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    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?

    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.

    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.”

    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:

    Published on: September 20, 2017

    by Kevin Coupe

    Michael Sansolo’s column yesterday focused on how professional football teams are concerned about the fact that kids seem to be playing it less than they used to, largely because of concerns about brain injuries that can cause major problems later in life. He used football as a metaphor for how businesses need to always seek ways to be relevant to their shoppers.

    In response to this column, an MNB user sent me a link to a Deadspin column about how the Minnesota Vikings have hired 18-year-old Jonah Stillman to be the team’s “Gen Z advisor.”

    Stillman, the story says, “just graduated from a local high school, and he recently co-authored a book with his TED Talk father David called Gen Z @ Work: How the Next Generation Is Transforming the Workplace. Jonah’s a self-proclaimed ‘voice of his generation’.”

    According to Deadspin, “Stillman’s actual role will be consulting the Vikings on ‘a variety of club business initiatives, including team marketing and fan activation efforts, Vikings Entertainment Network (VEN) and digital media content and strategy, U.S. Bank Stadium fan experience, STEM opportunities with the future Twin Cities Orthopedics Performance Center and workplace culture.’ If that sounds like a complicated way to say ‘he’ll help us relate to teens,’ well, guess what, that’s more important than you might think because, as the Stillmans’ website warns, ‘If you try to treat Gen Z like the Millennials, it will backfire!’”

    The MNB reader who sent me this story wrote:

    “I’ve worked in and studied the retail industry for enough years and I have to admit this story made me wonder why many retailers aren’t bringing ‘kids’ like this to the table. I’m not advocating that a teenager knows how to run a retailer’s business but what does it cost to listen to them, and I mean REALLY listen??  While many seasoned retailers are dropping out of the race, one has to wonder why not try a ‘hail-mary’ and take a page out of the Vikings’ book.”

    Good point. And, I think, an Eye-Opener.

    Two other points.

    First, we have a story below about a new IRI study into Gen Z shopping behaviors. Check it out.

    Second, as a Jets fan, I appreciated one comment from the Deadspin story:

    “No longer will the Vikings be squares who finish 8-8. Now they’ll be cool to teens as they finish 8-8.”

    Pretty funny.
    KC's View:

    Published on: September 20, 2017

    CNBC reports that just weeks after announcing that it will begin selling Amazon’s Alexa-powered devices and Kindles at 10 of its stores, department store chain Kohl’s said that some of its stores will begin accepting Amazon returns, packing and shipping eligible items to Amazon fulfillment centers for free.

    Not only will Kohl’s take Amazon returns, but it also will designate certain parking spaces near store entrances as being specifically for Amazon customers making returns.

    According to the story, “Starting next month, the Amazon return service will be available at 82 Kohl's stores across Los Angeles and Chicago. Kohl's hasn't said when the service will expand to other markets, but this looks to be just the beginning of Amazon using retailers' real estate to its advantage.

    “In acquiring supermarket chain Whole Foods, Amazon has launched a similar service, where shoppers can return purchases made on at the grocer's more than 400 stores … Sears marks another retailer that recently signed a deal with Amazon, aiming to sell more of its appliances, and those with Alexa capabilities, through the internet giant's platform.”

    Richard Schepp, Kohl's chief administrative officer, said in a prepared statement that “this is a great example of how Kohl's and Amazon are leveraging each other's strengths – the power of Kohl's store portfolio and omnichannel capabilities combined with the power of Amazon's reach and loyal customer base.”
    KC's View:
    There’s a part of me that thinks that while Kohl’s appears to be bending over backwards to accommodate Amazon and its customers, what it really is doing is bending over forward, and the long-term result is inevitable.

    As we talked about in this morning’s Innovation Conversation, partnerships can be important … but Kohl’s in this case is not just selling devices that will allow people to buy the products it sells from Amazon, but now also is giving its competitor’s customers preferred parking. I think the message to its traditional customers is pretty clear … and not helpful in terms of its long-term credibility.

    Published on: September 20, 2017

    IRI is out with a new study that looks at the shopping attitudes and behaviors of Generation Z, consumers who are age 21 and younger, concluding that this demographic group “will be different from millennials and the generations before them on many levels - on top of being the most culturally diverse shopper population to date, Gen Zers are already forming unique purchase motivators and preferences.”

    Among the conclusions:

    • “Brick & mortar holds its own against online. Gen Z sees both brick & mortar and online retailers being equally able to deliver the brands they want — a large product selection, low pricing and enjoyable shopping experiences.”

    • “Social media plays a far bigger role in influencing Gen Z purchase decisions than pricing or discounts. Gen Z is two to three times more likely to be influenced by social media than sale or discount pricing when making purchasing decisions, making them the only generation to be more driven by social media than price.”

    • “Ease of the shopping process has substantial influence. Gen Z is more likely than any other generation to choose a retailer based on how easy it is to find what they want, including millennials.”

    • “It’s not just a price game for Gen Z. The ability to find what they’re looking for in the store is as important in driving retailer choices as low prices.”

    • “While Gen Z is still not yet doing the majority of their own shopping, more than 25 percent of Gen Z members already engage with retailer apps for discounts and promotions, compared with 33 percent of millennials. These findings confirm the digital, social-centric shopper experience Gen Z will seek out, whether shopping online or in-store.”
    KC's View:
    Hence, the Minnesota Vikings approach, as described in this morning’s Eye-Opener.

    Published on: September 20, 2017

    The Chicago Tribune reports that the US Federal Trade Commission (FTC) has given its approval to Walgreens Boots Alliance’s $4.38 billion purchase of 1,932 Rite Aid stores.

    According to the story, “The FTC had long resisted a deal between Deerfield-based Walgreens and competitor Rite Aid, forcing the two to revise terms of a transaction several times since they proposed their merger in 2015. Originally, Walgreens had hoped to buy all of Rite Aid, America’s third-largest drugstore chain, in a deal then valued at $17.2 billion, including debt … The deal announced Tuesday is smaller than the most recent agreement reached in June, which had Walgreens buying 2,186 Rite Aid stores (about half of Rite Aid’s locations), three distribution centers and other inventory for $5.18 billion. The distribution centers and inventory remain part of the deal. Most of the stores it will buy are in the Northeastern and Southern U.S., and will be converted to Walgreens stores over time.”
    KC's View:

    Published on: September 20, 2017

    The Los Angeles Times has an interesting story about Halo Top, described as a “light ice cream” that “has exploded into surprising market dominance. Halo Top recently bested stalwarts Ben & Jerry’s and Haagen-Dazs for the top sales spot in its niche — grocery store ice cream pints … Halo Top’s appeal is simple: a no-shame pint of low-sugar, high-protein ice cream with just 240 to 360 calories for the entire carton. Vanilla, at the low end, compares with 1,000 calories for a Haagen-Dazs or Ben & Jerry’s pint.”

    But what really makesHalo Top interesting is the business model - the company “has no offices or headquarters. It uses a third-party manufacturer and distributor, and it's a formula that works.” The working premise is that it makes the most sense to remain frugal and nimble, and that building brand value is more important that building costly infrastructure.

    You can read the story here.
    KC's View:

    Published on: September 20, 2017

    Fortune is out with its annual “100 Best Workplaces for Women” list, surveying thousands of women to determine which companies go beyond the “flexibility, paid leave, and no harassment” that are part of cultures that “cater to the female half of their workforce.” Wegmans, as it often does on such lists, is high up in the rankings, coming in at number seven.

    Publix is ranked 39th, QuikTrip is 54th, Sheetz is 79th, and Nugget Market is 95th.

    Other retail and food companies that make the list include Build-A-Bear (16), Arby’s (19), Sephora (29), MOD Pizza (42), Cheesecake Factory (45), Container Store (57), Mars (68), and Nordstrom (81).
    KC's View:

    Published on: September 20, 2017

    CNBC has a story suggesting that one of the benefits of Amazon’s acquisition of Whole Foods may be an improved ability to sell alcohol.

    The story notes that “alcohol has been mostly out of grasp for Amazon - until recently. Even with a network as vast and complex as Amazon, the logistics of shipping booze is somewhat nightmarish. Intoxicating liquor can't be mailed in the U.S., and services like FedEx have strict requirements for delivery. Then there are individual state mandates on both shipping and retailing, not to mention the need to check the ID of every purchaser.”

    The ability to use Whole Foods as mini-warehouses in a number of local markets, CNBC suggests, could allow Amazon to both deliver alcohol and offer click-and-collect services to consumers, without having to deal with complicated shipping logistics.

    At the same time, Amazon has “quietly expanded the cities included in the alcohol delivery service through Prime Now, one of its subscriber services that mainly delivers groceries.” It also is enabling its Alexa-powered smart speaker system to take beer orders in some markets, and MillerCoors recently launched a a Dash button to simplify reorders.
    KC's View:

    Published on: September 20, 2017

    BuzzFeed reports that Walmart has been telling its employees “that the company is eliminating thousands of overnight positions nationwide … and will offer workers the option to move to day shifts, to other locations, or to receive 60 days' severance based on their current pay. The change will affect more than 430 of its small-format Neighborhood Market stores, according to the company.”

    Walmart says that the move is not about cutting payroll, but rather is designed to
    bring employees "closer to the customer – shifting overnight stocking hours to the daytime and using technology to make the inventory management process easier.”

    According to the story, “Some employees who spoke to BuzzFeed News about the latest change at the Neighborhood Markets said that stocking is more difficult with customers present during the day, since it can involve large pallets, equipment, and bulky merchandise. Several said they fear being laid off if they can't rearrange their schedules or switch stores. Others said that overnight maintenance — such as buffing and waxing floors — will be more challenging during crowded business hours.”

    • Walmart announced yesterday that rather than hire seasonal employees for the end-of-year holiday shopping season, it is offering extra hours to current employees, which will “will help staff traditional roles like cashier and stocker, and newly created technology-empowered positions such as personal shoppers and Pickup associates.”

    Judith McKenna, Walmart US’s COO, says that the approach dovetails with its increased “focus on service through new training, tools and technology. Thousands of associates have completed training in our Pathways and Academy programs, which prepares them to more effectively serve customers, especially during this busy season.”
    KC's View:

    Published on: September 20, 2017

    • Kroger yesterday announced what it called “a new, national effort aimed at ending hunger in the communities Kroger calls home and eliminating waste across the company by 2025.”

    Among the initiatives are the establishment of “a $10 million innovation fund within The Kroger Co. Foundation to address hunger, food waste and the paradoxical relationship between the two” … the acceleration of “food donations to provide three billion meals by 2025 to feed people facing hunger in the places Kroger calls home … and the donation of not just more food, (but) more balanced meals via Kroger’s industry-leading fresh food donations program.”

    Kroger says it wants to “eliminate food waste by 2025 through prevention, donation and diversion efforts in all stores and across Kroger.” And, it said that it is “also crowdsourcing for solutions, asking communities, partners and other stakeholders to help provide ideas, feedback and best practices as the effort evolves.”

    “No family in a community we serve should ever go hungry, and no food in a store we operate should ever go to waste,” said Rodney McMullen, Kroger’s chairman/CEO.

    • Albertsons announced yesterday that it is once again teaming with Academy Award-winning actress Viola Davis “ to continue the Hunger Is ‘Hungry for More’ campaign, which is designed to raise awareness and funds to fight childhood hunger in America. Through the generosity of Albertsons Companies customers, last year Hunger Is provided five million breakfasts to children in need, a number which the campaign will strive to match this year.”

    The company said that “over the last three years, Hunger Is has raised more than $18 million and awarded over 270 grants to support local hunger programs in 33 states plus the District of Columbia. More than 6.4 million breakfasts have been served to families in need, and the grants have touched the lives of more than 200,000 children across the country. The funds raised have helped local and regional institutions provide breakfast, even when schools are closed, and teach families how to cost–effectively shop and cook healthy food on limited budgets.”
    KC's View:

    Published on: September 20, 2017

    On the subject of Toys R Us’s bankruptcy, MNB reader Tom Murphy wrote:

    This appears to be another case of a private equity group with little knowledge of the business models, customer expectations and the intricacies of retail driving a retailer into the ground my syphoning off cash, cutting talent to save a buck, and generally trying to turn a fast buck.  There are some exceptions, e.g., Cerberus has done a reasonable job…but they were made up primarily of ex-retailers.  Generally, private equity and retail don’t mix.

    And, about Best Buy’s apparent strides, MNB reader Richard Townsend wrote:

    Just wanted to give you my take on why they may be competing effectively against Amazon.  I understand, though personal research mostly, that many manufactures cater to retailers by designing similar models with different features to meet certain price point requirements by the retailer.  I know Walmart does this as I suspect Best Buy, Target and others do it, too.  One of the things that Amazon, and other online sights, even Best Buy, fail to do effectively is properly illustrate their products and features so that a consumer can make an intelligent choice.  I find it very difficult to compare similar products across the internet, when various sights do not include all the necessary information about their products.

    I think that one of the reasons Best Buy has remained relevant, and other box retailers, is that a person can physically inspect what it is that they are buying and make a better decision on what is relevant to the purchaser.  When you consider the cost of these products, TV's that cost thousands of dollars, even mobile phones, these chain stores, I think, still hold the edge by allowing customers to inspect and compare.  I think Best Buy may have just been the first to understand how to make it all work better.

    Along the same lines, from another reader:

    I’ve been thinking a lot about the future of physical retail, particularly now that I’m back in the grocery space.
    As I tweeted yesterday, “Toys'R'Us provides no compelling reason to buy from them versus Walmart or Amazon. Dirty stores, underpaid staff, high prices. So long.” Contrast that with Best Buy – a store that recognizes the singular importance of physical experience in an increasingly online world. In another set of Tweets yesterday: “I'd like to offer one more reason bricks and mortar retail is sucking wind. The benefit of a physical location is the experience: the ability to touch a product, have an expert walk you through the benefits, and concretely imagine the purchase in your home and life. But this is impossible to do in a world where floor employees are paid poorly, for part-time work, with few benefits, and no expectation of hours. Why should a customer want to visit your store when your associates hate working at your store? Until retailers fix this they have no advantage over Amazon or Walmart.”
    Back in grocery world – the importance of experience has always been what distinguished the best performing supermarkets. Costco (and Price Club) understood the treasure hunt and the feeling of belonging to something exclusive. Whole Foods, Wegmans and Mariano’s had their acres of specialty prepared foods. Stew Leonard’s is…something totally else. And even hard discounters like Aldi can make saving money feel pleasantly real (“I’m keeping prices low by bringing my own bags”). But one reason that supermarkets are able to execute on these great experiences is the fact that they’re almost uniformly great employers. If you work hard you can make a living wage, without finishing high school. And store managers and assistant store managers are well paid and often lack a college education. And you don’t just see this in the premium chains: chat with an associate at a mid-tier Hannaford or Cub and you’ll find someone who’s helpful, knowledgeable, and professional.

    Regarding the story about Trader Joe’s being a great place to work, one MNB reader wrote:

    I, too, work at Trader Joe's as a PT job on the weekends. The article is completely accurate. I have been with TJ's since the beginning of July, and it is, honestly, an amazing place to work. The business and management model is amazingly efficient and is described as an "inverted pyramid" model. Our store has two captains and nine mates. I always enjoy going to work because it truly is a team effort, all day, every day. It makes me want to give 110% every time I clock in, knowing that everyone else will too.

    As a crew, we have daily goals to "Learn Something New" about a crew member, or "Make a Customer's Day!". As a crew member, we have the authority to open up a package and sample it if someone is unsure about it, hoping they will buy it if they like it, or save some money if they don't!  We can give a free bouquet of flowers to someone who, after engaging with at the register, we find is having a hard day. We are encouraged to engage with and learn about our customer base. What they like and dislike. For instance, near our store is a very large population of Jewish people. We have the ability to showcase and adjust our store merchandising to highlight items they may need during Rosh Hashanah. They love it! 

    The bottom line: Best place I have ever worked. Best shopping experience ever (just ask my kids!). Most efficient and effective grocery operation I have ever been a part of. Most open, trust-worthy management team I have every worked for. What more could you want in a career?

    KC's View: