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    Published on: May 29, 2019

    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 talk about the people who are necessary for innovative companies to succeed.

    And now, the Conversation continues…

    KC: We had a story last week about how H-E-B, while clearly making some important technology investments, also says that it is doubling down on people investments. The Dallas Morning-News quoted H-E-B president Craig Boyan as arguing that “companies' use of technology should be focused on creating jobs and making their customers' and employees' lives better — rather than simply squeezing out more money for shareholders.”  And, he expressed trepidation about how venture capitalists and other investors are giving huge sums of money to tech companies that are putting retailers out of business and thousands of people out of work — even though they have no viable business plan, and may never make money. So, you’ve been on both sides of this equation - retail and technology (though your companies actually make money), and I’m wondering what you think of his observations.

    Tom Furphy:
    I agree with many of Craig’s observations. I’ve said incessantly in this column that I think retailers need to be focused on making their customers’ lives better. Everything they do should be tied to a customer benefit, and one that makes a real improvement in their lives. In many cases new technologies can support that.

    I also agree that it’s important to make employees’ lives better. Employees are responsible for delivering value to customers. Whether that’s a front-line employee working directly with customers, a warehouse worker getting goods into the store or headquarters staff supporting the operations, it’s important to have motivated, engaged and energized employees. In many cases, technologies can support that.

    Work is a big part of people’s lives and therefore time spent at work should be rewarding. It behooves employers to provide employees tools to be more effective and to make the work as gratifying as they can. As mundane and repetitive tasks become automated, as technology manages and analyzes information, and as robotics support more physical processes, employees can be freed up to take on more value-added tasks. Also, technology can be used in training employees and assisting them in the performance of their roles. All of this can make them more effective and make their work more gratifying.

    Deploying technology with the primary purpose of creating jobs doesn’t seem like it would add any value to customers. I would have disagreed with Craig’s comments that technology should be focused on creating jobs if I had relied on the face value of the media coverage of his comments. However, I watched the panel discussion where he made his comments, and it is important to put it in context. He says that jobs are still important and that using technology should enable you to lower costs and create new types of jobs. More types of jobs that engage customers and lead and inspire others will lead to better results. Tech can allow you to win with better people. I completely agree.

    I also agree that the piles of investment capital moving into businesses that eliminate jobs is risky. Especially if those models are destined to eventually fail after the jobs are removed. That could potentially create a lot of near-term pain as folks deal with losing their jobs. Perhaps it could ultimately reverse if the jobs came back, but in many cases the damage would be done. It could also be really bad for the economy if overcapitalized new businesses take out old businesses, never become profitable and then fail when capital dries up. This could be a real crisis if we’re not careful.

    In our world, we think it’s great that technology can create efficiencies and, even more exciting, can fundamentally improve some elements of shopping. Ideally, a change driven by tech can also drive efficiencies that lead to lower prices and/or redeployment of labor into more value-added roles. In our portfolio, Replenium is an example of a technology that’s great for shoppers helping them manage mundane shopping tasks while driving efficiency at store level with inventory flow and labor scheduling. Those efficiencies can be used to fund delivery or other value-added functions such as nutritionists, chefs or other specialists at the store.

    KC: When you are evaluating companies that you might invest in, or entrepreneurs with whom you’d like to partner, is there a “tell” that you look for that defines for you - in terms of people - what will make a promising investment and what will not? I’m thinking about how there are a few retail leaders out there who have told me that when they hire people, they like to take them out to a meal and see how they treat waiters and waitresses … this can be a strong indicator of whether they see their roles in terms of servant leadership, or, at the other extreme, have some level of toxic arrogance that is unacceptable. (Granted, there is a lot of room in between those two attitudes.)

    When we evaluate investments and determine which companies we will take on, we look first at the business value proposition and market need being solved. Then we look at the size of the market opportunity, the capabilities of the company and then determine how uniquely the company can deliver the value proposition and stand up to competition. It’s important that the company is solving a real customer need, does so with a novel approach that is a significant improvement over incumbents and has a core technology or capability that is defensible versus competition. Once all of that is satisfied, we then look to the team, starting with the CEO, to determine if they can pull it off.

    Building an effective technology company from the ground up is difficult and requires a strong team across all the disciplines of strategy, product, technology, sales and marketing, admin and leadership. We look for leaders that have a deep understanding of their customer. This is often a retailer or manufacturer that they’re selling to, but also the end consumer of the manufacturer or customer of the retailer. They must understand the customer deeply and have a passion for solving the customer need. But they shouldn’t have so much passion that they are unwilling to listen and change. They must have the tenacity to endure the myriad challenges they are sure to face, such as slow-moving customers, product challenges, security and privacy issues, financial stresses and on.

    It’s critical that leaders are able to attract and motivate a team around them. We screen for that by talking to the team and to customers. We ask what motivated them to join the company and follow its leader. How do they like working for him or her? How do they work together? What kind of culture is fostered? We screen for leaders and teams that foster transparency, dedication, conviction, respect and compassion. Our process for engaging with companies takes place over months, so we get a good sense of how the leader and team work together. It’s a lot of work, but an important investment in time.

    KC: As you look down the road of how innovative companies will think about their people in terms of what they expect and how they will reward them, do you see certain inevitabilities that people would find surprising? What should employees and associates be looking for in a company? And, conversely, what should companies expect from their hires?

    The caliber, dedication and effectiveness of employees has always been the main driver of success of a business. That won’t change. The nature of the required work will change as machines, machine learning and AI take over or support much of the mundane tasks of work. We will have less need for employees whose main purpose is to move, process, calculate or observe. This will become increasingly automated.

    These functions will all trade to roles that require more thought, leadership, interpretation and judgement. People will be charged with improving the technology, motivating others, working with customers and providing real value. The resulting value conveyed to customers will be emotional and more rewarding.

    Employees should be looking for companies that have a clear customer value proposition and whose culture values its people to support that. I think it raises the expectations employees have of companies and at the same time raises the bar on the required caliber of hires. Businesses with the best humans – those behind the technology and those in front of the customers – will win.

    The Conversation will continue…

    KC's View:

    Published on: May 29, 2019

    by Kevin Coupe

    CNN reports on a new study saying that poor diet may have more of an impact on cancer risk than previously established.

    According to the story, “The researchers evaluated seven dietary factors: a low intake of vegetables, fruits, whole grains and dairy products and a high intake of processed meats, red meats and sugary beverages, such as soda … When the findings were looked at by diet, low consumption of whole grains and dairy products and eating a lot of processed meats contributed to the highest cancer burden.”

    The problem: “Ultra-processed foods occupy a growing part of the world's diet. A 2016 study found that 60% of the calories in the average American diet come from this kind of food, and a 2017 study found that they make up half of the Canadian diet. They make up more than 50% of the UK diet, and more of the developing world is starting to eat this way.”

    The Eye-Opening solution: “You may protect yourself from cancer by avoiding ultra-processed foods and instead choosing organic foods, research has shown.”

    It isn’t always that simple. There are a lot of factors that contribute to people eating ultra-processed foods, like convenience and budget. But it seems to me, especially as I get older, that there is one guiding principle in how I eat and drink and exercise … Something is going to get me. I’m going to help as little as possible, but still enjoy my life.
    KC's View:

    Published on: May 29, 2019

    Bloomberg reports that Amazon is getting ready to change the way it deals with small, mom-and-pop suppliers, which have “long relied on Amazon for a steady stream of orders … Rather than selling in bulk directly to Amazon, they’ll need to win sales one shopper at a time.”

    Amazon’s goal, the story says, “is to cut costs and focus wholesale purchasing on major brands like Procter & Gamble, Sony and Lego … That will ensure the company has adequate supplies of must-have merchandise and help it compete with the likes of Walmart, Target and Best Buy.”

    Here is some context from the Bloomberg story:

    “Amazon secures inventory two ways. The company buys products directly from wholesale vendors, reselling them like a traditional retail store, and it lets independent merchants post their own products on the site in a marketplace model similar to EBay Inc. or a consignment shop. About half of the goods sold on Amazon come from independent merchants, and the change will push the marketplace share of revenue even higher.

    “The vendor purge is the latest step in Amazon’s ‘hands off the wheel’ initiative, an effort to keep expanding product selection on its website without spending more money on managers to oversee it all. The project entails automating tasks like forecasting demand and negotiating prices which were predominantly done by Amazon employees. It also involves pushing more Amazon suppliers to sell goods themselves so Amazon doesn’t have to pay people to do it for them … By forcing many existing wholesale vendors to sell their products directly to consumers, the company holds less inventory itself -- reducing the risk that it gets stuck with unsold merchandise. Moreover, Amazon can collect a commission on each sale a vendor makes and charge them fees to store, pack and deliver their goods -- boosting profits.”

    A final decision has not been made to commit to this approach, but sources tell Bloomberg that the company is proceeding in this direction.
    KC's View:
    Some of the stories about this move by Amazon describe it as a “purge” of small suppliers, but it doesn’t really sound like that to me. It does seem like the acceleration of a change that already is taking place, since gross merchandise sales from Amazon’s Marketplace now accounting for 58 percent of sales on Amazon.

    The rule always has been that if you are a vendor, you do business through Amazon, not with Amazon … and this will continue to be the case. Some of this will be invisible to the shopper, who won’t much care about how Amazon structures its relationship with vendors as long as he or she gets good prices and fast delivery. I would expect that however relationships are structured, Amazon will continue to put the customer first … that is its greatest advantage, and at the moment, an immutable reality of how it comes to market.

    I do think that this notion of having vendors more in charge and control of their products could find its way into Amazon’s much-speculated-about opening of a new supermarket chain later this year. If, rather than buying product from suppliers and then reselling it to consumers, Amazon decided to fill the entire store with product owned by suppliers, never owning anything itself, it could be a potentially disruptive approach to traditional food retailing.

    It is one of the secret sauces that Amazon brings to its business recipes, and I fully expect Jeff Bezos to use it where and when appropriate.

    Published on: May 29, 2019

    Walmart has hired Suresh Kumar, a former executive at Amazon, Microsoft and Google, as its new global chief technology officer and chief development officer.

    His role, the Wall Street Journal writes, will be to “lead global technology, creating a new senior role as the world’s biggest retailer ramps up its efforts to take on Amazon.”

    CEO Doug McMillon said yesterday that Kumar will oversee both internal and consumer-facing technology efforts, speeding up Walmart’s transformation into a digital company.

    Kumar most recently has been “a vice president at Google where he worked on the company’s network advertising as well as advertising on Gmail and parts of YouTube,” the Journal writes. “He previously spent about four years at Microsoft Corp. working on cloud infrastructure. Before that he spent nearly 15 years at Amazon, where he oversaw about 500 engineers working on core retail functions, such as pricing, supply chain and vendor management.”

    The story points out that “Walmart is working to becoming an increasingly tech-focused company, buying up e-commerce startups, investing heavily to boost online sales, adding more grocery-delivery options and working to ramp up its digital ad revenue.”

    Walmart’s former CTO, Jeremy King, left to become Pinterest’s head of engineering.
    KC's View:
    The chemistry has to be right. There was a time when I would’ve thought that this was an admirable effort doomed to failure because of the cultural chasm that existed between Bentonville and Silicon Valley. But that is less and less the case, as Walmart has become more nimble.

    The competition for people like Kumar is going to become more intense, I’m guessing, as companies look for any advantage, any angle, that will give it the slightest edge in these wars.

    Published on: May 29, 2019

    Ahold Delhaize-owned e-grocer Peapod has announced a new collaboration with Mark Bittman, one of the country’s best-known food writers.

    Bittman has a new cookbook, “Dinner for Everyone,” offers 100 recipes, with each one “bundling three unique interpretations for home cooks to choose: Easy, Vegan and ‘All Out’.” Now, Peapod is making a number of the recipes available “in shoppable, click-to-cart format as well as an exclusive meal kit, Fast Pho, a Vietnamese inspired dish which features pre-measured, fresh ingredients. The new kit complements Peapod's large selection of meal kits and comes in serving sizes for both two or four.”

    "At Peapod we work to simplify grocery shopping, menu planning and meal time," says Spencer Baird, Senior Vice President of Merchandising at Peapod, in a prepared statement. "Meal kits allow us to introduce shoppers to inspired international flavors and dishes without any intimidation as every ingredient is selected and packed ready-to-cook. The partnership with Mark and collaboration on the meal kit is another way we want to support making dinner time enjoyable and approachable for shoppers.”
    KC's View:
    Very smart of Peapod, I think, since Bittman is one of the best writers around when it comes to food, being both progressive and accessible; he has a great wealth of content that Peapod can access if this relationship works out.

    Plus, Bittman has obviously wanted to move beyond just writing as a way to move the needle … he had a short relationship with meal kit company Purple Carrot that didn’t work out. I’m guessing that he ;earned from that experience, and I hope the Peapod deal works out better for everyone.

    Published on: May 29, 2019

    MarketWatch reports that the Conference Board has put the consumer May confidence index at 134.1, up from 129.2 in April, which it said was the highest it has been for the past six months.

    The numbers were “spurred by a strong labor market,” the story says, apparently unaffected by high gas prices and increased labor tensions with China, though “the survey results were mostly compiled before trade talks between the U.S. and China suffered a big setback.”

    The MarketWatch story goes on: “A separate survey that asks Americans how they view the economy in the present rose to a 18-and-a-half-year high of 175.2. The last time the index was higher was in December 2000. Another index that tracks how consumers expect the economy to behave six months from now rose to 106.6 from 102.7. The post-recession peak is 115.1, which was set last October.”
    KC's View:
    I believe that retailers and suppliers have to prepare for an inevitable economic downturn - there always will be another recession, and it will come sooner or later.

    I do think that for some reason, consumers are in denial to a certain extent about some of the warning signs. Gas prices are steadily going up, and we’ll see how that impacts people this summer. And if trade problems persist, it’ll have an impact on the prices of a lot of products, which also will have an impact.

    Published on: May 29, 2019

    The Buffalo News has a story about how western New York-based Tops Markets is approaching its post-bankruptcy life - “getting back up on our feet,” as CEO Frank Curci puts it.

    The story says that “though Tops' bankruptcy reorganization allowed it to greatly reduce its debt load, it still faces $55 million in annual interest payments, according to Bankruptcy Court papers. If interest rates rise, those interest payments will increase. With grocery margins sliding and competition increasing, it doesn't give the company much wiggle room to wait out storms.”

    Tops’ approach, the News writes, is focused on remodeling stores at the rate of 10-15 a year, trying to catch up after a period of time during which there was minimal capital spending. In addition, Curci says that the company would like to grow, perhaps through acquisition, “following the same strategy it had before the bankruptcy – adding fuel stations and opening stores that fit into their current footprint. For the most part, that will mean smaller stores than the bulk of its portfolio, especially in Central New York and the Hudson Valley.”

    And, the story says, Tops also is redoubling its efforts in the area of meal solutions and private label.

    Still, the road ahead is challenging for any company looking to get people into bricks-and-mortar stores. “The model is a little broken,” Curci says. “You have every outlet in the country trying to sell the top 50 items, and they can do it without profit. Then we're trying to sell the whole rest of the store. It’s a challenge … You've gotta give people a reason to come into stores. They can buy laundry detergent anyplace. We're looking at how we can make a customer's life simpler.”
    KC's View:

    Published on: May 29, 2019

    USA Today reports that former Sears CEO/chairman Eddie Lampert, whose hedge fund bought the chain’s assets out of bankruptcy, has asked a federal judge to release him from an agreement that he would pay severance up to $43 million to former Sears employees.

    According to the story, “The agreement applied to workers who lost their jobs from the day Sears filed for bankruptcy in October through February, when Sears assets were sold to Lampert in a last-minute deal. The company closed hundreds of stores during that period.”

    USA Today writes that “in a court filing, Lampert's representatives accused Sears Holdings of failing to deliver ‘hundreds of millions of dollars of assets’ it had promised as part of the deal to save the company from total liquidation. Those assets were earmarked to make the severance payments.”

    The move comes as Sears Holdings has sued Lampert’s company, accusing it of “engaging in a scheme to strip the company of assets over time.”
    KC's View:
    First of all, is it really any surprise that Lampert would try to get out of a financial obligation that he had to former Sears employees? I’m not saying that Sears Holdings held up its side of the bargain, but Lampert trying to welch on a deal seemed pretty much like a foregone conclusion.

    Here’s the sad bottom line. Over the past 15 years, Sears has closed some 3,500 stores and eliminated some 250,000 jobs. A formerly iconic retailer now has about 400 stores, and is owned by someone who has steadfastly mismanaged it through ignorance and incompetence, but who, I’m fairly certain, will come out of it with a profit, because that’s always what happens with guys like this.

    Sears is actually opening new stores these days - smaller format units called Sears Home & Life that sell mattresses, appliances and smart-home items. Hard for me to imagine that this will work … since there are better, more progressive and disruptive companies out there (Amazon? Caspar? Even Best Buy?) that these days may have more brand equity and a greater upside.

    Typically, I’m guessing that Sears is a day late and a dollar short.

    Published on: May 29, 2019

    • The New York Post reports that while Amazon may have canceled its plans to build part of its much-publicized HQ2 campus in the New York City borough of Queens, it is shopping for office space on Manhattan’s west side.

    According to the story, “The tech giant has been in talks with owners of two shiny, new skyscrapers located just one block west of Penn Station: The newly built One Manhattan West and its soon-to-be sister project Two Manhattan West … The online retailer is seeking ‘at least 100,000 square feet or much more’ - just to start, one well-placed source said.”
    KC's View:

    Published on: May 29, 2019

    • The Phoenix Business Journal reports that Target “is planning on updating 300 stores across the country this year. The renovations cost will between $4 million and $10 million per location … Some of the new features in these re-imagined stores include: updated order pickup and guest service counters, modern decor and fixtures, more engaging merchandise displays throughout the store and a nursing space for new moms.”

    According to the story, “Target’s store transformation project is just one pillar of its overall strategy to increase online and digital sales as it competes with rivals Inc. and Walmart Inc. The company is using its Shipt, order pickup and drive-up services to let shoppers pull into a store and pick-up their orders in minutes or get them delivered to their homes within hours.”
    KC's View:

    Published on: May 29, 2019

    Bloomberg reports that Walmart has named Mitchell Slape as CEO of its Massmart Holdings unit in South Africa, succeeding Guy Hayward at a time when the division’s earnings are expected to drop by as much as 50 percent.

    Slape has a long Walmart career, having held executive roles in Japan, India and Mexico.

    The story points out that “Walmart bought a majority stake in Massmart in 2011 for 16.5 billion rand ($1.2 billion) to tap into rising African consumer spending, but things haven’t quite worked out that way. Massmart is contending with falling sales at some retail outlets amid a slowdown in the continent’s most-industrialized economy and stubbornly high unemployment.

    “Rising taxes, fuel costs and other bills have also dented South African consumer confidence. Current economic data and sentiment suggest that there’s no immediate signs of improvement, Massmart said in a statement on Thursday.”
    KC's View:

    Published on: May 29, 2019

    …will return.
    KC's View: