The din around Amazon's $13.7 Billion acquisition of Whole Foods has been deafening. Most of it has focused on the expansion of Amazon into groceries and perishables. There's been speculation about who's next on Amazon's list of acquisitions. And, of course, there are the endless predictions about the death of retail as we known it. All of it is fascinating and I'm sure there's some truth in much of it. Yet, it's mostly short sighted speculation. It's not about the long game.
There's is something much more interesting at play here, something that is a game changer across the board for consumers and which will not only redefine retail but the very foundation of how and why we buy as consumers.
Amazon's Long Game
The simple fact is that Amazon's long game was never about just retail, at least not as we've known it. For the better part of last century retailers relied on three things, brand loyalty, selection, and price competition. For example, the iconic 20th Century brand Sears was all about having a trusted single place, be it the catalog or the store, in which to find everything you could possibly need, at a competitive price. You may think that sounds pretty much like Amazon's model, but you'd barely be scratching the surface!
Amazon is not just about being a digital catalog. That was just the launching pad. It was the bridge that attracted consumers to what they knew and were comfortable with in order to launch them to to the future.
So, what is the Bezos' vision of that future? Well, it's so radically different and disruptive that few people are even talking about it, and describing it can easily get mired in the complexity of the technologies that will be used to support it. I'll keep it simple.
The easiest way to describe it is to start with the model for retail that defined the consumer experience and which transformed retail over the last 100 years.
When Sears was founded in 1893 the retail experience was all about the general store. The nostalgic images of a quaint little shop with a wide variety of life's essentials. But what we don't think about as often is the proprietor of the store. This was someone who knew you and what was going on in the town better than even the local barber. Why? Because the lives of all the town's people was reflected in their purchases. From having a new baby to buying a shovel for a burial, it was all purchased from the general store.
That's when Richard Sears turned the world of retail inside out.
Sears, wasn't a retailer. He was a railroad agent who accidentally received a shipment of
goods bound for a jeweler. When the jeweler decided he did not want the shipment, Sears bought the goods himself and resold them--eliminating the local middleman. Sears went on to create his own network of agents through which to deliver all manner of goods.
Interestingly the infrastructure that made the Sears' catalog possible was another network game changer technology, the burgeoning railroad system.
Everything from hats to headstones could be purchased through the Sears catalog, which, according to sears, was at the "price your storekeeper at home pays for everything . . . and will prevent him from overcharging you." Sounding familiar?
Sears grew dramatically, as did consumerism, because it did one thing above all else, it simplified people's lives at a time of increasing socioeconomic complexity by eliminating the friction in a transaction and replacing it with a trusted experience. As an economy matures products and markets get more complex. When complexity increases it creates more and more points of friction, and while friction slows down the status quo it spells opportunity for innovation in a free market.
The Sears catalog, coupled with a burgeoning transportation system, was a brilliant mechanism by which to reduce friction and increase market efficiency. And the Sears store was a way to take that innovation to fast growing centers of urban populations. What defined a city was no longer its railroad but whether it had a Sears store! But something was lost in all of this. Sears didn't know you the way that General Store keeper once did.
The Game Changers
While the similarities between Sears and Amazon are striking--the railroad and the Internet, the elimination of the middle man with the Sears catalog and Amazon's self-publishing platform and content creation, the creation of an urban distribution network through local railroad agents and the 400 points of distribution that Whole Foods delivers to Amazon--there are also some game changing differences.
Here are the game changers as I see them. Notice that each one focuses on dramatically reducing friction and increasing customer experience.
1) Solving The Problem of the Last Mile
In every consumer facing industry the greatest challenge is in crossing what's known as the last mile. This is the distance, either physical or procedural, between the provider of a product or service and the buyer. Usually this is a matter of building out some sort of infrastructure that connects seller and buyer so that a transaction is as fast, frictionless, and efficient as possible. For Sears it was the railroads. For cable TV providers it was fiber to the home. For Amazon it's the logistics of getting the right product into the hands of the consumer.
"The last mile for Amazon is getting inside your head!"
You'd think that this would be a simple problem of shipping and logistics, which Amazon excels at, but the products still need to be shipped from somewhere. Which is why Amazon has already built dozens of fulfillment centers that put it within 20 miles of over 30% of the US population and 50% of it's target market. However, With Whole foods Amazon now is within 10 miles of 80% of its target population for same day delivery. That's not to say that Amazon will suddenly turn every Whole Foods into a fulfillment center for everything it sells but it actually does something even better. It provides a level of access to the behaviors of its customers that would otherwise be impossible to capture.
But here's where the last mile takes on a very different meaning. It also gives Amazon the opportunity to create cyber-physical experiences that can move seamlessly between online and offline transactions. For example, if you buy several packages of frozen fruits along with whey protein and almond milk don't be surprised if by the time you get home a smoothie blender is waiting on your doorstep. The last mile for Amazon is getting inside your head! Which leads me to the second game changer.
2) Predictive Purchasing
What we lost when the general store was replaced with a catalog was a person who knew us well enough to actually make valuable recommendations about what we might need. While every online retailer has been trying to do that, including Amazon, most of what we get today is an annoyance. "If you bought that you might also want this."
But Amazon has been toying for a while with a whole new dimension of personalization. It's called predictive purchasing and it works like this. If I know enough about your overall habits and behaviors, along with your buying, travel, and social experiences (current and planned) then why not make predictive purchases for you. Amazon will send the item to you without your even asking for it. If you like it, great, keep it. If you don't just put it back on your doorstep and off it goes with the next drone.
Now, I'm pretty sure I know what you're thinking. "That's creepy for me and awfully risky for Amazon." Well, creepy is a matter of socially accepted norms and value add. It was once creepy to use your cell phone in a restaurant or a public restroom. Ok, the latter is still a bit creepy, but you get where I'm going. Once something adds value to our lives we will no longer see it as creepy. I an odd twist, Amazon is trying to take us back to that General Store where someone really knew us.
As for Amazon's risk in sending stuff you may not want. That risk is proportional to the costs of shipping and returning. Both of which suddenly get dramatically lower when you now have 400 new distribution centers that you can ship the item to.
3) Building An Ecosystem
Perhaps the most disruptive aspect of Amazon's strategy, as evidenced by the Whole Foods acquisition, is building a new ecosystem for consumers. This is one of the hardest of the three game changers to grasp since it's still very much in its formative stages, but stick with me for a minute or two because this applies to just about every industry.
One of the most destructive forces that stifles innovation, frustrates consumers, and reduces the overall efficiency and effectiveness of any industry is the friction created as the industry grows organically. As with any machine, the larger it is and the more parts it has the more it needs to be maintained. In the case of huge industries such as retail, healthcare, and education that maintenance starts to not only slow down the industry and innovation but it also increases costs, makes the customer experience more frustrating, and ultimately distances the seller from the buyer.
The solution to this is rarely going to come from the current cadre of players who are already vested in the industry, no matter how dysfunctional. They have too much to lose by disrupting the status quo and likely no one player can influence change that is substantial enough. There are exceptions to this. For example Walmart disrupted retail through it's big box superstores, but these are typically still just derivatives of the old model since you can't change the entire infrastructure of an industry. Unless, that is, if you're an outsider unencumbered by the status quo, with nothing to lose and everything to gain.
So, how do you do it? Apple did it with the music industry. Uber is doing it with transportation. Tesla is doing it with automobiles. And Amazon is doing it with retail. You build an entirely new digital ecosystem that effectively rebuilds the industry from the ground up on a digital platform. In the lingo of digital change it's called a Walled Garden. You insulate yourself and your customers from the inefficiency and complexity of the incumbents and in the process you decimate the status quo and end up owning the customer.
Does all of this sound too far fetched? It shouldn't. We've been here before. Richard Sears understood the power of disrupting complexity and driving out friction by offering simplicty and experience just as well as Jeff Bezos does. A different time with vastly different technologies but with some amazing similarities.
And, I have to add, that in the ultimately poetic irony, it's fascinating to watch how Sears, the 20th Century's retail icon and game changer, is on life support as Amazon ushers in a new era of consumer experience, which in many ways takes us back to that General Store.
But that's the way disruption and innovation work. The friction that once created the opportunity for change inevitably finds its way back into every new industry where it spells opportunity for the next round of innovation.