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    Published on: September 21, 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: Last week's reports of the death of e-grocery have been greatly exaggerated.

    And now, the Conversation continues...


    KC: Tom, I thought it made sense to circle back on a study that came out last week, from TAB Analytics, which essentially suggested that with the exception of Amazon, e-grocery is pretty much a failure across the board.  What's interesting about the report was the way they spun the numbers - suggesting that "just" 4.5 percent of consumers were regularly buying groceries online.  I'd have two observations here.  First, that number actually is higher than the most recent US Department of Commerce number of four percent … and it ignores that this actually adds up to (if my math is right) more than $20 billion in sales.  And I've read at least one estimate (though not from TABS) that this number could quadruple by 2023.  It seems to me that this study is both myopic and pessimistic in ways that simply don't make sense.

    Tom Furphy:
    I would agree with you that 4.5 percent is actually a large number. Further, it has increased from 3.9 percent a year ago. That is a fairly significant penetration shift over just one year. And considering that the 4.5% is based primarily on Amazon and incumbent “full basket” players like Peapod and FreshDirect, that’s a pretty significant share across just a few players.

    It seems that by deeming it a failure, the survey is assuming that the industry has given online grocery shopping a full, honest effort. But it hasn’t. Full basket grocery has taken a long time to mature for a number of reasons. It has been difficult to offer a great customer experience because the available shopping tools have been somewhat cumbersome, it’s hard to substitute for the sensory nature of the store experience and it’s hard for retailers to stay fully committed to a well-executed program due to the difficult economics. However, all of this is getting much better and will stand to increase total market share significantly in the coming years.

    Like Moore’s Law, which states that computer processing power doubles every 18 months, as it has for decades, the amount of innovation in grocery shopping will also continue to accelerate significantly into the future. Replenishment shopping for center store items, interactive meal planning and preparation assistance, easy ordering across devices, economical delivery and easy pickup - it’s all coming. If you consider online grocery really only started less than 20 years ago, we’re still in the early days of its innovation. Brands and retailers that embrace that will do very well. Those that don’t, and hold onto the notion that e-grocery is a failure, will struggle.

    KC: Regardless of the numbers that traditional retailers generate in the e-grocery sector, I can't help but think that the one thing they have to keep focused on is the fact that even if the projections are only half right, and e-grocery only hits eight percent, that $40 billion in sales has to go somewhere … and if many bricks-and-mortar retailers don't want it, then companies like Amazon, Walmart/Jet and Kroger will be more than happy to take it.  Competitively, they have to look at the upside of the trend, not the downside.

    TF:
    Our analysis at CEP projects Amazon alone to grow to well over a $40B grocery business in the next five years. This is driven mostly by programs like Subscribe & Save, Dash, Internet of Things, Pantry and Prime Now. AmazonFresh delivery and pickup will drive it, too.

    I believe that most brick and mortar retailers do not want to cede this volume. Many are already building capabilities to capture it. So, when you add the amount of e-grocery growth that will come from existing grocers and new models to the Amazon’s piece, the total number should dwarf $40B. Your $80B estimate could be very reasonable. In that case, Amazon would own half of the market, with others sharing the balance.

    Customer-centric retailers and new models that drive the growth of the market will do so because they will use technology to improve the shopping experience and they will optimize the pickup and/or delivery experience and economics. Technology will enable easy shopping, automation of replenish-able products, better meal planning and shopping lists, better mobile capabilities and an overall more robust shopping experience. And the delivery environment will get better as companies that are competing for the last mile mature, build better density and drive higher volumes. Yes, I am repeating myself. These innovations will be significant and will support a much larger market than we see today. And if most traditional retailers become proficient, the total could far surpass $80B.

    KC: I also think it was telling that the study essentially suggested that retailers are spending too much time and money chasing the millennial spend, which is less at this point than the dollars spent by people with kids.  While I agree that most retailers always have to aim at the center of the target because that's where the dollars are, it strikes me as enormously short-sighted to ignore the fact that millennials are going to be at the center of the target (with their spouses and kids) pretty soon, and they're simply not going to abandon patterns and habits that they've developed over a long period of time.  It is these millennials that will drive e-grocery sales down the road, and again, retailers need to start laying that pavement now … because to ignore that e-infrastructure is tantamount to just handing over those sales to retailers that are better prepared.   Once again, Amazon would be happy to have those sales. Agreed?

    TF:
    I agree. Millennials are important. As you say, they are moving into the center of the target. So the mere dollars that they will drive will be important on their own. But they are also a proxy for other slower-tech-adopting segments of the market.

    I went back and re-read the press release. TAB Analytics said “Millennials are also harder to target with deals than other demographic groups since their participation in deals is well below the national average, particularly circulars and free standing inserts.” It stated that they are less sensitive to promotion, are less responsive to the weekly circular and don’t use FSI coupons. OK, let me get this right. Since they don’t respond to these archaic, expensive and generally ineffective practices – ones which often put retailers and manufacturers on opposite sides of the ledger – we should ignore them? Really?!?

    Millennials shop differently than older generations and they are giving us a direct glimpse into the future. They have become accustomed to a completely different set of tools to help them in their daily lives. Tools that the generations before them didn’t have at their disposal. They are true digital and mobile natives. Much of the traditional requirements of shopping – such as reading the insert, clipping coupons, driving to the store and walking up and down aisles – simply don’t work for them. They are used to easily ordering a car, a meal or a movie using technology. Amazon is more comfortable to them than going to the supermarket. Generations that follow them will be even more digitally native, and they will also help older generations become more comfortable with technology. Therefore, it behooves retailers and brands to understand the millennial customer more deeply and build capabilities to serve them.

    The Conversation will continue...

    KC's View:

    Published on: September 21, 2016

    by Kevin Coupe

    Advertising Age has a piece saying that Wrigley Americas did the right thing - and probably the only acceptable thing - yesterday when its Skittle brand suddenly got dragged into the presidential campaign by one side that issued a controversial Twitter posting using the candy as a metaphor.

    The problem emerged when Donald Trump Jr. said on Twitter that "if I had a bowl of Skittles and I told you just three would kill you. Would you take a handful? That's our Syrian refugee problem." And the Tweet was accompanied by the photo of a bowl of Skittles.

    When the posting generated controversy among those who felt the sentiments were callous, it took just hours for Denise Young, VP-corporate affairs at Skittles parent Wrigley Americas, to issue this statement:

    "Skittles are candy. Refugees are people. We don't feel it's an appropriate analogy. We will respectfully refrain from further commentary as anything we say could be misinterpreted as marketing."

    Which was exactly the right thing to do. The evidence seems to be that most brands want to stay as far away from this debacle of a presidential campaign season -on both sides - as possible, and not let themselves dragged into it.

    The corporate response was an Eye-Opener, even if the campaigns being conducted make me want to shut mine.
    KC's View:

    Published on: September 21, 2016

    The New York Business Journal reports that in the wake of Walmart's closing on its deal to acquire Jet for $3.3 billion, a move that it hopes will allow it to compete more effectively with Amazon, CEO Doug McMillon has written a blog post explaining why the purchase was made. The rationale was explained in five bullet points:

    "1) Jet.com brings more ways to serve our customers and reach new customers online. Jet.com created a unique, transparent way for customers to shop, helping them make choices that lower their prices as they shop — from building smarter baskets to opting out of free returns and using debit cards. This has helped Jet.com win fans among savvy shoppers and will help us put the power to save in more shoppers’ hands. Look for that on Walmart.com.

    "2) The deal will build on our e-commerce foundation and accelerate growth. We’ve grown Walmart.com to the second largest online retailer by traffic in the U.S. and in just the past six months we’ve expanded from 7 million items to more than 15 million on the site. We’re adding about a million more each month. We’ve built an impressive fulfillment network that uses mega-sized fulfillment centers and our stores to get orders to customers faster. Within a year, we’ve created one of the largest online grocery businesses in the country.

    "3) Jet.com’s and Walmart.com’s customer bases are complementary. Jet.com is a hit among urban millennials, and it will continue to focus on delivering premium brands and experiences. Walmart.com is winning value-conscious shoppers with everyday low prices by keeping costs low. And that’s enhanced by a wide assortment and convenient store pickup options. Together, both Jet.com and Walmart.com will be able to leverage each other’s assets to grow the ways we serve customers.

    "4) Jet.com boasts incredible talent. Marc (Lore, Jet's founder) is both a visionary e-commerce leader and a merchant. He brings with him a smart and talented team that, when combined with ours, will be the best in retail.

    "5) Together, Jet.com and Walmart can win the future of retail. We’re in the business of “saving people money so that they can live better.” But the value of our customers’ time cannot be overstated. To win the future of retail, we must save customers both money and time. By combining with Jet.com’s technology, shopping experience, customers and talent, we will do exactly that. We will exceed their expectations!"

    In a separate press release, the Journal reports, Walmart said that "as part of the transaction, approximately $300 million of Wal-Mart shares will be paid over time. Lore himself will receive more than 3.5 million shares of Wal-Mart common stock, worth about $250 million as of Monday, to be paid over a five-year period."
    KC's View:
    Probably not a surprise that the word "Amazon" is not mentioned in the McMillon posting, but you know that this is the context for pretty much everything Walmart is doing in this regard.

    As I've said here before, I'm not sure that Jet is the answer, nor that Lore will be a long-term player within the Walmart corporate structure. But let's be clear. We don't live in a world where either Walmart or Amazon can win with e-commerce, but not both. There is plenty of business out there for both of them, and I think that in many ways they appeal to entirely different customers bases ... and so while they compete, and each will raise the bar for what the other can and must do, it would be a mistake, I think, to see this as a death match in which only one can win.

    Both can be winners. And they'll together drive the e-grocery business, which will further prove the study we discussed above in "The Innovation Conversation" to be out of touch with reality.

    Published on: September 21, 2016

    Fast Company has a story saying that a a new study conducted by sustainability nonprofit BSR and underwritten by meal kit company Blue Apron suggests that "62% less food is wasted at Blue Apron's food prep facility and by consumers than the same meals cooked with grocery store ingredients."

    The reason: "Each meal comes with only the precise amount needed for each ingredient, whether it's a single carrot, three dates, or a tiny amount of flour. In theory, you'll eat all of it."

    According to the story, "BSR surveyed 2,000 Blue Apron customers to find out how much they threw out in meals that week—maybe because they didn't like a particular ingredient, or they didn't eat a full meal. Again, they compared that to USDA food waste stats for the same ingredients. Cooks threw out 7.6% of the food in Blue Apron meals, and would throw out an estimated 23.9% to make the same meal otherwise."
    KC's View:
    While the data is acknowledged to be imprecise (and we certainly have to consider the source), Blue Apron believes that it can make the end-to-end sustainability impact argument successfully, at least to the degree that it will be able to justify better the cost of its meal kits. I have to admit that I find it to be a persuasive argument; one of the my pet peeves (and it becomes a greater issue for me as I get older) is throwing out food that the people who live in my house have asked me to buy, but never ate.

    Published on: September 21, 2016

    The Wall Street Journal this morning reports that grass-fed beef, "once a niche luxury," is becoming mainstream and now is "sold at ballgames, convention centers and nearly every Wal-Mart in the US." Last year, the Journal writes, "sales of grass-fed beef rose nearly 40% over the year before, while conventional beef grew 6.5% during the same period."

    According to the story, "Grass-fed beef refers to cattle raised in a pasture, eating grass or 'forage' like hay, according to the U.S. Department of Agriculture. Conventional methods of raising cattle involve feeding them grains like corn and soy to build fat. Use of antibiotics, growth hormones, pesticides and confinement can vary farm by farm however, as can flavor and tenderness ... Beef labeled as grass-fed connotes much more than cattle that were raised in a pasture, say grocers and restaurateurs. Many consumers perceive grass-fed beef as a healthier, higher-quality alternative to conventional beef and are willing to pay more for it, no matter that labeling - and flavor - can be inconsistent."
    KC's View:
    The story implies that if greater consistency cannot be established in how grass-fed beef raised and regulated, there is the potential that a few bad players could kill the trend by selling lower quality product with a higher quality name. Then again, isn;t that pretty much the case with most trends?

    Published on: September 21, 2016

    Temkin Group yesterday issued its annual Temkin Emotion Ratings report, which "benchmarks the positive and negative emotions that consumers have when they interact with 294 companies across 20 industries," and concluded that "Publix, Chick-fil-A, and Residence Inn earned the only 'excellent' scores for delivering the most positive emotional experiences, followed closely by H-E-B, True Value, Kroger, Save-a-Lot, Wawa Food Market, QVC, and Amazon."

    The report also says that "the supermarket and fast food industries earned the highest average Temkin Emotion Ratings (at 'okay' level), while health plans, TV service providers, and Internet providers were at the bottom with 'very poor' ratings ... At the other end of the emotional spectrum, the companies with the lowest Ratings are Comcast (for both Internet service and TV service), Fujitsu, Health Net, Blue Shield of CA, Anthem, Time Warner Cable, Commonwealth Edison, Medicaid, Charter Communications, and AT&T."

    Temkin suggests that emotional resonance can have an economic impact - that "those who have a positive emotional experience are 15.1 times more likely to recommend a company" ... "8.4 times more likely to trust a company" ... "7.8 times more likely to try new products and services from a company" ... "7.1 times more likely to purchase more from company" .... and "6.6 times more likely to forgive a company after it makes a mistake."
    KC's View:

    Published on: September 21, 2016

    The Bellingham Herald reports that "a group of creditors still owed money from the Haggen bankruptcy is going after the grocer’s previous owner in court. The lawsuit filed in a Delaware Bankruptcy Court on Wednesday, Sept. 7, alleges that Comvest Group Holdings covertly siphoned away valuable real estate assets that Haggen acquired from Albertsons to benefit Comvest and not be used to pay back creditors."

    The complaint says that "Comvest was more interested in a real estate play rather than expanding Haggen," the Herald writes. "According to the complaint, about $100 million is still owed to suppliers, landlords and laid-off employees. The lawsuit seeks to access those assets to pay those debts to unsecured creditors."

    Comvest has not yet commented on the complaint.
    KC's View:
    I don't know the ins and outs of the deal, but it would not be hard to persuade me that when Comvest did the original deal, acquiring 146 stores from Albertsons that I thought from the beginning it would have no shot at operating successfully, it had to have a way to make money even if the chain collapsed. So, did these guys screw over creditors? Seems plausible to me. Did they protect themselves so that suits such as this one won't be successful? Wouldn't surprise me at all.

    Published on: September 21, 2016

    Reuters reports that Walmart said yesterday that it "paid more than $201 million in second-quarter bonuses to hourly store staff as 99 percent of its stores met targets for cleanliness, faster checkout and better service. The world's largest retailer said 932,000 store employees received a quarterly bonus this year. This was a jump from 880,000 employees in the second quarter of fiscal 2016 and 687,000 workers in fiscal 2015."

    The increase in bonuses, Reuters writes, "comes after the retailer bucked a string of weak earnings by its rivals and reported a better-than-expected quarterly performance last month, saying it benefited from more efficient U.S. stores and higher employee wages that fostered better customer service. It also comes at a time when the retailer is cutting back-office jobs."
    KC's View:

    Published on: September 21, 2016

    ...with brief, occasional, italicized and sometimes gratuitous commentary…

    • The Associated Press reports that Unilever struck a deal to acquire Seventh Generation, a sustainable cleaning products company. Terms of the deal, expected to close by the end of next month, were not disclosed.

    Unilever has been on a bit of an acquisition tear lately, buying Dollar Shave Club and reportedly in talks to buy Honest Co., the environmentally friendly CPG company co-founded by actress Jessica Alba.

    Unilever has proven itself to be a hands-off owner in cases where the companies it buys have unique and differentiated cultures, as with Ben & Jerry's, which has maintained a counter-culture image despite multinational ownership. According to the story, "Seventh Generation spokeswoman Brandi Thomas says Unilever’s sustainability goals line up well with the company’s values," and adds that company remains committed to Burlington, Vermont, where it long has been headquartered.


    Fortune reports that when Bayer acquires Monsanto, a deal that is expected to close by the end of 2017, it is a possibility that it will get rid of the Monsanto name and sell its products, like seed corn and Roundup herbicide, as Bayer CropScience brands.

    The story notes that "Monsanto has quite a bad reputation among environmentalists who don’t approve of its use of genetically modified crops, and resistance against labeling them. It also isn’t on such great terms with those who haven’t forgotten about its Agent Orange herbicide that was weaponized by the U.S. military during the Vietnam War.

    "While Bayer isn’t exactly in the good graces of environmentalists either, it is better known for inventing Aspirin, which it brought to the market in 1899."

    Bayer should not count too much on the idea that eliminating the Monsanto name will alleviate certain headaches. The activists that oppose Monsanto are not stupid.


    • The Associated Press reports that Whole Foods has agreed to pay a $3.5 million fine to the US Environmental Protection Agency (EPA) "over its improper identification or mishandling of hazardous waste at stores."

    According to the story, "The EPA says the grocer’s violations were at stores in Texas, Arkansas, Louisiana, New Mexico and Oklahoma. In a statement, Whole Foods said there was no allegation or finding by the EPA that it improperly disposed of hazardous wastes, but that it addressed 'record keeping' with regard to hazardous waste in its stores ... Whole Foods says it worked with the EPA and has updated operations and training, plus improved its systems to better track such waste."
    KC's View:

    Published on: September 21, 2016

    • The Wall Street Journal reports that Petco has hired John Zavada, most recently the CIO at Restoration Hardware and formerly an IT executive at chains that ranged from Guitar Center to Victoria's Secret, to be its new chief information officer.

    In a statement, the retailer said that Zavada will be responsible for Petco’s “information technology strategies, teams and projects, including the company’s business process optimization and enterprise program management office."
    KC's View:

    Published on: September 21, 2016

    Yesterday, we had a less-than-enthusiastic review from an MNB reader of the "365 by Whole Foods" store in Lake Oswego, Oregon ... and now, we have another reader chiming in:

    I live within walking distance so I can see how it’s doing. Not as much as expected.

    There’s a little back story connected to that ...  It could be called "How not to make a first impression.” Prior to the store’s opening, signs were posted in the parking lot indicating the lot was intended only for customers using the mall in which 365 was located. Through the many years, nearby Starbucks’ customers parked on that lot without repercussion. Then, with the store to open shortly, security guards trailed suspected scofflaws and if they went to Starbucks their car was ticketed with a warning. Later, several cars were towed ($400.00). This made the local newspaper, with a photograph and a story. Anger resulted from this little community to be sure.

    Full irony: the store’s parking lot has not been filled since 365’s opening days, and lately guards are gone and signs are down, so I suspect the Starbucks customers are back at their old parking spots. Folks will forget about this ill thought out move over time, but you wonder what the person who came up with the idea was thinking. Not public relations.





    MNB yesterday took note of an Associated Press report that there is a proposal on the table in Seattle that would legislate how retail and foodservice businesses deal with hourly employees, "including requiring them to schedule shifts two weeks in advance and compensate workers for some last-minute changes." The story said that "the mayor, city officials and labor-backed groups are targeting erratic schedules and fluctuating hours they say make it difficult for people to juggle child care, school or other jobs, to count on stable income or to plan for the future.

    I commented:

    For me, this new proposal is definitely a bridge too far, and if Seattle goes there, it runs the risk of undoing a lot of the economic growth that it has experienced.

    Such rules don't just undermine any ability for a retailer to have any flexibility, but it also actually hurts the employees who want to be more flexible because it gives them a differential advantage. It actually sounds like if someone were to cal in sick, the business would be financially penalized for calling someone else in to replace them. How does this make sense? This is just nuts, and is way too intrusive.


    MNB user Chad Spiegel wrote:

    I have to disagree with your take on Seattle’s push to bring some stability to the schedules of hourly workers.  Last-minute schedule changes don’t reflect employee flexibility, they reflect poor managerial practices.  Consider the costs, both to the business and the community, that come with disrupting child care, second jobs, or other responsibilities which inevitably leads to higher employee turnover.  Frankly, a business that can’t adequately plan staffing two weeks out deserves about as much sympathy as Kmart.

    Listen, planning is important. No argument. But, I also think it is important to remember the old Mike Tyson line, that "everybody has a plan until they get punched in the mouth."

    From another reader:

    As I recall from Econ 101 a zillion years ago, the more expensive you make labor, the easier it is to have technology and machines replace it. The example in those days was the elevator operators in New York (yes young folks, there use to be people operating elevators !). They unionized, got a big raise from building operators and were mostly gone in 3-5 years after Otis showed how easy it was now to pay out automatic elevators. Would think the tech savvy people in Seattle would know this.

    There also used to be telephone operators who had to place calls for you.

    Some one would argue that self-operated elevators and self-dialing telephones are inherently evil, because they are technological replacements for jobs that used to be held by people. But I'm not sure that this is a productive argument.
    KC's View: