Published on: December 14, 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 continue our conversation, begun in our November 30 edition, about what vendors need to do in order to work with Amazon. FYI ... you can read Part One here.
And now, the Conversation continues...
KC: As much as Amazon may be challenging to work with, I also would imagine that a lot of vendors offer challenges simply because they don’t have the kind of infrastructure necessary - from supply chain efficiency to adequate supply to product information - to satisfy Amazon’s 21st century demands. So what do you tell vendors to do even before they try to get a position on Amazon?
Tom Furphy: Amazon is different. As a manufacturer, almost everything that you’ve invested in over the past 20 years to serve big box retailers is out the window. Amazon requires a completely different approach to merchandising on the digital shelf. Accurate and complete catalog content is critical. Marketing programs to drive discoverability, exposure and repeat-purchase are not the same as in stores. The supply chain requires frequent, small orders, often with special labeling. Packaging materials and sizing must be appropriate for the online channel. And trade funding is structured differently and can be at higher rates than other channels. But done right, the ROI can actually be better. All of this adds a lot of complexity and anxiety for vendors.
It’s ok to try to go it alone, but vendors are more likely to be successful with the assistance of experts. But when looking for experts to partner with, buyer beware. There are a lot of firms out there that talk a big game, but can’t back it up. I would encourage manufacturers to partner with teams that have worked at Amazon, preferably for four years, were builders inside Amazon and have technology to support their service.
KC: Really? Because there are a lot of folks out there who did not work for Amazon who claim to have deciphered the Rosetta Stone of how to succeed on the Amazon platform. And why the "four years" threshold?
TF: Someone that claims to know Amazon from the outside as a consultant, agency or broker can’t hold a candle to someone who has lived inside the machine and has had to deal with its complexity every day. And four years is important because that's how long stock takes to vest there. Anyone who leaves earlier than that likely couldn’t cut it.
Beyond simply working for the company, you want to target people that were Amazon builders. Make sure the team has actually built something inside Amazon and was not merely an operator. Builders would have created something from the ground up and developed and demonstrated command of the model at a very granular level. Operators just focused on hitting their metrics and running the machine that was created by others. While impressive, that skill does not translate into doing the hard work that it takes to make a vendor successful on Amazon.
Once you find a partner with the right experience, make sure they have technology to support the relationship. Consultants sound great with their slides decks and sound bites of advice. But it means nothing if you can’t act on it. Make sure that your partner can back up what they are saying with actual execution. Look for them to have technology to constantly monitor the business, respond to and fix problems, forecast demand and inventory needs, run marketing campaigns, identify anomalies when they occur and report on trends in the business each week.
On Amazon, traditional categories are being replaced with search terms and brand marketing is being replaced with site marketing and customer reviews. With hundreds or thousands of products listed, it’s impossible to effectively manage the business manually. Amazon’s platform gives preference to the products with the best track record and best underlying data, so it’s up to manufacturers to ensure their data is good and they are collecting and converting all the clicks that they can. A good technology base enables partners to act with precision, speed and scale. The premium on detailed execution at Amazon cannot be over-emphasized.
KC: I have to believe though, that one of the challenges that Amazon presents is that it seems to be coming to market in so many different ways - there are the click-and-collect stores it seems to see as one version of its future, the lockers it is putting in so many places, the drones it wants to use to make deliveries, and now the new Amazon Go concept that it unveiled last week. Each of these concepts - and all the other innovations that it probably is working on that we haven't heard about yet - must place new demands on vendors who need to measure up. And yet, to quote my friend Craig Ostbo, they either have to be at the table or on the menu. So what are they to do?
TF: When you relentlessly focus on the customer and ways to improve their lives, it can take you in many directions. It’s pretty clear that Amazon doesn’t want to leave any product category or purchase occasion unturned. So you will continue to see them test multiple formats to find the combinations that work for the customer and that can work profitably for them. Amazon is masterful at evaluating all of these alternatives, testing and then scaling them once proven.
Through this testing and scale, Amazon is going to push vendors to uncomfortable places. For many manufacturers, it will be difficult to cope with these demands. But for those that are willing to test and learn, this discomfort can be a good thing. If they embrace the change and foster their own culture of innovation, it gives them an opportunity to develop new capabilities. Then, as first-movers in mastering these capabilities, they can in turn bring them to other retailers.
All this uncertainty becomes much easier to handle if manufacturers double down on the basics. They need great product content, appropriate packaging, a properly scaled and responsive supply chain, be willing to strategically fund the business and be ready to innovate. And they should not be hesitant to partner with experts. Doing these things will serve them well as they travel any avenue down which Amazon takes them.
The Innovation Conversation will continue next Monday with a special year-end chat about the new Amazon Go format...
- KC's View: