Published on: May 17, 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 topics: Making Big Bets Early, and "If This Then That."
And now, the Conversation continues...
KC: So, for all those folks who may think less of themselves because they didn't "get" Amazon, or understand its potential impact when it launched, we now have Warren Buffett saying that there is only one word to describe why he didn't invest in Amazon (or Google) in early days: "Stupidity." But he's hardly alone - Amazon has been in the Subscribe & Save business for years, and only now do we see retailers like Walmart and Target trying to catch up.
I suppose at some level people like Buffett avoided Amazon and Google because they did not have tangible enough businesses, but they're learning their lesson now.
Tom Furphy: Amazon and Google were two businesses that were very different than anything that came before them. While each was based on powerful premises and models, neither had anything tangible in terms of assets or financial performance upon which to base investment. The only way to invest in these companies early was to meet with the founders, listen to their vision, understand their intended path to monetization and then assess their ability to lead their company down that path. And even if an investor was able to do that, putting in money was still not a clear decision. While the Google guys had access to early capital through their Stanford connections, Jeff Bezos had to put up his own money, hit up his friends and family, then knock on about 40 investor doors before he got funded. Of course, those early investors in both companies have since been rewarded handsomely.
I saw a quote from Jeff Bezos the other day that really struck me. It had to do with taking a long term view of the business and recognizing that foundational changes can take a long time to yield results, but once they take root they can be both powerful and predictable. He said "I ask everybody to not think in two-to-three-year time frames, but to think in five-to-seven-year time frames." He followed "When somebody … congratulates Amazon on a good quarter … I say thank you. But what I'm thinking to myself is … those quarterly results were actually pretty much fully baked about 3 years ago. Today I'm working on a quarter that is going to happen in 2020. Not next quarter. Next quarter for all practical purposes is done already and it has probably been done for a couple of years."
So, Amazon makes big bets well before the market can see or understand them. How many retailers today think in these terms? My guess and my observation is nearly none. And it is going to kill them. As threatening as things feel now, with Amazon already claiming almost 1,000 traditional center stores in CPG, how will it feel in 4-5 years when that number is several thousand? I don’t think it will be pleasant. Making bold, foundational moves in business models is not optional today. If you are not currently making these, you are in big trouble.
KC: One way in which Buffett seems to be learning the lesson could be seen when he talked about the impact of driverless cars. He recently said that inevitably they will make the world safer, but that they will be terrible for the insurance business ... which is just another example, I suppose, of collateral damage from disruption.
We saw that recently in the story I ran on MNB about the builder in Los Angeles who believes that when he builds a garage, he has to make sure that it can be easily converted to another purpose, because eventually people are not going to have their own cars to park. I worry that I'm not smart enough to think this way ... but I suppose that to survive in the long run, you have to be able to think this way.
TF: Exactly. Retailers need to be thinking five or more years ahead. For example, the fundamental purpose and composition of the traditional grocery store is going to change. When the nature of the store changes, when the center store becomes an automated service due to subscriptions, automated replenishment and the Internet of Things and the perimeter truly becomes about service and the highest quality products, how many retailers will be ready? There will be some, but not many. Those that are not making foundational moves today will never be ready for the shopper of tomorrow. And tomorrow is coming fast.
KC: I did want to follow up with you about something I mentioned on MNB recently - the idea of an IFTTT (If This Then That) platform that, for example, allows me to tap into an algorithm so that a product is automatically bought online if it goes below a certain price. I haven't seen much of this, but it sounds like a natural. How much of it might you be seeing, and is this yet another way for the consumer to take control of the buying experience (and, by the way, potentially creating real problem for value-driven retailers)?
TF: IFTTT is pretty interesting. Essentially it’s a platform that lets developers create applets that do certain things when certain conditions in other web services are met. Apparently over 1 million tasks have been created. There are versions of the platform for both iOS and Android, and there are also Internet-of-Things protocols so anyone can connect an appliance or re-order button to an e-commerce site. It’s limited to doing one thing based on one criteria being met. But it’s still pretty cool in how it can be applied. It does have some potential to empower the consumer. But it’s ultimately up to businesses to use it in ways that actually provide value and allow them to better serve their shoppers.
IFTTT can certainly be disruptive in driving prices to the lowest common denominator. The pricing algorithms that Amazon and their competitors are using today are already pretty damaging to price. Amazon and competitor systems keep tabs on each other’s prices. They work to lower price to levels where the retailers are barely profitable, or not profitable. Adding another variable to this via IFTTT could stand to even further degrade prices. That’s good for the shopper in the short term. But in the long term it will be tough to sustain for retailers.
Today Tesco is using IFTTT for a number of automated tasks. Their applets can automatically order products if they meet a certain price, they can add burgers to a shopping basket based on the weather, or they can set a reminder to add certain items to a basket at a certain time. They are also using IFTTT to allow customers to use Google Home to add items to their basket. I’m not sure these add up to providing real utility for the shopper, but they are great for R&D. And Tesco should to be applauded for the innovation. Today, customers expect their favorite retailers to innovate on their behalf and that’s what Tesco is doing.
The Conversation continues...
- KC's View: