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 look at several of the summer's e-commerce-related stories, including Walmart's acquisition of Jet, Unilever's purchase of Dollar Shave Club, and Procter & Gamble's flirtation with retailer disintermediation.
And now, the Conversation continues...
KC: So, since the Innovation Conversation has been on hiatus, a number of things have happened that are worth laying attention to. Let's start with the acquisition of Jet by Walmart, which some commentators have suggested almost immediately makes Walmart.com more competitive with Amazon, and others have suggested is a desperate move that doesn't really address Amazon's advantages. I suspect that the reality is somewhere in the middle … how do you assess the deal and its broader implications?
Tom Furphy: The Jet acquisition by Walmart certainly was big news. At $3.3 billion, it is the largest private sale of an e-commerce company in history. While I understand Walmart’s rationale for buying it, and they may have had little choice, I think they paid too much for what they got. I also don’t think it will materially move the needle in their quest for e-commerce relevance, much less in their battle against Amazon.
Walmart purchased a company that just recently reached a $1 billion annual run rate in sales. That doesn’t mean they are doing $1 billion yet. It means that their subsidized low prices and massive marketing expenditures (some say they were running $20 million per month) have gotten sales to a recent level that, when projected forward a year, equals $1 billion. To put that in perspective, Amazon did $59 billion in gross merchandise sales in the second quarter of 2016, a $236 billion annual run rate. Walmart did about $3.3 billion in e-commerce sales in Q2. So, at their current run rate, Jet would contribute about 8% to Walmart’s e-commerce top line but wouldn’t even register in Amazon’s world at less than half a percent.
So that means they paid primarily for the potential of a team and a model. About $750 million of the purchase price will be going directly to Marc Lore, Jet’s founder and CEO. Marc will take over North American e-commerce for the company, running it out of their offices in Hoboken, NJ. They are making a big bet that he can right the ship and lead them to growth.
Marc’s first hit was selling Quidsi (parent of Diapers.com) to Amazon. They followed Amazon’s innovation lead (in my opinion, of course, we were his competitor) and were heavily reliant on venture capital investment to keep their prices low and to cover operating losses. The model was not yet self-sufficient when Walmart tried to acquire them back in 2010. To keep them out of a competitor’s hands, Amazon swooped in and snatched them up.
Jet was recently in need of another round of capital. The unofficial word in venture capital circles was that it was going to be difficult for them to raise more money unless they were willing to lower their valuation expectations, perhaps substantially. They had raised $565 million over the last two years, starting in mid-2014. That is a massive amount of capital to get to only a $1 billion annual run rate. But thanks to Walmart’s willingness to pay up, the investors will all realize a handsome return. One thing we can conclude for sure – Marc knows how to raise capital, power through losses with capital, quickly build up a business and realize a great return.
On the platform side, Jet is building a formidable marketplace of sellers and partners, which allows them to offer a large range of products across a range of retail partners. Walmart has struggled to get their marketplace ramped up. Also, Jet.com has an interesting cart algorithm that allows shoppers to save money by adding items to their order, paying by debit card or forgoing the option to return. However, all of these levers are very well understood by Amazon. They just choose to leverage the levers underneath the model, striving to offer the lowest prices possible.
Ultimately, I’m not convinced that the Jet.com acquisition will make a difference for Walmart. Amazon is massive, faster-growing and profitable. They have dozens of US fulfillment centers to Jet’s two. Walmart will need to quickly integrate and scale the Jet model through their site and stores to have a chance of yielding a positive outcome. In my estimation, they would have to pump $10 billion or more per year, for the next several years, into their platform, infrastructure, team and marketing to close the gap with Amazon. Do they have the stomach for that? I’m not sure they have a choice.
KC: At around the same time, Unilever purchased Dollar Shave Club … an acquisition that seems like it was more designed to help Unilever understand the importance of data and new realities of grocery distribution, rather than just selling more razors and blades. Can you talk a little about how this deal reflects the modern way of doing business, and what it means for more traditional models?
TF: While some argue that they may have overpaid (although the deal looks cheap next to the Jet acquisition), the DSC purchase by Unilever was smart on many levels. First, it gets them deeply into the shaving category that they were not in, with an instant double-digit market share. Also, with very little risk of cannibalization of existing product lines, they can now extend the DSC platform into a range of men’s personal care products that they do carry. Then, they could easily move into women’s shave. Is it a stretch to think of the Dove brand in the women’s shaving category?
It also gets them into the direct-to-consumer business at scale. As technology has opened the dialogue between brands and consumers, brands now have an opportunity to engage directly with shoppers and can reduce their reliance on retailers and the restrictions and rules they impose. Buying DSC enables Unilever to own a subscription technology stack and understand the nuances of this very complex technology. It also enables them to more deeply understand the consumer engagement potential of subscription commerce as well as understanding the economics of direct-to-consumer shipping, which are often challenging in CPG, but work well in the shaving category, thanks to the high value and margin of the products relative to their low weight and shipping costs. They can take these learnings across their portfolio and build direct models where it makes sense.
KC: I love the idea of Unilever extending the subscription model into brands like Dove. Parenthetically, we're big Dove users in our household, and have several Dove SKUs on order through Amazon's Subscribe and Save. If they can figure out a way to connect with families like ours directly, it'd be very interesting and could have a lot of potential.
Now, shortly after the Unilever-Dollar Shave Club deal, it was reported that Procter & Gamble has been testing a distribution model that essentially disintermediates traditional retail when it comes to its Tide Pods. It is a small scale test, but is this something that retailers need to be concerned about - major manufacturers looking for ways to sell direct to consumers?
TF: This is further proof that manufacturers are looking for more direct access to shoppers. The internet and direct-to-consumer business models enable manufacturers to circumvent the restrictions placed on them by retailers. Getting shoppers to sign up for automatic replenishment of their frequently purchased items is nirvana for a brand. Brands will look to forge these direct paths wherever they practically can.
Brands have tons of research that shows shoppers want solutions. They want their needs solved in logical ways. The category management, traffic and merchandising flow of traditional stores does not solve problems. Whether it’s helping clean the house, wash clothes, look better or prepare better meals, stores fall short. They present a sea of products and place too much burden on the shopper to determine what they need. Messaging is all about price. This does not make shoppers’ lives any easier or provide any richer experiences for them. So the gravitation to subscription solutions is completely logical.
However, despite the enthusiasm for single-solution subscription programs, they ultimately break down once shoppers try to solve the bulk of their needs through the programs. Shoppers don’t want to manage dozens of boxes arriving at their homes every month. They don’t want to go to multiple websites to manage the contents and timing of their shipments. They get overloaded with products or they fall short and have to buy from a store anyway to fill the gap until their next box. All of this leads to attrition, which is a big problem for these programs.
At Amazon we saw first-hand how much shoppers loved subscriptions. It was the major driver of sales in our CPG categories. Recently, we’ve seen predictions that Amazon’s Subscribe & Save program should eclipse $20 billion in five years. When you include Dash Buttons, Echo and the Internet of Things, the total would be much higher.
All of this shows the potential for shopping automation. It shows that shoppers love to let technology and services take care of their needs. Retailers cannot ignore this. Thanks to Amazon, the shift is irreversible. Retailers now have a game-changing opportunity to take advantage of the consumer thirst for solutions and automation by developing their own automated replenishment capabilities. It’s at least a $200 billion opportunity in the US in center-store alone.
Given the track record of both Unilever and P&G to accumulate institutional knowledge and then leverage and spread that knowledge, I would expect both companies to learn voraciously from these efforts, offer more direct programs and also be eager to help retailers develop their own subscription and automated replenishment programs. Whether working internally, with CPGs or with other service providers, shopping automation should be on every retailer’s 2017 roadmap.
This week's topic: We look at several of the summer's e-commerce-related stories, including Walmart's acquisition of Jet, Unilever's purchase of Dollar Shave Club, and Procter & Gamble's flirtation with retailer disintermediation.
And now, the Conversation continues...
KC: So, since the Innovation Conversation has been on hiatus, a number of things have happened that are worth laying attention to. Let's start with the acquisition of Jet by Walmart, which some commentators have suggested almost immediately makes Walmart.com more competitive with Amazon, and others have suggested is a desperate move that doesn't really address Amazon's advantages. I suspect that the reality is somewhere in the middle … how do you assess the deal and its broader implications?
Tom Furphy: The Jet acquisition by Walmart certainly was big news. At $3.3 billion, it is the largest private sale of an e-commerce company in history. While I understand Walmart’s rationale for buying it, and they may have had little choice, I think they paid too much for what they got. I also don’t think it will materially move the needle in their quest for e-commerce relevance, much less in their battle against Amazon.
Walmart purchased a company that just recently reached a $1 billion annual run rate in sales. That doesn’t mean they are doing $1 billion yet. It means that their subsidized low prices and massive marketing expenditures (some say they were running $20 million per month) have gotten sales to a recent level that, when projected forward a year, equals $1 billion. To put that in perspective, Amazon did $59 billion in gross merchandise sales in the second quarter of 2016, a $236 billion annual run rate. Walmart did about $3.3 billion in e-commerce sales in Q2. So, at their current run rate, Jet would contribute about 8% to Walmart’s e-commerce top line but wouldn’t even register in Amazon’s world at less than half a percent.
So that means they paid primarily for the potential of a team and a model. About $750 million of the purchase price will be going directly to Marc Lore, Jet’s founder and CEO. Marc will take over North American e-commerce for the company, running it out of their offices in Hoboken, NJ. They are making a big bet that he can right the ship and lead them to growth.
Marc’s first hit was selling Quidsi (parent of Diapers.com) to Amazon. They followed Amazon’s innovation lead (in my opinion, of course, we were his competitor) and were heavily reliant on venture capital investment to keep their prices low and to cover operating losses. The model was not yet self-sufficient when Walmart tried to acquire them back in 2010. To keep them out of a competitor’s hands, Amazon swooped in and snatched them up.
Jet was recently in need of another round of capital. The unofficial word in venture capital circles was that it was going to be difficult for them to raise more money unless they were willing to lower their valuation expectations, perhaps substantially. They had raised $565 million over the last two years, starting in mid-2014. That is a massive amount of capital to get to only a $1 billion annual run rate. But thanks to Walmart’s willingness to pay up, the investors will all realize a handsome return. One thing we can conclude for sure – Marc knows how to raise capital, power through losses with capital, quickly build up a business and realize a great return.
On the platform side, Jet is building a formidable marketplace of sellers and partners, which allows them to offer a large range of products across a range of retail partners. Walmart has struggled to get their marketplace ramped up. Also, Jet.com has an interesting cart algorithm that allows shoppers to save money by adding items to their order, paying by debit card or forgoing the option to return. However, all of these levers are very well understood by Amazon. They just choose to leverage the levers underneath the model, striving to offer the lowest prices possible.
Ultimately, I’m not convinced that the Jet.com acquisition will make a difference for Walmart. Amazon is massive, faster-growing and profitable. They have dozens of US fulfillment centers to Jet’s two. Walmart will need to quickly integrate and scale the Jet model through their site and stores to have a chance of yielding a positive outcome. In my estimation, they would have to pump $10 billion or more per year, for the next several years, into their platform, infrastructure, team and marketing to close the gap with Amazon. Do they have the stomach for that? I’m not sure they have a choice.
KC: At around the same time, Unilever purchased Dollar Shave Club … an acquisition that seems like it was more designed to help Unilever understand the importance of data and new realities of grocery distribution, rather than just selling more razors and blades. Can you talk a little about how this deal reflects the modern way of doing business, and what it means for more traditional models?
TF: While some argue that they may have overpaid (although the deal looks cheap next to the Jet acquisition), the DSC purchase by Unilever was smart on many levels. First, it gets them deeply into the shaving category that they were not in, with an instant double-digit market share. Also, with very little risk of cannibalization of existing product lines, they can now extend the DSC platform into a range of men’s personal care products that they do carry. Then, they could easily move into women’s shave. Is it a stretch to think of the Dove brand in the women’s shaving category?
It also gets them into the direct-to-consumer business at scale. As technology has opened the dialogue between brands and consumers, brands now have an opportunity to engage directly with shoppers and can reduce their reliance on retailers and the restrictions and rules they impose. Buying DSC enables Unilever to own a subscription technology stack and understand the nuances of this very complex technology. It also enables them to more deeply understand the consumer engagement potential of subscription commerce as well as understanding the economics of direct-to-consumer shipping, which are often challenging in CPG, but work well in the shaving category, thanks to the high value and margin of the products relative to their low weight and shipping costs. They can take these learnings across their portfolio and build direct models where it makes sense.
KC: I love the idea of Unilever extending the subscription model into brands like Dove. Parenthetically, we're big Dove users in our household, and have several Dove SKUs on order through Amazon's Subscribe and Save. If they can figure out a way to connect with families like ours directly, it'd be very interesting and could have a lot of potential.
Now, shortly after the Unilever-Dollar Shave Club deal, it was reported that Procter & Gamble has been testing a distribution model that essentially disintermediates traditional retail when it comes to its Tide Pods. It is a small scale test, but is this something that retailers need to be concerned about - major manufacturers looking for ways to sell direct to consumers?
TF: This is further proof that manufacturers are looking for more direct access to shoppers. The internet and direct-to-consumer business models enable manufacturers to circumvent the restrictions placed on them by retailers. Getting shoppers to sign up for automatic replenishment of their frequently purchased items is nirvana for a brand. Brands will look to forge these direct paths wherever they practically can.
Brands have tons of research that shows shoppers want solutions. They want their needs solved in logical ways. The category management, traffic and merchandising flow of traditional stores does not solve problems. Whether it’s helping clean the house, wash clothes, look better or prepare better meals, stores fall short. They present a sea of products and place too much burden on the shopper to determine what they need. Messaging is all about price. This does not make shoppers’ lives any easier or provide any richer experiences for them. So the gravitation to subscription solutions is completely logical.
However, despite the enthusiasm for single-solution subscription programs, they ultimately break down once shoppers try to solve the bulk of their needs through the programs. Shoppers don’t want to manage dozens of boxes arriving at their homes every month. They don’t want to go to multiple websites to manage the contents and timing of their shipments. They get overloaded with products or they fall short and have to buy from a store anyway to fill the gap until their next box. All of this leads to attrition, which is a big problem for these programs.
At Amazon we saw first-hand how much shoppers loved subscriptions. It was the major driver of sales in our CPG categories. Recently, we’ve seen predictions that Amazon’s Subscribe & Save program should eclipse $20 billion in five years. When you include Dash Buttons, Echo and the Internet of Things, the total would be much higher.
All of this shows the potential for shopping automation. It shows that shoppers love to let technology and services take care of their needs. Retailers cannot ignore this. Thanks to Amazon, the shift is irreversible. Retailers now have a game-changing opportunity to take advantage of the consumer thirst for solutions and automation by developing their own automated replenishment capabilities. It’s at least a $200 billion opportunity in the US in center-store alone.
Given the track record of both Unilever and P&G to accumulate institutional knowledge and then leverage and spread that knowledge, I would expect both companies to learn voraciously from these efforts, offer more direct programs and also be eager to help retailers develop their own subscription and automated replenishment programs. Whether working internally, with CPGs or with other service providers, shopping automation should be on every retailer’s 2017 roadmap.
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