Published on: September 4, 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 how the “the law of large numbers” is affecting Amazon, the likely impact of a recession on e-commerce, and whether Nordstrom’s eventual gains will be worth its current pain.
And now, the Conversation continues…
KC: Since last we had an Innovation Conversation, the conventional wisdom seems to be that Walmart is “catching up” with Amazon in some sense of that term. A few weeks ago, Nielsen came out with a study saying that while "Amazon remains the leader in online consumer packaged goods (CPG),” its “share growth has slowed … Back in 2017, Amazon had a 43% hold on CPG e-commerce. This year, that figure has fallen to 39%. On the flipside, we’ve seen Walmart triple its share to 6%, Instacart double in size to 8% and we’ve witnessed healthy share growth among merchants like Target, Kroger and chewy.com.”
When I read this, I think to myself … okay, Amazon’s growth rate may be backing off a bit because of heightened competition (which they had to expect), but their growth is still a lot greater than anyone else’s. What do you think?
Tom Furphy: It’s great to be back! I hope everyone had a nice summer.
I think Amazon is succumbing to the law of large numbers. I’ve seen numbers from Statista that show them growing CPG sales from about $14 billion in 2017 to $20 billion in 2018 (Food and Health & Personal Care on the platform). That’s 43% growth. Based on our work at Ideoclick, that may be a little generous. But even if it’s 30%, that’s still strong on a business of that size. That would equate to about another $6 billion in growth this year.
Given the small e-commerce bases on which the other businesses are starting, it would be reasonable to calculate that Amazon is adding more dollars than the others. Basic math – if Amazon’s $20B is roughly a 40% share, Walmart and Instacart would be at $3 billion and $4 billion respectively. So, to your point, Amazon grew by more than their total businesses last year.
Even more impressive (and should be concerning to others) is that all of Amazon’s sales growth is incremental to them and is taken out of the traditional channel. E-commerce growth for other retailers is often not completely incremental as at least some of it comes from converted store sales while some comes from competitors.
I would expect this category growth and share shift to continue for the foreseeable future. Retailers and new models are getting better and gaining traction. With the overall category growing as much as it is, there are still plenty of dollars to go around.
KC: There was a story we had the other day that took the position - some would argue an exceedingly obvious position - that if bricks-and-mortar retailers thought the last 10 years of a growing economy was tough, just want until a recession inevitably hits … things are likely to get a lot tougher a lot faster.
I guess I have a two-part question for you: 1) Are there things in terms of digital investments that these retailers should be fast-tracking right now in order to get ready for coming hard times (or is it too late)? And 2) Does it seem as likely to you as it does to me that a recession will cause a lot of “traditional” retailers to move into “let’s get back to fundamentals” mode, which will mean cutting back on innovation and technology investments, which actually plays right into the hands of fast movers like Amazon?
TF: If retailers are truly focused on their customers, then they are constantly working to serve them in new and compelling ways. These retailers should not need to fast track anything because they are already working on the right stuff. Obsessing over the customer allows retailers to remain relevant no matter the economic conditions. These retailers may decide to change priorities or pull back on investment, including digital, but it shouldn’t be a dramatic shift.
Retailers that see digital investments as non-core projects that need to be scaled back to focus on the fundamentals could be in trouble. They stand to lose to fast-moving, more customer-focused retailers, who have kept focused on the fundamentals while building relevant new capabilities. For these retailers, it is likely already too late. They are the ones that are losing in the share shift we discussed above.
I don’t think the fundamentals of retail have changed in this digital age. Traditional retail fundamentals come down to providing great value, offering the right products and services for customers and presenting well-run stores that are appealing to shop. Specific formats and capabilities, including digital, evolve over time and continually change how these fundamentals are delivered. If a retailer isn’t already focused on these fundamentals every day, it would likely be tough to get back to them in a downturn.
In hard times, with fewer shopping dollars available, retailers must serve a clear purpose and benefit to the shopper in return for the dollars spent. Customers want their needs to be met economically and to have tasks taken over for them. Services around affordable self-care are valuable and economical. Auto-replenishment can take over mundane shopping tasks and help customers save time and money. Providing great tasting recipes, with ingredients merchandised together or bundled for pickup, can provide an easy and economical alternative to eating out. Interesting stores, with chefs cooking great-smelling and great-tasting meals, and staff that offer education and help, will always be appreciated by customers.
KC: I did want to ask you about another Seattle based company not named Amazon … Nordstrom. It was interesting to recently to see a series of news reports about issues facing the company, and once again the conventional wisdom seems to be that despite seeming like it was making all the right moves in terms of e-commerce and digital investment, Nordstrom seems to be facing some of the same issues that have brought other retailers - like JC Penney and Macy’s - down to size. My feeling is that short-term issues don’t necessarily mean that the retailer isn't positioned for long-term and sustainable growth … like they used to say, “no pain, no gain,” and this is just the painful part.
TF: Nordstrom is doing a lot of things right to be positioned for the long haul. As much as we think Grocery and CPG is competitive, Nordstrom is fighting in a category where Amazon is approaching 20% market share. Not just online share, total share! Nordstrom has taken on the “pain” to fight the battle by investing in technology (including purchasing BevyUp from us last year!), going after new formats like Nordstrom Local and entering new flagship markets like New York City. They invest toward their most important customers with their Nordy Club, at 12 million customers, driving 60% of sales.
In addition to innovation, they are also doing a good job managing inventory and costs relative to the climate. They are seeing revenue stagnation and are pretty well positioned to weather it. Their digital sales growth is slowing now, up only 4% last quarter. But at a massive 30% of their volume – impressive for a traditional retailer – you would expect growth to slow. They are also right-sizing the store base, with gross footage down versus a year ago. As a result, they just delivered EPS higher than street estimates. A bit of short term “gain” in return for their “pain.”
It will continue to be a tough fight and they’ll have to withstand a lot of punches. But given their approach, I like their chances.
This is also a case study for traditional grocery retailers. Imagine a day when Amazon is 20% of total market share and the strongest traditional retailers are at 30% e-commerce volume. How ready will you be? Are you sufficiently evolving your business model today – stores, supply/fulfillment chain, services, and technology – to be ready for the coming reality?
The Conversation will continue…
- KC's View: