Published on: November 14, 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, a report from the GroceryShop conference.
And now, the Conversation continues…
KC: I was sorry that I couldn’t make it to GroceryShop this year, but I know you were there and I’m curious about your impressions. One thing that I gathered from my reading was that robotics were front and center, that they seem to be an almost unexpected momentum for this trend, both in stores and distribution centers. My sense is that the robotics revolution addresses a couple of issues - one is just the march of what technology makes possible, and the other is the fast-contracting labor market, which makes robotics a lot more attractive. Of course, there’s also the cost …
So, is this an accurate reading of the robotics trend, based on what you saw? What did you walk away from GroceryShop thinking about this segment of the technology revolution?
Tom Furphy: Robotics was definitely a key trend at GroceryShop. Ocado and Kroger each spoke about their joint partnership. Albertson’s used the event to announce their deal with Takeoff Technologies, who we discussed in the Innovation Conversation back in October. Chieh Huang, the CEO of Boxed wholesale and the best speaker at the event, gave a video tour of their technology. In each of these cases, robotics is being used to lower the cost of picking and packing orders. Next to merchandise and delivery costs, this is the most significant expense in any ecommerce model. Reducing this cost is key to reaching profitability.
Automated facilities can lower this variable cost, but they come with a high asset cost. If partnerships are structured so that the partner, such as Ocado or Takeoff, shoulder the asset cost and lease out the capability, then it can work for local retailers. The benefit is further strengthened when applied against a tightening and increasingly expensive labor force. That benefit was not overtly discussed at the event, but I agree with you that it’s real.
KC: One of the things I’ve gathered lately is that while we talk a lot about various innovations here in the US, the fact is that in many ways, we’re way behind what’s happening in a lot of other countries, especially in Asia. Was this alluded to in what you saw at GroceryShop? Any sense of urgency about US retailing catching up?
TF: Interestingly, I didn’t feel much of a sense of urgency, at least from the larger retailers. For the most part I sensed that these companies have been into ecommerce for a few years and are now becoming comfortable with, and convicted in, their paths forward. I heard more about experimenting and executing versus catching up.
That said, it was clear that both Asia and Europe are well advanced in grocery ecommerce. We saw that Chinese omni channel retailer Hema, which is owned by Alibaba, is far ahead of the US. And we also saw that Ocado in the UK, possibly the largest pureplay ecommerce grocer in the world, is also ahead, but not quite as far.
Hema is a powerful case study in omnichannel retail. They’ve been incubated by Alibaba since 2015 as a mobile/digital-first store. According to Jing Wang, business intelligence manager for Alibaba, all store transactions are settled using Alipay on customer mobile devices and 60% of the stores’ total volume is done online. Those living within a radius of 3 kilometers of a store – the vast majority of customers – can also use its home delivery services. They have 60 stores now and have reported that they will have 100 stores open as soon as the end 2018. I’ve seen reports that the stores are profitable.
Ocado shared that they are doing over $2 billion in pure play ecommerce sales. Their CEO, Luke Jensen touted how their technology and automation drives high service levels and operational efficiency. He refuted the notion that it’s impossible to make money selling food online, stating that Ocado has been profitable for several years.
KC: I gather that there was an effort to put to bed the urban myth that people don't like to shop for fresh food online - Ocado said that close to half its item sales are of fresh. Still, based on lots of conversations that I’ve had, I think there would be a lot of skepticism about that here in the US. Thoughts?
TF: Yes, Ocado’s Jensen pushed back on the notion that customers don’t want to shop for fresh foods online by stating that 48% of their volume is in fresh. He also shared that Ocado’s largest, most penetrated, customer segment is families and that they love the quality.
One of the biggest pushbacks on ecommerce from the naysayers is that people want to pick out their own produce and other fresh foods. However, it’s simply not true. Once a retailer proves they are adept at selecting quality products, most customers trust them to do so.
No doubt it’s quite difficult to get fresh food quality right at scale. But it is absolutely possible. The levels of data, plus systems and controls, that can be deployed through the fresh value chain from the source all the way through to the customer can go a long way toward ensuring great consistency and quality. Ultimately, it can be even better than store-based quality.
One of the challenges with picking ecommerce orders from stores, which is the predominant fulfillment method in the US, is that the best product often goes to online customers. This can leave store displays picked over, unappealing to customers and without the best quality products available to store customers.
Also challenging is that by the time the product gets to the store display, it has been handled a few times throughout the supply chain and the building of the display. More touches for any fresh food results in degradation of quality. Additionally, displays are often not the best conditions for storage of the product. Ecommerce can actually improve supply chain integrity and reduce the number of touches.
KC: I saw that Yael Cosset, chief digital officer for Kroger, talked about how "the physical store is going to play a different role in the customer’s experience, a lot more experiential… The need for that proximity, when you think about fulfilling those e-commerce orders, will probably force some reallocation of space in that physical footprint, so I would expect a normal grocery store to have a significant share of their square footage dedicated for fulfillment of orders — whether that order is shipped or driven or ready for pickup at the store is the customer’s choice — and then the rest of the store will be centered on experience.” Were there solutions to this challenge that you saw at GroceryShop? What is your sense of where this is going, and how fast?
TF: Kroger is to be commended for all their great work in ecommerce over the past few years. They are not sitting still. Yael’s vision of the future physical store is likely shaped by the learnings from their work in the field. Of course, this vision is consistent with what we’ve said many times here on MNB. It’s absolutely where it’s going.
I don’t think there was a single solution or set of solutions specifically positioned to address this future state. Yet there were dozens of solutions that would support a retailer that had the vision to execute on this future format such as store task management and productivity solutions, omnichannel ecommerce platforms, content management and measurement, pick-up and delivery services, robotics, driverless cars, recipe and list-building and voice. All these capabilities working together can shape customer experience and ultimately determine the future of the store.
KC: What’s the most impressive/disruptive thing you saw/heard at GroceryShop? Why?
TF: I saw nothing that was truly disruptive. But that’s not necessarily a bad thing. I think we’re now in a post-disruption period where everyone is experimenting and figuring out how to serve the new market. That alone is impressive!
Of course, there will be more disruptions ahead – connected homes, predictive retail, integrated health care and nutrition, new formats and more will keep coming at us. Hopefully retailers are learning that speed and agility are important to respond. I’m optimistic.
KC: Finally, to what degree was what you saw or heard positioned specifically as a response to Amazon?
TF: That’s tough to say. I’m not sure that anything I saw was specifically in response to Amazon, yet most of the capabilities at the show were launched after Amazon had launched similar. For example, was Google Home a response to Amazon Echo? Most everything happening in the space seems to have been catalyzed by Amazon’s leadership. I don’t see that changing in the near term. Amazon will keep driving the agenda.
The Conversation will continue…
- KC's View: