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    Published on: February 8, 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: The degree to which Amazon poses an existential threat to traditional food retailers. And why. And what the competition needs to do ti survive.

    And now, the Conversation continues...

    KC: It was my impression that some of the projections announced by Nielsen at last week’s Food Marketing Institute (FMI) Midwinter conference - that within a decade, 20% of total store sales will be online, and 40% of center store sales - may actually have gotten some people’s attention.  You were there - did you have the same sense of the audience?

    Tom Furphy:
    I think so. It’s always a little tough to read executives in our industry. But based on the conversations throughout the conference, I think people realize it's coming. One CEO told me that this is what keeps him up night. He said he’s constantly asking if his company is doing enough, if they are doing the right things. I think this is healthy.

    KC: Agreed. We're actually hearing senior executives say, for the first time in my memory, that the pace of change has gotten to the point where they are not sure they can keep up. That's an extraordinary admission.

    It is critical to be doing something today. Doing so encourages you to put customers first and to innovate on their behalf. It forces your organization to think about e-commerce as a core capability, and it requires you to get your supporting systems in shape to enable the processes and services required of e-commerce. That’s not to say that putting up an e-commerce site and offering pickup or delivery is enough. It’s not. But it is an important first step toward delivering the capabilities that the evolving shopper is going to demand. You don’t want to be playing catch up here.

    KC: And it isn't just about sales.  One MNB reader wrote in to remind me that if 40 percent of center store sales move online, that threatens the promotion and fee money that so many manufacturers pay to retailers in order to get placement on physical store shelves.  Our friend Glen Terbeek is fond of pointing out that a lot of retailers depend on that promotion money for their net profit margins at the end of the year, and so this shift isn't just a technological threat, but an economic one.

    Most retailers understand that more than 100% of their profits come from center store. That is, all of the perimeter departments combined tend to be breakeven or a little worse. The store is funded by the volume, stability and profit of the center store.

    Trade funding is certainly a primary driver of center store profitability. The dollars that retailers receive from manufacturers make the difference between profit and loss. E-commerce retailers like Amazon also rely on this funding. So, it’s not like the funding will go away from the industry. But it will follow the volume. As volume shifts away from traditional retailers, trade funding shifts, and the profit shifts. That is a tough equation for a retailer that doesn’t follow.

    Given this shift, it absolutely behooves a retailer to have a strategy to defend this center store volume. They need to think about how they can assist their customers in buying these products through them. As Amazon automates these categories with Subscribe & Save, Alexa voice ordering, Dash, new robotic formats and their Internet of Things strategy, retailers stand to lose a lot of ground if they don’t innovate commensurately. E-commerce ordering with pickup or delivery options is an important starting point. But retailers already need to be thinking about what is next. They need to develop a strategy to automate these center store categories.

    KC: I can't imagine that manufacturers want all this volume to go to Amazon.


    Manufacturers don’t want to shift all of their funding to Amazon and let them run away with these categories. It is not healthy for them to over-rely on one category killing retailer. We work with many manufacturers that want to support traditional retailers in developing these capabilities. That support comes in the form of teams, product and usage data, interesting supply chain and packaging initiatives and funding. With this support, as retailers are able to offer new capabilities to defend their center store share, they will be able to maintain and even grow their center store profitability. But they have to start now or the market will run away from them.

    KC: And what’s also interesting to me is how Amazon Go seems to have gotten people’s attention, though I think you can break down reactions into two basic categories - people who say Amazon is going to get killed by shrink and that this will never work, and people who say that this is the thing about Amazon that finally scares them.  I don't know about you, but my reactions to this are a) I’m pretty sure Amazon has figured out the shrink thing, and b) this is the thing about Amazon that scares you?  (This is a one-off, and so small in terms of proportion compared to everything else that Amazon is doing…)

    I’m sure Amazon either has the shrink thing figured out, or they feel pretty good that they will figure it out in short order. The technology in the store will be able to identify shoppers with the app as well as shoppers without the app. When shoppers without the app grab products, they will be tracked. If they try to leave without paying, the system can alert a clerk to “assist” them with their purchase. From what I’ve heard, the system works really well. Amazon employees that are testing the service are constantly trying to fool it by grabbing products and putting them in others’ baskets, crossing their arms in front of each other and the like. Apparently the system is pretty foolproof.

    Perhaps Amazon Go is the capability that has put people over the tipping point in recognizing Amazon’s disruptive potential. Digital programs like Subscribe & Save, Dash buttons and voice ordering, while all driving a multi-billion dollar business, are silent killers and seem less obvious to competitors. They will hold the lion’s share of the business for a long time. But I could see the Go concept working throughout a range of store formats and sizes. Over time it could add up to significant volume.

    Ultimately, as we’ve said for years here on MNB, Amazon is about being the go-place for anything a shopper may want. They realize that it takes a range of digital and physical capabilities to deliver on that. They innovate relentlessly on behalf of the shopper. They will not slow down.

    KC: The other thing that is amazing to me is that Amazon seems to be speeding up, not slowing down.  Slice is saying that in 2016, Amazon accounted for 53 percent of all e-commerce growth … as compared to 2015, when it accounted for 40 percent of e-commerce growth.  That strikes me as extraordinary, and a little surprising.  Thoughts?

    They still see themselves as a startup. When you are a startup, constantly bringing breakthrough capabilities to market, you can achieve pretty remarkable growth. That’s what you’re seeing. The hundreds of innovations that they have been creating are coming to fruition. It is causing a multiplier effect on growth. And there are hundreds more behind them. Amazon is claiming e-commerce as their own, and in turn are claiming the future of retail as their own.

    It’s pretty remarkable that this is the same company that now has physical stores, is investing in their own fleet of planes and a $1.5B cargo hub, will be delivering via drones shortly, has defined and owned the cloud computing space and is up for a best picture Oscar.

    And for them it is still Day 1!

    The Conversation will continue...

    KC's View:

    Published on: February 8, 2017

    by Kevin Coupe

    A few months ago, I did a FaceTime piece about Lisa Sedlar's newest Green Zebra store in Portland, Oregon - the second of the concept which often has been described as "Whole Foods meets 7Eleven." (You can see that piece here.)

    And now, there's an even newer one - opened just last week on the campus of Portland State University (PSU) there.

    It's taken Lisa longer than she probably expected to expand up to three stores. The first opened in northern Portland in 2013, and then it was three years before the second one opened. As much as I liked the original version, I thought the second edition, in the Lloyd District, got the concept absolutely right - it was a wholly original merging of convenience and healthy, with a strong foodservice component, excellent fresh foods, and a terrific beer and wine selection.

    What's interesting about the PSU store is that it rethinks the concept yet again - it probably is about half the size of the Lloyd store, and the departments have been edited some; for example, there isn't a bar (which was one of my favorite parts of the Lloyd store).

    But the changes make sense. This is, after all, a store that caters largely to students. So it makes sense to offer products - both fresh and packaged - that will appeal to that demographic. Lots of salads, for example, and plenty of coffee options. There's also a sandwich-making counter, as well as packaged sandwiches from Bunk Sandwiches, a local and highly popular purveyor. (The Bunk sandwiches are expensive, but have a ton of local appeal. This is Portland, after all, and "local" rules.)

    There are some pics of the new store below. I like this store a lot, not least because it shows the degree to which Lisa Sedlar and her folks are willing to keep rethinking, refining and reworking a concept. That's an important and Eye-Opening core value for the company she's building.

    I must also admit, in the interest of full disclosure, that I have a rooting interest in this store. It is about three blocks from the apartment I rent each summer in Portland, and about two blocks from the building where I team-teach a retail/marketing class with PSU's Tom Gillpatrick. So I figure this is going to be a go-to option whenever I get a craving.

    Can't wait.

    KC's View:

    Published on: February 8, 2017

    The Wall Street Journal has an interview with Bob Miller, CEO of Albertsons Companies, in which he talks about the company's operating philosophies as well as the advantages of going public.

    One interesting exchange is about how technology has affected the company, leading Miller to say:

    "We don’t want to be cutting edge, ahead of the curve, but we want to understand what’s going on. So far all this stuff about being able to check the customer out quicker and walking out of the store without having to go through a register and all that kind of stuff, we’re not ready to invest in any of that yet. But we are working on initiatives with technology partners…If we see something that we think is going to work, we aren’t afraid to invest a lot of money."

    Excellent piece. You can read it in its entirety here.
    KC's View:

    Published on: February 8, 2017

    Earlier this week, MNB took note of a piece in the New York City real estate journal The Real Deal reporting that Kroger has purchased "three Greenwich Village retail condominium units at 250-254 Bleecker Street for $20.6 million, according to property records filed with the city Friday. The retail at the base of the five-story, roughly 22,000-square-foot building is home to Murray’s Cheese and Amy’s Bread and was owned by Murray’s Cheese proprietor Rob Kaufelt."

    It ends up that Kroger is acquiring more than that.

    Kroger said yesterday that it has purchased the equity of Murray's Cheese that it did not already own, as well as the flagship location on Bleecker Street in New York City, to form a merger of the two companies. Kroger has been in business with Murray's since 2008, and currently has some 350 Murray's Cheese Shops in its stores.

    Kroger became a minority owner in Murray’s in 2012.

    Murray's former owner and president, Rob Kaufelt, will remain affiliated with the business as a strategic adviser. Terms of the deal were not disclosed.
    KC's View:

    Published on: February 8, 2017

    Business Insider reports that while Macy's is said to be in talks to sell itself to Hudson's Bay, the "best possible buyer may actually be the company that triggered the decline of its retail dominance: Amazon."

    Here's the rationale:

    "According to Cowen & Co. analyst Oliver Chen, a Macy's-Amazon combination could be 'revolutionary,' as it helps fill the needs of both companies." Chen suggests that "Macy's would give Amazon access to a whole bunch of new apparel brands and help expand its first-party seller relationship" ... "Amazon could take advantage of Macy's vast number of physical stores and warehouses to improve delivery speed" ... "Amazon has the 'best' predictive analytics technology in retail, so it could help Macy's make better decisions across inventory and pricing, and potentially lead to higher sales" ... "Amazon would gain foot traffic from loyal department store shoppers and get to utilize Macy's physical presence to showcase products and have customers return products easily."

    Chen also argues that "Amazon's online traffic growth, supply chain expertise, younger customer base, and superior mobile technology could help save Macy's."
    KC's View:
    The only thing I really agree with in this story is the following sentence:

    Chen doesn't believe any serious talks between Amazon and Macy's will materialize in the near future, given the high costs of maintaining physical stores, and Macy's already struggling business model.

    Every time a bricks-and-mortar company comes up for sale, some analyst suggests that Amazon should buy it. I may end up being wrong on this, but it seems to me that while Amazon has some Main Street ambitions, the last thing it wants is to have all the legacy issues that such an acquisition would create. Amazon doesn't mind making mistakes and learning from its own problems ... but the last thing it needs is someone else's problems.

    Published on: February 8, 2017

    • The National Retail Federation (NRF) said yesterday that "retail industry employment increased by 39,400 jobs in January over December, making up nearly a fifth of the 227,000 jobs added to the nation’s economy ... The retail numbers exclude automobile dealers, gasoline stations and restaurants."

    The report goes on to say that "retail results by business lines saw gains across all categories except general merchandise. Outsized gains were seen in clothing and accessories even after a strong December gain of 17,000 jobs in the same category."

    • The Food Marketing Institute (FMI) Foundation said yesterday that its new fundraising event, Stir It Up!, raised $1,032,000 in support of the Foundation's programs in food safety, nutrition and health at FMIs 2017 Midwinter Executive Conference.  This was the highest amount ever raised at a FMI Foundation event.
    KC's View:

    Published on: February 8, 2017

    • The Seattle Times reports that Starbucks - which already is at odds with the Trump administration on several fronts - now "is offering free legal advice for employees who may be affected by President Trump’s executive order temporarily barring refugees, and citizens from seven mainly Muslim countries, from entering the US."

    The new service, operated with Ernst & Young, "is intended to offer employees the most up-to-date information on fast-moving developments on the executive order, as well as human resources and legal support."

    The Times notes that company chairman Howard Schultz "sent a forceful message last week on the travel ban, pledging to hire 10,000 refugees and saying: 'We are living in an unprecedented time, one in which we are witness to the conscience of our country, and the promise of the American dream, being called into question'."
    KC's View:

    Published on: February 8, 2017

    • Alec McCowen, one of the most respected British character actors of the past century, having performed to acclaim both on stage and screen, passed away yesterday. He was 91.

    One of his best-known stage appearances was a one man show that essentially was a performance of "St. Mark's Gospel." And while his film roles included Alfred Hitchcock's late-career thriller Frenzy, as well as The Loneliness Of The Long Distance Runner and Travels With My Aunt, he is perhaps best known for playing the "Q" role in Never Say Never Again, the non-canon James Bond movie that featured Sean Connery's final appearance as 007.

    • Richard Hatch, who played different roles in the two TV versions of "Battlestar Galactica" - hotshot fighter pilot Captain Apollo in the late seventies original, and then political leader Tom Zarek in the recent reboot - passed away yesterday at age 71. The cause was pancreatic cancer.
    KC's View:

    Published on: February 8, 2017

    by Kevin Coupe

    Last week, we wrote about how Anheuser-Busch InBev had produced a Super Bowl commercial for its Budweiser brand with implications that could plunge it right into the middle of the ongoing immigration debate.

    You can see the commercial and read the original MNB commentary here.

    Called "Born The Hard Way," the minute-long commercial purported to show the arrival of Adolphus Busch in the US from Germany in 1857 - while some of the treatment he got as an immigrant was hostile, the commercial implicitly makes the argument that immigrants make invaluable contributions to the country.

    Not surprisingly, there has been some debate about the commercial ... including here on MNB.

    Last Friday, we ran an email from an MNB reader that said:

    I think the ad is terrific. Adolphus Busch arrived legally and was eager to adopt to our culture and way of life. He immersed himself into the capitalist attitude and did not wait for a government handout to make something of himself.

    I objected to the implication that this distinguished Busch from other immigrants. in fact, I think the vast majority of people who come to the US come not for handouts, but for the opportunity to achieve the American dream through hard work. And I wrote:

    You might want to be careful about using such a broad brush.  You may get some intolerance on you.

    But as is usually the case, I learned stuff from additional emails I got from MNB readers. One, Chad Spiegel, wrote:

    Whichever reader said “Adolphus Busch arrived legally and was eager to adopt to our culture and way of life” needs a lesson in beer history.  Adolphus Busch moved to St. Louis because it was heavily populated with Germans, he started brewing German-style beer to satisfy the German tastes of his fellow German immigrants, and he donated over $9 million (in today’s dollars) to Harvard for the purpose of opening a museum about German heritage.  And his emigration to the U.S. was only “legal” because back in 1857 there were no immigration rules or regulations.

    The reality is Adolphus Busch came to the United States to make a better life for himself and his family, and he did so not by forgetting who he was or where he came from but by embracing it.  His efforts to bring German beer to America’s heartland were welcomed by Americans, and as a result our country’s very culture and identify have been influenced by Busch’s German background. That sounds to me like a testament for embracing immigrants and their diverse backgrounds, not trying to silence or ban them out of misplaced and irrational fears.

    And another MNB reader wrote:

    You might want to have some people check their history, per the reader who was making the point that Augustus Busch was a legal immigrant who worked hard to succeed.

    Taking nothing from the point of view or from the Busch legacy, this is a revisionist history.

    There was essentially no such thing as either legal or illegal immigration to the US until  the 1880s. You could first be inspected for disease around then, and you might have a residency requirement before being allowed to be a citizen, and there were requirements of the various ports to keep records of your arrival (which were specifically NOT applied to land-arrivals) – but there were no actual restrictions on arriving in the US if you could afford to get here. Except for a brief period under the Alien and Sedition Acts in 1798 (discredited, revoked and struck down in various ways) you couldn’t even be legally deported until 1888.

    The first actual restriction was the Chinese Exclusion Act of 1882, which was famously racist and eventually seen as unconstitutional.  There were no major barriers to anyone else until the 1920s, except for a provision passed in 1903 that rules out “Anarchists, epileptics, polygamists, and beggars” as inadmissible. Ellis Island, the famous entry point in New York harbor, didn’t even open until 1892.
    Talking about “legal immigration”, particularly of white Europeans, prior to the 1880s is nonsense.   Busch arrived in 1857. There were zero restrictions on immigration at that time.

    So there.

    Except that it doesn't end there.

    Because it also ends up that, at least according to some historians, the ad is somewhat fanciful about Busch's immigration experience - he was well-do-do, not poor, and likely didn't deal with nearly as much discrimination as other ethic groups.

    One might even suggest that the ad trades on what could be called "alternative facts." Go figure.

    Which makes the ad look like it was specifically made to address the current debate about immigration and stake out a political position ... especially because it was aired during a Super Bowl in which there was a plethora of commercials that addressed political issues like immigration as either text or subtext.

    Except ... the Budweiser commercial was conceived of a year ago and produced before before Donald Trump got elected.
    And, because this seems to be the way the world works these days, there now are reports that people who self-identify as Trump supporters now are attempting to engineer a boycott of Budweiser. (Good luck with that one.)

    All of this gives me a headache.

    I liked the Budweiser commercial, but I think it has to be said that if it had been released six months ago, it would've gotten recognition but never would have generated the kind of controversy that it did last weekend. (I liked the puppy commercials a lot more.)

    I'm not a big fan of so-called "alternative facts," but I'm not sure when we started demanding veracity of television commercials. (Isn't the very definition of a commercial that it offers heightened or adjusted reality?)

    But the big lesson to me is the degree to which this debate continues to be toxic, and how even when companies do not intend to engage with a political debate, they can easily be dragged into it. And when they do want to engage in political debates ... which is what companies like Airbnb, Audi, and 84 Lumber did last Sunday ... they can create commercials that probably energize some customers and outrage others.

    Good lesson. Though it all still gives me a headache.
    KC's View:

    Published on: February 8, 2017

    Got the following email from an MNB reader:

    Kudos on the new MNB politics desk. It's getting increasingly harder and harder in our society to consume any news or information without it having some sort of political bent or implication. Putting all the political commentary in one section helps. For the days that I am sick of politics and can't look at one more pro-Trump/anti-Trump or conservative/liberal piece of news, I appreciate that I can skip politics completely, and MNB can serve as sort of a refuge from the din of political nonsense.

    Yes, well, I'm going to do my best. But the simple reality these days is that business and politics are intersecting more than ever before, and so it is hard to avoid these stories.

    And I'm not sure we should.
    KC's View: