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's topic: How the “nasty undercurrents” of traditional retail is setting the table for a new explosion of e-commerce and automation-related innovation.
And now, the Conversation continues…
KC: I was intrigued by two Walmart-related stories that have broken since last we spoke. In one case, Walmart announced that it is increasing pressure on its vendors by raising the fines they have to pay if they don’t make deliveries on time, and in the other, it said it will sharing more sales data with suppliers as it looks to sharpen its in-store replenishment and curb out-of-stocks. On the one hand, this seems a little carrot-and-stick to me, with Walmart execs playing both good cop and bad cop at the same time. But I suppose that it reflects a growing new reality of retailer-supplier relationships - that at a time when there are so many options, retailers simply cannot afford to be out of stock, and so they need to do everything they can to create an environment in which this doesn’t happen.
Tom Furphy: I’ve always felt that one of the nasty undercurrents of traditional retail has been in the chargeback and invoice deduction areas. Too often it’s used by subpar retailers to enable them to make profit off the buy vs the sell. Instead of focusing on building great experiences for customers, retailers would simply hammer harder on their suppliers to pad the bottom line.
To be fair, one of the stark realities of retail is that it is a thin margin business, in which retailers must act with precision across the supply chain, merchandising and store operations functions to be able to deliver profit. And the margin balance between manufacturers and retailers has forced even the best retailers to rely on manufacturer funding to make their numbers.
In-stocks have always been a primary driver of shopper satisfaction and, accordingly, have always been a strategic imperative for retailers. In the past, if a product was out of stock, the retailer had decent reason to believe that the shopper would select an alternative product nearby on the same shelf. Worst case, they would fill the remainder of their basket during the trip and grab the out of stock item separately from another retailer.
Today, in a world where an alternative source of a product is just a click away, the stakes are even higher. It is easy for a shopper to check other retailers’ inventory and move the transaction, and maybe even the entire basket there. Also, many retailers, such as Walmart, are using their stores as fulfillment centers for e-commerce. This puts further pressure on the stores to be stocked for both in-store and e-commerce customers.
So I think it is fair that retailers raise the stakes on having product in stock, just in time. E-commerce is a higher cost and higher stakes model than traditional retail. Manufacturers need to be fully vested in supporting the higher costs of the model with dollars and precision execution with tighter practices. While many will be compliant, it seems that the carrot and stick approach may be necessary for others.
KC: I must admit that while I’ve always been conscious of how tenuous the hold is that any retailer has on shoppers, I’ve been even more aware of this lately. I know that since going to checkout-free Amazon Go, I find lines at stores to be increasingly intolerable; it is like my brain has been rewired. And more and more, when I go to stores, I find myself creating a kind of informal list in the back of my mind of items that I don’t need to go to the store for anymore. I’m someone who has embraced e-commerce, but I feel like the wind is at my back these days, and the shift is taking place faster and faster … it is like the Ernest Hemingway line about going bust that I’ve quoted here from time to time - it happens “gradually and then suddenly.”
TF: We’ve often talked about the amount of time and discipline that Amazon puts behind understanding the shopper, innovating on their behalf and taking years to patiently develop and roll out new capabilities. I think we are going to see an explosion of these efforts transform the market in the coming few years.
The Go format is a great example of a cutting-edge capability that Amazon has been well in front of. They took years to incubate it in a warehouse prior to setting up the store for the employee test. And then they took their time to work out the kinks before opening it to the public. We don’t know how and when they will expand it beyond Seattle. But once they feel like they have it nailed, they will not be shy in deploying it widely.
We also talk about Amazon’s shopping automation. Capabilities like Subscribe & Save, Dash, Voice and their Internet-of-Things strategy. We’ve talked about Amazon’s years of developing these capabilities, learning from their customers and refining the programs. It’s a massive business today that has stolen single digit volumes from most incumbent retailers. But it’s going to explode. Goldman Sachs published a report last August that has Amazon’s packaged goods volume hitting $160 billion by 2027. And that’s before the impact of the Whole Foods acquisition which will only increase these figures. Are retailers ready to defend this? Have they also been investing in automation for years?
As Amazon works through their store strategy, develops offerings in health care and continues to invest in shopping automation, they alone will change the game. Then add what we are seeing from other retailers, led by Walmart, and the “gradually” will suddenly seem “suddenly”.
KC: Finally, what do you make of the story about JD.com, a major rival to Alibaba in China, coming to the US? Apparently JD.com is both raising funds to make an incursion that will start in Los Angeles, where it believes a significant Chinese-American population will be friendly to its offering, and is, according to its founder, “considering multiple options for a U.S. entry, including partnerships with local companies.” This last piece would scare me a little bit if I’m not one of the companies with which JD.com creates an alliance, and, as I said here the other day, it underlines the fact that in the current environment, you can’t move too fast, can’t invest too much, can’t embrace the future too enthusiastically. If you don’t go get the future, the future is going to get you … and it won’t be pretty.
TF: The notion of JD.com entering the US is very interesting. I’ve always felt that there was a tremendous opportunity here for a well-capitalized company with deep e-commerce domain expertise to deploy an ecosystem that re-engineers the way retail works. Much like Amazon is doing within its own ecosystem, the idea of a third party bringing e-commerce, marketplace and logistics capabilities across the US, market by market, could totally work. However, it would take massive amounts of capital to pull off – billions of dollars per market. But it could work, and a company like JD.com may have the capability and clout to pull it off.
It will be interesting to see how JD.com approaches it. Will they create an open, shared platform that allows retailers to act independently? Or will it be a closed system with only a few select retailers per market? The latter would certainly be scary for the unchosen. And a double-edge sword for the chosen.
It is certainly potentially a scary proposition for a retailer to do a deal with JD.com. But as long as it was set up so that the retailer could maintain its own customer relationships and use the JD capabilities as part of its own ecosystem, I could see it working.
This week's topic: How the “nasty undercurrents” of traditional retail is setting the table for a new explosion of e-commerce and automation-related innovation.
And now, the Conversation continues…
KC: I was intrigued by two Walmart-related stories that have broken since last we spoke. In one case, Walmart announced that it is increasing pressure on its vendors by raising the fines they have to pay if they don’t make deliveries on time, and in the other, it said it will sharing more sales data with suppliers as it looks to sharpen its in-store replenishment and curb out-of-stocks. On the one hand, this seems a little carrot-and-stick to me, with Walmart execs playing both good cop and bad cop at the same time. But I suppose that it reflects a growing new reality of retailer-supplier relationships - that at a time when there are so many options, retailers simply cannot afford to be out of stock, and so they need to do everything they can to create an environment in which this doesn’t happen.
Tom Furphy: I’ve always felt that one of the nasty undercurrents of traditional retail has been in the chargeback and invoice deduction areas. Too often it’s used by subpar retailers to enable them to make profit off the buy vs the sell. Instead of focusing on building great experiences for customers, retailers would simply hammer harder on their suppliers to pad the bottom line.
To be fair, one of the stark realities of retail is that it is a thin margin business, in which retailers must act with precision across the supply chain, merchandising and store operations functions to be able to deliver profit. And the margin balance between manufacturers and retailers has forced even the best retailers to rely on manufacturer funding to make their numbers.
In-stocks have always been a primary driver of shopper satisfaction and, accordingly, have always been a strategic imperative for retailers. In the past, if a product was out of stock, the retailer had decent reason to believe that the shopper would select an alternative product nearby on the same shelf. Worst case, they would fill the remainder of their basket during the trip and grab the out of stock item separately from another retailer.
Today, in a world where an alternative source of a product is just a click away, the stakes are even higher. It is easy for a shopper to check other retailers’ inventory and move the transaction, and maybe even the entire basket there. Also, many retailers, such as Walmart, are using their stores as fulfillment centers for e-commerce. This puts further pressure on the stores to be stocked for both in-store and e-commerce customers.
So I think it is fair that retailers raise the stakes on having product in stock, just in time. E-commerce is a higher cost and higher stakes model than traditional retail. Manufacturers need to be fully vested in supporting the higher costs of the model with dollars and precision execution with tighter practices. While many will be compliant, it seems that the carrot and stick approach may be necessary for others.
KC: I must admit that while I’ve always been conscious of how tenuous the hold is that any retailer has on shoppers, I’ve been even more aware of this lately. I know that since going to checkout-free Amazon Go, I find lines at stores to be increasingly intolerable; it is like my brain has been rewired. And more and more, when I go to stores, I find myself creating a kind of informal list in the back of my mind of items that I don’t need to go to the store for anymore. I’m someone who has embraced e-commerce, but I feel like the wind is at my back these days, and the shift is taking place faster and faster … it is like the Ernest Hemingway line about going bust that I’ve quoted here from time to time - it happens “gradually and then suddenly.”
TF: We’ve often talked about the amount of time and discipline that Amazon puts behind understanding the shopper, innovating on their behalf and taking years to patiently develop and roll out new capabilities. I think we are going to see an explosion of these efforts transform the market in the coming few years.
The Go format is a great example of a cutting-edge capability that Amazon has been well in front of. They took years to incubate it in a warehouse prior to setting up the store for the employee test. And then they took their time to work out the kinks before opening it to the public. We don’t know how and when they will expand it beyond Seattle. But once they feel like they have it nailed, they will not be shy in deploying it widely.
We also talk about Amazon’s shopping automation. Capabilities like Subscribe & Save, Dash, Voice and their Internet-of-Things strategy. We’ve talked about Amazon’s years of developing these capabilities, learning from their customers and refining the programs. It’s a massive business today that has stolen single digit volumes from most incumbent retailers. But it’s going to explode. Goldman Sachs published a report last August that has Amazon’s packaged goods volume hitting $160 billion by 2027. And that’s before the impact of the Whole Foods acquisition which will only increase these figures. Are retailers ready to defend this? Have they also been investing in automation for years?
As Amazon works through their store strategy, develops offerings in health care and continues to invest in shopping automation, they alone will change the game. Then add what we are seeing from other retailers, led by Walmart, and the “gradually” will suddenly seem “suddenly”.
KC: Finally, what do you make of the story about JD.com, a major rival to Alibaba in China, coming to the US? Apparently JD.com is both raising funds to make an incursion that will start in Los Angeles, where it believes a significant Chinese-American population will be friendly to its offering, and is, according to its founder, “considering multiple options for a U.S. entry, including partnerships with local companies.” This last piece would scare me a little bit if I’m not one of the companies with which JD.com creates an alliance, and, as I said here the other day, it underlines the fact that in the current environment, you can’t move too fast, can’t invest too much, can’t embrace the future too enthusiastically. If you don’t go get the future, the future is going to get you … and it won’t be pretty.
TF: The notion of JD.com entering the US is very interesting. I’ve always felt that there was a tremendous opportunity here for a well-capitalized company with deep e-commerce domain expertise to deploy an ecosystem that re-engineers the way retail works. Much like Amazon is doing within its own ecosystem, the idea of a third party bringing e-commerce, marketplace and logistics capabilities across the US, market by market, could totally work. However, it would take massive amounts of capital to pull off – billions of dollars per market. But it could work, and a company like JD.com may have the capability and clout to pull it off.
It will be interesting to see how JD.com approaches it. Will they create an open, shared platform that allows retailers to act independently? Or will it be a closed system with only a few select retailers per market? The latter would certainly be scary for the unchosen. And a double-edge sword for the chosen.
It is certainly potentially a scary proposition for a retailer to do a deal with JD.com. But as long as it was set up so that the retailer could maintain its own customer relationships and use the JD capabilities as part of its own ecosystem, I could see it working.
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