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 talk about how to monetize the meal kit business and retailer data in generating ad dollars. And, of course, we talk about Amazon’s NYC HQ2 decision.

And now, the Conversation continues…

KC: I wanted to ask you this week about some of the recent failures in the meal delivery business, with companies like Munchery, Sprig, Spoonrocket, Maple, Bento and Pronto … and from what I gather, most of these companies seem to have something in common - they’re able to raise money, but find profitability to be elusive. (Sounds sort of like Webvan.) In some ways, I think there may even some commonality with problems faced by the meal kit business; companies like Blue Apron seem to getting a second wind, though, because of alliances they’re creating with traditional retailers. You must see a lot of these pitches, and I’m wondering what your impression is about the mistakes they may be making, and what they need to do to survive.

Tom Furphy:
Yes, we were pitched by a few meal kit companies in 2011 to 2013 or so back when the traditional venture capital firms were jumping in. Most had similar business models of central production, some angle to lower delivery costs and were usually based on a subscription model. We could never get the math to work.

Production was always going to be costlier than they were projecting once you properly accounted for food, shrink and labor costs. Customer acquisition was expensive and would only work with strong retention. As in many novel subscription programs, retention was going to be a challenge. And the delivery economics were going to be an uphill battle unless a premium could be charged, or crazy density could be realized. All of the companies above suffered from some combination of these issues.

We’ve always felt that this space was there for traditional grocery retailers to lose. Shoppers rely on their local grocer to solve at least some portion of their mealtime needs. They have foot traffic, production environments that can be scaled across product lines and they can include meal kits as part of larger basket of goods, providing for better economics. Even moving toward delivery, they can include the meal kits in with larger orders to defray the costs. These offerings are likely here to stay with traditional retailers.

KC: The other day we took note of a Bloomberg report on how retailers, inspired by Amazon’s success in converting its massive amounts of data into manufacturer advertising dollars, “are quietly courting big brands with a sales pitch that goes something like this: Facebook might know what your customers like, and Google might know what they want, but only we know what they actually buy.” We’re seeing retailers like Walmart, Kroger and Target all try to make up ground in this area, in part because there’s another important factor about the data - the dollars in can generate can help fund the technology initiatives they need to embrace.

Thoughts about the degree to which this data and could be weaponized, and the potential privacy issues that these approaches could create?

We see Amazon’s ad platform up close in our Ideoclick business. We’re one of largest and fastest-growing advertisers on Amazon, using our platform to run search and other placements on behalf of our clients. The growth of Amazon in this area has been amazing. They are now the third largest advertising platform behind Google and Facebook.

Amazon owns search. Half of all product search starts on Amazon. Next comes Google with about a quarter of searches. Then all other platforms and retailers round out the last quarter. People search on Amazon because they know Amazon most likely will carry the product, there will be good product information and a wealth of customer reviews, and the price will be representative of the market price of the product. And of course, with 100 million Prime members, most shoppers are only a click away from ordering. This is a compelling value proposition for advertisers and creates a formidable competitive moat over other retailers.

That said, other retailers should rightfully look to monetize their customer traffic. However, they can only do so in relation to the scale that they have. Amazon will remain in the driver’s seat, but there is certainly some market available for others to appropriately market to their shoppers. Also, as retailers look to find ways to defray the cost of their ecommerce infrastructure, advertising is a good means to do so.

It will be imperative for retailers to use the information in ways that benefit, not exploit, the customer. Amazon is super tight about security and use of personal information. Customers are shown ads based on their behavior and indicated interest. They have built in safeguards to ensure that targeting is not abused and ads are relevant to customers.

We have good exposure to other retailers’ search and recommendation capabilities in our business. Most are woefully behind Amazon and underutilize the information at their disposal. In CPG, Amazon uses the power of suggestion to lead customers to solutions. Once they find a solution Amazon looks to lock them into longer term relationships with programs such as Subscribe and Save. It works well, and customers appreciate the convenience. Others will need to close this gap to keep their share.

KC: Finally, I need to ask you about Amazon’s decision to pull out its NYC HQ2 plans … were you surprised? Does this tell us something about what happens when public policy collides with private enterprise?

This is a tough one, and I want to be careful to not take a political side. I do think that companies, especially large ones, have a responsibility to their locales. And I think there is some validity to arguments that Amazon has not been a model citizen here in Seattle. However, creating what is now more than 50,000 jobs locally, with current plans to grow toward 100,000 has been a boon to the area. The boon has resulted in stresses, yes. But stresses on infrastructure, housing affordability and homelessness were going to come anyway. Amazon’s rapid growth has certainly accelerated and exacerbated them.

Amazon probably didn’t approach the political environment of NY State and NY City as adeptly as they should have. To think that they could be awarded $3 billion in tax incentives and not have to engage with political leaders over the myriad issues that growth will bring to an area is naïve. They should have been prepared to proactively engage there, with an open mind and plans to ease the concerns of the opposed. Based on media reporting, it’s difficult to tell how much or little they did that.

In my opinion, to say that the creation of 25,000 jobs paying an average of $150,000 is not worth $3 billion in tax incentive is crazy. I think it’s completely reasonable for a municipality to co-invest with corporations. Also, it’s not like the city was going to cut Amazon checks totaling $3b. These are incentives that Amazon would realize in tax breaks. That is, tax income the city wouldn’t receive when due. But the positive economic impact of these jobs cannot be overlooked.

Here’s some simple math. 25,000 jobs at $150,000 each would put $3.75 billion into the state’s and city’s economies every year! People would buy houses, pay property taxes, buy food and clothing, go to restaurants. Buildings would have to be built and services would need to be rendered. This is all positive. And with an average NYC tax rate of 3.5% and a NYS tax rate of 6%, that is over $350m directly into government coffers every year! And that’s before the benefit of secondary and tertiary jobs and the economic benefits they create. I’m struggling to see how some politicians are calling this a victory.

The Conversation will continue…

KC's View: