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, we focus on existential threats to traditional grocers, value propositions that can bolster so-called traditional retailers, and the ineffectiveness of whining.

And now, the Conversation continues…

KC: There was a day recently that I thought was emblematic of all the changes taking place in the retail space right now … it seemed like almost every story on MNB reflected existential change at some level.  For example, we had Target expanding its small urban format stores, which also can be used as delivery depots, and it is happening at the same time as it is expanding its Shipt delivery service.  We had Nordstrom expanding its Nordstrom Local concierge-driven concept, which essentially is a clothing store without clothes.  And then we had former JC Penney CEO Mike Ullman - who has since been named the new chairman of Starbucks - suggesting that projections from some quarters that roughly 25 percent of the nation’s 1,200 malls are likely to close are all wrong, and that he thinks only 25 percent are likely to survive.

I’d never argue that bricks-and-mortar is dead, but these kinds of stories certainly point to enormous and fundamental shifts, no?

Tom Furphy:
We are absolutely in the midst of a significant fundamental shift. Retail has essentially always been about solving problems. Those retailers that solve customers’ problems the best, with a winning combination of service, price and convenience win. The retail model has always been dictated by the tools available to retailers and their shoppers.

In the last hundred years it has evolved from small stores with little advertising media, to large format stores with mass media and efficient supply chains to now more digitally-enabled, personalized models with a variety of in-store services and delivery or pickup options.

Retailers are getting better at experimenting with and embracing technology. I think we are seeing more examples of progressive, customer-centric retailers making significant modifications to their go-to-market models to serve the changing consumer. I don’t think that signals in any way that stores are dead. But I do think the fundamental role of the store is changing. And good retailers recognize that.

Stores whose value proposition is solely to serve as inventory access-points for shoppers are going to be increasingly challenged by stores that provide deeper value. Shoppers have access to large, personalized assortments online. Having their purchases delivered to their homes or staged for pickup eliminates the mundane tasks of shopping. This opens up time for the shopper to spend on richer experiences and it enables stores to be used increasingly in value-added ways. Discovery, information and sensory experiences will become even more important. Stores that deliver on this will not go away.

As far as malls go, I have no idea how many will survive. It seems to me that, similar to individual stores, the malls that will do well into the future are the ones that provide value beyond aggregation of products or stores into one place. I’m pretty sure the malls that don’t make any changes will die. It’s ultimately up to the mall owners and operators to determine how they re-invent themselves and provide new types of value to shoppers.

KC: Another story that ran that same day was about how former Walmart CEO Bill Simon “slammed Amazon” on CNBC “for using cloud and ad revenues to support what he called meager retail profits.”  He argued that Amazon has achieved “traction and profitability” with businesses that have nothing to do with retail, and positioned Walmart as somehow superior because it built retail market share the old-fashioned way.  This struck me as a shining example of not understanding how to succeed in modern retail, and a little bit of sour grapes.  (One MNB reader wrote in to point out that if regulators had allowed Walmart to get into the banking business, that’s exactly what it would’ve done.  But it didn’t, so they couldn’t.)

Knocking the other company’s (entirely legal and very smart) business model gets you nowhere (except maybe being mocked on MNB);  you actually have to compete and figure out a better way, or at least a more effective way, to do things that other retailers aren’t doing.

It's amazing to me how the cynics point to Amazon’s multi-faceted business model as somehow being unfair. Over the past two decades there have been fundamental shifts in underlying business infrastructure, driven by digitization. It is this core shift that Amazon has capitalized upon as a first-mover, agile competitor. They have simply configured a business model to best serve the shopper as they want to be served. And I’d say that it has certainly gained traction!

Jeff’s original vision that the internet could open limitless selection based upon the elimination of shelves was powerful. Enabling a massive selection, ultimately across many categories is the force that underlies the entire business. Shifting from a store-based cost structure to a technology and fulfillment based cost structure is not unfair, it’s innovative. It’s a new way to serve shoppers, which matches up perfectly to their general shift to digital. And then defraying the costs of those capabilities via AWS for technology and FBA for fulfillment is brilliant.

Additionally, Prime is arguably the best loyalty program in retail. Kudos to Amazon for constantly adding services and benefits to increase the value. Solving a range of needs and wants is good customer service. How is this all somehow predatory or unfair?Incumbent retailers could have done many of the same things that Amazon has.

Glen Terbeek, industry veteran and author of “Agentry Agenda,” was preaching this to the grocery industry back in the late 90s. But nobody listened. Starting with stores and an existing cost structure does put incumbent retailers at a disadvantage. Perhaps capitalization challenges would have throttled the amount of innovation they could introduce at any one time. But that doesn’t mean they should have dragged their feet up until the last few years. Standing a higher ground and accusing Amazon of “cheating” is a fool’s game.

KC: Finally, there was a pair of stories that I found interesting and a little ironic.  One was about how suddenly the independent bookstore sector and Barnes & Noble are seeing each other as kindred spirits, despite the fact that not that long ago they were bitter rivals, mostly because Amazon is hurting both sectors.  (“The enemy of my enemy is my friend.”)  Of course, at the same time, on the same day, Amazon announced the opening of three more Amazon Books stores, reflecting additional investment in the bricks-and-mortar segment.  The battle goes on, even with some shifting loyalties…

A constant in these disruptive times is that Amazon will continually innovate on behalf of their customers and will always experiment to evolve the model. They tend to not focus a whole lot on competition. They are mindful of competition, but they are obsessed with customers. This makes them a force that constantly raises the bar for competitors.

I would not be surprised to see even more collaboration between traditionally competitive retailers in the coming quarters and years. Just as Amazon and Best Buy have recently teamed up, there will likely be many opportunities for retailers and external partners of complementary strengths banding together to serve the shopper. This ecosystem approach to the market is totally reasonable today, especially if it can enable retailers to be more agile and to serve their customers more effectively.

That said, I do think retailers need to approach partnerships with a clear purpose and value proposition. As they further rely on others to deliver value, they need to make sure they receive proper emotional credit from their customers. This will keep them in favor and keep customers coming back for more.

The Conversation will continue…

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