Innovation and Amazon? Size, As Well as Pizza, Matters!

To understand Amazon‘s success, I need to digress a bit. A few years ago I visited a leading mid-western department store retailer on a regular basis overseeing their work with a brand they licensed from me and my partner. At the first few meetings in 2008 there were 5 people in the room (three from the retailer) as we meandered through a “new” corporate headquarters filled with empty chairs and easy parking.

Within two years the meetings were with a team of over 25 people (we were still 2 people) and my partner was introducing members of the retailer’s team to each other after fighting to find a big enough and unused conference room, never mind finding a parking place. Other than killing our brand along with many others they licensed during that period, the handwriting of bad management was literally around the overcrowded table around which no one could move forward.

With that story in mind, one of the better “digestif” pieces about Amazon/Whole Foods is in Harvard Business Review. The analysis focuses on investment in R&D and its clear where this story will end. But there is a chart buried in the story that is amazing. It lists, by year, the new initiatives taken by Amazon and whether it was successful or not. Red means bad and blue means success. Blue outnumbers red, but not by as much as you’d think. What is “Blue and Red”, is how innovative Amazon is relative to all others. We all knew this, but the chart captures the epic pace of innovation.

As I said in an earlier post, this is the Waterloo moment for the grocery industry and all of supporting brands because of the private label angle. Scott Galloway of L2 has a chart that illustrates private label penetration at Whole Foods vs Amazon Fresh. Brands must innovate and fast.

So what is the HBR secret innovation sauce analysis? “Amazon CEO Jeff Bezos famously believes that if you can’t feed the team with two pizzas, it is too large”.  Thank God my competitors don’t even think of pizzas! There is clearly much more to innovation, but as they say, size matters.

Amazon Whole!

Its Game of Thrones time with the unfolding battle between Amazon, Aldi, Wal-Mart and the growing food oriented Dollar Stores. Kroger melting down and Amazon buying Whole Foods are just the tip of the coming “winter” in grocery retail. As if there were not enough potential for retailer margin impact, the stealth European giant Aldi is firmly committed to a private label only strategy which puts more pressure on brands.  If you thought food and household products were in a deflationary spiral, this slug fest at the bottom says it’s a long-term 3-5 year battle.

The WSJ had a story called “Pressure on US Grocers Rises”. Pressure is not the word. Final nail in coffin is better. For 30 years the grocery industry has ceded market share to Wal-Mart which was barely in food when it started! Aldi, the European low cost “Ryan Airways” of grocery, is planning to open 900 new stores with 5 billion dollars in the US market. Lidl is also ramping up and if you have not visited one of these stores you must. And Amazon is now taking a leadership position by overlaying their consumer technology and warehouse expertise onto a premium and well located chain of stores.

Between Aldi at the bottom and Amazon/Wholefoods at the top, this is the coupe d‘grace for the Grocery retail sector which is the worst managed retail segment in American retailing. With a dead man’s focus on slotting fees and illegal charge-backs, the Grocery chains long ago forgot how to be merchants and innovators. Except for a select few like the innovator Wegman’s, there is little to miss after they ceded almost half of the entire food market to Wal-Mart during the past 30 years.

There is another serious deflationary piece on top of all this. Amazon recently signaled it’s entering the fight to take market share at the lower end of the demographic market. With Prime household penetration at 50%, the next segment for growth is the 50% of American households below the median household income line. Of course with the Whole Foods acquisition, they just bought 431 “fresh distribution/pickup centers” and with the highest demographic customers in the market. Hi end/low end…Amazon wants it all. But let’s focus on the larger end, the lower demographics.

Most commentators, such as the WSJ, think that Amazon is aiming at Wal-Mart. Clearly they are, but there are two looming competitors that are sharper and tougher for Wal-Mart to battle in the lower end market; the above mentioned giants of the value segment, Lidl and Aldi.

The WSJ has a great chart of food stamp customers which illustrates the relationship between Amazon, Aldi, Wal-Mart and the dollar stores. This story, which may be the most significant one in years, if you sell the mass market, shows how Amazon wants that market and is making some incredible changes around payment systems for the un-banked, delivery for security challenged areas, and lowering the cost of Prime membership. This is the first time that I’ve seen an Amazon strategy that is capable of hurting the dollar stores and Wal-Mart all in the context of the massive Aldi and Lidl launches.

Amazon may have cracked the digital divide and entered, what has been to date, that last retail corner immune to the digital wave. It’s still too early to call the winner(s), but the household products and food industry are in for some serious deflation/price pressure. Wholefoods, with Amazon at the helm, will morph from “Whole Paycheck” into “Half Paycheck”. Far from value but they can easily double the sales by cutting pricing and passing through their better back end management. Food, like war, is a logistics battle and nobody other than Wal-Mart can compete with Amazon.

So if you are a brand owner, ramp up the marketing. As the old Chinese proverb says, “The more you sweat in peacetime, the less you bleed during war.” The only defense against price deflation is a strong brand.

Amazon Wins Again!

Fed Ex just sent a missile through the online retail world by finally figuring out that it needs to charge for cube (size of package) in addition to weight. Until today, your online order of heavy pasta sauce and laundry detergent was subsidizing the bulky paper towels and diapers.  This “truth in shipping costs” adjustment which they refer to as “dimensional weight pricing” according the WSJ, turns the tables on single warehouse shippers and retailers.

Continue reading “Amazon Wins Again!”