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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 Walmart has achieved a massive shift in culture, but how such a leap is not out of reach for far smaller companies looking to compete…

And now, the Conversation continues…


KC: I’m not sure that last week was an actual turning point for Walmart, but it certainly was a turning point in how I view the company … which is saying something, because I’ve been saying for a while that Walmart seems to be surprising a lot of people with how nimble and innovative it seems to be.

First, I did a podcast at Google’s NYC offices in which more than a few smart people told me that Walmart is the most innovative retailer out there right now - which is saying something.  (That podcast ran on MNB just a couple of days ago.)  Then, in short order, Walmart more than doubles the delivery companies with which it is working around the country and promises to expand its delivery business even more, it starts advertising for a CEO to run a so-called “stealth company” that is designed to be disruptive (I’m sure the folks in Bentonville loved the buzz about that),  Plus, they open a 340,000-square-foot, high-tech, automated consolidation center in California designed to  be the first in Walmart’s supply chain to receive, sort, and ship freight three times faster than conventional warehouses.

I guess I have two questions/observations:  1)  Would you agree that Walmart has managed to achieve a remarkable shift in culture in how it approaches internal disruption of a legacy business.  And 2) What are they drinking in Bentonville these days, because whatever it is, it’s working.

Tom Furphy:
I absolutely agree that Walmart has achieved a massive shift in culture over the past few years, post the acquisition of Jet.com. They made a massive bet on buying that company, its culture and leader Marc Lore for $3.3 billion. The technology and infrastructure that Walmart purchased was worth maybe a tiny fraction of the purchase price. But what they acquired in risk-taking, innovation and bold vision may end up being worth far more than the purchase price.

Building off the cultural impact of this acquisition, we’ve seen Walmart turbocharge their ecommerce and omnichannel efforts. They’ve made a number of public and private bets, they are experimenting widely, and they are not slowing down. We see them deciding to build some components of the services themselves and partnering for others. The resultant ecosystem that they are bringing to market is impressive. It’s robust, nimble and is well positioned to grow and go where the customer goes.

Walmart is a massive company – the world’s largest retailer. As a result, they need to make these massive bets to move the needle. They have the scale to be able to afford lots of experiments. But if you think about it, the cost of these relative to the size of the company’s volume and balance sheet, is not very extreme. The Jet.com acquisition price, while bold, amounted to less than 1% of that year’s sales. The amount they’re spending on R&D each year, and I’m guessing here, is likely no more than 1% of a current year’s sales.

Most retailers can afford this level of investment. They may not have existing budget for it, but with a little re-engineering of the existing cost structure, they could make room. I’d argue that retailers can’t afford to not be making R&D investments of at least 1% of sales. They’re all chasing Amazon, who experts calculate spent roughly $23B in 2017, or approximately 13% of revenue and 7% of their product sales that year on R&D. Everyone needs to be thinking and acting more like them.

KC: Having spent time at both CES and NRF over the past couple of weeks, as well as with some very smart and accomplished technology folks who have visions of some remarkable changes in how the retail business will approach e-commerce in general and things like BOPIS in particular, I can’t shake the feeling I have that the distance between the haves and the have-nots is only going to get larger, and that the ability to spend the kind of money necessary to compete will mean that smaller companies will find themselves at a disadvantage.

Now, I would offer a caveat to that conclusion, which is that some small independents - the ones that have been expert at creating for themselves differential advantages that and relevant to and resonate with the shopper - are going to be fine, because they have experience at turning their small size into a competitive strength.  But the vast middle of the competitive field, where they have neither big bucks nor a ton of imagination, probably is screwed.  Thoughts?

TF:
I think the gap will widen only if the have-nots let it. I don’t think anyone will be screwed solely because of their size or seeming lack of resources to fund innovation. As I said above, anyone, including those in the middle, can scrape together enough budget to adequately experiment and innovate. It’s not about size or resources, it’s about motivation and customer focus.

Smaller regionals and independents certainly don’t have the wherewithal to make bets at the scale of Amazon, Walmart or Kroger. These are massive companies with massive resources. A five-store test for them is a lot less impactful than a one- or five-store test for a 25-store chain. But, as you say, many small retailers do have a history of leveraging their small size to their advantage. They know their customer, focus on them and to innovate to better serve them. That positions them to make smart bets on testing and measuring. For them, even a small test can produce enough results to determine potential.

We’re now more frequently seeing the big guys use ecosystems of partners to nimbly and cost-effectively build new go-to-market paths. They define the customer value proposition, then weave together third party and homegrown capabilities to configure, test and scale the service. There is absolutely no reason that a mid-sized retailer cannot do the same thing.

KC: In other words, retail death is a choice. I’ll buy that.

TF:
In our businesses, we’re seeing many interesting collaborations where service providers are linking together to provide tests across a number of retailers, large and small. They’re collating the results, adjusting and iterating. These can all be done well within reasonable R&D budgets. Retailers of all sizes must actively seek these collaborations to remain relevant to their customers.

KC: Finally - Amazon Prime has more than 100 million members?  Yikes?  At this point I have no idea what the under/over is … but I’d bet the over.  You?

TF:
Prime has clearly been a successful program for Amazon. Nearly 100% of the people I ask say that they love being a Prime member. It’s hard to argue with the benefits of free two-day shipping, access to Amazing content and now special pricing at Whole Foods, all for $10 per month. That’s not to say that Amazon can rest on their laurels. We’ve seen some evidence of shipping speeds slowing and perhaps some selection becoming ineligible for Prime shipping. It’s understandable that Amazon may need to tune the program. But it’s important to continue to deliver an ever-expanding value proposition.

Who knows how high the membership numbers can go. It does seem that Amazon will make good on continually improving the value proposition. That should keep churn low and continue to attract new members. The law of large numbers will apply. And not every household will become Prime members. But it seems there’s still a little runway for growth ahead.

The numbers are truly impressive. At 101 million Prime customers, Amazon receives over $12 billion in revenue annually to offset the cost of the program. Those customers account for over $141 billion in annual sales. And Amazon has them captive to market more and more products and services. I’d say that’s an impressive loyalty program!

The Conversation will continue…

KC's View: