become known over the years. "Eat The World" features Lagasse going to six different locales - Sweden, China, Italy, Spain, South Korea, and Cuba - to get a sense of those cultures through both their traditional and modern foods. He's accompanied by fellow chefs on his travels - Mario Batali does with him to Shanghai, for example, in search of the world's greatest soup dumplings - which gives him someone to talk to and with whom he can share various culinary enthusiasms.

    The results can be enormously unexpected, such as a look at how Swedish chefs are inventing a kind of modernist cuisine by using traditional ingredients, or how Cuban chefs use limited resources to come up with big, festive and delicious meals. It may be more traditional to go to Italy in search of the world's greatest pizza ... but Lagasse and guest Nancy Silverton conduct their search first by finding the best sources of mozzarella and other local ingredients. (You are guaranteed to finish this episode both hungry and trying to figure out a way to book a trip to the Campania region of Italy.)

    In some ways, the six-part series is similar to the TV shows done by Anthony Bourdain, but I find Lagasse to be a lot more agreeable traveling companion. There is an open-heartedness to his curiosity about other cultures and respect for other chefs that makes the shows work; he and his guests all seem to share a genuine affection for each other, and I found myself grateful to be able to join them for their travels.

    "Eat The World" is a terrific series, that speaks to the importance of food to the cultures they reflect, and I hope it is an enormous success for Amazon - or at the very least, successful enough that they're willing to fund future travels for Emeril Lagasse, and shows that will make me both hungry and more enlightened.

    "Eat The World" is an Eye-Opener. Check it out.

    KC's View:

    Published on: September 7, 2016

    US News & World Report has a story saying that a Columbia University analysis of 35,000 Yelp reviews of 2,840 Walmart stores suggests that "race and socioeconomic factors" have a role in the levels of customer service offered by the retailer.

    Adam Reich, an assistant professor of sociology at Columbia University, says that "the higher the percentage of black or Latino residents in a zip code, the worse Wal-Mart service becomes, regardless of whether this zip code is poor or wealthy ... People used words like 'unorganized', 'nasty' and 'worst' to describe stores in communities of color much more than they used those words to describe Wal-Marts in whiter communities."

    The story quotes Walmart spokesman Lorenzo Lopez as saying that the analysis is "flawed and without merit."
    KC's View:
    Walmart here is being subjected to the sort of criticism that Amazon got earlier this year when it was revealed that it was not making deliveries to certain minority neighborhoods in cities that it was serving. Regardless of the motivations and rationales, Amazon took note of the criticisms and rectified the situation pretty quickly.

    Yelp reviews can be influential, but it is important to remember that it is not a scientific forum providing a valid sample. It's big and loud, but it is entirely self-selecting.

    But that said, Walmart probably has to pay attention to the "big and loud" part, because in the current environment, noise can be a highly influential factor in how people perceive companies and policies.

    Published on: September 7, 2016

    Fortune reports that Starbucks is getting into the brunch business, "conducting a small test for a weekend-only brunch menu in 78 locations in Portland, Ore., and Seattle."

    According to the story, "Starbucks’ brunch menu includes baked French toast, quiche, and Belgian waffles. But the launch also points to a natural limitation to to endeavor: All the food arrives premade each morning and then gets warmed up before serving. For Starbucks to fully participate in a brunch that many Americans think of today—where the food is almost always made to order—it would need to either reconfigure locations or open new, larger stores with fully operational kitchens."

    Starbucks says that the test is exactly, and that it is trying to learn from the limited initiative.
    KC's View:
    Starbucks, of course, has been engaged in series of ongoing efforts to figure out how best to expand its footprint and get more business out of its coffee shops. One of those initiatives has been to expand into beer and wine sales, as well as offering "small plates," at night in select locations, and Forbes reported the other day that it plans to offer its "Evenings" service at a number of airports, in New York, Washington, and Los Angeles.

    BTW ... the reason I think this is important is that every piece of french toast ordered at Starbucks is a loaf of bred, a dozen eggs, a quart of milk and a tin of cinnamon that may not be purchased at the local supermarket. The battle is being joined every day by the competition, and the struggle for share of stomach continues.

    (One note. Some of the best french toast I've ever eaten was at a Price Chopper-owned Market Bistro store in Latham, New York, where it was made with thick challah bread soaked - not dipped - in a special egg mixture for a minimum of 30 seconds. It had to be better than pre-made stuff available at Starbucks, and is an example of how to compete effectively.)

    Published on: September 7, 2016

    The New York Times reports on a new Pew Research Center study saying that "sixty-five percent of adults in the United States said they had read a printed book in the past year, the same percentage that said so in 2012. When you add in ebooks and audiobooks, the number that said they had read a book in printed or electronic format in the past 12 months rose to 73 percent ... Twenty-eight percent said they had opted for an ebook in the past year, while 14 percent said they had listened to an audiobook."

    The story goes on: "The 28 percent who said they had read an ebook in the past year has remained relatively steady in the past two years, but the way they are consuming ebooks is changing.

    "The Pew study, based on a telephone survey of 1,520 adults in the country from March 7 to April 4, reports that people are indeed using tablets and smartphones to read books. Thirteen percent of adults in the United States said that they used their cellphones for reading in the past year, up from 5 percent in 2011. Tablets are a similar story: 15 percent said that they had used one for books this year, up from 4 percent in 2011. While 6 percent said they read books only in digital format, 38 percent said they read books exclusively in print. But 28 percent are reading a combination of digital and printed books."
    KC's View:
    The most important line of the story is this one - that "voracious readers are happy to take their text however they can get it."

    And that's the most important lesson for any business that is faced with digital options ... you have to do your best to provide your content, whatever it is, to consumers in ways that they find relevant. Ignore that at your own peril.

    Published on: September 7, 2016

    The Wall Street Journal this morning does a second-day story about the decision by Amazon and Wells Fargo to end a two-month partnership designed to offer lower cost college loans to Amazon Prime members.

    According to the Journal, there was a lot of political pressure on both companies, which emanated from concerns that private college loans could end up being far more expensive than federal loans, despite the fact that the product offering was positioned as being less costly. The Institute for College Access & Success, which is funded by organizations such as the Ford Foundation and the Bill & Melinda Gates Foundation, put out a statement saying that the deal was “a cynical attempt to dupe current students who are eligible for federal student loans with a record low 3.76% fixed interest rate into taking out costly private loans with interest rates currently as high as 13.74%.”

    The statement led to a complaint made to several US Senators, which resulted in a referral to the Consumer Financial Protection Bureau, which the Journal says "has been critical of private student lending." The upshot was that the level of political concerns about the arrangement led Amazon and Wells Fargo to cancel the deal, apparently concluding that it would end up being more trouble than it was worth.
    KC's View:
    I wonder how many categories or segments out there are more trouble than they're worth, but retailers continue to be in them simply because they always have.

    Published on: September 7, 2016

    London.

    According to the story, "Dubbed Amazon Restaurants, the service is available in select postcodes via the Amazon Prime Now app and promises to let you order food from partner restaurants for delivery within the hour. It competes directly with the likes of Deliveroo and more recently Uber’s UberEats in the UK capital city.

    "Amazon says there are no menu markups or hidden service fees, and delivery on all orders is free for Prime members with a minimum order of £15.00." Amazon Prime membership is a prerequisite, though.

    Amazon currently also offers restaurant delivery service in Seattle, New York, Dallas, San Francisco, Los Angeles, Chicago, San Diego, Austin, Atlanta, Miami, Baltimore and Portland, Oregon.


    Out-Law.com has a story suggesting that while Amazon has announced its intention to roll out Dash button service in the European Union (EU), offering consumers the ability to replenish products with the touch of a conveniently placed buttons, there could be some legal hurdles to the roll out.

    In Germany, for example, the law says that before a product can be sold and bought, details about "the product's characteristics, its price, or how and when it will be delivered" need to be provided in contract form - and the buttons only have the brand's name. Amazon's position will be that the information is provided in the master agreement, but at the very least it is likely that the issue will have to be litigated.
    KC's View:

    Published on: September 7, 2016

    • Kroger yesterday announced what it called "a new, more affordable corporate brand line of cage-free eggs," saying that private label cage-free eggs will help it achieve its goal of a a 100% cage-free egg supply chain by 2025.

    The company says that in 2015, "15% of the eggs Kroger sold were cage-free compared to the industry average of 9%."
    KC's View:

    Published on: September 7, 2016

    • Whole Foods announced the naming of three new global vice presidents: Sonya Gafsi Oblisk, the former vice president of Marketing for Sam’s Club, who becomes Whole Foods' Global Vice President of Marketing ... Martin Tracey, the former Chief Talent Officer and vice president of People Development at Starbucks, who becomes Global Vice President of Team Member Services ... and Brooke Buchanan, the former vice president of Communications for Theranos and Vice President of Public Relations for Williams-Sonoma, who becomes Global Vice President of Communications.
    KC's View:
    Interesting hires ... and, I would think, at least a tacit admission that Whole Foods needs to do a better job of nurturing talent internally if it is going to take its operations to the next level.

    Published on: September 7, 2016

    From an MNB reader...

    I know you are pro Amazon and I was told by an acquaintance how archaic I was because I have never ordered anything from them. I just prefer going into a store! I really don't like ordering anything  online!

    In some cases, a retailer has some items available "online only" so I will break down and order it. I really don't like to buy without trying things on because sizes can vary so much.

    In the past two months, I have ordered from Nordstrom, Tommy Bahama and White House Black Market and returned all because I didn't like the way the garments fit. I can tell you that I have items in my closet from Tommy Bahama in XS, S and M...all fit but it's a crap shoot as to what size I'll wear in a certain design. I also ordered from Philosophy because they had a good money saving promotion but my order never showed up. They did replace the order.... but it was a hassle!

    Can we agree that what works for some just isn't everyone's cup of tea?


    Absolutely. In fact, I've never said anything else.

    In fact, I would argue that physical retail that is relevant and compelling will always have a role in consumers' lives - and more in some consumers' lives than others. I just think that mediocre, lowest-common-denominator, non-distinct retailing probably is at risk.

    And it should be.

    MNB reader Terry Pyles had some thoughts:

    I've been a frequent Amazon user since 1997, when all they sold was books.  I'm now averaging about 70 orders per year, which, as a single guy, means Amazon is the first place I turn to for nearly everything.  I've never used "Subscribe and Save" because I'm still a little old fashioned and prefer to make my buying decisions one at a time.

    However, the gist of this article applies to the Amazon site in general, not just Subscribe and Save.  While I don't use S&S, I do frequently use my order history; I look up the last purchase and click on "Buy it Again".  In recent months I have been gobsmacked by the price increases occurring over a few months' time.  In many cases their prices are not even competitive with the likes of Walmart, Target, or other brick and mortar stores.  Yes, the convenience factor is still there.  And maybe that's enough to satisfy many consumers.  And maybe it won't be, of they keep up this practice of price gouging.

    I keep thinking someone has to pay for the new fleet of Amazon trucks, as well as the drones they are no doubt stockpiling.  Not to mention their investment in their own brick and mortar stores.  Watch the rising prices and you'll see who's paying.

    Amazon is still my starting point for nearly every purchase.  But they have lost my confidence that they will be the best choice.





    We've had some discussions about online bulletin boards, which some publications have eliminated because of their concerns about what sometimes has been seen as hate speech. Which led one MNB user to write:

    Kevin, one of your reader's comments provoked me to weigh in on the online comments bulletin boards, especially those (and that's just about all of them) where commenters post anonymously:

    "I am against any form limiting the free exercise of speech in nearly any form."

    I doubt if this commenter recognizes that free speech and the 1st Amendment only applies to gov't restrictions on speech. The chances are pretty high that the commenter's employer, as do just about all employers, implement severe consequences when one of their employees expresses something hateful publicly.  It's not a matter of good or bad, hate is hate and bigotry is bigotry, it's just bad. Put yourself in the other person's shoes (or sandals or boots or flip-flops, etc, it's just a metaphor) and show some kindness and empathy.

    But if you want to go ahead and hate, at least sign your own name and own it, including any consequences to your job or partnerships or friendships.

    BTW, I am grateful that you curate the comments and don't permit an anonymous online bulletin board. My other favorite morning read, Seth Godin, doesn't do it either. And thanks again for including stuff like this in your column.


    From another reader:

    Thanks for curating the conversation on MNB, I've always thought you do a good/great job of providing equal staging for both sides of topics, with your opinion counting a little more (as it should). As for censorship, if people want their views to be heard write a blog, tweet, Facebook, whatever and maybe I'll find you, maybe I won't. At least I know I can read MNB without the vile, self-serving, egotistical, name-calling comments found nearly everywhere else on-line.

    Thanks. Though I must concede that sometimes I can be a little self-serving. (Have I told you lately about my books...?)
    KC's View: