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: The degree to which Amazon poses an existential threat to traditional food retailers. And why. And what the competition needs to do ti survive.

And now, the Conversation continues...

KC: It was my impression that some of the projections announced by Nielsen at last week’s Food Marketing Institute (FMI) Midwinter conference - that within a decade, 20% of total store sales will be online, and 40% of center store sales - may actually have gotten some people’s attention.  You were there - did you have the same sense of the audience?

Tom Furphy:
I think so. It’s always a little tough to read executives in our industry. But based on the conversations throughout the conference, I think people realize it's coming. One CEO told me that this is what keeps him up night. He said he’s constantly asking if his company is doing enough, if they are doing the right things. I think this is healthy.

KC: Agreed. We're actually hearing senior executives say, for the first time in my memory, that the pace of change has gotten to the point where they are not sure they can keep up. That's an extraordinary admission.

It is critical to be doing something today. Doing so encourages you to put customers first and to innovate on their behalf. It forces your organization to think about e-commerce as a core capability, and it requires you to get your supporting systems in shape to enable the processes and services required of e-commerce. That’s not to say that putting up an e-commerce site and offering pickup or delivery is enough. It’s not. But it is an important first step toward delivering the capabilities that the evolving shopper is going to demand. You don’t want to be playing catch up here.

KC: And it isn't just about sales.  One MNB reader wrote in to remind me that if 40 percent of center store sales move online, that threatens the promotion and fee money that so many manufacturers pay to retailers in order to get placement on physical store shelves.  Our friend Glen Terbeek is fond of pointing out that a lot of retailers depend on that promotion money for their net profit margins at the end of the year, and so this shift isn't just a technological threat, but an economic one.

Most retailers understand that more than 100% of their profits come from center store. That is, all of the perimeter departments combined tend to be breakeven or a little worse. The store is funded by the volume, stability and profit of the center store.

Trade funding is certainly a primary driver of center store profitability. The dollars that retailers receive from manufacturers make the difference between profit and loss. E-commerce retailers like Amazon also rely on this funding. So, it’s not like the funding will go away from the industry. But it will follow the volume. As volume shifts away from traditional retailers, trade funding shifts, and the profit shifts. That is a tough equation for a retailer that doesn’t follow.

Given this shift, it absolutely behooves a retailer to have a strategy to defend this center store volume. They need to think about how they can assist their customers in buying these products through them. As Amazon automates these categories with Subscribe & Save, Alexa voice ordering, Dash, new robotic formats and their Internet of Things strategy, retailers stand to lose a lot of ground if they don’t innovate commensurately. E-commerce ordering with pickup or delivery options is an important starting point. But retailers already need to be thinking about what is next. They need to develop a strategy to automate these center store categories.

KC: I can't imagine that manufacturers want all this volume to go to Amazon.


Manufacturers don’t want to shift all of their funding to Amazon and let them run away with these categories. It is not healthy for them to over-rely on one category killing retailer. We work with many manufacturers that want to support traditional retailers in developing these capabilities. That support comes in the form of teams, product and usage data, interesting supply chain and packaging initiatives and funding. With this support, as retailers are able to offer new capabilities to defend their center store share, they will be able to maintain and even grow their center store profitability. But they have to start now or the market will run away from them.

KC: And what’s also interesting to me is how Amazon Go seems to have gotten people’s attention, though I think you can break down reactions into two basic categories - people who say Amazon is going to get killed by shrink and that this will never work, and people who say that this is the thing about Amazon that finally scares them.  I don't know about you, but my reactions to this are a) I’m pretty sure Amazon has figured out the shrink thing, and b) this is the thing about Amazon that scares you?  (This is a one-off, and so small in terms of proportion compared to everything else that Amazon is doing…)

I’m sure Amazon either has the shrink thing figured out, or they feel pretty good that they will figure it out in short order. The technology in the store will be able to identify shoppers with the app as well as shoppers without the app. When shoppers without the app grab products, they will be tracked. If they try to leave without paying, the system can alert a clerk to “assist” them with their purchase. From what I’ve heard, the system works really well. Amazon employees that are testing the service are constantly trying to fool it by grabbing products and putting them in others’ baskets, crossing their arms in front of each other and the like. Apparently the system is pretty foolproof.

Perhaps Amazon Go is the capability that has put people over the tipping point in recognizing Amazon’s disruptive potential. Digital programs like Subscribe & Save, Dash buttons and voice ordering, while all driving a multi-billion dollar business, are silent killers and seem less obvious to competitors. They will hold the lion’s share of the business for a long time. But I could see the Go concept working throughout a range of store formats and sizes. Over time it could add up to significant volume.

Ultimately, as we’ve said for years here on MNB, Amazon is about being the go-place for anything a shopper may want. They realize that it takes a range of digital and physical capabilities to deliver on that. They innovate relentlessly on behalf of the shopper. They will not slow down.

KC: The other thing that is amazing to me is that Amazon seems to be speeding up, not slowing down.  Slice is saying that in 2016, Amazon accounted for 53 percent of all e-commerce growth … as compared to 2015, when it accounted for 40 percent of e-commerce growth.  That strikes me as extraordinary, and a little surprising.  Thoughts?

They still see themselves as a startup. When you are a startup, constantly bringing breakthrough capabilities to market, you can achieve pretty remarkable growth. That’s what you’re seeing. The hundreds of innovations that they have been creating are coming to fruition. It is causing a multiplier effect on growth. And there are hundreds more behind them. Amazon is claiming e-commerce as their own, and in turn are claiming the future of retail as their own.

It’s pretty remarkable that this is the same company that now has physical stores, is investing in their own fleet of planes and a $1.5B cargo hub, will be delivering via drones shortly, has defined and owned the cloud computing space and is up for a best picture Oscar.

And for them it is still Day 1!

The Conversation will continue...

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