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    Published on: June 28, 2017

    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: The implications and likely ripples that will result from the proposed $13.7 billion acquisition of Whole Foods by Amazon.

    And now, the Conversation continues...

    KC: The proposed acquisition of Whole Foods by Amazon for $13.7 billion strikes me as illustrating a number of things about Amazon.  One is that it is prepared to do the unexpected;  I don't know anyone who saw this one coming.  Another is that it is willing to move fast;  if reports are to be believed, Whole Foods CEO John Mackey only met Amazon CEO Jeff Bezos six weeks before the deal was announced.

    I've talked to a bunch of retailers about the story, and I have to say that the dominant reaction is that people are shell-shocked ... they understand that this deal points to a fundamental shift in the retail marketplace, but they seem uncertain about how to react or how fast to react.  Which I think is a real problem, because they don't understand that this is more than just Amazon buying Whole Foods;  with apologies to Buffalo Springfield, there is something bigger happening here, and while what it is isn't exactly clear, it is tangible, inevitable and problematic for conventional thinking.

    Tom Furphy:
    For anyone that’s followed our Innovation Conversations over the last couple of years, this acquisition should not come as a surprise. We have said, repeatedly, that Amazon will disrupt the grocery industry like they have all other retail segments. We talk about Amazon’s growth via shopping automation such as Subscribe & Save, Dash and Echo, and how that has already claimed the equivalent of over 1,000 traditional grocery stores. We talk about how Amazon is willing to experiment with different programs and formats. We’ve been clear that Amazon’s work with Amazon Fresh, pick up points and the Go store format are evidence that Amazon realizes that customers need to be touched on a number of fronts in order to serve the entirety of their grocery needs.

    This transaction was completely on strategy for Amazon. They now have an incredible platform for further experimentation and innovation. Over 60% of US households are Amazon Prime members. They share tens of millions of customers with Whole Foods, most of whom are already Prime members. That’s a lot of customers that they can focus on and work backward from.

    I’m not surprised that Amazon made the move within six weeks of initial contact. In the 2016 Amazon Letter to Shareholders, Jeff talked about agility. He talked about making decisions based upon having 60% of the data, because waiting for 90% will mean that you waited too long. Once the introduction happened, I’m sure the team dug in, determined the synergies between the companies, sketched out a vision for how they might use the stores in their future plans and then pulled the trigger.

    Two weeks ago we talked about taking “big swings” to keep up with Amazon. And now we see the biggest swing taken by Amazon itself. We talk about the need for organizational agility. And then Amazon demonstrates that they can move from initial exploration to completed deal in six weeks. All the while every company in the industry stood still with the exception of a couple of announced Instacart partnerships. Any advantage that store-based retailers had over Amazon is now gone. I can only imagine the rationalizations and excuses in board rooms across the country.

    We’ve tried to be diplomatic in this column by telling retailers they still have a chance if they react now. But now is slipping away. Amazon continues to prove that they are smarter, hungrier, faster, more technically advanced and more customer-centric than any other retailer. Many executives think that sticking to their current plans, strategies and roadmaps will get them to where they need to be. It won’t.

    Every day, Amazon widens their lead. Each week shoppers shift at least $50M in incremental repeat volume to Amazon and away from other retailers. Now Amazon gets to integrate their shopping programs into physical store environments, local pickup and delivery. Imagine when the Whole Foods center store moves over to automated replenishment. Imagine what they could then do to reconfigure the space into the service model of the future. This transaction was nothing compared to what will come of it. Remember, it’s still Day 1 at Amazon!

    KC: I saw you quoted in the Wall Street Journal as saying that you think  that once the deal is finalized - assuming it is - it will take several years for the two companies to integrate their operations.  Was that accurate?  And exactly what did you mean by that ... because that seems like a long time for Amazon to do anything.

    Gotta love reporters. I did state the words in the quote, but they were presented out of context.

    The day that the deal was announced, the reporter was asking me about the implications to Whole Foods’ employees and customers. My response what that it was good day for Whole Foods’ people, customers and shareholders.

    I truly believe that this is a perfect match. From the customer overlap, to the potential to use customer data better, to the private label synergies, to the store/fulfillment synergies, both companies have a lot to gain. I also think that Amazon will take strides to make the existing Whole Foods business more productive.

    From the outside, it looks like there are two areas that are ripe for Amazon’s touch. First, the use of data in running the business will become better. Amazon is very metric driven and Whole Foods’ distributed model does suffer from a lack of impactful standardized metrics. Second, I think that Amazon will find ways to make the model more efficient – on the procurement side in ensuring they are getting the best possible costs, on the supply chain side to make sure that goods are flowing through the model as efficiently as possible and on the administrative side to make sure their support costs are delivering appropriate return.

    I told the reporter that I think Amazon will likely make some internal improvements relatively quickly and then will begin to experiment with the model. I told the reporter that you may not see sweeping changes on the surface in “two or three quarters, but you will in two or three years” as Amazon patiently experiments and applies the learnings to the model.

    KC: There is a lot of speculation about another company - Kroger, for example, stepping in offer a higher competitive bid.  Who would you think is a likely candidate to do so?  Is there someone out there that you would recommend as a better fit than Amazon, or that would be well-served to prevent Amazon from making this acquisition?

    I am certainly not in a position to speculate about any competitive bidders. Frankly, I don’t think there’s a better suitor out there than Amazon. And I think that another competitor placing a bid to block Amazon would be a foolish waste of capital, time and focus. They could spend far less capital resetting their current strategies and pivoting their existing, safe, tactical product roadmaps toward something with a little more potential impact.

    KC: Finally, this is our last Innovation Conversation until after Labor Day.  (Though if something big happens, we'll bring it back for a special report.)  So here's my question for you - if you had to guess, what other major moves might take place in terms of mergers and acquisitions between now and then?  Who is vulnerable?  And who might be buying?

    This is really not my strength. But if I had to guess, I think someone may buy Instacart. While I have doubts about the long term viability of tacking a fulfillment infrastructure onto the end of the current store model, Instacart does have a great customer base of 160 or so retailers, and could be attractive to the right suitor. While this may not be the best long-term model for any retailer or the industry as a whole, it’s the only innovation that is seeing any kind of wide scale adoption.

    The Conversation will continue...

    KC's View:

    Published on: June 28, 2017

    by Kevin Coupe

    The Associated Press reports that Facebook has announced that it now has more than two billion users.

    The milestone was reached early Tuesday.

    Yikes. That's what I call an Eye-Opener.
    KC's View:

    Published on: June 28, 2017

    The Los Angeles Times reports that while Aldi has just 38 stores in Southern California, and "is just getting a toehold" in the market, it "is adding to the pressure on Ralphs, Albertsons, Wal-Mart and other big chains — as well as smaller grocers such as Sprouts — to keep loyal shoppers and avoid losing market share."

    Aldi "plans to open at least 20 additional stores in Southern California in the next 12 months ... It’s part of the company’s plan to spend $3.4 billion for an additional 900 stores nationwide by the end of 2022 on top of the 1,600 it already operates in the United States. The chain also plans to spend another $1.6 billion to remodel 1,300 of its existing U.S. stores by 2020."

    The Times notes that "a few would-be rivals have already flamed out in the cutthroat Southland market. Fresh & Easy and Haggen Inc. both closed their stores in the region after failing to gain a steady following, due in part to operational and pricing missteps."

    And, because it is almost impossible to write a story about the grocery sector without mentioning this deal, the Times reports that the Southern California competition is "about to get even more intense now that has agreed to buy Whole Foods Market Inc. for $13.7 billion. Whole Foods, the leader in the natural and organic food sector, has 465 stores including 85 in California. Whole Foods is widely expected to get more affordable under Amazon, which has transformed other retail segments such as books and electronics in part by driving prices much lower."
    KC's View:
    In a lot of ways, I think it is a mistake to cite either Fresh & Easy or Haggen as examples of companies that "flamed out" because of local competitive pressures. Fresh & Easy, I think, represented a fundamental misreading of the marketplace by UK retailer Tesco, and Haggen's experience was more a misguided effort by a a company that essentially was a minor league team to play in the big leagues. (Maybe that's not entirely fair ... but Haggen had enough trouble staying competitive in Washington State with fewer than 20 stores, and suddenly it had more than 150 stores all over the west coast. It had no shot.)

    The question is how best to compete with Aldi, and the best answer I would have is that retailers have to be true to themselves, continuing to tell the story that they believe best represents their relevance. That's not to say they shouldn't sharpen their prices a bit, or get better at marketing and merchandising. They should. But retailers make their biggest mistake when they run away from their essential narrative.

    Published on: June 28, 2017

    The Washington Post has a story about how, "over the past decade, as the District’s population has swelled in size and affluence, the range and quality of grocery stores has proliferated in wealthy neighborhoods. A new Whole Foods on H Street NE, among six supermarkets that have opened in rapidly gentrifying Ward 6 since 2010, includes a bartender serving 16 craft beers, which patrons can sip while they shop.

    "But in the District’s poorest neighborhoods, the number of supermarkets has decreased, exacerbating a long-standing 'grocery gap' that has grown more acute as the city has become more well-to-do."

    For example: "The 160,000 residents of Wards 7 and 8, on the District’s eastern edge, have a total of three full-service groceries, down from seven in 2010 after several Murry’s Steaks outlets shut down and a Yes Organic Market failed. That’s more than 50,000 people for every grocery store.

    "In contrast, Ward 6, with new apartment towers along H Street NE and near Nationals Park, has 10 supermarkets. Residents of Ward 3 in upper Northwest, where the new Wegmans is planned, can choose from eight. That’s about 10,000 residents for every grocery store."

    A recent study, the Post writes, "found that nearly 70 percent of the city’s supermarkets in 2016 were concentrated in its wealthiest, predominantly white neighborhoods. The remainder were in poorer areas that are overwhelmingly African American."
    KC's View:
    Just like America. If anything, this strikes me as a microcosm of the national experience. I'm not sure what the solution is ... but I have to believe that this represents a significant opportunity for some company that wants to embrace it.

    Published on: June 28, 2017

    MarketWatch reports that Lidl has announced plans to spend $100 million to build and open a regional headquarters and distribution center in Cartersville, Georgia - the "fourth such center in the US."

    According to the story, "The news comes as Lidl announced four new store openings on July 13. Two stores will be located in Virginia, and the other two in North Carolina. Lidl opened its first 10 stores on June 15 across Virginia and the Carolinas."
    KC's View:

    Published on: June 28, 2017

    In an interview with CNBC, Kroger CEO Rodney McMullen said yesterday that he was not surprised by Amazon's proposed $13.7 billion bid to buy Whole Foods.

    "You know, you could tell that Amazon wanted to do something from a physical asset standpoint and I think Whole Foods is a great fit for them," he said.

    And despite the fact that Kroger's stock price has taken a hit of late, McMullen said, "We do really focus on the long term. The long term is three to five years. We continue to grow market share. Our customers continue to tell us were doing a better job."
    KC's View:

    Published on: June 28, 2017

    Quartz has a story suggesting that Amazon's proposed $13.7 billion acquisition of Whole Foods is symptomatic of the retailer's ongoing efforts to sustain its success, and resist what some would characterize as an inevitable business cycle leading to decline.

    "The wheel of retailing," Quartz writes, "first proposed in 1958 by Harvard business professor Malcolm McNair, describes a cycle in which retailers start out by offering low-cost products to attract customers, often through an innovation that allows them to undercut more established competitors. As they grow and attract more customers, these retailers raise prices, allowing them to widen their margins and expand. As they raise prices, they become vulnerable to lower-cost competitors, starting the cycle anew."

    The story goes on: "Amazon has avoided getting caught in the wheel by constantly expanding into new sectors. By moving beyond books and into general merchandise, then onto fields as diverse as web services and entertainment, Amazon remains a perennial upstart, never taking on the characteristics of incumbents. The company has also never enjoyed the fat margins described by the wheel, instead sacrificing profit for continual growth.

    "Buying a store nicknamed 'whole paycheck' may not be an obvious choice for a low-cost strategy, but cementing its move into groceries gives Amazon yet another sector in which to harness its innovation and technology. The company’s long-game plan of offering streamlined grocery delivery undercuts incumbents by saving families something more valuable than money - time - which could be crucial in a grocery sector where margins are razor-thin."

    Bloomberg has a story about how Amazon's approach to technology is likely to impact Whole Foods' approach to distribution.

    "In negotiations, Amazon spent a lot of time analyzing Whole Foods' distribution technology, pointing to a possible way in which the company sees the most immediate opportunities to reduce costs, said a person familiar with the matter who asked not to be identified because the issue was private."

    Bloomberg goes on: "Experts say the most immediate changes would likely be in warehouses that customers never see. That suggests the jobs that could be affected the earliest would be in the warehouses, where products from suppliers await transport to store shelves, said Gary Hawkins, CEO of the Center for Advancing Retail and Technology, a Los Angeles nonprofit that helps retailers and brands innovate. As Amazon looks to automate distribution, cashiers will be safe-- for now ... Amazon sees automation as a key strategic advantage in its overall grocery strategy, according to company documents reviewed by Bloomberg before the Whole Foods acquisition was announced."

    A friend of mine told me that he thinks it is a fundamental misreading of the situation to suggest that Amazon believes it is buying a sophisticated distribution system in its acquisition of Whole Foods. Rather, he said, it is buying the potential of one."

    • And, The New Yorker has a piece worth reading about the deal, suggesting that what Amazon really has done is create "the world’s most efficient order-fulfillment system."

    An excerpt: "It hasn’t always been obvious that Amazon would transform the feeling of everyday life. At first, the company looked like a bookstore; next, it became a mass retailer; later, for somewhat obscure reasons, it transformed into a television and movie studio. It seemed to be growing horizontally, by learning to sell new kinds of products. But Amazon wasn’t just getting wider; it was getting deeper, too. It wasn’t just selling products but inventing a new method of selling; behind the scenes, it was using technology to vertically integrate nearly the entire process of consumption. This integration is Amazon’s real product."

    And, it is what Amazon almost certainly wants to bring to Whole Foods and the bricks-and-mortar environment.

    You can read the entire story here.
    KC's View:

    Published on: June 28, 2017

    Fortune reports that "the family of an Illinois Uber driver who was stabbed to death filed a wrongful death lawsuit on Monday against Wal-Mart Stores for failing to stop the teen suspect in the incident from stealing a machete and knife from one of its stores ... In addition to Wal-Mart, the lawsuit names Allied Universal and Monterrey Security Consultants as defendants, according to court documents. Both companies provided security services to the store."

    Walmart said it believed that its associates acted "appropriately," and that it would respond in more detail in court.

    • The Charlotte Observer reports that Walmart " is joining in on Charlotte’s food truck craze.

    "The retail giant’s new food truck is making several stops throughout the Charlotte metro over the next week, and it’ll give away free food like ice cream, tacos and sliders ... Adding a food truck could be one more way the retailer is looking to set itself apart in Charlotte’s competitive grocery-store industry."
    KC's View:

    Published on: June 28, 2017

    • The Chicago Sun Times reports that a group of Illinois retailers, led by the Illinois retail merchants Association, plans to go to court today to ask a judge to issue a temporary injunction that would prevent the implementation of a tax on sweetened beverages. The request will characterize the tax as confusing and "unconstitutionally vague."

    According to the story, "The suit argues, among other things, that there would be a double standard when it comes to imposing taxes on soda and some other sweetened beverages. At a coffee shop, for example, the tax would apply to a bottled sweetened beverage but not to one prepared by a barista behind the counter."
    KC's View:

    Published on: June 28, 2017

    • Kohl's has announced that it is hiring Bruce Besanko - who just announced his departure from Supervalu, where he was CFO - as its new chief financial officer.

    Besanko succeeds the retiring Wesley McDonald.
    KC's View:

    Published on: June 28, 2017

    ...will return.
    KC's View: