business news in context, analysis with attitude

Published on: May 30, 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 focus on the clicking clock facing retailers, and why retailers cannot afford to be complacent or take their time in addressing the need to innovate.

And now, the Conversation continues…

KC: Well, there have been a number of interesting developments sine our last Innovation Conversation, so let’s get to it.  When Kroger invested in Ocado to the tune of $250 million we did a brief “Innovation Chat,” and you said that it was an opportunity for Kroger, though not a move that addressed a glaring weakness.

I’ve talked to other retailers who said that they’re not wildly concerned, since it will take some time for Kroger to integrate Ocado’s technology into its own operations to any meaningful extent … though it seems to me that they have to be careful not to be too complacent.  After all, while this may not be revolutionary all by itself, the whole may be larger than the sum of the parts, especially if Kroger can use robotics not just as a way of driving down labor costs, but also in the end to be more responsive to what customers need and want.  Anything that makes retailers more responsive is a good thing is the bottom line for me, but they can’t take forever.

Tom Furphy: Any Grocery retailer trying to develop a broad e-commerce offering faces cost-to-serve challenges. For the most part, picking off store shelves is not sustainable economically in today’s model. By the time the product gets to the store shelf, it has incurred most of its costs except for front-end handling and the bag. We all know traditional industry net profit margins are in the low single digits, so that leaves very little room to cover the incremental cost of picking, packing and delivering the product.

This means that any retailer trying to win in e-commerce must be willing to rethink their model. This ultimately goes all the way back through the manufacturer to production, packaging, trade terms and distribution. But that’s a topic for a different time. However, retailers can solely control the model from the time it lands on their warehouse receiving dock through to conveying the product to the customer. So, it is critical that they focus here.

An e-commerce model consists of two main components – demand generation and fulfillment. Demand generation encompasses things such as the website, digital marketing, apps, IoT, auto-replenishment, etc. These are the innovative ways that shoppers can put products into their basket and direct them toward the home. Fulfillment covers all of the elements of the model required to get the products into customers’ hands. These include click & collect, local delivery, parcel delivery, on-demand delivery, etc.

The jury is still out on which service configurations will best serve customers. Amazon has made it clear that they are innovating aggressively in this area with their efforts in merging Fresh and Prime Now and other experiments they will take on within the Whole Foods platform. Likewise, everyone else in the space will need to invest, test and learn as they go.

While Kroger’s deal with Ocado doesn’t address a glaring weakness in Kroger’s model, it does address an important challenge in the overall service model. Getting products into totes to either be delivered to homes or picked up by customers is expensive. And as we said, doing that out of stores is a very difficult proposition. Ocado’s automated facilities dramatically lower the cost of getting products into totes quickly. How that ultimately fits into the service model will be up to Kroger to test and configure. But having an exclusive deal, effectively their own lab for experimentation, puts them in a very good place competitively to figure it out and better serve their customers.

I don’t think that other retailers have the luxury of sitting back and taking their time. The space is developing quickly and the most innovative and agile companies stand the best chance to win. Sure, it will take Kroger a while to get the first facilities online. And before, during and after that, Kroger will continue to perfect their model in many ways. Any competitive capabilities other retailers develop will take some time, too. As you say, Kevin, “compete” is a verb. This is not a time to be watching from the sidelines.

KC: We’d hardly finished covering the Kroger-Ocado deal when Kroger then decided to acquire Home Chef, the nation’s third largest meal kit business, for another $250 million (though that number could go to $700 million if Home Chef meets certain benchmarks).  Albertsons already owns Plated, and then Blue Apron’s stock price actually started to go up, which it hadn’t for quite some time.

I’ve been fascinated with the degree to which companies are looking for some entry into the meal kit business - Amazon is doing its own, Walmart is doing its own, Costco is selling Blue Apron kits, and last week I noticed that a relatively small, regional player named Roche Bros. is doing its own meal kits.  But I also wonder if this flurry of activity points to what strikes me as being a likely scenario - that we’re going to see a lot of acquisitions or mergers or alliances in the coming months, as retailers of all sizes realize that they can’t stand pat with the cards they’re holding, and that the clock is ticking.

TF: The idea of a well-executed meal kit program makes sense for many households. Whether foodies trying to expand their repertoire or busy moms trying to get a solid meal on the table within time constraints or any other life situation that makes putting a meal on the table challenging, meal kits can certainly serve a purpose. However, most of these models have struggled to thrive on their own.

The common challenges with standalone models has been around cost-to-serve and customer subscription breakage. Product, production and distribution costs can be challenging in any food service environment. When you add the complexities of this business, including those of quality assurance, packaging and fulfillment, it requires a high degree of precision to be successful. Also, in subscription models, it’s important to continue to provide compelling value and good service to keep customers. That really raises the bar.

Grocery retailers are particularly well positioned to play in this market. Simply from an engagement and distribution standpoint, they have large customer bases with tremendous foot traffic and web traffic. They can put these kits in front of shoppers on line and in the store. And they can also get them into customers’ hands effectively, without all the traditional parcel packaging and delivery costs. And they don’t necessarily need to require a subscription.

Further, many Grocery retailers have advanced culinary capabilities and can take some of the production and quality burden off these models. Integrating production into existing central facilities and/or stores can lower costs and drive quality. As shoppers make meal time decisions, either in real time or in advance, having fresh ingredients, meal kits and prepared meal options to choose from is the best customer experience. I think customers will grow to expect this range of solutions from their favorite stores.

I think the recent flurry of partnership and acquisition activity indicates that we’re seeing retailers starting to embrace the ecosystem approach to the market. There are certain core capabilities that are important to retailers, which they should develop or acquire. And there are other capabilities that can be partnered with and woven into the service offering. Regardless, it’s up to the retailer to own their customer experience, deliver great value and make sure their customers give them emotional credit for solving their needs.

The Innovation Conversation will continue…

Published on: May 30, 2018

by Kevin Coupe

The Boston Globe reports on the latest workout trend that seems to be gaining some traction, especially among young professionals.

Pot.

Here’s how the Globe frames the trend:

“As marijuana legalization has pushed the drug further toward the mainstream — and a longstanding social stigma has begun to dissipate — more individuals are toking up before hitting the weight room, sports field, or mixed martial arts mat.

“Sometimes dubbed ‘cannathletes,’ those who regularly supplement a workout with some form of marijuana laud the benefits of the combination, claiming everything from improved focus and relaxation to help in recovery and pain management.

“While the idea might seem inherently counterintuitive — weed, after all, is a substance more commonly paired with Doritos than dead lifts — there is a passionate contingent that swears by it … Unlike traditional pre-workout supplements — the caffeine and energy drinks designed to provide a jolt while exercising — cannabis has effects, say those who use it, that are largely psychological. Proponents say that the drug gives them focus they otherwise can’t achieve, that it breaks up the monotony of a long run, or that it makes them more mentally nimble.”

I bring this up not because I’m endorsing or even suggesting it … though I have to admit that I’m intrigued by by the notion that maybe it would help me deal with aching 63-year-old knees when I’m out for a run. No, I’m mentioning it because, whether or not I agree with it, the legal pot business is changing the retail landscape to an Eye-Opening degree, and I see little evidence of that slowing down.

And I wonder when we’re going to see traditional retailers get into the business.

Published on: May 30, 2018

Albertsons said yesterday that it is partnering with Genomind to offer shoppers counseling and access to genetic testing that will allow them to make more informed treatment choices.

The service will be offered at 21 Sav-On pharmacies at Albertsons in Boise, Idaho and nearby communities; five Jewel-Osco pharmacies at Jewel-Osco in the Chicago area; and two Sav-On pharmacies at Acme in the Philadelphia area.

According to the announcement, “At the select locations, specially trained pharmacists may decide to counsel a patient if they see a pattern of the patient having unsuccessful experiences with a medicine prescribed for depression, anxiety, obsessive-compulsive disorder or other mental illnesses. For instance, up to half of all patients respond poorly to the first psychiatric medicine they try because everyone's body is different, partially based upon on their individual genetic makeup.

“The pharmacist, if the patient agrees, would then contact the treating clinician and suggest the Genecept Assay. The Assay identifies patient-specific genetic markers that indicate which treatments are likely to work as intended, have no effect or cause adverse effects. The pharmacist would be able to administer the test in a private area of the pharmacy; it involves collecting a small amount of saliva from the patient's mouth with a cheek swab.

“The pharmacist would review the results of the genetic test with the patient after it's returned from Genomind's CLIA-certified lab. The clinician also would receive the test and could use it to help guide treatment decisions.”

Published on: May 30, 2018

Amazon announced this morning that it is extending Prime member savings to 121 Whole Foods stores in 12 states, plus all nine of the 365 by Whole Foods stores nationwide.

With the expansion, Amazon says, “These savings are currently available at Whole Foods Market stores in Arkansas, Colorado, Florida, Idaho, Kansas, Kansas City, Missouri, Louisiana, New Mexico, northern Nevada, northern California, Oklahoma, Texas, and Utah.”

According to Amazon, “Prime members will receive an additional 10 percent off sale items, typically hundreds of products throughout the store, plus exclusive weekly deep discounts on select popular items … Prime member deals will be prominently featured in store. Customers can also go to the Whole Foods Market app to learn about many of the best offers … To start saving, customers can download the Whole Foods Market app, sign in with their Amazon account and then scan the app’s Prime Code at checkout. Or, customers can opt in to use their mobile phone number to save at checkout.”

Published on: May 30, 2018

The Washington Post reports that “as Walmart aggressively buys upscale niche brands, analysts say it’s facing an uphill battle to win over younger, more affluent shoppers across the country. Although traffic at Walmart.com is growing rapidly — 34 percent since last year — the company’s forays into higher-end online brands have been less successful.”

Bonobos’ website traffic is down 12 percent in the past year, while Moosejaw’s is down seven percent and ModCloth’s is down eight percent.

The story notes that “analysts say well-to-do 20- and 30-somethings in large cities also tend to be sensitive to Walmart’s business practices. The company has long been a target of labor advocacy groups who say its low wages push some workers to turn to food stamps and other public programs to make ends meet.”

In fact, the Post points out, “last year, Walmart rolled back its health coverage for workers at Bonobos, ModCloth and other acquisitions, resulting in higher out-of-pocket premiums and deductibles for workers,” though Walmart says that “it has added some benefits for Bonobos workers, including a 401(k) match and financial assistance for adoption and foster care.”

But the problem seems to persist for Walmart - some of the very consumers it was hoping to attract by purchasing brands with broader appeal may not want to buy those brands once they’re owned by Walmart.

Published on: May 30, 2018

The Internet of Business reports that Unilever-owned ice cream retailer Ben & Jerry’s is teaming with the Poseidon Foundation to create what is being billed as the “world’s first retail platform that connects consumers to their own carbon footprints.”

According to the story, the “platform uses blockchain technology to integrate carbon markets into transactions at the point of sale, giving retailers and their customers the opportunity to support climate change action via conservation projects when they buy or sell goods … The technology allows both sellers and buyers to make each purchase/sale climate neutral or positive, by embedding the item’s carbon footprint into the deal, offering Poseidon users the opportunity to offset it, while enabling them to track the impact of any carbon credits they purchase on conservation projects.”

The story goes on to explain how the pilot program works: “A retailer’s point of sale system reveals the carbon impact of each product. On purchase, this is then added to the customer’s bill as an optional item. When the shopper pays for the good(s) with a credit or debit card, the Poseidon back end matches the details with that person’s profile, buys Poseidon’s native tokens on their behalf, and acquires the equivalent offset in the form of carbon credits. These are added to the customer’s profile, and the blockchain is updated with all the transaction details … The aim is to transform people’s relationship with their carbon footprints, encouraging behaviour change, and using the growth potential of carbon markets to address environmental challenges directly.”

Published on: May 30, 2018

CNBC writes that resurgent electronics retailer Best Buy sees the senior citizen health care business as place of opportunity, with CEO Hubert Joly telling investors this week that “we already assort a variety of health-related products and technology products designed for seniors like specially designed phones and medical alert systems. We’re also testing a service called Assured Living to help the aging population stay healthy at home with assistance from technology products and services.”

Joly said that “one of the things we've talked about is how technology can help people stay in their home for longer and there's a lot of excitement around helping people do that,” adding that technology "improves people's health and wellness and reduce[s] health care costs for the country.”

The strategic goal, Best Buy says, is to address "key human needs in areas such as entertainment, productivity, communication, food preparation, security, and health and wellness.”

Published on: May 30, 2018

The Washington Post reports on how one Sacramento, California, Chick-fil-A owner is increasing hourly wages at his restaurant “to $17 to $18 from the $12 to $13 he pays now.” The move comes some four years ahead of a scheduled minimum wage increase in California to $15 per hour.

According to the story, “The sizable raise represents a possible new high-water mark for fast-food workers, say restaurant industry analysts, at a time when competition for even unskilled labor is rising amid low unemployment, greater immigration scrutiny and fewer teenagers seeking to work in fast-food jobs. While analysts can't say whether a $17 to $18 hourly wage is the highest in the country for front-line fast-food workers, it certainly appears to be among the higher ones.”

Eric Mason, the owner, refers to the increased pay as “a living wage,” and says that “as the owner, I'm looking at it big-picture and long-term. What that does for the business is provide consistency, someone that has relationships with our guests, and it's going to be building a long-term culture.”

The Post story notes that “many restaurant chains also operate on even tighter margins, making it harder to raise wages without raising prices for consumers or cutting into profitability. But the high cost of turnover in the restaurant business — the turnover rate in the restaurants and accommodations sector was 73 percent in 2016, according to Bureau of Labor Statistics data — could mean a raise is canceled out by savings in retraining and hiring new workers.”

Published on: May 30, 2018

USA Today this morning reports that ESL Investments, the hedge fund controlled by Sears Holdings CEO Edward Lampert, has said that “it had received ‘numerous’ inquiries from potential partners,” and has asked the retailer’s board of directors “for permission to ‘engage with’ potential partners "to allow us to put forward a definitive proposal that will result in the most benefit to Sears.”

According to the story, “The special committee previously placed limits on ESL working with partners as the hedge fund explores the potential purchase of Sears' real estate, Kenmore brand and other assets.” ESL, in fact, is said to be negotiating to acquire Kenmore - Sears’ longtime private label appliance brand - from Sears; Lampert has urged the company’s board to sell Kenmore, as well as its parts and home services businesses, in the same way that Sears sold its Craftsman tool brand last year to Stanley Black & Decker for $900 million.

Published on: May 30, 2018

• USA Today reports that global brand consultancy BrandZ estimates that Google, with a brand value of $302 billion, has passed Apple (at $301 billion) to become the world’s most valuable brand. Amazon comes in third, at $208 billion, with Microsoft fourth at $201 billion. China’s Tencent’s brand valuation was estimated to be $179 billion, followed by Facebook at $162 billion.

The highest ranked non-tech company on the list is Visa, seventh at $146 billion, followed by McDonald’s at $126 billion.


• In Minnesota, the Star Tribune reports that Target is introducing three new private label brands in an effort to appeal to teenagers and young adults.

One of them, Heyday, “will include playful cell phone cases, headphones, speakers and more, most of which will be under $20. The line will hit stores and Target.com next month.

“In addition, two new clothing brands will debut in August. Wild Fable will offer young women trendy apparel and accessories to mix and match and will come in a wide range of sizes from 0 to 26W. Meanwhile, Original Use for young men will have a street-style aesthetic and will also be available in big and tall sizes.”

Published on: May 30, 2018

Yesterday, as Starbucks closed some 8,000 of its owned-and-operated US stores to engage in racial bias training for the majority pf its employees, a response to the incident in Philadelphia last month when a white store manager called the police on two black men waiting for a friend to arrive before ordering.

As the stores prepared to close, Starbucks chairman Howard Schultz sent out an email to customers that, I thought, did exactly the right thing in explaining the rationale for the closure and the company’s goals. I want to share it here, because it tells a story - in real-time, effectively, that makes the Starbucks brand about more than coffee.

That’s always been Schultz’s goal. Sometimes he hits, and sometimes he misses.

This one’s a hit:

An Open Letter To Starbucks Customers:

This afternoon Starbucks will close more than 8,000 stores and begin a new chapter in our history.

In 1983 I took my first trip to Italy. As I walked the streets of Milan, I saw cafés and espresso bars on every street. When I ventured inside I experienced something powerful: a sense of community and human connection.

I returned home determined to create a similar experience in America—a new ’third place’ between home and work—and build a different kind of company. I wanted our stores to be comfortable, safe spaces where everyone had the opportunity to enjoy a coffee, sit, read, write, host a meeting, date, debate, discuss or just relax.

Today 100 million customers enter Starbucks® stores each week. In an ever–changing society, we still aspire to be a place where everyone feels welcome.

Sometimes, however, we fall short, disappointing ourselves and all of you.

Recently, a Starbucks manager in Philadelphia called the police a few minutes after two black men arrived at a store and sat waiting for a friend. They had not yet purchased anything when the police were called. After police arrived they arrested the two men. The situation was reprehensible and does not represent our company’s mission and enduring values.

After investigating what happened, we determined that insufficient support and training, a company policy that defined customers as paying patrons - versus anyone who enters a store - and bias led to the decision to call the police. Our ceo, Kevin Johnson, met with the two men to express our deepest apologies, reconcile and commit to ongoing actions to reaffirm our guiding principles.

The incident has prompted us to reflect more deeply on all forms of bias, the role of our stores in communities and our responsibility to ensure that nothing like this happens again at Starbucks. The reflection has led to a long–term commitment to reform systemwide policies, while elevating inclusion and equity in all we do.

Today we take another step to ensure we live up to our mission:

FOR SEVERAL HOURS THIS AFTERNOON, STARBUCKS WILL CLOSE STORES AND OFFICES TO DISCUSS HOW TO MAKE STARBUCKS A PLACE WHERE ALL PEOPLE FEEL WELCOME.

What will we be doing? More than 175,000 Starbucks partners (that’s what we call our employees) will be sharing life experiences, hearing from others, listening to experts, reflecting on the realities of bias in our society and talking about how all of us create public spaces where everyone feels like they belong—because they do. This conversation will continue at our company and become part of how we train all of our partners.

Discussing racism and discrimination is not easy, and various people have helped us create a learning experience that we hope will be educational, participatory and make us a better company. We want this to be an open and honest conversation starting with our partners. We will also make the curriculum available to the public.

To our Starbucks partners: I want to thank you for your participation today and for the wonderful work you do every day to make Starbucks a third place for millions of customers.

To our customers: I want to thank you for your patience and support as we renew our promise to make Starbucks what I envisioned it could be nearly 40 years ago—an inclusive gathering place for all.

We’ll see you tomorrow.

With deep respect,

Howard

Published on: May 30, 2018

Another perspective on the truck driver shortage, from an MNB reader:

 My husband has been a driver for just short of 20 years and on Thursday will be parking the truck for the last time to leave the field.  With the new regulations, he has taken a 25% pay cut  (on a good week) – making about 70K a year now – not a shabby amount at all.  But, that 70K is having him gone from home 6 nights a week, working crazy hours to ‘make the clock work’ and avoid sitting in traffic for hours on end hoping that he can make it to the next stop before the clock runs out.  The price increases are going to happen, as more truckers are leaving the industry because the money that they do make is not enough to warrant working nights, weekends and being at the mercy of loading dock staff to get him in and out in a reasonable amount of time.  The replacement drivers are working cheaper, but companies are having to put more trucks on the road to move the same amount of product, hence the price increase at retail.  The loser here is ultimately the consumers who are paying more in store.




Yesterday, we took note of a Food & Wine report that Amazon-owned Whole Foods “is delaying a policy that would have required its suppliers to label genetically modified organism (GMO)-containing products on its store shelves by September of this year,” a policy that was announced five years ago.

According to the story, “Whole Foods cites upcoming U. S. Department of Agriculture standards as the reason behind the change and has not yet provided a new deadline.” The retailer told suppliers in a letter that it “wishes to avoid any undue additional costs or challenges to food manufacturers based on the USDA's guidelines.”

I commented:

Interesting. I wonder if there will be some who will argue that this represents less of a commitment to the GMO issue on Whole Foods’ part since it was acquired by Amazon. At first glance, it may be argued that Whole Foods is following rather than leading.

I think it may actually be more interesting that Amazon/Whole Foods is casting this as a pro-vendor position, especially since there are considerable tensions between the retailer and many of its suppliers these days. This may be something of an olive branch.

One MNB reader responded:

It’s no olive branch - not with Amazon at the helm.

From another reader:

Over promises and under delivers.

And I'll add when I traveled on business years ago I would always seek out a WFM for their food bars and of late it's clearly evident they have lost their edge and have mass produced their foods to such a degree it's unappealing at this point.

So again, over promised and under delivered!

And from another:

Olive branch...too little too late for food manufacturers. In order to meet an on-shelf deadline of September 1, food manufacturers have all but made the change within their supply chains. Think of how long it takes for new labels to be created and printed, labels sent to manufacturing facilities and inventory produced, sent to warehouses, shipped to Whole Foods/UNFI, etc. New ingredients potentially having to be sourced, or existing ingredients approved through non-GMO Project verification. All this work would have already been done to meet the requirement, so for Whole Foods to push this requirement out to an unspecified date, 3 months prior to Go-Live is being blind to all the work they made happen behind the scenes at their suppliers...and are I say, very Wal-Mart-esque of them...demanding things be done regardless of what it takes to make it happen. I'm not blind to the fact WFM made this requirement announcement 5 years ago, so shame on the companies waiting until the 11th hour, they should have had their ducks in a row years ago. But for companies who are constantly providing WFM with new innovations items or small start-up companies who are running thin teams and hustling, this is a lot of undue burden.