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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 the impact that three deals that Microsoft has made with different retailers could have on the retail business.

And now, the Conversation continues…

KC: It was been interesting, and probably not at all coincidental, that three major retailers - Kroger, Albertsons and Walgreens - all have announced significant individual partnerships with Microsoft.

Tom Furphy:
It makes sense on a number of levels. Microsoft is one of the largest and historically most innovative tech companies. Their Azure cloud computing platform is a strong alternative to Amazon’s AWS, giving retailers an option versus working with a competitor. And, given their scale, they need to power entire industries to drive growth. They cover almost everything a retailer would need from software, to certain hardware, computing and storage, machine learning and AI. Working with large retailers will allow them to better tailor products to the business and help them build a robust roadmap forward.

KC: From my reading, the Kroger deal seems to be the most ambitious of the three, aimed at creating a store-of-the-future that will be better both for the consumer and the company, with, for example, smart shelves that will make more and better information to shoppers as well as making it easier for Kroger employees to pick products for online orders. There’s also a project in which the two partners are working to develop a Virtual Store Manager, which would alert the human store manager when, say, there aren’t enough shopping carts for customers at the front of the store. (I may be wrong about this, but it sounds like the Doctor hologram on ‘Star Trek: Voyager,” which actually would be pretty cool.)

The physical store experience is ripe for innovation. Although I would want to make sure they’re applying the technology thoughtfully and not just implementing tech for tech’s sake. If technology can lower costs, save time and improve shopper experience, then it is well founded. Retailers can apply the freed-up cost and additional shopper time to add to the richer, sensory elements of the experience. People only have so much shopping capacity. If we can take the mundane processes of shopping and automate them, we free up shopping capacity to be spent on discovering products, engaging with store employees and overall increasing the utility and emotion of the experience.

KC: Two comments from the companies struck me as fascinating, and I’d love to hear your thoughts. One from Kroger CEO Rodney McMullen, who said, “Together we can create something that, separately, we could not.” The other was from Microsoft CEO Satya Nadella, who said he hoped the Kroger experience would adds “inspire other grocery chains to adopt it in their own stores” … which pointed to the fact that while Kroger may be at the head of the line for this technology, it will not have an exclusive.

I think that is an important statement from Mr. McMullen. So often we see retailers that think they can do everything themselves. They feel that they are experts in their business and that no outsider can add value. They are guarded to open up with partners, often beating them back while holding on to their own technology roadmaps. That simply is not going to cut it going forward. Amazon invests billions of dollars annually on R&D. Retailers need to invest more heavily while also putting some of the investment burden on partners.

It would be pretty tough for Microsoft to give any retailer an exclusive. I think the tie-up gives Kroger first shot at the things they want to do and an early look at the things Microsoft is working on. As long as Kroger can be nimble in experimenting and implementation, they should be able to stay ahead of the curve, while allowing Microsoft to monetize the innovation across their customer base.

KC: The Walgreens deal was for something different - to design ‘digital health corners’ for its stores that will “promote the sale of health-related devices and help patients manage chronic diseases.” This intrigues me because health care seems to really be at the nexus of a lot of retail and technological innovation these days. I’m sure you’re seeing a lot of this in your VC business … companies looking for ways to disrupt the health care business.

In our first Innovation Conversation of the year, you asked me to predict where we would see the most disruption in the coming year. I answered with health care. The current system is too broken and too expensive to not disrupt. And retailers are the perfect disruptor. They have wide-scale customer/patient relationships, they are in every neighborhood, they handle prescriptions and sell products that support better health management and they have a knowledgeable staff and partners to deliver the content of medical advisement. Yes, in our business we are seeing lots of innovation in health care both on-Amazon and off. Amazon is going to really shake it up. But there is absolutely a window for other retailers, such as Walgreens in this case, to get out in front of Amazon here. But it’s a small window.

KC: And then Albertsons signed a deal that will apply Microsoft’s artificial-intelligence technology to its business and could lead to the development of checkout-free stores. It seems to me, from my reading of the press releases and a lot of the stories about these deals, that Albertsons actually was a lot more honest about why it was making these moves - Amazon’s aggression simply made them vulnerable and, as a result, more motivated to modernize its infrastructure and in-store experiences.”

I have two thoughts about this. One is that companies have to be ready do do a lot more than just modernize their in-store experiences … in this environment, they have to be willing to make large and fundamental changes to be positioned for the customer of the future. The other is that, as I wrote last week, among the things that Amazon is best at - maybe better than any other company - is reinvention and disruption from within. Amazon has known that as its business grew, competition would become more intense, not less so. What Albertsons - and everyone else - has to do is not aim for where Amazon is now, but where they’re going to be in five years. Which ain’t easy.

The Albertson’s move with Microsoft is nice but will merely allow them to catch up with Amazon’s current capability as a best case. What are they doing to truly improve shoppers’ lives? Using Machine Learning and AI to make stores better is one thing, but are they really truly changing the shopping experience?

Machine Learning and AI are going to transform retail. Amazon has thousands of experts embedded across their teams. It’s engrained in everything they do. They innovate internally well before experiments hit the market. Jeff Bezos often says that Amazon is working on a quarter that is three years out. Imagine how far ahead they are with thousands of experts innovating out in 2022? Amazon’s lead is still expanding, not contracting.

For me, the Amazon DRS (Dash Replenishment Service) exhibit at CES was mind blowing. It showed the connected home creating demand signals all over the place, and Amazon receiving and fulfilling them. Goldman predicts Amazon will have $160 billion in packaged good sales by 2027. Over half will be driven by subscription, prediction and IoT. I also recently spent some time with the Amazon Key team. The strides they are making in bringing goods directly to your refrigerator, cupboard or pantry is amazing. What are other retailers doing in these areas?

The Conversation will continue…

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