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    Published on: January 25, 2017

    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: How e-commerce dealt with the holidays, the challenge to bricks-and-mortar stores, and the advantage of no-limits thinking.

    And now, the Conversation continues...

    KC: I was talking to a friend of mine who was exhibiting at NRF last week, and one of the things that he told me was that someone from Forbes magazine came to his booth and asked why online grocery isn't working.  That’s an amazing question to me.  Forget about Amazon for a minute … it seems to me that it was way too premature and way too inaccurate to reach that conclusion.  If you look at companies like Kroger and Hy-Vee and Harris Teeter and Roche Bros. and Ahold Delhaize-owned Peapod - just to name a few - there seems to be clear evidence that to varying degrees, e-grocery is working.  It may not be taking off as fast as books and movies, but it also is a lot more complicated, with a lot more barriers to acceptance.  Are you as astounded as I am by the fact that there seems to be a perception that e-grocery is not working?

    Tom Furphy:
    I guess I’m not really that astounded. When we think of e-grocery, we think about the replacement for the traditional grocery store trip. The full basket of goods that transitions into a delivered or click-and-collect order. The fact is, the e-grocery market under that definition measures only a couple percentage points of the market. Given that the model has been around for almost twenty years, I think it’s fair to perceive that it’s not working.

    KC: Well, so much for my point of view.

    Stay with me here. While it is hard to deem it a premature assessment after two decades, I think we actually will look back and agree that calling it unsuccessful at this time is premature. Since inception, the model has faced significant headwinds. At first, Webvan overinvested in infrastructure before broadband could deliver a good shopping experience. The lack of volume and delivery density couldn’t generate the profits that were needed to sustain the model.

    Since then, players like Simon Delivers,, Peapod and FreshDirect all came along. While there are differences between the models, they’ve all seem some level of success. Certainly not enough to bring the market to a tipping point, but they’ve demonstrated enough traction with enough shoppers to prove that the model is desirable. Now, today, you add AmazonFresh, Kroger’s ClickList, Hy-Vee’s Aisles Online and others, and you have further proof of customer desire.

    Part of the undertow inhibiting growth has been that traditional retailers are running parallel businesses. They still must maintain their traditional stores while layering in e-commerce. That becomes very difficult to do profitably. Pulling some volume away from the store, then adding the costs of e-commerce, barely pencils out. But it’s the right thing to do in order to be ready for what’s coming next.

    Sweeping format changes in the grocery business have always taken time. The evolution from the corner store to the supermarket then to the alternative formats of today have taken decades each. Considering what is coming in the next few years, I think we’ll look back and view this shift into e-commerce as fairly swift.

    KC: Okay, I feel better. I agree with you about headwinds. In fact, I think that one of the reasons that e-grocery has a perception problem is that companies like Instacart are running into problems.  You and I both felt the same way about Instacart, I think - that it was not a sustainable business model, that ownership was in a race to see if it could sell the thing before it collapsed, and that retailers were making a mistake by trusting Instacart to be a delivery mechanism when it was serving the same role for other retailers in the same market - it just seemed not nearly differentiated enough, and now Instacart seems to be cutting labor costs, which isn't going to make its drivers happy, and they’re the ones representing retailers to consumers.  What’s your sense of Instacart’s current situation, and what retailers need to be thinking about?

    I notice you are almost referring to Instacart in the past tense. It’s like you’ve already written them off.

    KC: Am I being overly pessimistic?

    While I do have serious doubts about the model, I think the company still has a good chance to reach a successful outcome. The changes in their compensation model make me think that they are honing the unit economics in preparation for a sale. They’ve demonstrated a reasonable level of consumer acceptance. From what I’ve seen, shoppers that regularly use the service love it. If they can prove that the economics work, then they will in a position to be acquired.

    Ultimately, I don’t see how the current third-party, store-pick, model can be sustainable. By the time products get to the store shelf they are fully burdened with costs. The only cost left is the front-end scan, which costs barely pennies per item. So layering in the cost of picking, tendering and delivering to that adds a good amount of cost. Sure, customers are paying a delivery fee to cover that cost. But if that cost is $10 per order to break even, how much can they ultimately charge for the convenience, and how much market is available to them? I think the jury is still out on that.

    To make a new model work would require changes in the physical supply chain and underlying financials all the back through to the source of the product to reconfigure product flows and balance the costs and margins throughout. Over time the industry may get there, but it’s a significant change of some very entrenched practices.

    I understand that Instacart has been a cost-effective way for grocers to get to market quickly in e-commerce. But I have to think that the grocers that are going to win into the future will be the ones that can deliver their own branded experience to their shoppers. If they stop short of that and rely on Instacart or other third-party services, these retailers are merely expensive warehouses that can, and will, be replaced over time.

    KC: If you had to guess, will there be a tipping point that will accelerate the growth and acceptance of e-grocery?  And what do you think it will be?

    I do. The innovations have already been developed inside Amazon, and their rollout into the market will force the industry over the tipping point. Frankly, I think the tipping point has occurred, but our big lumbering industry hasn’t fully felt it and is taking a long time to respond and tip.

    The innovations that Amazon has brought to market across the range of shopping automation and efficient delivery will continue to allow them to gobble up market share. They are a shopping utility that has already claimed the volume almost 1,000 traditional supermarkets, growing substantially every year. When we see companies across our industry reporting softness, particularly in center store, that’s where a big chunk of the volume is going. Given how the Amazon flywheel works, this impact stands to deepen significantly in the coming few years. This will force a tipping point in how people shop and, in turn, how retailers need to serve them.

    In reaction you’ll see the big players successfully offering e-commerce in most US markets. That will help soften the blow, but at the cost of lower profitability. To me the big tipping point will come when new types of shopping, like automated replenishment, completely transform the traditional center store and provide the basis for profitable e-commerce. When this happens, when the center store becomes an automated service for shoppers, then stores can be reconfigured over time, the perimeter can expand and become even more important, and the industry will experience a renaissance.

    The Conversation will continue...

    KC's View:

    Published on: January 25, 2017

    by Kevin Coupe

    The BBC is reporting that Air India, looking to "enhance comfort level to female passengers" and reassure female passengers traveling alone, has begun selling tickets for female-only seat sections.

    According to the story, "The restriction will apply to the front row of six seats on economy flights and comes after reports some women were being groped by other passengers ... In cases of unruly behaviour, the airline crew are authorised to take action as per the law." And, "The airline will also now carry two pairs of restrainers to deal with disruptive passengers who can not be controlled."

    Now, not everyone thinks that this move is justified; some critics seem to feel that the gropers and unruly passengers can be dealt with effectively without having to cordon off women. And my first impulse was to think that this kind of segregation is the wrong way to go.

    But ... I also have to respect the fact that the airline is looking for ways to make its customers happy and safe. Sometimes that means going to extremes, but that's what customer service is all about.

    This situation - and solutions - are Eye-Openers.
    KC's View:

    Published on: January 25, 2017

    The Wall Street Journal reports that as part of its broader effort to cut corporate employees throughout the company, Walmart "plans to lay off about 200 e-commerce employees in its California offices ... Tuesday’s cuts are intended to shift the retailer’s e-commerce staff toward more shopper-facing roles, said spokesman Dan Toporek."

    Marc Lore, who now is running e-commerce for Walmart, sent a memo to the staff in which he wrote that the company is “focused on adding the right talent to our team and making sure we’re investing in ways that directly improve our customer experience."

    Lore's memo went on: “As difficult as this decision is, I know it’s the right one. We have a clear strategy. We’ve structured the team for speed and simplicity ... We’re building an organization with the right talent and experience. We’ve created an environment where the best minds across our many locations can team up and drive great ideas forward. And while some roles are going away today, we’ll be investing in our business and adding new skill sets during the year.”

    The Journal goes on to report that Walmart "is investing billions to boost e-commerce sales, including buying Mr. Lore’s company Inc. for $3.3 billion last year, putting pressure on operating costs broadly across the company ... Mr. Lore, whose is run from Hoboken, N.J., has moved quickly to reorganize the retailer’s e-commerce operations, which are run out of offices in San Bruno, Calif. Earlier this month, Wal-Mart shuffled its e-commerce and technology leadership ranks, giving several top executives responsibility for both online and in-store operations while announcing others would leave the company."

    The layoffs apparently are not limited to California. In Oregon, the Portland Business Journal reports that "The Portland office of Walmart Labs is losing eight of its 29 positions as part of the broader restructuring of the retail giant’s e-commerce business."
    KC's View:
    If these cuts are being made with effectiveness in mind, and Walmart is simply moving the pieces around in order to serve the customer better, then this strikes me as a good thing. Marc Lore must be enjoying the fact that he now has an enormous, well-stocked, well-funded playground in which he can take the battle to Amazon.

    I've always said, though, that I'll believe Walmart is serious about e-commerce as long as it keeps its Walmart Labs operations going on the west coast. If they move them to Bentonville, I'll suddenly get a lot more skeptical.

    Published on: January 25, 2017

    Barron's has a story about how Whole Foods is finally - almost two years after it first announced the format - "starting to accelerate one of its most important initiatives: its lower-priced '365' stores."

    While only three currently are open - in California, Oregon and Washington State - " there are 23 stores in development, according to Whole Foods, and the next one is set to open in April. Certainly, the lower-priced stores are no panacea for Whole Foods, whose approximately 465 standard stores are still the company’s core. But the smaller-format 365 stores could add a much-needed boost, leveraging Whole Foods brand name and its logistics network to expand its shopping base. The danger is that the new stores could draw shoppers away from traditional Whole Foods markets, but it’s worth testing the concept on a larger scale, some analysts say."

    But the story also suggests that Whole Foods hasn't got a lot of room for error: "With pushing more aggressively into the grocery world, Whole Foods needs to find new innovative ways of drawing customers unfamiliar with the brand. The 365 rollout can’t come soon enough."
    KC's View:
    Sure, Amazon is competition to take seriously, but I'd also be thinking about companies like Sprouts and Lucky's Market and all the other retailers that do a helluva lot better job marketing and merchandising healthy products than they did even just a few years ago. In some ways, i wonder if it has taken a little too long to get this format off the ground ... and I wonder if they have it right yet. I wasn't wild about the one I've seen, and I'll be curious to see what changes they've made going forward.

    Published on: January 25, 2017

    New York magazine reports that as of February 1, midwestern supermarket shoppers will be able for the first time to buy genetically modified fruit approved for human consumption.

    According to the story, "As early as February 1 in some midwestern grocery stores, Okanagan Specialty Fruits is expected to debut its Arctic Golden Apple, a Golden Delicious that has been genetically modified not to brown. Initially, the apples will be available at ten locations of several midwestern chains, though Okanagan has so far declined to disclose exactly which ones."

    The magazine goes on to say that "along with the Golden Delicious apples, the USDA has approved Granny Smith and Fuji apples and, additionally, Arctic Gala apples could be approved in 2018. (The company could further apply the non-browning technology to other tree fruits like pears and cherries.)."
    KC's View:
    Here's the line from the story that bothers me:

    Packaging also won’t declare the apples as GMO, information that will only be revealed by scanning a QR code.

    I think they have it half right. It ought to say that it is a GM product right on the packaging, and explain what the benefit is. Transparency is all.

    Published on: January 25, 2017

    Reuters reports that Tesco is facing a new lawsuit, from a US fund manager, over the systematic overstatement of revenue and understatement of expenses that in 2014 led to federal investigations of the company and charges against some company executives.

    The lawsuit, filed by Manning & Napier, claims that the company lost $212 million because of the accounting irregularities.

    The story notes that "Tesco is already defending a more than 100 million pounds ($125 million) claim from a group of 125 institutional investors that was filed last October ... In November 2015 Tesco agreed to pay $12 million to settle a U.S. shareholder lawsuit. The retailer denied wrongdoing in agreeing to settle."
    KC's View:

    Published on: January 25, 2017

    Salon has an interesting piece about a decision recently made by upscale hamburger chain Shake Shack - to raise prices. The reason was simple - the company wanted to increase wages and benefits for its employees.

    Adam Seth Litwin, associate professor of industrial and labor relations at Cornell’s ILR School, puts it this way: "Shake Shack is betting that its customers - willing to pay a premium for quality - would be willing to pay a premium for good employment practices, too.”

    Here's how Salon frames the story:

    "If the price of a product or service goes up slightly in order so as to fairly compensate the workers who make it, are customers OK with paying extra? This is a question that Shake Shack is asking this year as it raises the prices of its burgers and chicken sandwiches so as to offset the rising share of its operating costs attributable to labor and related expenses, including health insurance.

    "Price increases on some menu items went into effect this month after restaurateur Danny Meyer’s 12-year-old burger chain, which sprouted from a Manhattan park kiosk into a $1.2 billion global venture, raised wages across the board for its employees last year ... The hikes vary by region under a new tiered policy designed to help the company adjust for local wage standards and other business expenses."

    The story goes on: "Like Starbucks and Chipotle, Shake Shack falls within a group of companies that have been considered as having a progressive corporate identity. Still, when the nationwide average for food and beverage servers is just $9.16 an hour, offering above-average wages and basic benefits like matching 401(k) and health insurance payments could be viewed less as an act of magnanimity and more as a bare-minimum gesture."
    KC's View:
    Pay employees like they are an asset to the business, and they'll actually be an asset to the business. I know that this might mean different things to different people in different places, but I think it is a pretty good rule of thumb.

    Published on: January 25, 2017

    • Tom Stenzel, president/CEO of the United Fresh Produce Association, issued the following statement after President Donald Trump announced that he was pulling the US out of the Trans-Pacific Partnership Trade Agreement:

    "We were not surprised that President Trump has officially withdrawn from the Trans-Pacific Partnership (TPP) trade pact. As we know, Congress was not likely to confirm the agreement in any case. But now is the time to move past anti-trade rhetoric and begin the process of building consensus for the key portions of the agreement that had been negotiated in the TPP. Both U.S. agriculture and U.S. consumers benefit from trade, and exports to the Asian Pacific countries are a critical opportunity for U.S. producers. Beyond that, the TPP was the first major agreement that began to build strong rules for countries to prevent putting up protectionist measures in the form of sanitary and phytosanitary barriers. Without this agreement, we fall back to an environment where countries can simply choose to block imports without scientific justification.

    "We encourage President Trump and his new Administration not just to withdraw from trade agreements, but to come to the table to renegotiate agricultural agreements as soon as possible. Our potential trading partners won’t sit idly by, but will find other partners and leave the United States behind. Most importantly, America deserves real trade agreements that benefit both consumers and producers.”

    • Campbell Soup announced that it is teaming up with NBC's "Today Show" and Vox Media to produce what Ad Week calls four "original branded videos that will live on and Eater, Vox's food and dining site ... The series, 'Home-cooked, chef-made,' showcases Campbell's products used both by chefs and home cooks. The goal is to show Eater's and Today's audiences the diverse range of uses for those products."

    The goal, according to the companies, is to "highlight accessible recipes for busy families" and show Campbell's "saving the day in the creation of one-dish meals."

    Bloomberg reports that Costco has "won dismissal of a lawsuit claiming it didn’t disclose to customers that it was selling farmed shrimp from Thailand fed a diet of cheap fish caught at sea with unpaid, forced labor. A San Francisco federal judge threw out the case Tuesday," the story says, without ruling on the facts but rather saying that the consumers who filed it did not have the standing to do so.
    KC's View:

    Published on: January 25, 2017

    • Kroger said yesterday that Jerry Clontz, senior vice president of operations at the company's Harris Teeter division, has been named president of its Mid-Atlantic division; Clontz joined Harris Teeter as a bagger in 1971.

    Clontz succeeds Joe Fey, who is retiring from Kroger after 44 years with the company; he began his career there as a meat clerk in 1972.

    • The Golub Corporation, parent company of Price Chopper and Market 32 Supermarkets, announced two promotions.

    Blaine Bringhurst, Senior Vice President for Sales, Merchandising and Marketing, has been promoted to the position of Executive Vice President Marketing, Merchandising and Store Operations. And Leo Taylor, Senior Vice President of Human Resources, has been promoted to the position of Executive Vice President Administration, where he will continue to oversee Human Resources but will also have responsibility for Information Technology, Distribution, Engineering, Real Estate, Public Relations and Consumer Services.

    • Toys R Us announced that it has hired Carla Hassan, most recently senior VP of brand management for PepsiCo.'s global beverage group, to be its new executive vice president and global chief marketing officer.
    KC's View:

    Published on: January 25, 2017

    ...will return.
    KC's View: