Published on: February 21, 2018
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, we mark the 50th edition of the Innovation Conversation with a discussion of the importance of taking ownership and showing commitment to innovation-driven initiatives in a climate of potential opportunities.
And now, the Conversation continues…
KC: I thought the decision by H-E-B to acquire Favor, which it described as an “innovative on-demand delivery service,” was typically foresighted … it seemed a tacit acknowledgement of something you and I have talked about a lot here - that it is critical for retailers to own (even if they partner with some service providers) as much as possible the entirety of the customer experience. I think this is true with both the bricks-and-mortar experience (in which they need to differentiate it from the moment a customer drives into the parking lot to when they drive out) and the e-commerce experience (in which it needs to reflect the broader value proposition). It can’t just be an add-on … it has to be fully integrated.
Tom Furphy: Retailers serve customers. Customers look to those retailers to be served. As retailers succeed in serving customers’ needs, the deeper these relationships form. This results in more loyalty from the customer to the retailer, and it gives the retailer more right to serve the changing and expanding needs of the customer.
Any introduction of a third party to this relationship diminishes the bond between retailer and customer. Even when the third party is an effective partner, they get some of the emotional credit for serving the customer’s need. Because of this, I have always advised retailers to be very careful when allowing an external party to serve a core element of their value proposition.
There is an important difference between this and the ecosystem approach to serving the customer that we’ve supported. In the ecosystem approach, a web of partners is assembled which leverages the strengths of each partner, but the ownership of the overall experience and responsibility for fulfilling the customer’s needs lies with the retailer. Whenever third parties are used, they should ideally be branded and executed under the retailer. And, while not optimal, if a retailer has a partnership with a branded external partner, the retailer should have full access and ownership rights to the customer and their shopping data.
After attempting and struggling to cast a wider net across several markets nationally, Favor had focused its service area on the same markets that HEB serves. Given that they’ve raised tens of millions of dollars of capital and are facing competitors who’ve raised hundreds of millions, such as Instacart and Postmates, and strong incumbents like Amazon Prime Now, it seems likely that a sale to HEB was seen as a reasonable outcome for the investors and the team.
This deal makes good sense from HEB’s side. We know that HEB is incredibly customer focused. In making the Favor acquisition I would imagine that they envision a world where this last-mile service can be a nice compliment to their local delivery and curbside pickup services. The shopper is not becoming more store-centric. They are becoming less so. Therefore it behooves retailers to think about owning customer service beyond their own walls. This is exactly what HEB is doing here. Plus, with now also being able to deliver from smaller local retailers and restaurants, HEB actually expands their value proposition to their customers.
KC: When we did our first podcast, we interviewed Jackson Jeyanayagam, CMO of Boxed, a company that apparently is up for sale, with a number of companies expressing interest. I’m not sure we saw it coming so soon…in fact, we joked during the podcast about Boxed buying Costco. But this would seem to say something specific about the realities of start-up companies these days - that they need to get traction very quickly because capital is getting more expensive (and will get even more so as inflation occurs). They just don’t have the runway they used to have. But I wonder if this also creates opportunities … because these companies in search of capital may also be open to being acquired at more reasonable numbers by traditional companies earlier in their lifespan that they might have otherwise.
TF: It is very rare that a company that is thriving, with good access to capital at increasing valuations, with plenty of market growth foreseen ahead, and little worry about competitive incursion, would allow itself to be sold to an established industry player. There is simply too much upside for investors and founders to give up. Usually when one of these companies sells, it is because capital is becoming less available and/or costlier, they are aware of some core flaw in their business model or profitability equation that may be tough to overcome or they are worried that competition from upstarts or incumbents will ultimately curb their ability to win. It doesn’t have to be a doomsday scenario, but some combination of these factors usually leads these companies toward a captive acquisition. And these acquisitions generally come at a lower price than they would versus going public or being sold to a larger competitor.
This was likely the case with Favor and HEB, and for Plated when it was acquired by Albertsons Safeway. It was certainly the case with Jet when it was acquired by Walmart and it is likely the case now with Boxed. They are growing a decent business, which is reportedly the size of two or three good Wegmans stores. But I wonder how big it can really become as a standalone business. PrimePantry is a nice service, but it’s not a major driver of Amazon’s volume. And how hard would it be for Costco, Kroger or any of a number of large retailers to replicate the Boxed model? And all of these retailers have far more customer data from which to start.
It’s not that I don’t believe there is a role for boxed, parcel-delivered goods to the home. There most certainly is. But, done right, this service should be layered into a retailer’s overall offering across stores, e-commerce, pickup and delivery.
KC: Finally, I’d love to hear your impressions of Amazon Go - both in terms of its expandability and the impact the whole concept of checkout-free shopping will have on shoppers and retail.
TF: I think Amazon Go is an amazing project. I call it a project because it’s not completely clear to me where it can lead. It could become a format in itself. The tech can support any number of small formats and I could certainly see it expanded to larger formats. One thing that’s for certain, it absolutely shatters the paradigm of the traditional check out process. It is a joy to shop there.
In its current form, Amazon Go is the ultimate “grab and go” format. Within a minute or two you’re in and out of the store with a few items for near-term consumption, or the essentials for tonight’s meal including protein, or maybe a boxed kit and wine. You are completely unconcerned with price, although the pricing is very good. You are in and out so effortlessly that you emotionally thank Amazon for making your life easier.
Amazon is solving one of the prickliest pain points of retail – the checkout line. As they say, they are innovating on the customer’s behalf. Amazon has heard that customers don’t like to wait in checkout lines. In service to them, they have spent a number of years and millions of dollars to solve their problem. While they will continue to experiment, and we don’t know if the format is economically sustainable long term, we do know that Amazon is showing customers that they come first.
The Conversation will continue…
- KC's View: