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    Published on: December 14, 2016

    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: We continue our conversation, begun in our November 30 edition, about what vendors need to do in order to work with Amazon. FYI ... you can read Part One here.

    And now, the Conversation continues...

    KC: As much as Amazon may be challenging to work with, I also would imagine that a lot of vendors offer challenges simply because they don’t have the kind of infrastructure necessary - from supply chain efficiency to adequate supply to product information - to satisfy Amazon’s 21st century demands.  So what do you tell vendors to do even before they try to get a position on Amazon?

    Tom Furphy:
    Amazon is different. As a manufacturer, almost everything that you’ve invested in over the past 20 years to serve big box retailers is out the window. Amazon requires a completely different approach to merchandising on the digital shelf. Accurate and complete catalog content is critical. Marketing programs to drive discoverability, exposure and repeat-purchase are not the same as in stores. The supply chain requires frequent, small orders, often with special labeling. Packaging materials and sizing must be appropriate for the online channel. And trade funding is structured differently and can be at higher rates than other channels. But done right, the ROI can actually be better. All of this adds a lot of complexity and anxiety for vendors.

    It’s ok to try to go it alone, but vendors are more likely to be successful with the assistance of experts. But when looking for experts to partner with, buyer beware. There are a lot of firms out there that talk a big game, but can’t back it up. I would encourage manufacturers to partner with teams that have worked at Amazon, preferably for four years, were builders inside Amazon and have technology to support their service.

    KC: Really? Because there are a lot of folks out there who did not work for Amazon who claim to have deciphered the Rosetta Stone of how to succeed on the Amazon platform. And why the "four years" threshold?

    Someone that claims to know Amazon from the outside as a consultant, agency or broker can’t hold a candle to someone who has lived inside the machine and has had to deal with its complexity every day. And four years is important because that's how long stock takes to vest there. Anyone who leaves earlier than that likely couldn’t cut it.

    Beyond simply working for the company, you want to target people that were Amazon builders. Make sure the team has actually built something inside Amazon and was not merely an operator. Builders would have created something from the ground up and developed and demonstrated command of the model at a very granular level. Operators just focused on hitting their metrics and running the machine that was created by others. While impressive, that skill does not translate into doing the hard work that it takes to make a vendor successful on Amazon.

    Once you find a partner with the right experience, make sure they have technology to support the relationship. Consultants sound great with their slides decks and sound bites of advice. But it means nothing if you can’t act on it. Make sure that your partner can back up what they are saying with actual execution. Look for them to have technology to constantly monitor the business, respond to and fix problems, forecast demand and inventory needs, run marketing campaigns, identify anomalies when they occur and report on trends in the business each week.

    On Amazon, traditional categories are being replaced with search terms and brand marketing is being replaced with site marketing and customer reviews. With hundreds or thousands of products listed, it’s impossible to effectively manage the business manually. Amazon’s platform gives preference to the products with the best track record and best underlying data, so it’s up to manufacturers to ensure their data is good and they are collecting and converting all the clicks that they can. A good technology base enables partners to act with precision, speed and scale. The premium on detailed execution at Amazon cannot be over-emphasized.

    KC: I have to believe though, that one of the challenges that Amazon presents is that it seems to be coming to market in so many different ways - there are the click-and-collect stores it seems to see as one version of its future, the lockers it is putting in so many places, the drones it wants to use to make deliveries, and now the new Amazon Go concept that it unveiled last week. Each of these concepts - and all the other innovations that it probably is working on that we haven't heard about yet - must place new demands on vendors who need to measure up. And yet, to quote my friend Craig Ostbo, they either have to be at the table or on the menu. So what are they to do?

    When you relentlessly focus on the customer and ways to improve their lives, it can take you in many directions. It’s pretty clear that Amazon doesn’t want to leave any product category or purchase occasion unturned. So you will continue to see them test multiple formats to find the combinations that work for the customer and that can work profitably for them. Amazon is masterful at evaluating all of these alternatives, testing and then scaling them once proven.

    Through this testing and scale, Amazon is going to push vendors to uncomfortable places. For many manufacturers, it will be difficult to cope with these demands. But for those that are willing to test and learn, this discomfort can be a good thing. If they embrace the change and foster their own culture of innovation, it gives them an opportunity to develop new capabilities. Then, as first-movers in mastering these capabilities, they can in turn bring them to other retailers.

    All this uncertainty becomes much easier to handle if manufacturers double down on the basics. They need great product content, appropriate packaging, a properly scaled and responsive supply chain, be willing to strategically fund the business and be ready to innovate. And they should not be hesitant to partner with experts. Doing these things will serve them well as they travel any avenue down which Amazon takes them.

    The Innovation Conversation will continue next Monday with a special year-end chat about the new Amazon Go format...

    KC's View:

    Published on: December 14, 2016

    by Kevin Coupe

    Alphabet, the parent company of Google, placed a serious bet on the autonomous-driving car business yesterday when it turned the Google self-driving car project into a standalone and independent business called Waymo, which stands for "a new way forward in mobility."

    Until now, the project has been part of Google's secretive research unit, dubbed Google X.

    "It's an indication of the maturity of our technology," says John Krafcik, Waymo's CEO. "We can imagine our self-driving tech being used in all sorts of areas."

    Krafcik emphasizes that Waymo has no intention of manufacturing cars, but just wants to be in the business of "developing the technology to drive them. Possible applications would be in ride-sharing, transportation, trucking, logistics, and personal use vehicles, he said."

    The story goes on: "Although no deals were announced, the move signals a desire to finally monetize the company's valuable research amid fierce competition from a score of rivals all vying to be the first to launch production-ready self-driving cars."

    The advance sounds like an Eye-Opener. Though I'm sure there will be folks who will decry Waymo as an evil company and the technology as a reflection of the end of western civilization ... not just because it has the potential for replacing truck drivers and cabbies, but also could put hundreds of drivers education schools out of business.
    KC's View:

    Published on: December 14, 2016

    The Associated Press reports that ConAgra has pleaded guilty to a single misdemeanor charge of shipping adulterated food, which included an agreement to pay $11.2 million " to resolve a decade-long criminal investigation into a nationwide salmonella outbreak blamed on tainted peanut butter ... Disease detectives traced the salmonella to a plant in rural Sylvester, Georgia, that produced peanut butter for ConAgra under the Peter Pan label and the Great Value brand sold at Wal-Mart. In 2007 the company recalled all the peanut butter it had sold since 2004."

    It is said to be the largest criminal fine ever imposed in a foodborne illness-related case in the United States.

    According to the story, "ConAgra said it didn’t know peanut butter was contaminated with salmonella before it was shipped. However, the plea agreement documents noted that ConAgra knew peanut butter made in Georgia had twice tested positive for salmonella in 2004. Problems weren’t all fixed by the time of the outbreak.

    "ConAgra officials blamed moisture from a leaky roof and a malfunctioning sprinkler system at the Georgia plant for helping salmonella bacteria grow on raw peanuts. The company spent $275 million on upgrades at the Georgia plant and adopted new testing procedures to screen for contaminants."

    The AP reports that "Leo Knowles, president of ConAgra Grocery Products, offered no testimony as he entered the misdemeanor plea Tuesday on behalf of the Chicago-based corporation’s subsidiary."

    While no deaths were reported relative to the salmonella outbreak, the story notes that it "sickened at least 625 people in 47 states."

    Bill Marler, the Seattle attorney who specializes in food safety and represented some of the plaintiffs in separate civil cases, says that "the case shows corporations can be prosecuted even when there’s no evidence of intentional criminality."

    “Companies are very concerned, they’re very worried,” Marler says. “They’re very interested in knowing: How can they charge us with a crime even if we don’t mean to do it? People are paying attention to that and hopefully it’s going to drive positive food behavior.”
    KC's View:
    I know someone in the food safety business who, while no fan of Marler's, also says that he is one of the smartest people in the country when it comes to this issue. So I take his point very seriously - companies can and should be held responsible even for food safety problems that are an accident.

    Just as important, they also are going to be held responsible in the court of public opinion. Manufacturing and/or shipping contaminated food is the kind of thing that can kill a brand, no matter how much money and attention have been lavished on brand equity.

    Published on: December 14, 2016

    The Wall Street Journal reports that both FedEx and United Parcel Service (UPS) "are straining to keep up with holiday shipping volumes that have blown past expectations, delaying the delivery of some of the millions of online orders shoppers have placed since Thanksgiving."

    UPS had been projecting that it would handle more than 700 million packages during this year's holiday season, up 14 percent from a year ago; FedEx was expected it would handle 10 percent more packages. And both say that during peak times during the holidays, shipment volumes can be twice that of a normal day.

    According to the story, "UPS has relocated hundreds of staff from its headquarters and other corporate offices to help at shipping hubs struggling to handle record demand, according to people familiar with the situation. Already in advance of the busy holiday season, both UPS and FedEx had extended delivery windows on some routes, suspended delivery guarantees and refunds for certain weeks and stopped promising to deliver express packages by a certain time in some cases."

    The Journal goes on: "Parcel carriers’ logistics operations are being tested by the surge in web orders at the holidays, which has grown rapidly over the past several years. This year, e-commerce accounted for 25% of consumer spending on Black Friday and the two days prior, up from 18% last year and nearly double the figure for the same period four years ago, according to First Data Corp."
    KC's View:
    Shows two things, I think. (Probably more, but these are the first two that come to mind.)

    One, it just shows the continuing growth of e-commerce ... and why, if you are in any segment of the retailing business, you have to be taking this stuff very seriously. I know there are still some folks out there who think that this won;t affect them. But they're just kidding themselves.

    Two, it shows why Amazon is trying to figure out how to take greater control of the shipping process. Because that may be necessary if it is to live up to its brand promises.

    A present doesn't show up in time for Christmas, we don't blame UPS. We blame Amazon. Which makes me think that if a customer is given a choice between a product being delivered by truck possibly showing up late or being delivered by drone and being delivered on time, the vast majority will choose the latter option.

    Published on: December 14, 2016

    The New York Times this morning has a story about a Southern California startup called Apeel Sciences that "aims to make obsolete the gas, wax and other tricks growers use to keep fruits and vegetables fresh over time."

    Here's how the Times frames the story:

    "Using leaves, stems, banana peels and other fresh plant materials left behind after fruits and vegetables are picked or processed, Apeel has developed a method for creating imperceptible, edible barriers that the company says can extend the life of produce like green beans and berries by as much as five times. Apeel can even deliver a day-of-the-week bunch of bananas, each ripening on a different day.

    "An Apeel product already has been used to stretch the shelf life of cassava in Africa ... Apeel’s products, sold under the brand names Edipeel and Invisipeel, take plant materials and extract all liquids from them to produce tiny pellets. The company then uses molecules from those pellets to control the rate of water and gases that go in and out of produce, thus slowing down the rate of decay."

    The story notes that "the company’s product is still largely untested at a commercial level, and it faces several potential hurdles beyond effectiveness. Consumers may be wary of a new coating on fresh food, for example, and growers may decide it adds too much cost."
    KC's View:
    Wow. I love this stuff. I don't really understand any of it (the last science class I took was in 1971, and it didn't go very well), but I love it.

    The great thing, it seems to me, is that this may have an impact not just on food availability, but also on food waste and maybe even food safety at some level. It may require some education of consumers, but it'll be worth the effort.

    Published on: December 14, 2016

    The Canadian Press reports that Sears Canada is going to try to compensate for "store closures and sagging sales" by venturing "into the grocery business in an effort to lure shoppers."

    According to the story, Sears Canada has signed a deal with two as-yet unnamed specialty supermarket companies "to run food markets at some of its revamped locations."

    The Press writes that Sears Canada "declined to provide further details. But executive chairman Brandon G. Stranzl said he is confident the agreement will bring customers to Sears more frequently. 'A grocery store, you might go to two or three times a week,' Stranzl said in an interview. 'A department store you might go to once a month ... once a quarter or something'."

    Sears Holdings, the US company controlled by Edward Lampert, owns about 11 percent of Sears Canada.
    KC's View:

    Now, let me be clear. I cannot remember ever having been in a Sears Canada store. (Obviously I've been to them in the US. They've mostly been memorable for all the wrong reasons ... though I did have a good experience buying a snow blower in one several years ago.) So I'm basing some of this on guesswork, which isn;t entirely fair. (That said, it sounds like Sears Canada has a lot of the same sales and profit issues as Sears in the US.)

    But I have to point out that the conclusion that food drives traffic is one that Walmart reached three decades ago. Hell, Kmart reached that conclusion three decades ago. (I remember going to those first supercenters, and the irony is that Kmart's was better than Walmart's. The difference is that Walmart kept learning and growing and getting better, and Kmart was...well, it was Kmart.)

    Everything I know about Sears makes me wonder why any supermarket retailer in his or her right mind would want to get into business with them ... because it is hard to imagine that this little foray will do anything to burnish anyone's reputation in the long run.

    Published on: December 14, 2016

    Fox News reports that Walmart is donating a door from Sam Walton’s first Arkansas outpost - a Ben Franklin store in Newport - to Smithsonian’s National Museum of American History in Washington, D.C.

    According to the story, there are very few artifacts existing from those early days of the company.

    “We had absolutely no artifacts, nothing from that store because nobody held onto them,” says Alan Dranow, the director of the Walmart Museum. “Nobody knew that Walmart was going to be what Walmart became or that Sam was going to become what he became.”

    The story goes on:

    "Enter the doors from the very first Ben Franklin store.

    "According to Dranow, the doors were kept for decades in a warehouse by Gene Ivy, co-owner of the Arkansas-based contractor Ivy Brothers Construction. The company was charged with renovating Walton’s first store in Newport in the 1960s-- and the original doors have been kept in storage since then.

    Ivy kept the doors in his garage after he retired. When he died in 2014, one of his grandchildren contacted a Walmart employee about what to do with salvaged store relics. The Walmart Museum, which first opened in 1990 as the Walmart Visitor Center, was more than happy to take in the prized store relics this summer ... One door will live in Bentonville, and a second will soon be relocated to a place where millions of Americans can take in a bit of Walmart history every year-- the National Museum of American History in the nation’s capital."

    The irony is that the doors - which are not in great shape - cannot be shipped to Washington in a Walmart truck. Rather, they have to go via an art shipper.
    KC's View:

    Published on: December 14, 2016

    • The Cincinnati Business Courier has a story about how Kroger is viewing the Amazon Go, checkout-free bricks-and-mortar convenience store experiment that Amazon is conducting in Seattle, quoting CFO Mike Schlotman as saying, “It’s just like any competitor. It’s one thing to do a test in a 1,800-square-foot store. It would be interesting to see if that test could be relevant in a 100,000-square-foot store with 60,000 SKUs in it, and so they’re all interesting. There’s pieces of that technology that we have as a foundation, some of the things we’re doing in our store already, or similar technology.”

    While Amazon Go may not have checkout lines, Schlotman points out that "Kroger has reduced the average wait to check out by more than three minutes with new technology in recent years," saying, "What we try to do is we try to make sure that the people who have to serve our customers every day, they worry about and focus on the customer."

    • The Associated Press reports that Whole Foods has fired nine store managers in its mid-Atlantic region "for manipulating a bonus program to their benefit." The story says they "engaged in a policy infraction that allowed the managers to benefit from a profit-sharing program at the expense of store employees."

    The company says that it "is still investigating exactly how much money is involved and plans to ensure that employees at the affected stores are compensated properly."
    KC's View:

    Published on: December 14, 2016

    Alan Thicke, the Canadian actor and talk show host who gained fame during his seven years playing psychiatrist Jason Seaver on the popular situation comedy "Growing Pains," died yesterday of a heart attack. He was 69.

    On "Growing Pains," Thicke played the stereotypical TV patriarch, dispensing wisdom and knowledge to his kids - including, for one season, a young Leonardo DiCaprio.
    KC's View:

    Published on: December 14, 2016

    Got the following email from MNB reader Tom Murphy:

    We so seldom disagree that it pains me to write this email.

    Your comment, “I think that not only is Walmart/Jet a potent combo to which Amazon needs to pay serious attention…” is off-base, as you personally have noted in the past.

    Amazon asks three questions every day when they are thinking about their future and their strategy: 1) what does the customer want, 2) what will make the customer happy, and 3) how can Amazon make a difference to the customer.  Not once do the words competitor, Walmart, Target, or Jet show up in their discussions.  It is what differentiates them from the competition and what is the “eye-opener”.  I am truly hoping this slip in your observations and compelling insights is merely based on an over-exuberant Holiday celebration!!

    Nope. I was sober when I wrote it.

    I totally agree with you about Amazon's advantages and mindset. I was just arguing that Walmart is a powerful entity with a big footprint, and that Jet gives it another weapon in its arsenal. I might not focus on what they're doing, but I'd certainly keep an eye on them. To ignore them would be arrogant and complacent ... and that's a bad combination, I think.

    Writing about self-checkout and no-checkout innovations, I commented:

    “Supermarkets,… can use them to redeploy people to where they might make a difference. C-stores, probably less so.

    Leading MNB reader Ben Ball to write:

    A different POV – C-stores can use that labor to up their game in full-service food service. Enhancing the legitimacy of food service is going to do a lot more for C-store success in the next ten years than having someone chatting up customers in a supermarket aisle will.

    Fair enough.

    On another subject - the problems companies like PepsiCo are having getting consumers to buy into their focus on healthier foods - MNB reader Peter Talbott wrote:

    It seems to me that Pepsi’s business was built on consumer addictions to caffeine, sugar and salt which led to boundless success.  I’m not sure they’ve yet cracked the code on the next human vulnerability, but watch out when they do.

    Funny line from an MNB reader writing in about how Japan's Asahi Group will spend $7.8 billion to acquire a number of Central and Eastern European beer brands from Anheuser-Busch InBev:

    Probably a wise move. I had Asahi for the first time at a sushi bar last weekend and it makes Bud Light taste like real beer.

    MNB took note the other day of a story quoting experts as suggesting that long-term studies indicate that automation ultimately creates jobs rather than destroying them.

    One MNB user wrote:

    Your article in today’s MNB about automation creating more jobs is complete B.S.! For every article like the ones you have chosen to mention, I can show you 3 with the opposite POV…Nice to be in a position where you can pick and choose your sources.

    Aren't we all in that position?

    Still, I wish you;d told me how you really feel...

    From another reader:

    Agreed that more thoughtful analysis is needed about the employment impacts on the next generation of automation.  That analysis should focus on the future effects and not just use analogies of previous century effects such as agriculture.  The WSJ report notes that number of bank tellers increased after the introduction of the ATM. OK, but not clear to me that was caused by ATM's, seems to me more by the move to retail branches.
    Automation is here, it is replacing not just manual labor.  Doctors, radiologists, stock analysts, media buyers, accountants, etc. are being replaced.

    So what are the new opportunities that automation/AI are creating? We have about 4.5 million truck/bus/taxi drivers- what should they plan next?

    The article also reports a further bifurcation of the job market- in a world where income inequality is a growing problem, this concerns me.  Will this also accelerate the urban/rural divide?   For the first time ever a new generation of Americans is less educated than the previous and their projected income is not largely better than their parents.  Retail employs one out of four Americans and these employees are also shoppers. What do we need to be doing to prepare all Americans for the opportunities of the future?

    And from another reader:

    Since I have worked in the computer field for the past 40+ years, I think I can safely make a couple of points.

    • Back in the late 80's, when technology was in its boom era, an article was published (I think it was in ComputerWorld, but not sure) about how "technology has NEVER displaced any jobs".  A bold headline for the time, to be sure.  But they made the point that for every job that fell by the wayside due to automation, 1.5 jobs were created elsewhere.

    Now I know, you can make statistics prove anything, but I recall when supermarkets first installed scanners, and every item had the "mark of the beast" printed on it.  So, in my best paraphrase... Change is bad, only until it is good.  When done right, cashiers are more productive, inventory is better controlled AND the checkout process is faster.

    • Compare the example of the buggy whip maker, I doubt he/she spent anytime at all learning auto mechanics, so they could keep pace with the technology of the times.  They really had no idea what an industrial revolution lay on the horizon.  The tool that controlled the power that pulled the buggy, was lost to technology, but unlike then, today's people can (or SHOULD) see it coming and it is their responsibility to be ready when it gets here.  If you don't / can't see where your job will be affected by technology, find it, or find someone that does and listen to them. We have SO MANY more opportunities today, than the poor buggy whip maker.

    Some may consider this an eye opener, but I just call it common sense: If the world passes you by, it's nobody's fault but your own.  Although Compete IS a verb, it may not always mean "in the same arena".  Thanks to MNB, at least no one in THIS industry can say "I had no idea." LOL.

    KC's View: