business news in context, analysis with attitude

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 e-commerce dealt with the holidays, the challenge to bricks-and-mortar stores, and the advantage of no-limits thinking.

And now, the Conversation continues...

KC: Just a few subjects with which to start the new year…to begin with, I’ve had a couple of MNB readers point out to me that in some ways, the e-commerce silence was deafening over the holidays.  There weren’t any reports that I’m aware of about broad outages or websites collapsing under the weight of increased internet traffic.  And there weren't even very many complaints about products not getting to people on time for the holidays.  (Okay, there was one I’m aware of, from my wife … but that more fell into complaining about having to spend extra on expedited shipping because she waited too long.)  And yet, the e-commerce numbers were pretty strong.  I guess I’m wondering is this means that we’re actually at a point where the e-commerce infrastructure has largely gotten to the point where it is keeping up with even expanding demand.  And whether this is likely to be a semi-permanent situation, or is it likely to be just a lull before another storm?

Tom Furphy:
You’re right, it was a pretty quiet holiday. I do think it’s because we’re at a point where the infrastructure has matured to the point of being able to handle demand. Both the underlying technology platforms and the distribution infrastructure have been heavily upgraded over the past few years.

The technology has benefitted from improvements in core functionality as well as improvements in architecture. The technology stacks have become much more efficient. Early e-commerce systems were monolithic applications that became severely stressed and would buckle under the pressure of high volume. All the elements of functionality, like content, search, inventory, and payments all worked together in the same stack. When volume ramped up, these functions would try to work with each other and processing power could not keep up. Sometimes they would crumble under the weight of the data or a glitch with one piece of functionality would take down the whole stack.

KC: It seemed like every year there would be a story about a couple of major retailers - think Toys R Us - that collapsed under the weight of e-commerce expectations. What always was interesting to me was the range of reactions. Some thought it was incontrovertible evidence that e-commerce was a flawed business model, but others thought that it was just a matter of building a strong and deep enough foundation to support a growing segment of the business. I always was part of the latter group, and you were actually in there helping to build the foundation.

Over the past few years, the “big data” infrastructure to support these systems has dramatically improved. Also, these e-commerce stacks have migrated into “services architectures” where each discreet piece of functionality works on its own and efficiently connects to the others. This all allows for processing capacity to be distributed across the services and is far more efficient than everything being coupled together.

As far as on-time delivery goes, I think we’re realizing the benefit of all of the investment in the physical infrastructure over the past few years. We know Amazon added dozens of warehouses in 2016, hundreds over the last several years. This gets more inventory into the system and places it closer to customers. Also, Amazon is bearing more of the load by using their own planes, trailers and local delivery staff. Couple this with improvements made by other retailers and third parties such as FedEx and UPS and you have enough capacity and efficiency to meet demand.

Barring a crazy spike in e-commerce in the coming years, I think that technology and delivery capacity will continue to improve enough to generally keep up with demand. We will see some stresses, but I think overall we’ll see mostly smooth sailing going forward.

KC: It was interesting to me to see stories in recent days about the increasing visibility that e-commerce-oriented AI seems to be getting, largely because of Amazon’s Echo/Alexa system which pretty much sold out over the holidays, as well as about how we’re likely to see more and more store closures during 2017 - and not just by perennial underperformers like Sears.

To me, this reflects a couple of things in the bricks-and-mortar world.  One is an inability to compete in the technology arena, but the other - and this is critically important, I think - is the absolute necessity of creating bricks-and-mortar stores that compete against tech-driven companies.  The ad we posted on MNB from Monoprix, emphasizing the importance of so-called “human technology,” seems an almost isolated effort among bricks-and-mortar retailers to a) be who they are, and b) own it.  Thoughts?  (I would expect that this will be something that you’ll discuss when you participate in the keynote panel at FMI Midwinter later this month..)

Technology is certainly changing the game. AI and other shopping utilities are becoming part of everyday life and fundamentally changing the way shoppers discover and procure products. It is to the point where people can easily order from their phones, or with the push of a button, the mention of a product to their device or passively when their appliances trigger it. The traditional stock up trip, the very bread and butter of the grocery business, will become automated to the point where replenishment orders are ready before shoppers even think of it. Retailers that fail to embrace this reality and aren’t acting on it now will certainly be left behind.

The other day I heard Jim Cramer on CNBC say that retailers are the cavalry, on horseback with muskets, fighting against Amazon who has tanks, jets and long-range missiles.

KC: It is like the line from The Untouchables - you don't want to bring a knife to a gunfight. Which is exactly what a lot of traditional retailers are doing. Instead, they should follow the advice of Jimmy Malone - "He pulls a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue!"

That is so true, and retailers have no idea how far behind they are falling. Retailers lose technological ground to Amazon every day. Their evaluation cycles are longer than Amazon’s innovation cycles.

Here’s the reality. Retailers cannot compete technologically head to head with Amazon. There is no retail roadmap as powerful as Amazon’s and there is no retail IT team as strong as Amazon’s. Retailers cannot innovate and develop technology on their own, head-to-head vs Amazon. They will lose. I know we get knocked for constantly touting Amazon in this column, but that’s the cold hard fact.

In my opinion, the best way for a retailer to effectively differentiate against Amazon long term is to truly think about their own customers and work backward. Who are these shoppers? What is important to them? What unique and compelling value can you provide to help solve their problems? When they do this, I think they will find their stores and their people to be pretty important parts of the service equation and areas where they have an advantage over Amazon.

Leveraging stores and people, then layering in technologies that both serve their customers and empower their employees is critical. Retailers with a compelling mix of physical assets, people and technology can do well against Amazon. It’s important to have all three.

To me, incumbent food retailers have just as much right as Amazon to define the next generation of shopping. The capabilities are there for retailers to automate the replenishment trip, ramp up services and experiences in the perimeter, empower teams to be experts in helping shoppers and to make sure there are easy delivery or pickup options. Each retailer can put their own twist on this. But some combination of these can be a compelling answer for everyone.

KC: Finally, I have to ask:  what the hell is going on with Amazon’s super drones and floating warehouses?  When I see these kinds of stories, it has gotten to the point where I sort of shrug my shoulders, laugh, and figure that regardless of whether Jeff Bezos is just playing with us or whether this stuff represents real potential advantages, it is just a perfect reflection of Amazon’s attitude and culture.  As in, “Normal just begs to be messed with.”  What do you think about this stuff?

There truly are no limits on Amazon’s thinking. To them anything is possible. It is a culture where people are encouraged to be bold and to take chances. This is ingrained their strategy, planning and budgeting processes. They will take some swings and misses. But they are also going to hit a lot of home runs.

If super drones and floating warehouses are even remotely possible, and Amazon’s analysis shows them that these will help better serve customers, it’s not surprising that they are seeking patents for them. And considering Jeff Bezos’s other passion is space travel, these things seem entirely possible.

Remember, as successful as Amazon is, they don’t sit back. Every day they come in to work believing that “Today is Day 1”. They operate as if they are a raw startup and anything is possible. That takes them into some pretty interesting places. And it is that kind of thinking that will be required of retailers in order to compete effectively against them.

The Conversation will continue...

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