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: How the retail game is changing, and the cultural, financial, strategic and operational adjustments retailers will have to make in order to survive.
And now, the Conversation continues…
KC: To me, one of the most interesting retail stories of 2018 was last week’s analysis that people who use their Amazon Echo systems to buy products on Amazon spend more than members of Amazon Prime - which is noteworthy since it has long been known that Amazon Prime members spend a lot more on Amazon than non-Prime members. Now, the numbers aren’t in the same ballpark because there are so many more Prime members (more than ever, apparently, after a holiday season in which those numbers went up dramatically), but it seems to me that this tells us that Amazon’s prime conceit (pun intended) is accurate - that its core differential advantage is an ecosystem that differs fundamentally from what traditional retailers do. Amazon also sold a ton of Alexa-driven gadgets during the holidays, which means, I think, that this trend is likely to gain a lot of momentum. Were you surprised by any of this? Your thoughts about how this is going to play out?
Tom Furphy: I’m not the least surprised by all of this. Amazon is building the largest shopping utility in the history of retail. They endeavor to touch and improve as many parts of their customers’ lives as they can. And they constantly strive to leverage that improvement into more commerce.
Their devices are very good. They have relentlessly focused on their customers and obsessed over delivering them levels of capability and value through the devices that were never thought possible. It’s such an order of magnitude of mindset and action over anything that other retailers are delivering.
Using the Echo is a way to drive even more value to Prime members as they can access services like Prime Music, Prime Video and Prime Now through the devices. They can easily order replenishable items, add items to their list and ultimately discover can buy products in new ways. Amazon has loaded so much value into Prime that they’re making it very difficult to shop elsewhere. With almost 60% of US shopping households as Prime members, the strategy is clearly working. They have solidified themselves as the first place many shoppers will look to serve their needs.
This is a strategy that Amazon has been executing toward with abandon for ten years. We consistently discuss this in the Innovation Conversation, and it’s what I discuss directly with manufacturers and retailers every day. Manufacturers are learning from Amazon and have high ambitions for e-commerce overall. They are yearning to develop new routes to market and want to partner more deeply with retailers to develop new capabilities for shoppers. Yet most retailers focus on the current quarter and manage their IT and business roadmaps at a snail’s pace. They are ill-equipped to partner strategically and move with the shopper. As a result, I think many retailers are in for a rough road ahead. For many, it’s a road to irrelevance.
KC: Another story from the past week that intrigued me was the Wall Street Journal piece about how Unilever is taking a new approach to innovation and disruption because small upstart companies are making competitive headway against it. What they’re finding is that there is a downside to bigness, which is interesting because there also have been numerous stories in recent months about how “big food” is less trusted these days than ever. What this says to me is that companies need to embrace the old Amazon rule about how every business team has to be small enough to feed with two pizzas, because that is the best way to generate innovation. This strikes me as particularly applicable to retail; our friend Glen Terbeek has argued for years that companies of a thousand stores, say, ought to be structured so that they operate as units of 25 … this would make them better able to localize their efforts, engage with their shoppers, and innovate in meaningful ways. Do you think that there is much evidence that companies are learning this lesson about the advantages of playing the equivalent of what in baseball is called “small ball.”
TF: Well, I completely understand the approach. In Terbeek’s view and in the traditional sense of retail it would be considered “store autonomy”. The recognition that stores understand their local market intimately and, if properly empowered, are in the best position and are most agile to properly serve it.
Inside Amazon, Jeff Wilke, who is CEO of the Consumer Business, describes the company as “separable, single-threaded teams.” What that means is that the company is comprised of hundreds or thousands of teams – many small enough that could be fed by “two pizzas.” The thinking is that a team that is separated from others, that is not bogged down in administrative burden and is not worried about other teams’ objectives, is able to stay laser focused on its own objectives, which almost always involve innovating for and serving customers.
It’s hard to retrofit an existing company into this culture. At Amazon, it is deliberate and well documented that the company hires for this culture and its performance measures embrace it. That is difficult for other companies to do, but not impossible. It starts at the top, with an openness to change. It usually will require an ecosystem mindset. At Amazon, the ecosystem is a compilation of internal teams. For existing companies, it should be a combination of existing teams and support from outside experts.
The only company I see getting anywhere close to this is Wal-Mart. They are taking a big swing in the wake of the Jet.com acquisition. They are letting Marc Lore and his team inject a sense optimism and a bias for action in how they go to market. It’s refreshing. And it should scare the heck of weaker competitors.
KC: I’m curious about something. Even though traditional retail had a pretty healthy end-of-year holiday shopping season, there were a bunch of stories in the media that referred to a coming retail apocalypse, mostly keyed to some predictions that twice as many stores will close this year as will open. Yet, it would be my argument that this is less an apocalypse than it is a virus that will weed out the weak and allow for the survival only of the fittest. And by “fittest,” I mean the companies that are culturally, financially, strategically and operationally committed to innovating in ways that will make themselves more relevant and resonant to shoppers. The line I used last week is that retailers can’t just be an alternative - they have to offer a distinct and differential advantage. That strikes me as the kind of marching order that retailers have to embrace as they begin 2018. Agreed?
TF: Agreed. I think it’s a very serious virus. Dare I call it the Black Plague of Retail. Food and packaged goods retailers still have no idea how impacted they are being from Amazon because they’ve only felt a little bit of the pain so far. The Amazon growth and share gain that we see across the 100+ manufacturers that we work with is astounding. Manufacturers simply aren’t realizing that kind of growth elsewhere.
The innovation that Amazon has brought to shopping, by not being in the business of selling things but of helping people buy things, is a set of capabilities years ahead of where incumbent retailers are. When you think about the power of everything from assortment, efficiency, the fulfillment network, personalization, Prime penetration, logistics, automated replenishment, on-demand fulfillment, the voice ecosystem, the marketing platform, the IoT lead and now the store-based retail strategy, Amazon is turning the industry on its head.
While some retailers marvel at 100% e-commerce growth and think they’re making headway, or we see Costco’s 8% top-line annual growth as somehow being Amazon proof, I just don’t get it. These results are certainly positive, indicate strong value propositions and do position these retailers better than others. But we can’t lose sight that Amazon is still crushing all of them with 25%+ top-line growth in overall merchandise sales, and much more than this in consumables. They are growing dollars faster than ALL other e-commerce retail combined and their total sales are claiming market share from everyone.
We very well may see a day in the next decade when Amazon accounts for 20% of all retail sales. The good news is that there will be 80% left for the others that survive the plague. But the game will be different then, and the retailers that survive will have to have had the cultural, financial, strategic and operational will to truly innovate. They will absolutely have to offer a clear and compelling value proposition the shopper. It’s going to be a costly and bloody fight. But the strong can survive.
The Conversation will continue…with a new Innovation Conversation podcast on January 24, featuring an interview with Marty Ramos, chief technology officer for Retail, Consumer Products & Services at Microsoft.
- KC's View: