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    Published on: October 4, 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 Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” a new book by Scott Galloway.

    And now, the Conversation continues…

    KC: This week’s column will focus on a new book by Scott Galloway, “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” in which he analyzes and dissects four technology giants that he says “have inspired more joy, connections, prosperity and discovery than any other entity in history,” but also may be the Four Horsemen of the Apocalypse, wielding enormous and unprecedented power and influence while ingratiating themselves into every facet of our lives.  Those companies are Amazon, Apple, Facebook and Google.  For the purposes of today’s column, we’re just going to focus on his view of Amazon, and we’ll get to the other three in future columns.

    So, Tom … One of the most interesting parts of Galloway’s Amazon analysis is the notion that because Jeff Bezos simply does not return profits to investors, it gives him enormous sums of capital with which to play and innovate … an advantage that virtually no other retailer has.  We talk a lot here about the importance of speed, the value of embracing failures, the importance of having a customer-first strategy, and the advantage of taking a holistic approach to the business rather than thinking and acting in silos.  But when you come right down to it, it is all the investment capital that Amazon has that is the fuel that drives all these engines.  One of the questions I get a lot is, how can or should the competition - shackled to more traditional metrics - compete?  Galloway’s answer is that they need to do it by investing in human capital, with what he terms “a deft investment in technology.”  That strikes me as accurate, if maybe a little glib … what do you think?

    Tom Furphy:
    Way back in his 1997 Letter to Shareholders, Jeff laid out the company’s approach to investment. The main message was that the company was going to focus on the customer, innovate relentlessly on their behalf, use profits to fuel further innovation and develop market-leading positions across the business. This was not to be a short term tactic, but a long term strategy. So much so that the company still attaches a copy of the 1997 Shareholder Letter to its current letter every year to remind investors of the strategy.

    Because this is engrained in the culture as the way Amazon does things, and innovation is a key metric for teams throughout the organization, they have become very good at it. The amount of innovation and speed at which they execute is unmatchable. Wall Street is rewarding Amazon for delivering on their growth promise and likely will continue to do so for some time.

    I agree with Galloway that incumbent retailers need to leverage their greatest existing assets along with smart investments in technology in order to compete. I view these most important assets as (in no particular order) people, locations, existing market share, shopper trust and vendor relationships. We work across our portfolio to help retailers and manufacturers deftly introduce technology to get the most out of these assets and, more importantly, deliver a better shopping experience. Ultimately, these are shopping experiences that can stand up to competition from Amazon.

    Although most companies are acting too slowly, several are forging ahead with these investments. We see brands starting to add more digital capabilities and developing more direct shopper relationships, we see retailers and brands jointly working on shopping automation at Replenium and we see employees empowered with great service technology, such as our BevyUp technology powering Nordstrom stylists and underpinning the new Nordstrom Local concept. None of these required significant investment levels. They simply required conviction to experiment.

    KC: Galloway clearly has a somewhat jaundiced view of Amazon - that while it is celebrated as a paragon of innovation, it also can accurately be described as a tax-avoiding job-killer.  (I’m simplifying a bit, but I think it boils down his essential attitude.)  I’m not sure he’s entirely wrong on this, though I would suggest that every person and business pays as little tax as possible, and that circumstances just allowed Amazon to be better at it than most of its tradition-bound competition; while I think that the job-killing accusation has validity, the same can be said of many innovative and disruptive companies throughout history.   But to me, one of the more interesting observations he makes about Amazon is that “history favors the bold,” while “compensation favors the meek” … meaning that most CEOs actually have been financially rewarded for not being aggressive and innovative. That’s not in the DNA at Amazon.  You’ve been inside the belly of the beast …. what are your thoughts about his analysis?

    Traditional business metrics kill innovation. When leadership is charged foremost with driving near-term profitability, they naturally focus on the meek activities that drive that. Things like cutting costs, driving efficiency, expanding methodically based on a multi-year plan and managing margin all can drive small short term improvements to the bottom line. When this happens, executives get their bonuses and keep their jobs. This works for a while, but over time the companies’ top line softens, they lose market share and profits suffer. And then the executives take an early retirement package.

    Conversely, Amazon is all about being bold, experimenting and making several bets across the business. Throughout history, industry leading companies that stopped innovating, that became incremental, that focused on compensation, have all died. Amazon is betting their long-term viability on their continued innovation. Given how relentlessly Amazon focuses on this and how engrained it is in their culture and measurements, I think they stand a great chance of thriving for a long, long time.

    KC: From your perspective, can you explain something to me?  Galloway believes that Amazon’s approach of acquiring bricks-and-mortar stores to “complement” its e-commerce business is more effective than “bolting on” an e-commerce operation to an existing bricks-and-mortar infrastructure.  Why is that?  Is it just a matter of legacy issues?  Or is there something deeper going on?

    TF: Amazon has spent the past two-plus decades building out an expansive e-commerce ecosystem. That starts with providing great digital capabilities to shoppers and delivering on a core promise of wide selection, great prices and fast delivery. As shoppers browse and buy more, Amazon learns a lot about them and builds massive databases about shoppers and preferences. They use this data to better serve shoppers. It creates a flywheel effect that is undeniable.

    All the while, they keep adding new capabilities, expanding their fulfillment network and further delivering on their promises. This creates enormous market share and fierce customer loyalty.

    Through the years, Amazon has learned that there are certain elements of shopping that benefit from on the ground, in market, physical presence. To bring these elements to their shoppers, they have experimented with pick-up points, a number of store formats, the Go technology and now have purchased Whole Foods. They will use all of these touchpoints to deliver a more complete shopping experience and will continue to innovate in these formats for their customers.

    Incumbent retailers don’t have the advantage of these years of ecosystem development. The best they can do is build up e-commerce capabilities and layer them into their existing store-based model. That is difficult for sure. Especially because you are adding new costs to an already highly efficient and low-profit model. And this is a model that is supported by legacy systems, measurements and cultures. However, innovation is imperative for these incumbents. And it needs to be done by leveraging existing assets with a deft investment in technology.

    KC: I love Galloway’s notion that Amazon’s core competence is storytelling, developing a narrative and vision that appeals to both shareholders (at least, those interested in the long-term) and customers.  I think that this is absolutely true, and that most mainstream retailers don’t have this.  Dorothy Lane Markets and Stew Leonard’s do, for example, but most retailers don’t, and are so busy putting out fires and making this week’s numbers that they don’t even think about it, much less engage in the process.  Do you agree with Galloway’s conclusion … and how would you advise companies with which you work to go about hand-crafting their stories?

    I think my shareholder letter references above are great examples of Amazon’s story telling. Other retailers need to start talking to Wall Street in similar fashion. I realize that stock prices tend to drop when companies state that earnings will be down for some time. But haven’t retailer stocks already taken most of that hit?

    To me, a retailer that articulates and executes an ecommerce strategy, especially one that embraces their store base and employees, is a much better bet than one that keeps plodding along, holding on to as many legacy profits as possible. This will hurt short term for sure. The seas will be rough for a while regardless as the market shifts develop. But retailers that invest smartly through this should be rewarded with growing customer loyalty, increased market share and ultimately higher profits.

    ”The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” can be purchased in bookstores everywhere, and, of course, on Amazon.

    The Conversation will continue in two weeks, with the first “Innovation Conversation” podcast…

    KC's View:

    Published on: October 4, 2017

    by Kevin Coupe

    I was in San Francisco the other day, hanging out as is my habit there, enjoying a glass or two of wine and some nibbles at Cafe Zoetrope, Francis Ford Coppola’s restaurant. After I ordered, I spied a small kiosk that seemed new since my last visit. I investigated.

    It was a Short Story Dispenser, and it offers three options - stories that can be read in one, three or five minutes. Intrigued, I chose a three-minute story, and was treated to a three-foot long strip of paper that was roughly the size of a cash register tape, and featuring what ended up being the translation of a short romantic piece by a French author; it was a kind of literary miniature, and served as a nice diversion from my iPad and dozens of emails. Perfect for a brief getaway in a neighborhood bistro/cafe … and also on brand for Coppola, who publishes a short story magazine.

    I chatted with the bartender, and he told me that the dispenser is part of a broader program that started in France, with kiosks located in train stations, bus stops, malls, hospitals, and airports - any place that people might hang out for a few minutes and could be looking for something to read. I subsequently did a little research, and found a Boston Globe story saying that “the stories are submitted by writers to the Short Edition website and chosen by readers who vote on their favorites. For now, the tales available in the United States will be translations from the French, but the company has just launched an English version … Short Edition’s Loic Giraut says that the random element of the dispenser - you never know which story you’ll get of the several thousand the company has curated to date - is one of the allures. They do have the ability to customize, however. The French national train system recently requested all romance tales for the week of Valentine’s Day.”

    I think this is a fabulous idea, and am heartened to see that “since 2015, when Short Edition debuted the machine, it has installed nearly 140 of them, throughout France and as far afield as Hong Kong and Australia. So far, more than 600,000 stories have been distributed.”

    Lovely. And just another, Eye-Opening way to create a differential advantage.

    KC's View:

    Published on: October 4, 2017

    The Cincinnati Business Courier has a story about growing speculation that Kroger “might be considering linking up with Dutch supermarket operator Ahold Delhaize.”

    The question seems to be whether Ahold Delhaize would be trying to acquire Kroger, or a merger of equals.

    Neither company is commenting on the speculation.
    KC's View:
    Sounds like a deal cooked up by a financial analyst who wants to get his name in the news. Which, of course, it has.

    I’d be a lot more intrigued if Kroger were interested in buying Ahold Delhaize. But either way, I’m not sure that creating bigger company does what it needs to do to create a localized approach to markets that I think is necessary to compete today.

    Published on: October 4, 2017

    Ahold Delhaize-owned Food Lion this week announced a new rewards program, "Shop & Earn,” which currently is being rolled out in the Greensboro, N.C., market, after a successful pilot in the Raleigh, N.C., market earlier this year.

    The company says that consumers can activate personalized monthly offers to their MVP cards either through the company’s website or the Food Lion mobile app. Rewards are automatically added to their accounts and then redeemed on subsequent shopping trips.

    “Through the Shop & Earn MVP Customer Rewards Program, we are offering our customers the opportunity to save an average of $20, or more, each month in our stores in categories they are already shopping in," says Deborah Sabo, vp-Marketing at Food Lion. "The more our customers shop at Food Lion, the more they will save. We believe our customers will find tremendous value through these personalized offers based on their shopping behavior.”
    KC's View:
    Big week for Ahold Delhaize-owned companies; Hannaford also announced a new rewards program this week. It’s interesting that the various companies are working along the same lines but not using the same program infrastructures … but maybe that’s because Hannaford and Food Lion have different value propositions and customers, and therefore require more localized programs. I’d buy that.

    Let me reiterate something I said in reference to the Hannaford program … that enrolling customers in a program like this means that the company will be able to track - and, more importantly, respond to - customer behavior. The reality is that retailers need to have as much specific, actionable information about their customers as possible … and then have to actually act upon it.

    Published on: October 4, 2017

    In Minneapolis, the Star Tribune reports that Target’s new curbside pickup service now has gone live in 50 stores in the Twin Cities market: “Customers who want to use it place online orders through Target's app, click a button when they are on their way to the store, park at a designated parking spot and then employees bring the items out to their car.”

    The service was tested by headquarters employees this summer at three area stores.

    The story continues: “The service is one of the latest ways that brick-and-mortar retailers are trying to fight off Amazon and stay relevant as consumers are increasingly accustomed to having online orders show up on their doorsteps within hours. Like in-store pickup, curbside pickup also is a more profitable way for retailers to fulfill online orders since customers make the trip to the stores to fetch their orders instead of having to pay for the extra costs of shipping them to people's doorsteps.”
    KC's View:
    A good idea, though I’m not sure it is the kind of gamer-changer that Target needs to really break through all the retail clutter. It is a stopgap measure, but not really disruptive.

    Published on: October 4, 2017

    The Associated Press reports that Warren Buffett’s Berkshire Hathaway is acquiring a 38.6 percent stake in Pilot Flying J truck stops, in a deal structured to give it majority ownership within about five years.

    Terms of the deal were not disclosed.

    Pilot Flying J operates 750 truck stops across 44 states and Canada and employs 27,000 people.
    KC's View:
    I find this to be an interesting move in a traditional direction, all the more intriguing because earlier this year Buffett described himself as being stupid for not having seen the potential in and invested in disruptive companies such as Amazon and Google.

    Old habits die hard. Though who am I to question Warren Buffett?

    Published on: October 4, 2017

    Crain’s Chicago Business reports that Ace Hardware “has bought a majority stake in the Grommet, an e-commerce startup that touts new and innovative products from independent entrepreneurs.”

    According to the story, Grommet “attempts to lure buyers with promises to smartly solve everyday problems such as smudged eyeglasses and pilly sweaters with new gadgets. It claims to have discovered and launched brand names including FitBit, IdeaPaint, OtterBox, SimpliSafe and SodaStream. The Grommet has featured more than 2,500 products and has more than three million customers, the companies said in a statement.”

    The two companies started collaborating last year, but that was just a prelude to the majority investment by Ace.
    KC's View:
    Ace is a 93-year-old company, which means it almost certainly is dripping with legacy systems and tradition. This is what companies like that have to do - find fresh blood that can give it an infusion of innovation and disruption. They have to manage the integration wisely - learning from the smaller company as opposed to imposing its own disadvantages upon it. But done right, this could be a really good idea.

    Published on: October 4, 2017

    CNBC reports that upscale burger chain Shake Shack “ is opening its first-ever cashless kiosk,” in New York City’s Astor Place, this month.

    According to the story, “This Shake Shack won't have a cashier's counter. Instead, guests will use digital kiosks or their mobile phones to place orders. Manning these kiosks will be ‘hospitality champs,’ Shake Shack employees who specialize in making customers' time in the restaurant as seamless and enjoyable as possible.” CEO Randy Garutti calls it “a place for the company to test out a variety of digital innovations and ways of connecting with its consumers.” Garutti says that while many customers still pay with cash in other locations, “the company wants to see if removing that option will make the dining experience more seamless.”

    The story goes on: “In addition, instead of the traditional Shake Shack buzzer, diners will receive a text from the restaurant letting them know when their food is ready. This way customers are no longer tethered to the restaurant while their food is being prepared, Garutti said.”
    KC's View:
    I’m totally on board with this … especially if the goal is to make the experience more seamless and pleasant. I’m generally ordering from Shake Shack via the app anyway, so this plays right into my preferred behavior.

    Published on: October 4, 2017

    Unilever-owned, Vermont-based Ben & Jerry’s has signed “an agreement with a farmworkers’ group that establishes labor standards for the company’s suppliers in the state, and creates an enforcement strategy that encourages workers to speak up about violations,” according to a story in the New York Times.

    The Times story writes: “The 1,200 to 1,500 workers in Vermont’s dairy industry have been laboring under their own grim circumstances. A 2014 survey of about 170 dairy workers in the state by Migrant Justice, the farmworkers’ advocacy group that signed the agreement with Ben & Jerry’s, found that in addition to a scarcity of days off, workers had schedules that frequently kept them from sleeping more than a few hours at a time. Many of the migrants, who typically work year round for low wages and live on the farms that employ them, also had substandard housing.”

    Ben & Jerry’s CEO Jostein Solheim says, “We believe in worker-led movements, and in bringing in dairy and doing it in Vermont.”
    KC's View:
    Good for Ben & Jerry’s. Too many companies have a culture in which the people at the top get big salaries, and everybody else - you know, the folks who actually do the work - are treated as costs instead of assets. Worse, the people at the top often are rewarded for driving down labor costs as low as possible, which marginalizes the folks who they should want to feel invested in the business.

    Published on: October 4, 2017

    ...with brief, occasional, italicized and sometimes gratuitous commentary…

    • Albertsons announced that it will sell 71 of its store locations to a Delaware limited-liability entity and then lease them back, a deal that is expected to raise as much as $720 million.

    • The National Retail Federation (NRF) is predicting that holiday retail sales in November and December – excluding automobiles, gasoline and restaurants – to increase between 3.6 and 4 percent for a total of $678.75 billion to $682 billion, up from $655.8 billion last year.

    NRF says that “this year’s forecast would meet or exceed last year’s growth of 3.6 percent and the five-year average of 3.5 percent. While recent hurricanes are not expected to have a significant long-term effect on the economy, NRF is issuing this year’s forecast as a range rather than the usual fixed percentage because the impact of the storms on economic indicators has made it difficult to make a more precise forecast.”

    • The New York Post reports that the Nordstrom family now appears unlikely to go ahead with an expected buyout of the 69 percent of shares that it does not own, largely because “interest rates were too high and terms too tough.” The high rates are said to be a result of the broader trouble facing the bricks-and-mortar retail sector.

    The question is whether the lack of a buyout would affect an acquisition of Nordstrom by Amazon … which also is the subject of a lot of speculation.
    KC's View:

    Published on: October 4, 2017

    …will return.
    KC's View:

    Published on: October 4, 2017

    In last night’s American League Wild Card game, the New York Yankees defeated the Minnesota Twins 8-4, and now will go on to face the AL Central Division champion Cleveland Indians in a best-of-five divisional playoff series.
    KC's View:

    Published on: October 4, 2017

    In last night’s American League Wild Card game, the New York Yankees defeated the Minnesota Twins 8-4, and now will go on to face the AL Central Division champion Cleveland Indians in a best-of-five divisional playoff series.
    KC's View: