How Social Commerce And Online Auctions Are Set To Revolutionize Retail

How Social Commerce And Online Auctions Are Set To Revolutionize Retail

Retail is one of the oldest industries still operating. Throughout history, individuals have had a desire to buy for fun and a need to buy out of necessity. Retail is also an industry that is constantly changing. The arrival of Amazon has ushered in the growth of e-commerce, and consumers are increasingly shifting their preferences to ordering products online vs. shopping inside retail stores.

Based on what I’m seeing, I believe retail is about to undergo further changes as a result of the growth of social commerce, where buyers form a group in order to receive discounts from suppliers. Complementing social commerce is the growing trend of using online auctions to find the lowest bidders to fulfill orders for apparel, shoes and other merchandise.

Much of my academic research during three master’s degree programs was focused on retail, auctions and supply chain management. Since 2015, I have conducted research on one of the largest social commerce platforms, China-based Pinduoduo. In addition, I have provided consulting to retailers interested in social commerce and online auctions. (I do not mention these retailers in this article.)

Auction-Driven Social Commerce

Pinduoduo has taken China’s retail industry by storm. The platform reportedly had 585.2 million active buyers in 2019, surpassing JD.com’s 362 million and catching up to Alibaba, which reported 712 million users (in the 12 months leading up to September 30, 2019). I believe this can be credited to Pinduoduo’s executive team’s focus on efficiently receiving, fulfilling and shipping orders to customers.

To accelerate growth, products on Pinduoduo list two prices: one for individual purchases and a price for team purchases. Team purchases encourage consumers to convince as many friends and family members as possible to buy the same products together. The more products that are purchased, the lower the price for each product sold.

The model from Pinduoduo differs significantly from a warehouse club like Costco or Sam’s Club, which already sells a product in bulk. Convincing friends and family members to buy the same product in bulk doesn’t decrease the price.

I believe this is what’s missing in the current commerce model — duplicating the social experience online where friends and family buy together and have fun together. Further, I anticipate a move toward an online bidding model, whereby more than one seller can bid on selling their products to a group of consumers. This model has the potential to explode in popularity for several reasons.

First, the Nobel Prize for economics was recently awarded to two Stanford University professors for their work related to online auctions. The award has generated interest from retailers (several of them my clients) who wish to learn how to leverage auctions within their retail ecosystems.

Second, at nearly $800 billion, the grocery industry remains one of the most important industries operating today. Consumers purchase groceries more than any other commodity on an annual basis.

However, according to many economists and analysts, grocery retailers are examples of monopolies due to the fact they control all pricing power over the products sold in their stores. Walmart, for example, reportedly controls over 50% of the grocery market in many areas within the U.S.

In addition, the growth of online grocery ordering and delivery has uncovered a weakness in the current model: Every online grocery order is treated as a separate order. No attempt is made to combine orders to sell in bulk to reduce prices.

I believe the current grocery model can easily be disrupted. For example, a third party with an online platform for ordering groceries could enter the market with the promise of reducing grocery prices to their lowest possible level through the use of an online auction.

Instead of treating every online order as a separate transaction, a third party would be able to bundle hundreds of thousands of online orders and, on a daily basis, conduct a bid whereby brands, grocery retailers and wholesalers bid to fulfill the online orders at the lowest cost. (I wrote more about this topic earlier this year.)

Removing pricing power from grocery retailers has the potential to drive significant growth to a third party that perfects the use of social commerce and an online auction for selling groceries.

When To Use An Auction Model

Virtually all retailers can use an online auction and social commerce in their business, assuming they have a platform with the required technology. However, there are risks that must be taken into account. For example, retailers must understand what their costs are, and they must have a cutoff price that they won’t exceed, lest they rob themselves of margin and eliminate any chance of making a profit.

Also, retailers must have a supply chain capable of managing inventory and shipping bulk orders to many locations. Partnering with the right inventory optimization software can provide the needed algorithms to manage and optimize inventory.

It should be noted: I don’t recommend the use of social commerce or online auctions for high-value products that require a long time to make. I evaluated an online auction model for a company that manufactures extremely complex and expensive (over $1 million in some cases) CT scans and other intricate medical equipment. Using an auction would prevent the company from personalizing its process for making the machines and showing how its “hands-on” approach provided value above and beyond price.

Retailers must evolve or they will surely die. The status quo is no longer acceptable, and I strongly recommend all retailers in the U.S. to crush it.

Read the full article in Forbes

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This Is Why Whole Foods Is Failing

This Is Why Whole Foods Is Failing

According to this Bloomberg article, trips to Whole Foods in September were down 25% from a year earlier. This is alarming when compared to Kroger, Walmart and other grocery retailers that have seen massive increases in store traffic and online sales primarily as a result of the pandemic. (Google the grocery industry and you will find a large number of articles on the topic of how the pandemic has significantly increased sales and online ordering of groceries).

Bloomberg also quoted Whole Foods customers and store managers pointing out the unpleasantness of shopping at Whole Foods stores due to crowding from Prime Shoppers fulfilling online orders, and customers trying to shop for the products they need. This is a bigger issue than the decrease in trips to Whole Foods.

Although it’s true that I am the first person to recommend to Amazon to acquire Whole Foods (I made the recommendation in this 2013 research paper), I was also the first person to write an article making it clear that acquiring Whole Foods could be Amazon’s ‘Bridge too Far‘.

So what’s the truth? Is Whole Foods failing? Is Amazon Fresh the future of Amazon’s grocery empire while Whole Foods becomes marginalized? I will answer these and other questions in this article.

John Mackey Loves Whole Foods…And That’s a Problem 

I like John Mackey as a person. I think he is a very kind and decent human being. However, I have been on the record since 2017 warning that Mackey is the last person who should be the CEO of Whole Foods if Amazon acquired the company.

When Amazon acquired Whole Foods in June 2017, I argued that Amazon should keep Mackey no longer than 3 to 6 months. Why? Because John Mackey loves Whole Foods. John Mackey created Whole Foods to fit his view of the world. And come hell or high water, John Mackey is going to protect Whole Foods from anyone who believes Whole Foods should change.

This interview that Mackey gave to Business Insider proves that I’m right.

The biggest mistake Amazon has made thus far when it comes to Whole Foods is allowing Mackey to stay on as CEO. I recommended to Amazon to hire Sergei Goncharov (I provided a list of several candidates) and place him at the helm of the company. John Mackey has stated publicly several times that he grew Whole Foods as large as possible and then the company began to fail. Mackey sold Whole Foods to Amazon because he had no alternatives. Sergei Goncharov in 2017 (or in 2020) is someone who would address the issues facing Whole Foods.

As long as Mackey remains CEO of Whole Foods, nothing major will change and Whole Foods will struggle to grow. One final comment – Mackey isn’t driving innovation at Whole Foods, he is protecting the status quo at all costs. Whole Foods is Mackey’s baby and no one is going to tell Mackey his baby is ugly.

Not Enough Hippies

When I evaluated which retailers Amazon should acquire, I selected Whole Foods because it had a fabulous reputation for selling the best fresh fruits, vegetables, meats and other perishable products. Whole Foods is also non-union and has stores nationwide. However, the big negative of Whole Foods, but a negative that could easily be corrected, was that Whole Foods doesn’t allow products with unnatural ingredients to be sold in their stores.

Selling organic products is fine but not if the goal is to acquire the retailer and grow the business. There simply aren’t enough hippies (as John Mackey has referred to himself and Whole Foods customer) interested in eating only natural foods. The solution? Introduce branded CPG products into the stores like Coke, Pepsi, salty snacks, and other in-demand products stocked on store shelves at traditional grocery retailers.

Whole Foods is not a one-stop shopping destination. Love organic produce but you also like to drink Coke and munch on Cheetos? You can buy the produce at Whole Foods, but the Coke and Cheetos will have to be purchased elsewhere.

My analysis indicated that less than 2% of Whole Foods customers would abandon the chain if CPG products were introduced into the stores. However, Whole Foods would attract a double-digit percentage increase in new customers.

Mackey, however, remains adamant – Whole Foods will never change its assortment. This is the primary reason why I believe Mackey should not be CEO. No matter what Whole Foods does in terms of innovation, it will not increase sales or attract new customers to the level it would if CPG branded products were available in the stores.

Instead of making the decision to hire a new CEO, Amazon retained Mackey guaranteeing that no substantive changes will ever be made. In other words, Amazon is the reason why Whole Foods isn’t thriving. None of the senior Amazon officials or their deputies assigned to oversee Whole Foods or work with Mackey’s team, are experts in grocery. Big mistake.

The Forlorn Hope 

SInce 2017 when Amazon acquired Whole Foods, I’ve shopped in over 50 Whole Foods stores in 12 different states. My worst fears about Amazon owning Whole Foods and John Mackey running the company have become a reality. Whole Foods isn’t a mess and the company isn’t broken but it does have severe issues that need to be corrected. (Yes, it’s true that Amazon plans in terms of a decade and they have only owned Whole Foods since June 2017. However, with no plans to replace Mackey, what will change at Whole Foods?)

The good news is that things can quickly improve with the right leadership and a strategy to accelerate operational improvements. What’s needed at Whole Foods is an intervention.

I can’t stress this enough, the majority of complaints I have received about Whole Foods is related to how crowded the stores are. The first thing that has to be addressed at Whole Foods is improving the customer experience by eliminating the crowding.

This can be done primarily by adopting the use of micro-fulfillment centers or what I refer to as Super Micro-fulfillment or Nano- fulfillment centers, inside Whole Foods stores to reengineer the process for fulfilling online orders and removing independent contractors from the aisles that are picking groceries to fulfill orders.

For example:

  • Massively accelerate the number of dark stores to fulfill online orders but automate the dark stores using technology from AutoStore or other micro-fulfillment companies
    • Let customers shop in the stores
    • Remove pickers from roaming aisles to fulfill online orders
  • Install super micro-fulfillment centers inside Whole Foods stores
    • The centers can range from 2,000 to 15,000 square feet
    • Inventory can be removed from inside Whole Foods stores and stored inside the fulfillment centers
    • There is no ‘one size, fits all’ approach to opening micro-fulfillment centers inside Whole Foods stores due to so many stores having different layouts, ceiling height and square footage

I’m convinced that Amazon is going to open a 20,000 square feet micro-fulfillment center inside an Amazon Fresh supermarket and/or at an offsite dark store. Amazon understands the value of micro-fulfillment. However, traditional micro-fulfillment solutions aren’t necessarily the best solution for use inside Whole Foods stores.

I expect to see Amazon work with any number of micro-fulfillment companies to come up with a better solution for leveraging technology to reduce the costs and complexity associated with fulfilling online Whole Foods orders, and increase customer experience.

Leveraging micro-fulfillment centers and automated dark stores will generate an immediate ROI for Amazon by automating the majority of steps required to fulfill online orders.

This is a must-have for Whole Foods to provide customers with a better shopping experience.

The Future of Whole Foods

Amazon will continue to invest heavily in growing it’s grocery business but will Whole Foods be a priority? No. Amazon has learned that Whole Foods in its current format is extremely limited in terms of growth potential. John Mackey opened Whole Foods stores nationwide and there is little need to open additional Whole Foods stores. The future of Amazon’s grocery empire will be the following:

  • Amazon will open Amazon Fresh stores inside select Kohl’s locations; I have recommended this since 2018 and recently an article appeared quoting individuals with knowledge of the matter that Kohl’s and Amazon have begun a pilot
    • Kohl’s operates 1,158 stores
    • It’s conceivable that Amazon can open an Amazon fresh store inside every Kohl’s
    • If the pilot is successful, I anticipate that Amazon will acquire Kohl’s
  • Amazon will continue to open different formats including supermarkets branded Amazon Fresh
  • Amazon can make additional acquisitions
    • Target remains at the top of my list
    • Amazon can open Amazon-branded stores or Whole Foods branded stores inside each Target
    • Amazon can acquire TakeOff, Fabric, Dematic, Alert Innovation, Exotec or any number of micro-fulfillment companies

The brutal truth about Whole Foods is this – the company isn’t strategic to Amazon long-term. As Amazon opens their own branded stores stocked with organic and branded CPG products, the value of Whole Foods decreases. Why? Because there aren’t enough hippies to shop at Whole Foods. (Amazon was right to acquire Whole Foods. It was not a strategic error. Where Amazon has made an error is allowing the status quo to remain).

If Amazon doesn’t insist that Whole Foods introduce CPG branded products, where will the growth come from? (I made the argument to Amazon that adding CPG products can be done fairly easy. Changing the name to Whole Foods + to indicate Whole Foods has increased the assortment of products they sell is also something that can easily be done).

I firmly believe that Whole Foods should morph into a fitness company capable of providing customized meal plans. Whole Foods should manufacture the highest quality line of supplements. Whole Foods should invest heavily in technology related to fitness and wellness. For example, why can’t Whole Foods be a competitor to Peloton? I think Whole Foods should acquire the bankrupt fitness chain, 24 Hour Fitness, and create an integrated health, fitness and nutrition ecosystem for their customers.

The Whole Foods I envision looks much different than the Whole Foods that exists today. John Mackey remaining CEO of Whole Foods doesn’t make sense to me. John Mackey running a fitness and nutrition company does. Whole Foods can be much bigger than a grocery retailer.

Amazon is running out of time. Organic products can be found in nearly every major grocery store chain and even at independent grocers. Kroger and Walmart have done a fabulous job increasing the number of organic products they sell. Whole Foods isn’t as needed or valuable as it used to be hence the need for Amazon to rethink Whole Foods operating model and assortment. All companies must evolve over time. Why should Whole Foods be any different?

Is is possible that one day Amazon could divest Whole Foods? Yes. Not likely as of the time I write this article but it is certainly plausible.

True story. In 2013, I reached out to Kroger and I informed them that I was writing a research paper on the topic of Amazon acquiring Whole Foods. I made the argument to Kroger that they should acquire Whole Foods as a way to balance their portfolio of banners, and deprive Amazon of a future acquisition target that could one day impact Kroger. Kroger instead chose to acquire Harris Teeter.

If Kroger had acquired Whole Foods, I wouldn’t have had to write this article.

As for Amazon, they would have been limited regarding who they could have acquired as there are few non-union retailers. My argument to Amazon was to acquire H-E-B if they didn’t want to acquire Whole Foods. H-E-B is arguably the best grocery retailer in the United States. They sell organics, private label brands, and branded CPG products.

H-E-B also recently entered into an agreement with AutoStore to provide them micro-fulfillment technology to automate fulfilling online grocery and curbside pickup orders. It’s amazing what a grocery retailer can do when it has a team of skilled executives who think big and embrace change. (I anticpate that Ahold-Delhaize will be the next grocery retailer to announce a partnership with AutoStore).

The issues facing Amazon aren’t insurmountable. What I question is the willingness of Amazon to take command and control over Whole Foods. Let me make it easy for Amazon: Hire Sergei Goncharov and allow him to utilize his global experience to take Whole Foods to the next level.

Was acquiring Whole Foods Amazon’s bridge too far? I believe we’ll know the answer in 2021.

 

Read more articles like this from PULSE’s Chief Marketing Officer Brittain Ladd