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    Published on: June 13, 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 existential threats to traditional grocers, value propositions that can bolster so-called traditional retailers, and the ineffectiveness of whining.

    And now, the Conversation continues…


    KC: There was a day recently that I thought was emblematic of all the changes taking place in the retail space right now … it seemed like almost every story on MNB reflected existential change at some level.  For example, we had Target expanding its small urban format stores, which also can be used as delivery depots, and it is happening at the same time as it is expanding its Shipt delivery service.  We had Nordstrom expanding its Nordstrom Local concierge-driven concept, which essentially is a clothing store without clothes.  And then we had former JC Penney CEO Mike Ullman - who has since been named the new chairman of Starbucks - suggesting that projections from some quarters that roughly 25 percent of the nation’s 1,200 malls are likely to close are all wrong, and that he thinks only 25 percent are likely to survive.

    I’d never argue that bricks-and-mortar is dead, but these kinds of stories certainly point to enormous and fundamental shifts, no?

    Tom Furphy:
    We are absolutely in the midst of a significant fundamental shift. Retail has essentially always been about solving problems. Those retailers that solve customers’ problems the best, with a winning combination of service, price and convenience win. The retail model has always been dictated by the tools available to retailers and their shoppers.

    In the last hundred years it has evolved from small stores with little advertising media, to large format stores with mass media and efficient supply chains to now more digitally-enabled, personalized models with a variety of in-store services and delivery or pickup options.

    Retailers are getting better at experimenting with and embracing technology. I think we are seeing more examples of progressive, customer-centric retailers making significant modifications to their go-to-market models to serve the changing consumer. I don’t think that signals in any way that stores are dead. But I do think the fundamental role of the store is changing. And good retailers recognize that.

    Stores whose value proposition is solely to serve as inventory access-points for shoppers are going to be increasingly challenged by stores that provide deeper value. Shoppers have access to large, personalized assortments online. Having their purchases delivered to their homes or staged for pickup eliminates the mundane tasks of shopping. This opens up time for the shopper to spend on richer experiences and it enables stores to be used increasingly in value-added ways. Discovery, information and sensory experiences will become even more important. Stores that deliver on this will not go away.

    As far as malls go, I have no idea how many will survive. It seems to me that, similar to individual stores, the malls that will do well into the future are the ones that provide value beyond aggregation of products or stores into one place. I’m pretty sure the malls that don’t make any changes will die. It’s ultimately up to the mall owners and operators to determine how they re-invent themselves and provide new types of value to shoppers.

    KC: Another story that ran that same day was about how former Walmart CEO Bill Simon “slammed Amazon” on CNBC “for using cloud and ad revenues to support what he called meager retail profits.”  He argued that Amazon has achieved “traction and profitability” with businesses that have nothing to do with retail, and positioned Walmart as somehow superior because it built retail market share the old-fashioned way.  This struck me as a shining example of not understanding how to succeed in modern retail, and a little bit of sour grapes.  (One MNB reader wrote in to point out that if regulators had allowed Walmart to get into the banking business, that’s exactly what it would’ve done.  But it didn’t, so they couldn’t.)

    Knocking the other company’s (entirely legal and very smart) business model gets you nowhere (except maybe being mocked on MNB);  you actually have to compete and figure out a better way, or at least a more effective way, to do things that other retailers aren’t doing.

    TF:
    It's amazing to me how the cynics point to Amazon’s multi-faceted business model as somehow being unfair. Over the past two decades there have been fundamental shifts in underlying business infrastructure, driven by digitization. It is this core shift that Amazon has capitalized upon as a first-mover, agile competitor. They have simply configured a business model to best serve the shopper as they want to be served. And I’d say that it has certainly gained traction!

    Jeff’s original vision that the internet could open limitless selection based upon the elimination of shelves was powerful. Enabling a massive selection, ultimately across many categories is the force that underlies the entire business. Shifting from a store-based cost structure to a technology and fulfillment based cost structure is not unfair, it’s innovative. It’s a new way to serve shoppers, which matches up perfectly to their general shift to digital. And then defraying the costs of those capabilities via AWS for technology and FBA for fulfillment is brilliant.

    Additionally, Prime is arguably the best loyalty program in retail. Kudos to Amazon for constantly adding services and benefits to increase the value. Solving a range of needs and wants is good customer service. How is this all somehow predatory or unfair?Incumbent retailers could have done many of the same things that Amazon has.

    Glen Terbeek, industry veteran and author of “Agentry Agenda,” was preaching this to the grocery industry back in the late 90s. But nobody listened. Starting with stores and an existing cost structure does put incumbent retailers at a disadvantage. Perhaps capitalization challenges would have throttled the amount of innovation they could introduce at any one time. But that doesn’t mean they should have dragged their feet up until the last few years. Standing a higher ground and accusing Amazon of “cheating” is a fool’s game.

    KC: Finally, there was a pair of stories that I found interesting and a little ironic.  One was about how suddenly the independent bookstore sector and Barnes & Noble are seeing each other as kindred spirits, despite the fact that not that long ago they were bitter rivals, mostly because Amazon is hurting both sectors.  (“The enemy of my enemy is my friend.”)  Of course, at the same time, on the same day, Amazon announced the opening of three more Amazon Books stores, reflecting additional investment in the bricks-and-mortar segment.  The battle goes on, even with some shifting loyalties…

    TF:
    A constant in these disruptive times is that Amazon will continually innovate on behalf of their customers and will always experiment to evolve the model. They tend to not focus a whole lot on competition. They are mindful of competition, but they are obsessed with customers. This makes them a force that constantly raises the bar for competitors.

    I would not be surprised to see even more collaboration between traditionally competitive retailers in the coming quarters and years. Just as Amazon and Best Buy have recently teamed up, there will likely be many opportunities for retailers and external partners of complementary strengths banding together to serve the shopper. This ecosystem approach to the market is totally reasonable today, especially if it can enable retailers to be more agile and to serve their customers more effectively.

    That said, I do think retailers need to approach partnerships with a clear purpose and value proposition. As they further rely on others to deliver value, they need to make sure they receive proper emotional credit from their customers. This will keep them in favor and keep customers coming back for more.

    The Conversation will continue…

    KC's View:

    Published on: June 13, 2018

    by Kevin Coupe

    Fox News reports that fore the time being, every In-N-Out location in Texas - all 37 of them - have been closed. If you want a Double Double, Animal Style or a chocolate shake, you have to go elsewhere.

    The closures aren’t permanent. In fact, they hope to have the units open today.

    It all depends on getting a shipment of hamburger buns that the company feels are up to its standards.

    That’s right. In-N-Out was dissatisfied with the quality of buns that it got - we are assured that it was a quality issue and not a food safety problem - so it decided that it would rather close than serve up burgers on sub-standard buns.

    Here’s the company statement: “At In-N-Out Burgers, we have always served the highest quality food with no compromise. We recently discovered that our buns in Texas do not meet the quality standards that we demand. There was and are no food safety concerns. We decided to close all of our Texas stores until we are confident that we can serve our normal high quality bun … We apologize for any inconvenience this closure may cause for our customers.”

    Wow. Can you imagine? In-N-Out may lose money because of the closures, but the brand equity it gains - this clearly is a customer-focused statement, strategy and culture - is enormous. Priceless, you might say.

    And an Eye-Opener.
    KC's View:

    Published on: June 13, 2018

    The National Grocers Association (NGA) is out with its annual Independent Grocers Financial Survey, conducted with FMS Solutions Holdings, showing that “independent grocers’ same store sales were down 0.6 percent compared to the previous year. Despite the decline, it is an improvement over last year’s results, which showed a 1.62 percent decrease in same store sales.”

    The survey goes on: “Despite a growing number of competitive formats, independent grocers’ margins were slightly ahead of where they were a year ago. Additionally, 71% of the respondents indicated that they are more optimistic about their business’ future.”

    One explanation: “In fiscal year 2017, food at home price deflation continued to be a drain on sales. Average food at home prices were 0.2 percent lower than they were a year prior according to the Bureau of Labor Statistics. Deflation was especially drastic toward the beginning of the year, however by December, monthly food at home prices began to show improvement.”

    “There’s no doubt that the supermarket industry is changing at a rapid pace,” says Peter Larkin, president/CEO of NGA. “However, independent grocers have faced industry shifts and challenges in the past and have proven resilient. They are the entrepreneurs of the industry, and have the ability to experiment and adjust as needed to meet their shoppers’ needs.”
    KC's View:
    Seems appropriate here to refer you back to something Tom Furphy said in today’s Innovation Conversation…

    Stores whose value proposition is solely to serve as inventory access-points for shoppers are going to be increasingly challenged by stores that provide deeper value. Shoppers have access to large, personalized assortments online. Having their purchases delivered to their homes or staged for pickup eliminates the mundane tasks of shopping. This opens up time for the shopper to spend on richer experiences and it enables stores to be used increasingly in value-added ways. Discovery, information and sensory experiences will become even more important. Stores that deliver on this will not go away.

    What was resilient in the past may be insufficient in the present. Independent retailers - especially those that may be undercapitalized, because being small and independent can have its drawbacks - have to be not just experimental, but also ambitious, aggressive and innovative in finding new paths to relevance and resonance.

    Published on: June 13, 2018

    Albertsons-owned Tom Thumb is opening its first convenience store, the Dallas Morning News reports, a “2,500-square-foot store, about the size of a 7-Eleven … with six gasoline pumps out front and some expected quick-stop basics like coffee, Freal milkshake and smoothie machine and an ICEE maker. The store will also sell fresh items from a nearby Tom Thumb supermarket: sandwiches, salads, cut fruit and hot foods ready to take home.”

    The story says that the c-store is being opened to stake out some competitive territory, just east of downtown Dallas, while it waits for a new full-sized store to be completed late next year.
    KC's View:
    Smart move … competitive format flexibility has to be a core value if one wants to survive the increasingly hot retail inferno.

    Published on: June 13, 2018

    CNBC reports that Sears is expanding its relationship with Amazon, growing the number of Auto Centers that will install car tires bought on Amazon from 71 to 118.

    The story quotes Mike McCarthy, vice president and general manager of Sears Automotive, as saying that "Amazon customer reviews have been very positive and we are two months ahead of schedule," and that “customers are also ‘taking advantage’ of additional services, like oil changes, when they come to Sears to get their tires installed.”
    KC's View:
    This isn’t a relationship. It is a lifeline…and I continue to believe that it presages a move that Amazon could make to take greater ownership of the auto center business. Let’s not forget that Sears Holdings is closing stores, selling off brands, and trying to persuade people - mostly unsuccessfully - that it has some sort of plan for retail survival.

    Published on: June 13, 2018

    The Wall Street Journal reports that Home Depot “plans to spend $1.2 billion over the next five years to speed up delivery of goods to homes and job sites as the rise of online shopping resets consumer expectations.” The plan is to “add 170 distribution facilities across the U.S. so that it can reach 90% of the U.S. population in one day or less … . The new sites will include dozens of direct fulfillment centers for next-day or same-day delivery of commonly ordered products, as well as 100 local hubs where bulky items like patio furniture and appliances will be consolidated for direct shipment to customers.”

    Mark Holifield, Home Depot’s executive vice president of supply chain and product development, says that “the retailer is realigning its supply chain to a changing retail landscape. Customers ‘expect delivery to be free, they expect it to be timely … Sometimes they want it fast, and are willing to pay for that. Sometimes they want it free, and they’re willing to wait for it. We need to have the right options there’.”

    The Journal writes that “online orders accounted for 6.7% of the retailer’s $100.9 billion in sales last year, but the digital revenues expanded 21% from the year before. About 45% of online orders are picked up inside stores, and the company is rolling out self-service lockers at the front of some stores to speed up order retrieval.”
    KC's View:

    Published on: June 13, 2018

    The Wall Street Journal reports that Marc Lore, who runs Walmart’s e-commerce business in the US, has just acquired an 8,569-square-foot New York City penthouse in Manhattan’s Tribeca neighborhood for $43.79 million.

    The apartment reportedly has “rustic wood beams, five bedrooms and its own private outdoor pool.” The building, which also is home to actress Jennifer Lawrence, has “a 71-foot indoor swimming pool, a children’s playroom, a roof terrace, a fitness center and a temperature controlled wine cellar. There is a parking lot beneath the building with electric charging stations.”

    Lore is said to have bought the apartment through a limited liability company.

    The Journal describes Lore as a “serial entrepreneur,” saying that he “founded Diapers.com in 2005, which he sold to Amazon in 2010 for $545 million. He also founded of Jet.com, an ecommerce site that was purchased by Walmart for about $3.3 billion in 2016. Since taking on the role of president and CEO of Walmart’s e-commerce division in 2016, Mr. Lore, 47, has spearheaded the acquisition of several companies, including clothing retailers Bonobos and ModCloth. He also launched an in-house startup incubator at the retail giant.”
    KC's View:
    I normally don’t report on these sorts of things, because I figure that people who have earned this sort of money ought to be able to spend it as they see fit; the apartment sounds great.

    It’s just that when I read it, I thought about Sam Walton’s Ford F-150 Custom truck, which he bought new in 1979 and drove until he passed away in 1992 as one of the richest and most successful people in the country. (It’s now in the Walmart Museum, in Bentonville, Arkansas.) And I thought about how far Walmart has come and how much it has changed since those days.

    Some would argue that Walmart has moved too far from its roots. Some would argue that it has moved to keep pace with competitors and stay relevant to shoppers. I just keep thinking that 443 Greenwich Street in New York City is a long way from 105 N. Main Street in Bentonville.

    Published on: June 13, 2018

    A new study funded by the Food Marketing Institute (FMI) and the Grocery Manufacturers Association (GMA) says that “more than 7 in 10 shoppers want to find out more about the grocery products they buy than they are currently able to get with traditional on-package labels … These shoppers want to go beyond the ingredients listed on the label to get information on what the ingredients do and why they are in the product.”

    The survey results, the organizations say, support :”the importance of a new digital tool – known as SmartLabel – that enables consumers to get easy access to this extra, detailed information about the products they use and consume … SmartLabel gives consumers access to more product information than could ever fit on a traditional package label. Consumers can find out not only what ingredients are included in products, but also why those ingredients are in the product, what they do, and even where they come from. SmartLabel can include detailed descriptions on allergens, usage instructions, information about how the product was produced, how animals were treated during the development process, or the product’s environmental impact.”

    The report says that “nearly 28,000 food, beverage, personal care, household and other products throughout food retail stores are now using SmartLabel.”
    KC's View:
    Transparency wins … because transparency is consumer-centric. That’s been the gospel according to MNB for a long, long time.

    Published on: June 13, 2018

    • Supervalu said yesterday that it is reorganizing its corporate structure in what it calls an effort to “facilitate strategic transformation, among other benefits to stockholders.”

    SuperValu president/CEO Mark Gross said in a prepared statement: “The proposed holding company structure is another significant and important undertaking by our team that would support and advance our transformation by further separating our wholesale and retail operations in a tax efficient manner.”

    Among the expected benefits, the company says, is the facilitation of a “previously announced strategic transformation plan to sell certain retail assets to third parties,” better segregation of the company’s liabilities “into their respective business segments,” and increasing the company’s “strategic, business and financial flexibility.”


    • The Wall Street Journal reports that “Sears Hometown and Outlet Stores Inc., which was spun off in 2012 by Sears Holdings Corp. , said Friday it plans to close up to 100 of its 882 stores this quarter to reduce costs.” The company announced the closings “while reporting a $9.4 million loss for the first quarter ended May 5.”

    Most of the stores, the Journal notes, “are run by independent dealers and franchisees.”


    • As expected, the Seattle Times reports, the Seattle City Council voted 7-2 to repeal a “head tax” that it passed just last month, charging big employers $275 per employee annually to help fund housing and services for homeless population.

    The tax had been opposed vociferously by major employers, including Amazon and Starbucks, and it was expected that if a repeal was not enacted there would have been a ballot referendum on the issue this November.

    Seattle Mayor Jenny Durkan is expected to sign the repeal into law.
    KC's View:

    Published on: June 13, 2018

    • Kellogg Co. announced that Chris Hood, president of Kellogg Europe, is becoming president of Kellogg North America.

    Hood’s old role will be filled by Dave Lawlor, vice president of Kellogg European Cereal Business.
    KC's View:

    Published on: June 13, 2018

    Yesterday we reported in our Eye-Opener that Disneyland and Disney World have changed the Pirates of the Caribbean ride so that they do not show women being sold off as property.

    I commented, in part:

    The story notes that the changes have been met with mixed reviews, with some decrying how political correctness has affected even amusement park rides.

    I’d have one response to such people: Tough.

    Sometimes political correctness isn’t a bad thing. Sometimes, it is just correct. And, it corrects, or at least addresses, the sins of the past.

    I’m sure that the guys - and they almost certainly were all guys - who created that ride thought the whole auctioning-off-women-as-property thing was funny. There are guys out there who almost certainly still think that it is funny.

    But it isn’t. In 2018, it is indefensible … especially to our sons and daughters, who ought not be taught that such things are humorous or acceptable or appropriate or not worth paying attention to.


    One MNB reader wrote:

    History is supposed to accurately portrays what people used to think and do - not what currently is thought to be politically-incorrect. I think that’s why it’s called “history.”

    Really? You think that “Pirates of the Caribbean” is positioned as a factual depiction - or even reasonable facsimile - of history?

    Give me a break. That’s an utter crock.

    One MNB reader agreed with me:

    It’s easy for people (read: white males) who have not suffered from the stereotypes to find the movement towards being more politically correct inconvenient, but for those of us who have had to deal with it, it’s a welcome change in the tide. It’s not like this is an exhibit in a museum accurately portraying a historical event; it’s a feature at an amusement park for children, which has the burden of responsibly impacting the young minds consuming their content. Cheers to them.

    Exactly.

    Thank you.



    When writing about the Washington, DC, Capital Pride festival yesterday, in which businesses of all kinds reached out to the LGBTQ community, Michael Sansolo wrote:

    It was ironic, by the way, that this festival was being held - and embraced by local businesses - at the end of a week when a Colorado bakery owner went to the US Supreme Court and won the right not to do business with the LGBTQ community.

    One MNB reader wrote:

    What’s “ironic” about that?  This issue in question was the right to CHOOSE whom to do business with.  Nobody’s questioning the right of these companies to choose  to do business with the LGBTQ community.

    The irony is that some companies understand that in an increasingly diversifying world, it is important to value people of all kinds, even if we don’t understand them or approve of their lives. Some don’t, and think that just baking a cake of a gay wedding signifies approval of same-sex marriage.

    The Supreme Court may have said it is constitutional to deny products and services to gay folks under certain, limited circumstances. That doesn’t necessarily make it good business.




    Finally, I wrote yesterday about how IHOP, after stoking speculation via social media about why it would change its name from “IHOP” to “IHOB,” announced that the “B” stood for “burgers,” and that the change was a temporary one that “celebrates the debut of the brand's new Ultimate Steakburgers, a line-up of seven mouth-watering, all-natural burgers.”

    I commented in part:

    I wouldn’t go to IHOP for pancakes. I sure as hell wouldn’t go there for burgers.

    To me, this whole effort strikes me as a tease without a sufficient payoff. The bet here is that while the marketing folks probably thought this was brilliant, it’ll end up being a nothingburger with customers. (IHOP’s Twitter feed is pretty funny, especially if you enjoy people mocking a company for much ado about very little.)


    Some MNB readers though this was a little harsh:

    One wrote:

    My wife and I love IHOP and go there all of the time. We love he food and the service we receive from our local IHOP. We also believe that it is a great idea to add a number of new burgers and we will be going there for them.

    MNB reader Jim Huey wrote:

    IHOP seems to be taking a swing that you laud in other companies. It may well fall flat but aren’t you the one who espouses taking swings?
     
    From another:

    Wow,  your comments were very harsh.

    And another:

    Just because you're not the target segment doesn't mean it didn’t work. Sometimes it's not just about us!

    Ands finally, a knockout blow from MNB reader Tom Hahn:

    Kevin, could you maybe give their burgers a try before slamming them? Wouldn’t that be the prudent thing to do? Aren’t you always advocating for companies to step out of the box and try something different to engage customers? Apparently that only counts if they are a trendy company.

    Your typical elitist POV is showing – if this were Amazon or Starbucks or one of the many companies you have a man-crush on, I suspect we would get plaudits about their marketing acumen. But because it’s IHOP – which must be doing something right to stay in business – we get the typical dribble from you that I’ve come to expect. Out here in flyover country, we appreciate that IHOP offers value for the dollar; it’s all a matter of setting one’s expectations.

    Shame on you for being so uppity.


    First of all, you make an excellent point. Not about “dribble” … though I think you actually meant “drivel.” I may be old, but I’m not dribbling. Much. Yet.

    I think it is a reasonable argument to say that I was too harsh yesterday. Maybe I was a little cranky. Maybe the bad experiences that I remember from past IHOP visits weighed too heavy on my memory. (At the time, the food weighed too heavy on my stomach.)

    Tom suggests that I should actually try one of their burgers before being critical. While I sort of make a living commenting - or driveling - about stuff with which I sometimes have no personal experience, this is a case where I can jump in the pool.

    Which is what I am going to do. Before the week is out, I will seek out an IHOP, order a burger, eat it, and report back.

    And I will do my level best to go in without attitude or predisposition.

    Now, just to be fair, the Boston Globe yesterday posted a review of the new IHOP/IHOB burgers yesterday, which you can read

    here.

    Here’s an excerpt:

    “The patty itself is made of USDA choice Black Angus beef. It is flat, but fatter than the average fast-food patty, greasy within reason, very well done. Even so, it has good beefy flavor. The lettuce is plentiful, the tomato abysmal (crunchy and pale), the flabby, fatty bacon assuredly not worth the $3.50 upcharge. But to the good, there’s American cheese, pickles, and signature IHOP sauce, a pinky-orange condiment reminiscent of other proprietary burger sauces you may have known and loved. It comes with a whole mess of very salty, fairly average fries. It is probably worth $6.99 (for a limited time only) for the classic Steakburger with unlimited fries and a drink. But when there is Five Guys to the left of me, Shake Shack to the right, this is not a good enough burger to bet the brand name on.

    And one other note from the review, which seems especially appropriate considering our Eye-Opener this morning about In-N-Out closing its Texas stores temporarily because bun quality wasn’t up to snuff:

    “It comes on the shiniest bun I have ever seen. It looks wet but it isn’t. I can see my reflection in it.”

    On the other hand, miracles can happen. I got the following email from another MNB reader, who wrote:

    By the way, I tried a MacDonald’s quarter pounder yesterday, fresh meat, not frozen, made when you order it. I never thought I’d say this: It was delicious, juicy tasty etc. What a positive difference!

    Maybe I have to give McDonald’s another try…?
    KC's View: