Published on: September 20, 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: The power and pitfalls of creating partnerships.
And now, the Conversation continues…
KC: One of the more common questions I get is what I think the next merger-acquisition will be in the retail sector, but I’m beginning to think that we may see more alliances and partnerships than mergers. For example, we’ve got Amazon’s new deal to put a store-within-a-store at select Kohl’s units, and the deal between Amazon and Microsoft to allow their Alexa and Cortana voice-activated AI systems to communicate back and forth and build on the strengths of the other. I wonder if it makes more sense - and actually is faster - for companies to strike these sorts of deals rather than go through all the complexities of a merger or acquisition. What do you think?
Tom Furphy: This goes back to the ecosystem idea that we’ve discussed in prior Conversations. Companies need to determine who they are and how they uniquely serve their customers. They need to identify the key differentiators of their product or service that they absolutely must own. These are the differentiators that keep customers from looking to others. With these established and defensible, they can then think about serving their customers and their market in new ways beyond their core. Here they should definitely be open to partnerships to expand their capabilities, serve their customers better, drive overall volume and expand their addressable market. And unlike a merger, these deals can usually be undone if they don’t work out.
The Kohl’s deal to sell Amazon devices and Home Services in their stores is probably both a defensive and offensive effort. Kohl’s sees the opportunity to use the appeal of these goods and services to give their customer more reasons to shop (or not leave) Kohl’s. However, they need to be aware that they are handing out Trojan Horses to their customers. They are allowing Amazon to have greater access to these shoppers. And we know Amazon is coming after all of Kohl's’ product categories. But since most of these shoppers were probably going to own these devices anyway, why not give the partnership a shot?
In the case of the Microsoft and Amazon deal, both companies likely determined that deeper capabilities and interoperability of their voice platforms, while at least partially competitive in their own rites, would allow them to better serve their distinct customers and would allow them to open their product and service ecosystems to reach more customers. This is probably even less of a competitive risk than the Kohl’s partnership.
KC: You and I have both expressed some skepticism l about retailers partnering with the likes of Instacart and Amazon PrimeNow, on the premise that it outsources what should be an important and even proprietary part of the customer experience. If we’re seeing the benefits of other partnerships, should we be rethinking that skepticism?
TF: I certainly see the benefit of partnering with an ecommerce and delivery expert. Tapping those capabilities and getting efficiency out of a shared service makes a lot of sense. But do retailers give up too much of the customer relationship? Do they farm out what should be a critical core competence? I’m not sure. These services certainly provide retailers an instant, full-service ecommerce offering, which they need. But as these retailers look out 5, 10 or 20 years into the future, will these ecommerce customers stick with them or will they move over to Instacart, Amazon or others directly?
KC: It probably isn't a coincidence that Amazon is involved with both the Kohl’s and Microsoft alliances … simply because, as we’ve often talked about here, they move so much faster than almost everyone else and seem to see what other companies don’t. I’m sure you weren’t surprised - but also were dismayed - to see the study we quoted last week saying that while more than 75 percent of executives believe their business will be transformed by digital disruption, 40 percent of executives feel corporate leaders either don't understand the threat or are not responding appropriately. I’m reminded of the old proverb about how “there's many a slip 'twixt the cup and the lip,” which tells us how much can go wrong even when do things right … just imagine how badly things can go when you’re not prepared or positioned for the future.
TF: You’re right, I wasn’t surprised at all by the results of the survey. I spend a lot of time working with retailers. Their lack of readiness for this next generation of commerce is staggering. Every day Amazon increases their lead over the rest of the industry. They are adding volume that can never be reclaimed. And yet retailers are simply not responding boldly enough. Countless retail teams that I work with are frustrated in their own lack of agility and incapacity to innovate. They are holding on to legacy cultures, systems and processes while customers move purchases away from them in droves. And they don’t know how to break out of it.
There are few companies in any industry, and no companies in retail, that are innovating anywhere near the pace of Amazon. We’ve talked about how innovation is engrained in their DNA. Leaders and staff throughout the organization are charged with out-innovating themselves. They are good at it. And they are relentless.
For retailers and manufacturers, there can be a good amount of agility attained by partnering with Amazon. But it’s a double-edged sword. History has shown that Amazon doesn’t partner particularly well. Think about the past high-profile partnerships with Barnes & Noble, Toys R Us and Target. How did they turn out? In these cases, the retailers were effectively outsourcing key elements of their customer proposition. And it was a customer proposition that they shared with Amazon. If Amazon will ultimately compete with you, either as a retailer or as a brand via private label, then you must partner carefully. You should have a clear purpose for the partnership, with a clear growth and exit strategy. And you still need to innovate on your own in parallel. This is critical to long term survival.
KC: By the way, I have to ask you about the story we had last week about the so-called moveable refrigerator that will actually deliver items to people who either can’t get up or don’t want to … which struck me as interesting, but mostly because it seems to dovetail so nicely with other innovative technologies, especially those that enable equipment like refrigerators to reorder food that is running out. I cannot help but feel we’re moving toward this major confluence when all these things are going to come together in some sort of technological big bang, and there will be a quantum leap forward in terms of what is not just possible, but viable. As Amazon said in its old commercial, “what used to seem wildly impractical now seems completely normal.”
TF: The Internet of Things tipping point is still a ways out. But you’ll see a good amount of IoT innovation starting to emerge over the next few years. Leading the way will be Amazon, who has thousands of employees working on the ability of appliances to trigger orders to them through an initiative called Dash Replenishment Service.
Appliances in general will be smarter and will be connected. They will be able to send demand signals and orders to retailers. How many retailers will be able to receive these, cue them into customer orders and deliver or stage them for pickup? If you’re not thinking about an IoT strategy now, you are behind. All of these new replenishment models, subscription, auto-replenishment, voice, IoT and ultimately predictive retail are all coming to fruition. Quite simply, it is the way people will shop in the future.
The Conversation will continue...
- KC's View: