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    Published on: November 28, 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, evaluating the innovation levels that can be found at the manufacturer end of the supply chain … and defining where the opportunities are.

    And now, the Conversation continues…

    KC: We spend a lot of time here talking about consumer-facing technological innovations, but I’ve been meaning to ask you about supply chain innovations … am I correct in assuming that the radical shifts taking place in retailing are likely to mean equally radical changes in the supply chain?   Is it your sense that manufacturers are re-engineering their systems and infrastructures in order to adapt to the changed environment?  Do you think that many or most of them are ahead of the innovation curve, or behind it?

    Tom Furphy:
    As important as all of the business model and consumer-facing innovations are to the emergence of ecommerce and our new generation of retail, the real unsung hero is the supply chain. We often hear that the best retailers want their customers to be able to buy products whenever, wherever and however they choose. To be able to deliver on this promise, it’s imperative that supply chains adapt to be able to serve shopper needs at stores, with local delivery and with parcel delivery. This is a tall order considering that supply chains had previously been designed to get products efficiently into stores.

    Because they are on the hook for satisfying the customer, most supply chain innovation has been driven (or demanded) by the retailers. As the pioneer in e-commerce, Amazon has led the charge. They’ve invested in hundreds of distribution centers, various types of automation, planes, trucks, vans and even their crowdsourced Flex program where regular citizens deliver products to customers. They have also worked with manufacturers to reconfigure shipments, accept smaller, streaming orders, and even have set up shipping lines in manufacturer warehouses so they can send products directly to consumers. Now they’re working on how the store environment and local facilities can support the supply chain. They will remain at or near the forefront of this innovation.

    We’re now seeing many other retailers placing new demands on suppliers to re-engineer their supply chains through the way they forecast demand, receive and process orders and ship products to retailers. As pureplay and omnichannel retailers strive to better serve their customers with new models, they will keep up this pressure on the manufacturers. And I do think that several, arguably most, manufacturers are investing in supply chain innovation today. In our businesses we see many manufactures eager to work with retailers to shape their supply chains to new market demands.

    Despite all of the great progress we’ve seen, most manufacturers and retailers, including Amazon, would assess that they are behind the curve. The entire industry is racing to create the perfect customer experience. To truly be able to deliver on the promise of serving customers needs precisely as they desire will be a constant quest.

    KC: Where do you see the biggest opportunities in terms of supply chain innovation?  Is there a specific challenge that you think new supply chain systems have to address?

    The biggest, most challenging opportunity is in ensuring the proper staging of the right inventory at stores for immediate purchase, plus having inventory in position and available for local same-day or next-day delivery, and then having the right inventory that can arrive in a few days via parcel delivery. It’s a complex but necessary proposition for ecommerce to be successful. And doing all that at costs that allow for free or inexpensive delivery will become mandatory. This is a massive opportunity that will take years of experimentation, collaboration and systems improvements to get right.

    The fundamental challenge to overcome is that today’s retail supply chains have been optimized to most cost-efficiently serve the needs of large format stores. Even this optimization process took place over more than a decade led by Walmart, other large retailers and the ECR movement. Perfectly layered pallets of similar items, with perfectly cubed out trucks that serve large distribution centers or large stores simply are not optimal for ecommerce. The best ecommerce supply chains allow for the fastest moving items to sit closest to customers, with slower moving items residing upstream where they can be efficiently sent into the supply chain based on customer demand.

    Further, there are also opportunities for changing product formulations, packaging, product information and even introducing new business processes and models that can all work to improve ecommerce customer experiences, efficiencies and profitability. But we can save those for a future Conversation.

    KC: Definitely.

    So let me ask you one more thing. Is the current supply chain climate one in which start-up companies, ones without legacies and existing infrastructures, have an advantage over existing, established companies?  Or do bigger companies have some sort of advantage simply because they have the financial resources to make necessary changes?

    I do think startup companies without legacy systems and processes are likely better positioned to be more innovative than incumbents. Even though they don’t have money, they are not encumbered with existing budgets, customers and protocols. That allows them to think freely about new ways to go to market. But these models and companies are nothing if they sit inside a bubble without money behind them. They need capital obtain new customers and to roll out at scale.

    Look at Dollar Shave Club for example. They invented a new consumer-direct model, which was fairly innovative and not encumbered by existing supply chain and retailer practices. They raised money from investors and then spent tens or hundreds of millions on marketing. Once they had the customers, they were able to take significant share from P&G who still struggles to serve consumers more directly despite their deep pockets. Dollar Shave Club was fueled by innovation, then driven and scaled with capital.

    Now we’re seeing a wave of supply chain automation coming, such as Dematic, Ocado and Takeoff Technologies that, in many cases, were developed without the burden of existing businesses processes. These and dozens of other earlier-stage companies are now available to experiment with, without the need to invest significantly out of the gate.

    There is no reason existing retailers and manufacturers can’t harness the power of innovation inexpensively, then scale it once proven by applying their financial resources. It’s a new way of thinking versus traditional incremental approaches, but it’s mandatory today. The fact that we’re starting to see if from industry leaders such as Walmart, Kroger and Unilever, among others, is encouraging.

    The Conversation will continue…

    KC's View:

    Published on: November 28, 2018

    by Kevin Coupe

    An MNB user sent me a link to this commercial, for Canadian retailers Winners. HomeSense, and Marshalls. I thought it clever… and funny… and worth sharing.

    Sometimes, the commercial argues, there is value in the old ways of doing things.


    KC's View:

    Published on: November 28, 2018

    AdWeek has a story about how Walmart is trying to develop a startup culture as it changes its modus operandi, viewing itself “as a scrappy challenger in the ecommerce space dominated by titans like Alibaba and Amazon.”

    Key to this evolution, the story suggests, are a pair of executives - Andy Dunn and Barbara Messing.

    Dunn “joined Walmart in June 2017,” the story says, “after the company’s $310 million purchase of men’s apparel brand Bonobos, which he founded a decade earlier and led as CEO. Now, leading Walmart’s digital brands, Dunn drives a whirlwind of activity. A flurry of acquisitions—including fashion players Eloquii and ModCloth, along with in-house launches such as mattress and bedding startup Allswell—have boosted Walmart’s digital cachet, with its online sales expected to grow 40 percent this year.”

    Messing “arrived this summer as marketing chief after spending seven years at travel site TripAdvisor. Her experience devising campaigns for a digital-first operation, and helping shift TripAdvisor’s brand proposition from travel research to bookings, dovetails with Dunn’s pedigree to give Walmart a potent one-two punch.”

    Dunn describes the environment this way: “This absolutely is a startup. It sounds odd for a Fortune 1 company, but we’re operating at a level of scrappiness and speed that reminds me exactly of the early days of building Bonobos. Rather than just scaling, we’re evolving what we are doing every week, and each quarter we are doing entirely new things.”
    KC's View:
    This fits into what seems to be Walmart’s stated approach these days, which is to be as nimble as possible and agnostic about whether people shop in-store or online.

    Of course, there's many a slip 'twixt the cup and the lip. Won’t be easy, and won’t be fast. But in terms of thinking and executive staffing, Walmart is doing that I think it has to do, and what every big company has to do in order to survive in the current environment.

    Published on: November 28, 2018

    The Associated Press reports on a new Ikea store just opened in Warsaw, Poland - “not one of Ikea's out-of-the-way, maze-like warehouses that require a car to visit, but a shop like any other in a city center shopping mall. The Swedish retailing giant plans to open 30 such smaller stores in major cities around the world as part of a broader transformation to adapt to changing consumer habits. Compared with just a decade ago, shoppers are more likely to be living in urban areas and not have a car, and often want a nearby location to look at goods like furniture in person before ordering things online.”

    At about 54,000 square feet - 25 percent of the size of a standard Ikea store - this is a place where “shoppers can buy cushions, curtains and other home items. They can design the layout of bedrooms and kitchens at computer stations. But those hoping to buy a bookcase or bed will not find them stocked in a large warehouse, though they can order them at kiosks and have them delivered to their homes.

    “As such, it offers a very different shopping experience from the usual visit to one of the large warehouse stores.”

    Andreas Flygare, project manager for the Warsaw store, tells the AP that Ikea must “adapt to a consumer environment that has changed dramatically in the last 10 years. ‘You have companies like Amazon and Uber that are raising the bar for what is expected. Because if you can have same-day delivery, or an Uber is two minutes away, it influences other companies, like Ikea,’ he said in a recent interview in the store's cafe. ‘It can be a quite tough environment. Everything is changing so fast’.”
    KC's View:
    Everything is changing so fast?

    No kidding.

    Actually, I give Ikea a lot of credit here … and I have to wonder if, down the road, there will be similar stories about retail formats like, say, Costco or Sam’s or BJ’s.

    Published on: November 28, 2018

    The New Yorker has an excellent piece about Panera Bread founder Ron Shaich, who in addition to exploiting the explosion of the fast casual restaurant trend, also believes that “the fixation on short-term profits is jeopardizing the future of American business, and creating social instability that has contributed to our current state of political polarization.”

    An excerpt:

    “Shaich has come to believe that the current business environment is far less amenable to the process of building companies like his. Wall Street has embraced the idea that companies exist solely to serve the holders of their stock. Under this way of thinking, managers of companies should focus their actions on driving short-term value for their shareholders, and should pay far less (or no) regard to other constituents who may have a stake in the business, such as employees, customers, or members of the community. Shaich partly blames activist hedge funds, many of which buy shares in companies with the aim of pushing their management to make decisions that drive their stock prices up within a few months. According to Shaich, this makes it more difficult to invest in long-term projects, and create sustainable jobs.”

    And, he argues, that’s not good for business. Or America.

    You can read the entire story here.
    KC's View:

    Published on: November 28, 2018

    The National Retail Federation (NRF) reports that “from Thanksgiving Day through Cyber Monday, more than 165 million Americans shopped either in stores or online, surpassing the 164 million who had said they would shop in a consumer sentiment survey conducted ahead of the holiday … The average shopper spent $313.29 on gifts and other holiday items over the five-day period, down from $335.47 during the same period last year.

    “Of the total, $217.37 or 69 percent was specifically spent on gifts. The biggest spenders were older millennials and Gen Xers (35-44 years old) at $413.05 … Retailers’ investments in technology continued to pay off with consumers seamlessly shopping on all platforms throughout the weekend. The survey found more than 89 million people shopped both online and in stores, up nearly 40 percent from last year. The multichannel shopper outspent the single-channel shopper by up to $93 on average.”

    The report goes on: “The most popular day to shop online was Cyber Monday, cited by 67.4 million shoppers, followed by Black Friday with 65.2 million shoppers. The most popular day for in-store shopping was Black Friday with more than 67 million shoppers, followed by Small Business Saturday with 47.4 million shoppers. Also, 66 percent of smartphone owners used their mobile devices to make holiday decisions, up from 63 percent last year.”

    Meanwhile, the Washington Post reports on some impressive weekend shopping stats:

    • “Over 24 hours on Cyber Monday, Americans spent a combined 11,000 thousands years — or 95 million hours — shopping online.”

    • “Black Friday saw a record $2.1 billion of sales coming from smartphones.”

    • “Over the holiday weekend, shoppers got through the mobile order process 5 percent faster than they did in 2017.”

    And, Digital Trends this morning notes that as Amazon said that CyberMonday was the single biggest shopping day in the company’s history, the number one product sold that day was the new version of the Echo Dot smart speaker. Other hot items - the “Bose QC 25 noise cancelling headphones, the multi-use Instant Pot Duo, Michelle Obama’s Becoming autobiography, and the Jenga game.”
    KC's View:
    The one thing I find frustrating about the Amazon numbers is that we really don’t know how big a day it was for the company. It may have been the biggest day in the company’s history, but was that by $1 billion … $1 million … or $1? Just curious.

    Published on: November 28, 2018

    The Puget Sound Business Journal reports that Amazon decided back in September that it was going to split its second North American headquarters location - dubbed HQ2 - between two different cities.

    Which it did - choosing New York’s Long Island City, just across the East River from Manhattan in the borough of Queens, and Arlington, Virginia, in the Crystal City neighborhood, adjacent to National Airport and just across the Potomac River from Washington, DC. And which it announced on November 13, more that two months after it made the decision.

    There was, the story notes, advance warning that this could be Amazon’s decision: “The decision to split HQ2 was foreshadowed in company's original Sept. 7, 2017 request for proposals: ‘Amazon may select one or more proposals and negotiate with the parties submitting such proposals before making an award decision’.”

    The Journal writes that “splitting the growth between two cities may help the company avoid some of the challenges related to affordable housing and transportation that it has faced in Seattle as the city has struggled to keep up with the company's rapid growth.”

    But, the story points out, “It also may have helped Amazon score more incentives. While northern Virginia cut its incentives package in half to reflect the split, it's unclear if New York City altered its bid after learning of the split decision.”
    KC's View:
    There will be upsides for Amazon and the locations it chose. There almost certainly will be downsides, as well. But I think that Amazon did what any major company would do in making this decision.

    There are folks out there who think the whole thing was rigged, that Amazon had no intention of going to a smaller city or the midwest. I don’t know if this is true … but I’m sure there were cultural considerations as well as economic concerns. (I always argued that whatever location Amazon chose, it would be in a blue state or area … because many of the people it would want and need to hire would perceive a red state as being hostile to their beliefs and priorities.)

    I would’ve loved to have seen Detroit be chosen. (It didn’t even make the list of 20 finalists.) In the beginning, I was betting on Boston. But at least as long as Amazon continues to grow, it has tons of information about communities around the country that may be hospitable to it … and those communities know a lot more now about what they need to do if they are going to be attractive to 21st century technology companies.

    That sounds to me like an upside.

    Published on: November 28, 2018

    DIY retailer Lowe’s has made a strategic decision to get out of the smart home technology business, though it will continue to sell other companies’ smart home devices.

    MediaPost reports that Lowe’s announced that “it will be shutting down its Iris smart home platform to ‘focus on its core home improvement business and improve profitability.’

    “Iris by Lowe’s, which connects with more than 75 smart devices, provides consumers with IoT capabilities to manage, monitor and maintain their homes, all controlled via mobile app.”

    In a prepared statement, the company said, “We will continue to carry Iris and other smart products on our shelves. However, we will focus on the retail side of the Iris business, not on supporting our own smart-home platform. The smart home category continues to be an important part of our customers’ home improvement journey, and Lowe’s remains committed to carrying the breadth and depth of smart home products and brands to meet our consumers’ needs now and in the future.”

    The story notes that “Lowe’s was the first company to target the mass consumer market with a broad home automation solution using the open platform by Iris for devices from different brands to connect with each other.”
    KC's View:
    This sounds more like a short-term profit decision than a long-term move toward differentiation. Anyone can sell other companies’ devices, but Lowe’s was trying to serve as connective tissue.

    Maybe this makes sense. Maybe this grows out of projections that the Iris initiative was untenable. But it just feels like a differentiation opportunity that has been lost.

    Published on: November 28, 2018

    …with brief, occasional, italicized and sometimes gratuitous commentary…

    • The Puget Sound Business Journal reports that Amazon has patented “a package delivery system that won't damage products when dropped from a drone. The patent describes an airbag covering the package that the drone could inflate before dropping it to a customer's backyard or patio below.”

    The patent application sounds vaguely familiar - about 18 months ago, Amazon patented a shipping label that would turn into a parachute when a package is dropped from a drone.
    KC's View:

    Published on: November 28, 2018

    …with brief, occasional, italicized and sometimes gratuitous commentary…

    • The Milwaukee Journal Sentinel reports that Kroger CEO Rodney McMullen has pronounced himself happy with the $300 million that his company has invested in its Wisconsin stores, “including the Pick 'n Save brand, since purchasing Milwaukee-based Roundy's Inc. in 2015” for $800 million.

    While the stores were “not exactly thriving” and “were dated and in need of a makeover,” Kroger believed that Roundy’s stores had a solid customer service foundation that it could build upon. And while it does not break out the numbers by chain, Kroger says that the turnaround efforts in Wisconsin are working, and that the company is ‘winning.” And McMullen says that Kroger’s investment in the region will continue.

    • The Dallas Morning News reports that bankrupt Sears has identified 505 store locations that it would like to sell as a group next year, which would help it reduce debt and costs and find a path to some sort of survival.

    At the same time, the story says, “Sears is asking landlords for rent reductions to help it keep profitable stores open.”

    Good luck, especially selling them in one fell swoop. I would imagine that there is a lot of distressed real estate in this group, in part because Sears has driven the value of the stores into the ground through mismanagement and incompetence, and in part because the whole mall business model is facing nine miles of bad road anyway.
    KC's View:

    Published on: November 28, 2018

    Regarding the decision by General Motors to close 5 plants and lay off more than 14,000 employees, from which I drew several business lessons, one MNB reader wrote:

    There is another lesson in this story: The decision to bail out a badly managed GM with more than $50 Billion in public funds only delayed the inevitable. Government subsidies to flawed companies who have lost touch with their key customers and fallen behind their free market competition is bad public policy. Consumers decide what they want. Companies that deliver products that fulfill those desires better than competitors do will survive and flourish. Those that don’t shouldn’t be subsidized by government intervention.

    MNB reader Larry Ishii wrote:

    I cannot agree with you more.

    This situation also points out the importance of relativity. You mentioned low gasoline prices (or, lower). But for this retiree, when I got married in 1969, gasoline was 23.9-cents a gallon. And, if I filled up, I got a free coffee mug as well. So, I will keep my Chevy Cruze as long as I can so $3.50-per-gallon gasoline does not drive me to the poor house.

    From another reader:

    I am a long time reader and appreciate your insight.  There is a GM plant near me that is not impacted by the 14K layoffs – the local news reported this story last night.  My observation is that during MNF last night, I saw a GM commercial in prime time almost more often than I saw plays by each team in the game.  I am a former grocery ad guy, so I get the need for marketing, etc., but I couldn’t help but wonder how much those prime time ads were costing versus the ROI and if reductions in the marketing budget could have saved some jobs?  Not bashing GM at all – it just struck me as bad timing for the ads.

    Responding to my piece yesterday about Facebook’s Portal system, which seems badly timed at best because of the company’s transparency and trust issues, one MNB reader wrote:

    Just read your column about Portal. I totally agree with you on every point.

    But, to me, it is related to a larger issue. When I was in high school, I had to do a paper on a great book. Our list included "Modern Prometheus" or what we all commonly refer to as "Frankenstein". Little did I know how important its message would be as I grew older.

    While Portal is technology that should be dealt with cautiously and with forethought given the potential it represents to be so invasive, there was another very scary development in China, which if true, could change mankind forever. 

    That would be the power or ability to engineer genes to control the traits of newly born babies. The implication of such ability could be Modern Prometheus becoming reality. We can easily see from Mr. Trump how such power in the wrong hands can be used in such damaging fashion.

    We had a piece yesterday about how a relaxation of water testing regulations may be leading to the rash of E. coli contaminations, which prompted MNB reader Ron Pizur to write:

    This administration’s plan to Make America Great Again by rolling back regulations may be going in the wrong direction.

    My view is that knee-jerk dismantling of regulations is a mistake, as is knee-jerk imposition of regulations. In this case, though, the relaxation seems to not be consumers’ best interests.

    Finally, on the future of Amazon Go, from MNB reader Randy Evins:

    First, I think the concept of Amazon Go is spectacular....that said it is an extremely tall order to think it’ll work mainstream. I used to be a meat supervisor a long time ago and I had East LA as a part of my territory. Can you imagine what that would look like. On the weekends our stores were PACKED with families, their grandparents, their cousins, their children....It was an event. At the end of the day it was chaos all day and I can assure you, no one EVER put anything back on the shelf where they acquired the product. So while it’s really cool tech, and the concept will work as a convenience store for geeks like myself, it’s not likely going to get Kroger, better yet Northgate Gonzales, to jump in the water.

    It won’t be for everyone, it won’t be for every store, but to underestimate the potential impact of checkout-free technology would be a mistake, I think.
    KC's View: