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    Published on: May 3, 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: Competition, Walmart, Jet, and the Amazon competition scenario.

    And now, the Conversation continues...

    KC: I've been thinking about something I wrote about a few weeks ago, while attending the GMDC tech conference in Silicon Valley, concerning a comment that Marc Tarpenning, one of the co-founders of Tesla, made about competition.

    He said that Tesla’s leadership always was convinced that once they’d identified the technology solution they were seeking, that pretty much everybody would jump in, and that there would be competition from all angles.  Instead, he said, there was virtually none to speak of, and that this was the one possibility that they’d never considered.  Instead, automobile companies are doubling down, looking for reduced mileage standards instead of embracing a different sort of future.  And I guess I’m wondering if there is any sort of similarity to how Amazon looks at the e-commerce landscape in general, and e-grocery in particular … that they may be sort of amazed that it has taken so long for it to be recognized as a legitimate competitor in the space.

    Tom Furphy:
    I don’t think that Amazon is all that surprised that competition has been slow to respond in e-grocery. As you look back across all of the retail categories that they’ve conquered, in each case the incumbent competition has not mounted a formidable counter attack to Amazon’s incursion.

    As Amazon made their way from books, to media to electronics and hard lines, they started with easier categories then moved into more complex ones. All the while, incumbent competitors could see Amazon coming, but were always slow to respond despite the visibility. Now that they’re attacking apparel and grocery, they are into categories that are very difficult to get right online. It’s taking Amazon longer to master these categories, but they’ve been afforded the comfort of competitors that simply aren’t able to respond. Be it legacy cultures, systems or processes, or competing priorities, these companies simply cannot keep pace with Amazon’s agility and Day 1 mindset.

    Additionally, Amazon doesn’t really think too much about competition. They think about customers. They say that they obsess over customers and how to make their lives better, then they innovate on their behalf. It’s a very empowering philosophy and culture. Unfortunately for incumbents in grocery, competition doesn’t really give Amazon anything to worry about.

    KC: Which brings me to Walmart.  I think it is interesting the degree to which Walmart seems to have suddenly found religion … or at least, realized that it was better to sign on to Marc Lore’s version of religion rather than doing what it had been doing.  It seems to me that there are some significant differences from the Amazon approach.

    First, there seems to have been a decision that Amazon has too much of a head start to compete organically, and that acquisition (of both existing businesses and, maybe more importantly, the talent that comes with them) was a far better/faster way to go.  While I think there is the possibility/probability of some cultural disconnects, this also adheres to something we discussed in this space weeks ago - that companies have to realize the value of creating outside networks that can make the whole greater than the sum of the parts.

    Running at about 10x the size of Walmart’s e-commerce business and growing at more than double the rate, Amazon was pulling away to an insurmountable lead. So Walmart had to do something significant to change their own trajectory. The jury will be out for a long time on whether the Jet acquisition will pay off. But bringing in fresh perspective and a fresh culture was certainly necessary. Frankly, there are many retailers that would benefit from this. They don’t necessarily have to break the bank and make acquisitions. But they do need to be willing to partner deeply enough, and break out of their routines, so that the partnering has the chance to positively impact culture and enable customer-focused agility.

    I think spending $3.3 billion on Jet is forcing Walmart to be decisive. They’ve made the bet that Marc and his team can lead them to the e-commerce promised land. They are making major operating changes weekly, along with taking on a number of additional acquisitions. These are the kinds of bold moves that they had to make.

    For any retailer, it’s critically important to develop a Day One mindset and willingness to be agile. Otherwise they won’t stand a chance against Amazon. Testing and learning is crucial. And it’s hard to do that on your own. Building a network of partners and developing an ecosystem of services is a great way to get there quickly. But sitting around talking about it won’t get it done. Companies have to start making bets. They have to bring new innovations to their customers or risk losing them.

    KC: Great points. I do think that it highlights the core difference between Amazon and Walmart - that Walmart just wants to be able to sell you more stuff, while Amazon has visions of being at the core of an all-encompassing ecosystem.  Agreed?

    I think you’re right. It’s not yet apparent that Walmart is thinking about building an ecosystem. But they could be. At its core, Jet is a platform to enable others to be successful. And Walmart has dabbled in allowing third parties to sell on their platform. So it’s not out of the question that Walmart starts to add a variety of services to their platform. Will they offer web services like AWS, fulfillment services like FBA or will they start producing award-winning original content? Not sure.

    KC: Could you ever see Walmart building its own version of the Echo/Alexa system?  Or bidding on NFL streaming rights?  And perhaps most importantly, does this matter?  I’m not sure it does;  I think it just signifies a different vision and approach to business.  I’m not sure it makes Walmart any less a compelling e-commerce competitor … I just think they’re playing a different game … and that in the long run, everybody else in the market has to be concerned about becoming collateral damage.

    I don’t think Walmart would want to build a competitor to the Echo device or Alexa voice platform. Those are incredibly difficult platforms to build and it’s taken Amazon several years to bring them to market. Walmart would be better served to partner with Google on the Google Home and/or other IoT related companies. Really, any of the capabilities that Amazon is building would be good partnering opportunities for Walmart given their scale and willingness of partners to work with them.

    But if I were Walmart, I would be sure to double and triple down on my core strengths. Stores and their locations put Walmart in a good position to be successful in e-commerce. Building a set of e-commerce capabilities that enable shoppers to effectively discover products, buy them and either pick up in store of have them delivered will be key. Walmart should not partner for the core elements of this service, like so many retailers have done with third party services. They can partner for certain elements where they may not have expertise, such as automated replenishment, as many retailers are. But they should own the service. They could be a formidable competitor to Amazon in e-grocery if they get their act together. And if they do, there will be many other retailers that feel the impact as well.

    The Conversation will continue...

    KC's View:

    Published on: May 3, 2017

    by Kevin Coupe

    The notion of using brand advertising to address social issues has gotten some bad press in recent weeks, especially because of the ad campaign launched - and quickly pulled - by PepsiCo, in which it used model Kendall Jenner (of the notorious Jenner-Kardashian clan) to express a supposed solidarity with your people protesting in the streets. It seemed loud, tone-deaf, and manipulative, and caused the company to get all sorts of grief in the media. (MNB joined in, with enthusiasm.)

    But now, at the opposite end of the spectrum, comes an extended commercial from Heineken that, while it was produced in the UK, has been getting a lot of positive notices. Called "Open Your World," the ad is designed to portray real-life people from diverse ends of the political and cultural spectrum debating their views, and (spoiler alert!) figuring out how to get along over a beer.

    It is a kind of compressed version of reality television, and fascinating to watch ... not least because Heineken is treading on some tricky ground. It works, I think, because it feels authentic, and because the idea that problems and differences can be worked out over a beer seems entirely reasonable.

    Take a look. I think it is an Eye-Opener. (And so did the several MNB readers who drew this ad to my attention. Thanks ... I appreciate it.)

    KC's View:

    Published on: May 3, 2017

    The Washington Post reports that the US House of Representatives has passed legislation 229-197, mostly along party lines, that "would allow private-sector employees to exchange overtime pay for 'compensatory time' off, electing to accrue extra hours off rather than extra pay in their wallets."

    In other words, employees can opt to take an hour and a half of paid comp time instead of time-and-a-half pay when they put in overtime.

    The Post writes that the legislative proposal goes back to when Newt Gingrich was Speaker of the House, but has never become law because it has failed to pass the US Senate. However, things could be different this time around, if only because the Trump administration has indicated that it is in favor of such a law being implemented.

    The same rules have applied to government employees since 1985.

    According to the story, "Though the bill includes language that bans employers from 'directly or indirectly intimidating, threatening, or coercing or attempting to intimidate, threaten, or coerce an employee' to choose comp time over pay, many Democrats and advocates for workers say they are concerned that people will feel pressure to opt for the comp time and may not have the resources to seek legal help if they are coerced."
    KC's View:
    Some employers will, of course, go out of their way to exploit their employees and take advantage of them. But in general, it is hard to argue against the idea that an employee who works overtime ought to be able to choose between comp time and extra pay. It seems a sensible approach.

    Published on: May 3, 2017

    Despite the fact that the US Food and Drug Administration (FDA) ruled this week that a implementation of a rule mandating the posting of calorie counts on menus of food retailers larger than 20 units would be delayed from this week until May 2018, the Chicago Tribune reports that "some chain restaurants, grocery and convenience stores are moving ahead with plans to post calorie counts on menus and food labels this week."

    According to the story, "Ken Cruikshank, a sales and merchandising manager at Jewel-Osco, said the grocer also is sticking with plans to implement calorie counts and post menu boards across the deli, salad bar, seafood, produce and bakery departments this week despite the year delay and the possibility that the regulations could change again before they're final."

    "We decided it was the right thing to do," he says. Plus, all the elements were in place, and so it made sense to move ahead.

    In addition, "Chicago-area Krispy Kreme franchisee operator Carlos Larcada said that the chain is moving ahead with posting calorie counts in its stores even though it has another year to comply."

    Yesterday, MNB reported that Wegmans also was moving ahead with the labeling, despite the so-called reprieve from the federal government.
    KC's View:
    We have an email on this below, and I'll say here what I say there - that I hope these efforts prove to be a compelling differential advantage in the battle against those who take a less enlightened approach.

    Published on: May 3, 2017

    Yesterday, MNB reported that troubled Marsh Supermarkets, which is closing 10 stores, now is closing its pharmacies and selling its prescription records and drug inventory to CVS, all in an effort to reduce expenses.

    Well, it is even worse that that.

    The Indianapolis Star reports that Marsh also has to sell all its hard liquor stocks and has to get out of the hard booze business.

    According to the story, "Thanks to an obscure Indiana law, Marsh will not be allowed to sell liquor once that transaction is completed. The reason is in line with Indiana's convoluted alcohol laws. In general, drug stores are allowed to sell liquor in Indiana, while supermarkets can only sell beer and wine. But, of course, there's a loophole. Grocery stores with pharmacies qualify for drug store permits."

    But now, for Marsh, that loophole is closed.
    KC's View:
    I don't think we're at "dead company walking" yet. But we're getting very close.

    Published on: May 3, 2017

    CNBC quotes a research report from Barclays saying that "Amazon could use 'robot vans' in urban markets given the proximity of the AmazonFresh fulfillment centers and the Prime Now drop-off area. What's more, it said automation in the Fresh warehouse might be achieved using a technology similar to the Kiva robots already deployed in Amazon's traditional warehouses."

    "Delivery automation is one of the saving graces for online given that nearly 80 percent of the delivery costs are associated with labor expenses and wages," Barclays said. And CNBc adds that "Barclays forecast that AmazonFresh could generate more than $40 billion in gross merchandise value, or total sales volume, in the next 10 to 15 years from its online fresh grocery business."
    KC's View:

    Published on: May 3, 2017

    The Washington Post has an extensive piece about organic milk regulations, saying that there are "critical weaknesses in the unorthodox inspection system that the Agriculture Department uses to ensure that 'organic' food is really organic."

    Indeed, it gets worse, since "the growth of mega-dairies that may fall short of organic standards and produce cheaper milk appears to be crushing many small dairies."

    Fascinating story, and definitely worth reading here.
    KC's View:

    Published on: May 3, 2017

    Business Insider reports that "Walmart has announced that it will invest more than $500 million in building 50 new stores in India over the next three to five years, more than doubling its number of physical stores in the country to 71 ... The new store locations could help increase the company’s brand awareness across India’s vast consumer base, helping it stake out a share in the region’s burgeoning e-commerce sector."

    According to the story, "The Walmart-branded stores will be operated by Bharti Enterprises, one of India’s larger mobile carriers, to avoid regulatory restrictions on foreign retailers, while Walmart will provide logistics, inventory, and payments support."
    KC's View:

    Published on: May 3, 2017

    • The Associated Press reports on how some convenience store chains are "fighting for customers with smaller restaurant chains, and with supermarkets that offer prepared foods for busy shoppers." That means "expanding their hot food offerings in hopes of stealing customers away from fast-food chains."

    For example, "in the past year, 7-Eleven has added $1.99 chicken sandwiches and cheeseburgers kept in warming cases. That's in addition to sandwich melts the chain introduced in 2015. The chain ... says food is a top priority."

    C-store chain Sheetz "says half of its new locations are built with a drive-thru, an accommodation the fast-food industry relies on for the majority of its sales. While Sheetz customers use the drive-thru mainly to order from the chain's made-to-order foods like burgers, the company says they can also request items like a gallon of milk from elsewhere in the store if they want." At Wawa, "along with its prepared foods such as hoagies and sandwiches, the chain offers packaged drinks and snacks that people can grab with their meals."

    • The Richmond Times-Dispatch reports that "Food Lion is spending $110 million to spruce up 71 stores in the greater Richmond region.
    The renovations are underway as competition for grocery customers is about to get more intense with market newcomers Lidl and Publix Super Markets scheduled to open stores in the coming months.

    "The Food Lion renovations include stores in Richmond and neighboring counties, plus stores in Amelia, Blackstone, Bowling Green, Dinwiddie, Emporia and elsewhere in the Salisbury, N.C.-based grocery chain’s Richmond market."

    • The Pittsburgh Business Times reports that c-store chain Sheetz "plans to hire 3,400 employees ... holding interviews this week for full- and part-time employees."

    Sheetz currently has more than 550 stores.
    KC's View:

    Published on: May 3, 2017

    • Kroger has named Todd Foley its new chief accounting officer, succeeding the retiring Mary Elizabeth Van Oflen. Foley has been a VP at Kroger since 2013, and before that was assistant corporate controller.

    • Publix announced that it has named a new head of its government affairs efforts - John Provenzano, currently executive director of the National Association of State Treasurers, will become its VP government relations.

    • The Reading Eagle reports that Redner's Markets Inc. has named Ryan Redner as president/CEO of the supermarket chain, succeeding Richard Redner, who will remain chairman of the company's board of directors.
    KC's View:

    Published on: May 3, 2017

    There has been a lot of discussion here recently about government regulation, and how it ought to be take a back seat to competitive market forces. Which is why I thought this email from MNB reader Bob Thomas was so interesting:

    Government regulations mandate that airplane crews get adequate rest.  Competition keeps making the seats more narrow with less legroom.

    Good point.

    On the related subject of banking and interchange fees, one MNB reader wrote:

    Financial Institutions, primarily Banks, make almost all of their income from fees. Late fees, balance fees, statement fees, and swipe fees.

    Retailers have virtually no choice in paying these fees, they have to accept all the terms and conditions of whatever is offered to them by the processors and the banks. A monthly statement for processing lists literally hundreds, if not thousands, of different rate classes at which the retailers fee is calculated. Most retailers are probably paying close to, if not more than, their net profit in fees. These fees have to be passed on in the form of higher fees.

    There is no rational connection to the fees charged to the retailers and the cost incurred by the banks. Even when fraud, which is a problem, is factored in. As the railroad agent S. Behrman told Dyke in Frank Norris' The Octopus:

    "We don't force you to ship. You can do as you like."  

    And most famously his response, when asked what was the basis of the rates:

    "All the traffic will bear."

    This was a book about the railroad monopoly. Today it is the Financial Monopoly. They can lobby, they have basically all the money. They lobby against all of us using our money. This is a real issue affecting everyone.

    And, not to belittle calorie counting, how our attention is being diverted away from the issues that affect how we live in the here and now, all the while our pockets are literally being picked.

    There is no competition to the bank monopoly. Their is no way to create a competitive entity or service for all practical purposes. It takes a company with pockets deeper than the banks, Apple, to even try to make a dent in this,  And they too will charge fees and will ultimately get regulated out of existence or regulated into to compliance and complicity with the banks to charge similarly outrages costs. At some point their payment system has to interact/intersect with the banks and there is the entry point for banks to influence the process.

    The only answer is what was done in Europe where fees were long ago capped at or below 1%. That would seem to be why they started the EMV/Chip program to fight fraud as they had to learn to rein in costs in Europe, not so much in the US.

    This is one area where the government can help, if they really want to be on the side of the people.

    In general, I think, the government has no interest in being on the side of the people, unless the people happen to be part of a larger business entity that uses lobbying money and campaign contributions to invest in the best government money can buy.

    (Maybe you've caught me in a cynical moment...)

    On another subject, from another reader:

    A while back it was written that Target may be looking for a grocery partner? Wouldn’t it be interesting if Amazon entered there store model into the Target pantries. With of course a separate exit to the store, which was proposed by Target already? Former Kroger executive Jeff Burt is very creative.

    The Target space is available across the US. we have seen stranger partners! Could Amazon bring sexy back to Target?

    From MNB reader Art Turock, regarding Michael Sansolo's column this week about the NFL draft:

    Thanks for your extremely perceptive view of the evolution of the NFL draft. It's definitely not a sporting event that draws fan's attention. Mostly guys sitting at a table sharing opinions. You nailed it!

    Regarding the FDA's decision to delay implementation of menu labeling rules. one MNB reader wrote:

    Yes, it’s great news for the folks that waited, but what about the companies that invested in outside testing and analysis? I think we will continue on the project to better inform our customers and give them the choices they deserve.

    Good for you. I hope your efforts prove to be a compelling differential advantage in the battle against those who take a less enlightened approach.

    Loved this email from an MNB reader:

    I notice a thread, as often happens, where the same subject crops up in different places – in this case, the delay of menu information and calorie counts on the one hand, and the potential changes to credit card swipe fees on the other (and of course, the larger issue of banking regulation in its entirety). Both of them, to some degree, are received by people in the same way – those who feel we need rules to control  corporate behavior, and those who do not wish there to be such regulation.

    And among the highlights of today’s column is that Wegmans, a company most of us in the industry have good reason to respect, is going ahead with menu labeling on their own no matter what happens to the regulation itself. I live hear a WegmansWegmans. I am pleased. I shop there.

    I hear the arguments about cost, lack of behavioral change, etc. about menu labeling. I hear the arguments about free competition for pay systems at the cash register. And it doesn’t wash. For every person who doesn’t care there is someone who does. Those who don’t care will gladly ignore calorie counts and food labeling if they want to do so – but those who DO care can only take action when they are given the information.  Which is kind of the point.

    I would love a world where everyone is like Wegman’s, and does the right thing as they see it  because they put customers first. I would love a world where corporations are inclined to produce transparency for the greatest number of people on everything possible and let them make up their own minds. And no doubt there are such companies. But they are so  often betrayed by other organizations that do not do this. My local bank did not cause the meltdown of 2008.

    Heck, my local bank at the time didn’t cause the S&L crisis of 1989, which most people conveniently forget. And that bank went out of business as a result.  My local restaurant may not feel their menu needs calorie counts – but I suspect a fair number of  them would love it if someone would make that easy to do so those patrons who care about it can feel enabled and informed, instead of lobbying against something just because we don’t like rules.
    Very large institutions tend, over time to run amok  with enormous power. And whoever is “on top” tends to use their power and access to stay that way, while innovators, entrepreneurs and ordinary citizens have very little control or ability to protect themselves. We have moved over the last 50 years or so to where business overall tends to be dominated by very large companies that are unresponsive. Think of it as the United Airlines syndrome.
    People need to study history – every one of the many agencies who form the collective pattern of our government came into being for a reason – and regulation is almost always a political response to some people getting  repeatedly and royally screwed. Re-read the story of foreclosures in the 1930’s. Reconsider the revelation in the early 20th century that caused Teddy Roosevelt to create the FDA (what used to be sold over the counter is pretty disgusting, actually). Re-read about price fixing and cartels and monopolies over the entire last two centuries. The fact is the good companies (like Wegman’s and their calorie counts)  don’t resist such rules, and I find it hard to trust the company that tells me I do not need to know.
    The Federal government can mess up. But it is MY government and I know who to blame if it doesn’t do what I want.

    It is interesting to note that many of the same people who want government intervention when it comes to interchange fees don't want government intervention when it comes to menu labeling.

    Go figure.

    I wrote yesterday about Amazon, saying that its strategy "is about creating an ecosystem in which products are available, food is purveyed, content is created, and people's lives are made easier through technology."

    Prompting one MNB reader to write:

    "Purveyed" .... 

    A simple definition says where something, a product or service, is provided. Then, look to the origins of the word -  'to foresee'.

    Ah, that's where the magic is! And, it is so much more critical as that is where the content is determined. It is the origin where the innovation of not only the knowledge of the products desired are foreseen,  yet further, how they are tied together with the innovation of technology in delivery to in fact make people's lives easier...

    That is when a purveyor becomes the valued and trusted partner in the lives of their  customer... They 'purvey'  - make available, what they foresaw that the consumer needed... That is when the customer leaves with the thought ... "It was like they knew I was coming and just what I needed ..."  

    Such a great word ....

    It is. I just wish I could claim that I used it with all the subtext that you found in it.

    But your point - and how it applies to Amazon - is a good one.
    KC's View: