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    Published on: October 5, 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: Business lessons from how baseball has embraced technology as a game-changer.

    And now, the Conversation continues...

    KC: You and I are both NY Mets fans, and we're both cheered by the team's unlikely return to the playoffs after an injury-ridden season, so I wanted to employ the Innovation Conversation this week to use baseball, and sports in general, as a metaphor for retailing.  I've been arguing for a while that one of the reasons that MLB decided to allow instant replay, beyond a basic desire to get the calls right, was that those of us watching at home actually had better views than the umpires.  We have these big HD televisions, the networks are able to show us a variety of views in amazingly slow motion, and so we knew immediately whether the umpires were right or not.  To me, that has a lot of resonance for how technology affects retailing - companies have to be better at trackability, traceability and transparency because consumers, in the end, may be able to have more information than they do if companies are not careful.  Would you agree?

    Tom Furphy:
    I absolutely agree. It’s a great metaphor. In the not-too-distant future, consumers most certainly will have at least as much information available to them before, during and after the shopping experience as do retailers. Retailers should count on it. In many cases consumers will have access to even more information at any point in time than the retailer. From digital recipes to shopping list to product information to sourcing and supply chain, to shopping tools and purchase history, shoppers will have virtually unlimited data available to help them along every step of the way.

    It already has happened in other industries. Think about the experience of buying a car, which today is nothing like it used to be. Every consumer who wants to have more information about the car he or she wants to buy is able to, right down to what the profit margin is and what every other dealership (anywhere in the country!) is selling the car for.

    Ultimately, this is all a good thing. This information will give shoppers more control and will allow retailers that embrace the new environment to deliver a better, richer shopping experience for customers. With the assistance of data, retailers will be able to cater to all shoppers precisely and individually, before during and after the trip. Regardless of if the trip is an e-commerce trip or a store trip. That’s a big win for both shoppers and retailers.

    However, unlike MLB teams and umpires, retailers do not have the luxury of instant replay. They need to be on their game, real-time, all the time. They are not afforded the opportunity to reverse a bad shopping experience in the same way that umpires can reverse a bad call.

    KC: It also has been interesting that this year, for the first time, Major League Baseball made a deal with Apple that allows managers to use iPads in the dugout, giving them access to far more information and far more quickly than in the past.  Video technology makes it possible to analyze the way players swing a bat or throw a ball with far more precision than any scout ever could have - which is an enormous advantage, especially if the opposing team did not have access to the same info.  Again, a great metaphor - companies cannot afford to concede these kinds of advantages to their competition.

    Having a deep data strategy is not optional today. And this goes for customer-facing functions as well as any function throughout the organization. Data can make everyone better at what they do. The retailers that have the most data and have developed the best capabilities to leverage that data will be much better suited to win with shoppers than those retailers that don’t. The retailers that are out in front of this will benefit from a flywheel effect – they will deliver a better experience rooted in data, those experiences will generate even more data, and that data will be used to reach more shoppers and deliver even better experiences. Retailers that are behind will find it more and more difficult to gain ground on the leaders.

    KC: Sometimes people bemoan the impact of technology on sports the same way that they talk about how Amazon uses algorithms to such advantage, and how Jeff Bezos says he'd prefer to operate with as few people as possible.  But I'm not sure it ever is an either-or situation.  Michael Sansolo and I talked here a few weeks ago about our being the opening act for Lou Piniella at a conference, and we talked with him about technology's impact on the game.  And he said something that really resonated with us.  Piniella said that all the technology could be an enormous help, but at the end of the day, a manager has to be able to walk out to the mound, look a pitcher in the eye and tell whether he's got anything left in his head, heart and balls.  It seems to me that even with all the technology available, that's an important quality that a leader/manager always has to have - the ability to gauge human potential and possibility.  Even Jeff Bezos.  Agreed?

    I’d say that I pretty much agree. While technology has absolutely allowed us to rely less on human variability, I think leaders and organizations ultimately need to strike the right balance of technological and human influence that works for them.

    Technology takes data from the past, mines it to recognize patterns and then develops and applies algorithms to predict future events. So, in baseball, could data and algorithms detect a breakdown in a pitcher’s form? Could the pitcher’s trailing ball location and speed data be used to predict a forthcoming breakdown? Maybe. Actually, it’s probably likely.

    Perhaps Mr. Piniella’s pitcher feels great and genuinely believes that he can keep going. His competitive juices, pride and desire to perform for the coach could very well overwhelm his recognition of an actual mechanical and physical breakdown that is occurring. However, statistical data might actually calculate there is a 90% chance that he can’t make it through the rest of the inning without being unacceptably vulnerable to walks, hits and home runs. Maybe then it would be a good idea to bring in a reliever.

    However, like Mr. Piniella, I do believe that it’s critically important for leaders and managers to have the ability to connect at a deep human level both to assess potential and, even more so, to help inspire people to realize their potential. It’s one thing to set up quantifiable goals and “program” people to use the tools at their disposal to reach those goals. It’s another thing to inspire them to dig deep, leverage the emotion to obliterate the goals and be inspired to set new, even higher goals.

    Let’s go Mets!

    The Conversation will continue...

    KC's View:

    Published on: October 5, 2016

    The Cincinnati Business Courier reports that one investment analyst is suggesting that Kroger "is so big that it has pricing power over its competition and can wait out the current tough pricing environment" that has been created by deflation in so many categories.

    “Kroger is going for volume over margins,” says Andy Stout, managing director of investments at Simply Money. “They’re playing the market share game.” The story notes that "Kroger’s same-store sales growth was 5.4 percent in the third quarter last year, but it had dwindled to just 1.7 percent in this year’s second quarter. Kroger is still on an industry-leading streak of 51 straight quarters generating same-store sales growth."

    The Courier writes that "the idea is to keep sales volumes high and rising even with pricing tight and margins squeezed thanks to food price deflation and price wars with Wal-Mart and others. When the tide turns and prices come back up, Cincinnati-based Kroger will already have the customers and sales in place so its profit margins could quickly return."
    KC's View:
    A consistent refrain I've heard recently when chatting with top industry executives has been how tough food deflation is making it on them; it creates enormous challenges in terms of numbers, and companies have to make tough choices in terms of short-term issues (like staffing) and long-term priorities (like acquisitions) because of the issue.

    There are some enormous advantages that Kroger has because of its size. And I think it is really smart to play the market share game whenever things get tough ... because when things get better, it gives the company are much more stable foundation upon which to build.

    Published on: October 5, 2016

    There are a number of stories this morning using the occasion of Target opening a small urban format in New York City to examine the company's broader strategy, which the Wall Street Journal writes is to open "smaller stores in urban areas and college towns from New York City to State College, Pa., as it battles declining traffic and sales at its nearly 1,800-strong fleet of largely suburban stores."

    CEO Brian Cornell says that there could be "hundreds of these. It could be a huge part of future growth outlook over time.” And, he says,the new stores should start "moving the needle" for Target in 2017 and 2018: “It brings us into neighborhoods where we don’t exist today and where there is demand for our brand."

    "Target is attempting to succeed where others have struggled, a sign of the limited options for brick-and-mortar retailers competing with e-commerce," the Journal reports. "Wal-Mart Stores Inc. retreated from a similar experiment earlier this year, closing more than 100 of its smaller Wal-Mart Express locations to focus on its massive SuperCenters and grocery-store-style Neighborhood Market formats. Unlike Wal-Mart, which opened its Express stores largely in suburban and rural locations, Target is focusing on densely populated urban areas and customizing the assortment in each store to cater to local tastes."

    In a related story, MarketWatch reports that industry analysts believe that Target has to figure out its food offering if it really wants to be competitive, that "without compelling food offerings, there are limits to Target’s competitive upside and its ability to claw back, soon, the ground it has lost the past year."
    KC's View:
    I am mildly dubious. I've been in a couple of these small-format Target stores, and to me they seem a little vanilla. I can see how they might be effective, but it is hard to envision them as the engine that can help generate greater growth for Target ... they look to me more like something that would power a lawn mower, not a race car.

    Published on: October 5, 2016

    Forbes has a story about German discounter Lidl, which along with fellow discounter Aldi has managed to completely disrupt much of the UK market and now is looking to bring its approach to the US, where it already has said it plans to open 150 stores during its first year here.

    Lidl, the story notes, "is preparing to expand up the East Coast, from Georgia to New Jersey, by 2018. It has invested $77 million in a U.S. headquarters in Virginia, about $120 million in a distribution center, and in late August began seeking managers in 12 metro areas, including in Virginia, North Carolina and South Carolina."

    The Forbes suggests that Lidl brings a number of advantages to the US - it is an enormous company (operating 10,000 stores worldwide, with revenue in excess of $62 billion), with what is called a "simple" value proposition that focuses on being "transparent and honest, easy to understand, innovative and able to make its customers feel valued."

    As a so-called "soft discounter," Lidl "offers a broader product portfolio and more brand names than a hard discounter, such as Aldi. Hard discounters are marked by a highly limited assortment that is dominated by private labels. Business Insider describes Lidl as a cross between Walmart and Trader Joe’s."
    KC's View:
    If Lidl gets it right - unlike how Tesco totally fumbled the ball with its Fresh & Easy US operation - I continue to believe that it could be a real threat to traditional grocers ... especially those that do not take it seriously.

    If I were a grocer in any market Lidl plans to enter, I would think that it would be important to start competing with it right now.

    Published on: October 5, 2016

    Tesco announced this morning that there seems to be evidence that it is accomplishing a turnaround in the wake of an accounting scandal that coincided with declining sales and profits, saying that first half operating profit was up to the equivalent of $770.4 million (US), from $473.2 million during the same period a year earlier. Revenue for the period was up just a tick, to $34.8 billion from $34.6 billion a year earlier. Same-store sales in the UK were up 0.6 percent, while total store same-store sales were up one percent.

    The Wall Street Journal writes that Tesco seems to have improved profitability in several ways: "It has cut its product range by 23%, lowered regular prices 6% while eliminating 40% of promotions, and added 12,000 more customer-facing employees. It has also sold noncore businesses including its gardening arm, Korean business and coffee-shop stake, and has slashed back-office jobs."

    The Journal notes that CEO Dave Lewis has established several goals for the company - to achieve "an operating margin of between 3.5% and 4% by fiscal 2020," as well as cut operating costs by $2 billion (US) "by improving distribution and simplifying its store operations." Tesco says it will spend $1.7 billion "a year in capital expenditure through fiscal 2020 to drive these changes."
    KC's View:
    It would seem that if Dave Lewis's goal is to do more with less, he is achieving it. But at some point, I think, it is going to be important to grow same-store sales, not just profit more from what already exists.

    Published on: October 5, 2016

    Eater reports that Starbucks is testing curbside pickup at a store in Snoqualmie, Washington, allowing customers to order using its mobile application but not even have to leave their cars when they arrive at the store.

    According to the story, "The test is only being conducted at one location, and will last for six weeks ... Customers using the service can’t simply park in the lot, as that would be dangerous for baristas. Instead, the Snoqualmie store has an area near the front of the store designated just for curbside pickups, with several signs and a large curb with room for two cars."

    However, an employee at the store tells Eater that "curbside service has so far been 'really slow, with usually no more than one person at a time.' She estimates that only about five people used the service the first day it was launched."
    KC's View:
    This strikes me as just a place where Starbucks can play a little bit to see what happens. I would have to think that in most of the places where it would have space for curbside pickup, it already has a drive-through window. I know that I will use its mobile app from time to time and, when I get to a Starbucks with a drive-through window that isn;t busy, I'll use it.

    But it is fun to play when the opportunity arises. A company can learn a lot from just messing around to see what happens. I see no downside.

    Published on: October 5, 2016

    • The Wall Street Journal has a story about how Amazon's "all-you-can-read subscription service in Japan was so successful that it had to be sharply scaled back within weeks of its introduction," with more than 1,500 titles being removed from the service.

    According to the story, "The Kindle Unlimited service started in Japan in August, offering unlimited reading of hundreds of thousands of Japanese and foreign titles for a monthly fee of ¥980 ($9.60) ... As part of a deal to attract customers to the service, Amazon made contracts with Japanese publishers to pay them a premium through the end of this year when a customer read at least 10% of a book or other content, publishing company officials said. The goal was to get publishers to offer popular content.

    "It worked—too well. Since it’s easy for readers to get through the first 10% of a magazine or photo book in just a few minutes, Amazon quickly found itself on the hook for large payments, a person at one publisher said."

    Amazon is reported to have sought a renegotiation of its contracts with publishers, who were not interested in any changes. Since it couldn't get new terms, Amazon removed some titles as part of what it called a normal rotation of offerings.

    Amazon has not commented specifically on the contretemps with Japanese publishers.
    KC's View:

    Published on: October 5, 2016

    • The National Retail Federation (NRF) is predicting that sales during November and December 2016, the end-of-year holiday shopping season, will "increase a solid 3.6 percent to $655.8 billion — significantly higher than the 10-year average of 2.5 percent and above the seven-year average of 3.4 percent since recovery began in 2009." The numbers exclude autos, gas and restaurant sales.

    NRF also forecasts non-store sales to increase between 7 and 10 percent to as much as $117 billion.

    CNN reports that "if your Starbucks barista seemed particularly happy for a Monday morning, there's a reason: The whole company just got a raise. Pay increases of 5% to 15% took effect Monday for all 157,000 Starbucks employees in the United States." The raises also include "a doubling of company stock awards for employees who have been there at least two years."

    CNBC reports that "roughly one year after shuttering FAO Schwarz's iconic New York City flagship, Toys R Us is selling off the brand.

    "ThreeSixty Group, a company that designs and distributes toys and other consumer products, said Tuesday that it acquired the 154-year-old toy retailer, which had been owned by Toys R Us since 2009.

    "Terms of the deal were not disclosed."
    KC's View:

    Published on: October 5, 2016

    We had a story yesterday about how Safeway is putting Amazon lockers in some of its stores, which prompted me to ask:

    I cannot help but wonder about the advisability of Safeway providing easy access - not to mention the free advertising that comes from just having the lockers highly visible in the store lobbies - to an installation operated by a major competitor. I'm sure Safeway wouldn't put Kroger lockers in its stores. Or Bristol Farms lockers. So why Amazon?

    One MNB user responded:

    Maybe not, but Safeway sells Turkey Hill ice cream.  Kroger owns Turkey Hill Dairy.

    Legitimate point. There's a little bit of a difference, since it isn't labeled as Kroger ice cream. But I think retailers need to look at places where they can avoid enriching the competition.

    Regarding Amazon's overall expanding use of lockers, one MNB user wrote:

    My friend and I are Prime members and big fans of these lockers.  We both work all day and prefer not to have stuff delivered to our homes where it is vulnerable to the possibility of package thieves.  I had been trying to get my packages delivered to a locker since they started but they were all located 20-30 miles away.  I was delighted to go do my grocery shopping and there in all its glory outside the Safeway was “Buster” a very large Amazon locker.  I immediately began using Buster and have been delighted.  When Amazon had their Prime day I shipped multiple packages to the locker and they were able to add more to than one package in the locker to conserve space even if they were not from the same order.  My friend and I were texting all day about our purchases and her locker “Betty” was full and she was given the opportunity to choose another locker and/or delivery address.  The code that opens the locker is sent via e-mail and all I have to do is bring up the barcode in the email and have Buster scans it and locker pops open.  The locker is open 24/7 so package retrieval can be done at any time. 

    Oh, and we are Baby Boomers!

    Regarding Sears CEO/chairman Eddie Lampert's assertion that Kmart will not be shut down, despite the trend lines being overwhelmingly negative, one MNB user wrote:

    I remember when Fast Eddie figured that he could make a quick buck competing against Walmart, Kohl’s and Target. The rationale was that even if the stores didn’t make an operating profit, there was always the real estate. Now he is discovering that prime real estate selected 40 years ago, may not be so prime now. Neighborhoods change. That plus the bricks to clicks transition, may have him wishing that he stuck with hedge funds.

    Another MNB reader compared Lampert to Donald Trump:

    Kevin, he has a LT strategic is just a secret!

    And Jim Swoboda wrote:

    Not only are they a dead company walking, I would suggest he’s a blind man leading.

    On the subject of Amazon doing a better job at culling customer reviews to be sure that they are relevant, MNB user Tom Herman wrote:

    I am a big purchaser on Amazon Prime.  I will probably have to delay my retirement because of it.  That said, I only look at reviews of verified purchases.

    MNB also took note yesterday of a Columbus Business First report that Amazon "is laying the groundwork to add alcohol delivery to its Prime Now service in Columbus and Cincinnati," having filed for permits "to sell carryout beer, wine and pre-packaged low-proof mixed drinks in Franklin and Hamilton counties, according to applications with the Ohio Department of Commerce. Carryout licenses allow delivery."

    Prompting one MNB user to write:

    I love it! The evil Amazon, with its corporate greed and total disregard for job loss, could finally be stepping into an area that could take it down a notch or two. Delivering to college campus and even more questionable, tailgates, has lawsuit written all over it. Combine individual state liquor laws, underage drinking and our (unfortunate) litigious society won’t only cause disruption, but more likely, lawsuits.

    So not only do you believe that Amazon is intrinsically evil, but you now are rooting for lawsuits against it.

    Okay. I guess we know where you are coming from.

    On another subject - baseball - this email from MNB reader Jim Huey:

    Kevin, thank you for talking about your baseball memories. I am 46 and grew up about an hour from Milwaukee. When I was about 4 years old my mom and dad took my older brother and I to see the Brewers so we could say we saw Hank Aaron play. My eyes tear up even writing it all these years later. Sadly my parents divorced messily, but my mom continued to take us to baseball games.

    When I was a kid the Brewers had a program where you got 6 tickets, to likely less desirable games, pretty cheap. In ’81 the strike cut out one of our games and we were reassigned one later in the season. Amazingly it ended up being the game the Brewers clinched the American League East against the Detroit Tigers, I believe. In the bottom of the ninth Rollie Fingers came on to try and close out the game. The entire stadium was on their feet, clapping and stopping their feet. If I close my eyes I can still feel the stadium shaking beneath me. He struck out the last 2 batters and seemingly an instant after the umpire called “strike” big Ted Simmons was jumping into Rollie’s chest. The stadium erupted and the fans began to pour onto the field.

    My brother and I, 11 and 12 at the time, begged my mom to let us go onto the field but she prudently would not let us. It is one of the best memories of my childhood. I never went to a pro basketball or football game as a child but have many great memories of baseball. Thanks for helping me relive them!

    My pleasure.

    And from MNB reader Scott J. Proch, about my ballpark rankings:

    Thanks for a great list!  Writing as it is nice to hear that Coors Field (where I root now) and KC (where I grew up) are in your top 10.  I think everyone likes the ones where they attended as kids and we often marvel at how great the ‘K’ is, having opened in 1973 during the period of ‘ugly’ ballparks with carpet.  Yet, they’ve kept it up so well it’s still great.  I also wish it was downtown.  Maybe someday.
    Coors Field is actually a perceived issue with the Rockies.  The experience is so great, they draw 3M fans a year even when they’re terrible, so why bother increasing the payroll!

    KC's View:

    Published on: October 5, 2016

    In the American League Wild Card game last night, the Toronto Blue Jays defeated the Baltimore Orioles 5-2 in an 11-inning contest. As a result, the Blue Jays will move on to face the Texas Rangers in one of the two American League Divisional Series.
    KC's View: