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    Published on: October 19, 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: Amazon's Bricks-And-Mortar Ambitions.

    And now, the Conversation continues...


    KC: Okay, so let’s talk about the apparent decision by Amazon to open convenience/food stores … a decision that as far as I know has not been confirmed by Amazon but has been widely reported in the media.  I have to be honest about this.  When I saw the first Amazon Books store in Seattle my first thought that it was adaptable to other categories, including food. But before that, I figured that the last thing Amazon would want to invest in would be bricks-and-mortar.  It just seemed to me that physical stores have the potential of saddling Amazon with many of the same legacy problems that the companies with which it competes have.  Clearly I was wrong.  What did I misunderstand about Amazon’s intentions?

    Tom Furphy:
    I think the thing to remember is that Amazon aims to accomplish two things in its retail business. They want to become the go-to retailer where people can “find, discover and buy anything they want to online”. They also “start with the customer and work backward.” Given these, it is no wonder that the food/grocery space is important to them. It is one of the largest consumer spending areas, so it’s a big retail opportunity. It is also one of the categories that shoppers spend the most time thinking about, shopping for and consuming.

    Amazon has been in the fresh foods, full-basket grocery business for almost 10 years now. They have a lot of learning from the AmazonFresh effort. They’ve learned about what customers like and don’t like about the service. They’ve been able to test many different go-to-market strategies within the business. They’ve tested a number of financial models from tweaking the order minimums, to the “Big Radish” volume-based loyalty program, to $299 annual fees (including the standard $99 Prime membership), to now the $14.99 monthly fee on top of Prime. They’ve had several different strategies around Produce, Meat, Seafood and Dele, involving different mixes of Amazon staff, partners and even local merchants to deliver the experience. We even had pickup points in the first iteration of AmazonFresh.

    All of these learnings, along with those generated from the bookstores, seem to have led Amazon to the point of testing a more extensive version of a local pickup point. The newest versions appear to have some space apportioned to allow shoppers to come in, browse and pick up any last-minute items they may have forgotten (or that Amazon recommends for them!). Done right, this combination of drive-up pick-up and mini store can definitely work. They should be able to be much more economically viable than a traditional convenience store, moving much larger baskets and larger overall volume with less inventory on hand on far less labor relative to the volume.

    Amazon will no doubt launch and learn from these first outlets, just like they are learning from the bookstores. They can afford to take a little time to test different concepts to see what works. This is a very, very small bet for the company. Testing a few of these locations will cost low tens of millions of dollars. Even a hundred-million dollar test is a drop in the bucket for them. This is a company that did $59B in gross merchandise sales in the 2nd quarter of 2016 and threw off $1.3B in cash flow from operations in the quarter. Amazon is a beast right now.

    KC: What does this do to the economics of Amazon’s operations?  If one of the ways it has been able to keep prices down is by being as efficient as possible, doesn’t this inevitably raise its costs?  Or is the assumption that the increase in sales will compensate for the costs incurred in occupying the so-called last mile?

    TF:
    At first glance, it would appear that this would be a cost driver for Amazon. However, I’m not so sure. Adding pick-up points with a small amount of local inventory in the facility can actually add to the efficiency of the model. As we’ve said in the column in the past, the economic success of grocery delivery hinges on the density of delivery that can be realized. If trucks are delivering lots of orders every hour, the economics can work. If they are only dropping off a few, the cost of the truck, fuel and driver can quickly consume any profit from the order.

    So, if you convert some portion of the volume delivered to volume that is picked up, while maintaining reasonable density on deliveries, then it can work economically. At scale, savings from the shift away from delivery can be used to support the limited store ops cost. When a pickup point is churning out high volumes, it can be quite profitable. Most any European retailer with a successful “Drive” strategy could attest to that.

    KC: On a related subject, there was a story recently about how Amazon was going to have restrict the ability of new vendors to have space in its warehouses, and therefore limit the number of items available via Prime, because it doesn’t want to overload the system for the holidays.  But I cannot help but think that Amazon has to be careful about reducing its essential value proposition, which is to sell everything and to have most of it in stock.  Thoughts?

    TF:
    This is nothing new for Amazon. I remember every year we would have numerous internal meetings, at least weekly starting in August, to plan for the company’s “peak” inventory level. I can’t get into too many details about how the process worked, but it was all about making sure the facilities were stocked as fully as possible on the items that were most important to customers. Every year, Amazon gets to a peak inventory level at a point in time prior to its peak holiday volume level. And that peak level is a full 100% of the capacity that is available throughout the network. It’s actually more than 100% when you consider the trucks staged in the yards and upstream. We would always have to apportion space across our vendors, giving preference to existing vendors, whose products are proven and who have a track record of successfully delivering to Amazon on time, with good supply compliance. These vendors should naturally receive preference over new, less proven suppliers.

    The only thing that is different this year is that Amazon has “exposed” this process to its supplier base in a more formalized manner. It used to be handled by each of the merchandising groups, but now it is being managed more directly and publicly by operations. As the company scales, this becomes necessary. What a high-class problem to have! A company that has added dozens, if not hundreds of facilities globally in the past year needs to overfill its facilities to meet its projected customer demand. Amazon is a beast right now.

    KC: One final thought.  In talking to retailers recently, I keep getting questions about Amazon’s ability to remain a low-price leader in an increasingly competitive climate.  But my feeling is that to relegate Amazon to simply being a low-price leader is a mistake, because that underestimates the importance of a) convenience, and b) the long tail.  Would you agree?

    TF:
    Amazon does happen to have very low prices. And for many of their items, they have sold them at a loss in the strategy of getting more customers. Remember Amazon’s virtuous cycle.

    It starts with the long tail. Amazon is a place where you can find anything. That’s why they lead over Google for product search. Once Amazon has the customer, they deliver a great customer experience – on the site, on delivery and through customer service. As more customers shop and click around, and as more merchants sell products on the site, the marketplace becomes more robust. And as it becomes more robust, Amazon rolls out more fulfillment centers, which lowers the distribution cost to customers. All of this amounts a “perfect” and efficient marketplace.

    Amazon’s product detail pages solve for the proper market price by pitting multiple sellers, including Amazon, against each other. In the event that the market price becomes too low to be profitable, either sellers lose money or they eventually have to increase prices. Either way, because there are multiple sellers of the product, Amazon will always offer lowest or near-lowest prices. There may be certain products where Amazon and its sellers are not lowest, and we’ve seen that. In many of these cases, the prices are high because the products struggle to be profitable in the e-commerce channel. But the model will eventually solve for the right price. And as fulfillment costs lower, Amazon will be able to offer low prices on more and more product.

    The beauty in Amazon is that all of these elements work together to benefit of both customers and shareholders. Amazon is a beast right now.

    The Conversation will continue...

    KC's View:

    Published on: October 19, 2016

    by Kevin Coupe

    Fortune has a piece about Apple's retail chief, Angela Ahrendts, who says that her company views its retail stores as, in fact, "the biggest product we produce," and one that is being evolved into "potential town squares within each of the cities they reside."

    According to the story, "By the end of this year, 95 stores will be fully redesigned with this vision, the first of which were the San Francisco Union Square location and the London Regent Street outpost. The community aspect to each store is key, Ahrendts said, with these town squares serving as educational centers. For example, next year, Apple stores will soon hold coding classes for children in Apple’s programming language, Swift.

    "The new stores have also been holding what she calls 'Teacher Tuesdays,' to help educate teachers on how to incorporate technology into their classrooms."

    And, Fortune writes, "There’s a new team employed in the stores, called creative pros, who are solely available to teach customers skills such as how to take better pictures with their iPhone’s camera or how to use photography apps. They also help with downloading Apple Music, gaming and art apps. This group of employees is similar to those who run the newly redesigned Genius Grove, which is a customer service stand that fixes and troubleshoots Apple products."

    Now, I took a look at the Apple Union Square store a couple of months ago, and was impressed. And while Ahrendts, who has a history in the luxury retail segment, is giving a new veneer to Apple's retail operations, I think that this community-oriented approach is consistent with how Steve Jobs and Ron Johnson conceived the concept 15 years ago.

    That's what the Genius Bar - then a revolutionary concept - was all about. And the Apple Store always has positioned itself as a resource for information as much as a source of product. Which is very smart.

    And Ahrendts' comment that the store is, in fact, a product, is extremely savvy ... and points to precisely how executives should think about the retail experiences they create.

    Savvy, and an Eye-Opener.
    KC's View:

    Published on: October 19, 2016

    Pittsburgh-based Giant Eagle announced that it is offering buyouts to 340 of its corporate employees, saying that "competition from other food retailers and falling food prices are behind their need to cut operating costs," according to a story from WOSU Radio.

    The number of employees getting the offer represents about one percent of its total employee count; Giant Eagle says that the cuts will not affect jobs at any of its 420 stores.

    No word on precisely how many people Giant Eagle expects or hopes will take the offer.
    KC's View:
    Nothing wrong with trying to be more efficient, as long as, at the same time, the company focuses on being more effective. These two things don't always go hand in hand, and in my view, "competition from other food retailers and falling food prices" make greater effectiveness more important, not less so.

    Eleven years ago I wrote a piece about business lessons gleaned when I learned how to drive a race car. One of those lessons was that one of the ways you can pass the competition is by speeding into the curves, as opposed to slowing down.

    And that's something I think that efficiency-minded retailers ought to consider.

    Published on: October 19, 2016

    Tech Crunch reports that Walmart yesterday unveiled a new video streaming service, called Vudu Movies on Us, that "will include thousands of titles, which will be available in HD and can be streamed for free. To generate revenue, Vudu Movies on Us will be ad-supported.

    "While Amazon’s Prime Video is a perk that comes with an Amazon Prime membership, then offers a variety of commercial-free movies and TV shows, including originals, Vudu Movies on Us will not have new releases. Instead, it will more narrowly focus on distributing free blockbuster titles and other classics, the company says."
    KC's View:
    I'm sure this will have appeal to some folks, but I would not be one of them. If I'm going to stream, I'd rather commercials not get in the way.

    Maybe this betrays a bias toward Amazon and iTunes, but somehow this just seems like an afterthought, rather than an integrated and strategic part of the broader package. And so, it may not matter all that much.

    Published on: October 19, 2016

    Shake Shack, the upscale/gourmet hamburger chain, yesterday announced "the launch of its first-ever mobile ordering Shack App for iOS."

    The company said that the app will only be usable for mobile orders to be picked up at a single location in New York City - 600 Third Avenue in Manhattan - for the time being, and no timetable has been set for any chain-wide rollout.

    "In creating our first-ever app, we took great care to develop a mobile ordering platform that maintains the high quality our guests have come to know and love, but now just a tap away,” said Randy Garutti, CEO of Shake Shack, in a prepared statement, adding, "We’ve got a lot to learn, and we intend to take our time listening to our guests and tweaking the app before launching it in additional markets."

    The announcement says that "the Shack App includes all of the mobile ordering essentials: guests can find Shacks via a location finder; pick from their favorite orders; keep track of food allergies; access nutritional information; see the latest events and promos; connect to all Shake Shack social media channels and share feedback. What’s more? At any time, guests can view the live Shack Cam at the O.G. Shack in New York City’s Madison Square Park."
    KC's View:
    I think these sorts of apps are going to be standard operating procedure for a lot of companies going forward. Starbucks has set the bar pretty high, establishing consumer expectations for what we can do and want to do.

    We have a Shake Shack going in about a half-mile from my house, and the ideas that I might be able to place an order online and then ride my bike down to pick it up is utterly irresistible. Can't wait.

    Published on: October 19, 2016

    Business Insider reports that Target, as part of its broader focus on food retailing, soon will embrace the practice of vertical farming, described as "an agricultural technique that involves growing plants indoors in precisely programmed conditions."

    The story notes that "in January, Target launched the Food + Future CoLab, a collaboration with design firm Ideo and the MIT Media Lab, and they plan "to test the technology in a few Target stores to see how involved customers actually want to be with their food ... During the in-store trials, people could potentially harvest their own produce from the vertical farms, or just watch as staff members pick greens and veggies to stock on the shelves."

    "Food is a big part of our current portfolio today at Target — it does $20 billion of business for us," says Casey Carl, Target’s chief strategy and innovation officer. “We need to be able to see more effectively around corners in terms of where is the overall food and agriculture industries going domestically and globally.”
    KC's View:
    I'm not sure that this solves all the problems that Target is having with food, but I think the idea of being transparent about sourcing and bringing people closer to the food supply is a smart one.

    Published on: October 19, 2016

    • The Portland Press Herald reports that Hannaford Supermarkets is acquiring two Maine stores from a wholesale customer, Bud’s Shop ‘n Save.

    The Bud's stores have been customers of Hannaford's wholesale division for more than six decades. When the deal is completed later this year, Bud's owner Dean Homstead will still own and operate one store under the banner.

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

    Published on: October 19, 2016

    • Starbucks yesterday named its first CEO for China while also saying it plans to more than double its store count - to 5,000, from 2300 in more than 100 communities - there by 2021. The company also plans to pen a Starbucks Roastery & Reserve Tasting Room in Shanghai sometime next year.

    Belinda Wong, who has been president of Starbucks China, has been promoted to CEO of the division. At the same time, Leo Tsoi, vice president of store development and design for Starbucks China, has been promoted to COO there.
    KC's View:

    Published on: October 19, 2016

    Got the following email from MNB reader Victor C. Farr:

    I enjoyed your piece on the Washington Post Article which states how 50% of store managers are using a "gut feeling" when managing store inventory.

    I do agree with you that good store managers need to have insight and an understanding of what will sell and when it will sell, but more importantly I think the article points out the lack of innovation in the food industry. With companies like Amazon now getting into the mix, it will be impossible to compete if retailers rely on a store manager to manage inventory levels.

    I was fortunate to be apart of USC Marshall's Food Industry Management (FIM) program this past spring and the Capstone group I was so lucky to be a part of researched this very topic - Automated shelf replenishment. 

    In case you are interested, here is a video of our presentation at the WAFC convention for your reference: https://vimeo.com/185806601 .

    Now I am not saying the solution presented is the perfect answer to everyone's problems but it touches on certain operational aspects of the industry that must be addressed.

    In summary, I believe the existing players within the food retail industry are going to suffer if investments are not made in technology. New entrants to the industry, like Amazon, are certainly making a dent.


    Agreed. (See "The Innovation Conversation," above.)




    Responding to Michael Sansolo's piece about business lessons that can be learned from NBC's coverage of the Summer Olympics, MNB reader Tom Murphy wrote:

    Michael hit the nail on the head, but did not come down hard enough of the primary difference between the BBC & NBC…the BBC allowed their audience to curate their own experience.  Infinitely more of those than NBC could ever have discovered or delivered…that is the real message for retailers!

    But another MNB reader thought Michael was a little bit harsh:

    If it was necessary, you could probably label me as a "millennial cord-cutter".  I gave up on my cable subscription more than a year ago for a more cost effective portfolio of streaming services (Hulu, Amazon Prime, Crackle, TED, Youtube, etc.).  My daily news source is a free news channel on my Roku from CBSN and my guilty pleasure is a subscription with MLB.tv to (painfully) watch the Philadelphia Phillies.

    I was concerned with what access I would have to the Olympics when they came around, but I must admit that I had access to stream every Olympic event via my Roku streaming source and the NBC Sports/Olympic channel.  I was able to enjoy watching whichever event whenever I wanted, right through my Roku - Handball, Fencing, and Water Polo were among my favorites – and if I wanted to watch the live primetime coverage with NBC, I could watch that too.  My friends and I had watch parties through our streaming services and sometimes even streamed to our laptops through the Olympics website at the office.  I could watch old matches over again (like replays of Phelps' gold medal races), or fast forward through parts of a basketball or volleyball match I didn't want to watch.  It was a beautiful thing.
     
    I wouldn't argue that NBC's primetime coverage was disappointing, untimely, and drowned in endless backstories.  But from my perspective… as a millennial cord-cutter… someone with no daily access to a traditional cable network… I was more than pleased with the access to the Games in Rio, and can't wait for PyeongChang.





    At least one MNB reader is unhappy with Macy's announced plans to open on Thanksgiving an hour earlier than it did last year:

    I have shopped at Macy's every year for Christmas.  I do not have any friends or family in retail at Macy's.  But with this news they are staying open on Thanksgiving, tearing up the families of employees for that one day of an assured family gathering, they are officially on my #$%#$% list and will not see much business from me this season.  I will go out of my way to buy elsewhere.  It is unconscionable, greedy, shortsighted and outright stupid management decision. I hope they have sullen employees that day and their sales project the face of those employees.

    REI took a position on Black Friday last year not to be open sending their employees to enjoy the day (AND THANKSGIVING) and they got at least $4-500 dollars of my Christmas shopping for the noble and gutsy act.  I went there first to reward them.  Shame on Macy's!





    Responding to our coverage of the New York Times story about how Walmart seems to achieved cleaner, higher-performing stores by paying employees better, MNB user Joe Axford wrote:

    Refreshing to see Walmart putting associates and customers first, not Wall Street. Your line from the past, "treat your associates as assets, not liabilities" really resonates in today's business world, KC.

    Even a broken clock is right twice a day.

    But another MNB user wrote:

    I can tell you that this is not happening at the large Northeast chain I work for, where we are treated as liabilities, not assets. It's all about cutting labor, not training associates to be future managers and ambassadors for the company.

    And from another reader:

    While I agree with the premise, I think this is a very simplistic way of looking at a complex issue.  There are obviously diminishing rates of return.  You can’t pay all the Walmart employees $30 an hour and expect to make more profit.  So what is the right balance - that is different for every person. Secondly, how long does it take for a retail employee to become complacent?  Equity theory (Adams 1969) would suggest that once an employee realizes he/she is doing better work and making the same pay as the co-worker who is just getting to go along for the ride, the original employee backs off their extra effort.   
     
    In other words, you cannot reward everyone the same for different levels of work and expect sustained long term results.  It may take more management training to recognize, but here is a novel idea, let’s try rewarding those that give the extra effort and stop treating everyone like a number.


    I have no problem with that, though I do think in many cases the floor has to be higher just so people can survive.

    Another MNB reader is less than impressed with Walmart:

    Let me get this right?  Wal-Mart is now following the strategy that Costco has had in place for many years (one of the few retailers growing comp each year...) and now they're getting a similar result?

    "Slow follower" would be seem an appropriate label.


    A fair point.




    On another subject, MNB reader Dean Balsamo wrote:

    Several years ago after Lidl first announced their interest in coming to the States, I began reaching out to them – to their German headquarters and later with the first CEO they’d named for this country.  Around that time one of the Lidl executives based in Europe was quoted as saying they needed to go more upscale in their offerings.
     
    Of course I kept tracking Lidl news so we’d be ready to make a proposal. I noticed that in the UK Lidl has made a big thing out of having more gourmet and upscale offerings in general.

    And if you’ve followed the various presentations Lidl has had to make to the cities-like Richmond, VA for instance-where they intend to open stores you see that on average Lidl is looking at stores in the 30-35,000 sq. foot range - not the usual small, hard discount format. I would say they have more upscale features planned. Their staff in this country from what I’ve been able to glean is overwhelmingly on the young side so I’d expect some more contemporary aspects to their merchandising and stores here.


    And MNB reader Bob Vereen wrote:

    As a regular Aldi shopper, I can report that the company has been promoting organic products heavily for more than a year, and increasing its emphasis and assortments almost weekly.  It seems to be promoting them more aggressively than Kroger and Walmart.  Also, low-cal products under Fit & Active label.




    Finally, Todd Hale had a thought about my infatuation with the Echo/Alexa system from Amazon:

    You are sounding a bit like Joaquin Phoenix who fell in love with an “intelligent operating system with a female voice” in Her.

    Have your wife and kids been looking at you any stranger than normal?


    No stranger than normal. But they give me strange looks all the time.

    And by the way, I really liked Her when I saw it. And I don't even want to think about how much time I'd spend talking to my Echo if Alexa had the voice of Scarlett Johansson.
    KC's View:

    Published on: October 19, 2016

    In the American League Championship Series, the Toronto Blue Jays defeated the Cleveland Indians 5-1. Cleveland still holds a 3-1 lead on the best-of-seven game series.


    And in the National League Championship Series, the Los Angeles Dodgers defeated the Chicago Cubs 6-0, taking a 2-1 lead in their best-of-seven game series.
    KC's View: