Brands’ dependency on retailers, Amazon’s investments in cashierless stores, Albertsons review of its business, and Target’s 2021 Q4 earnings
It’s March 7, 2022 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Brands may need retailers more than they realize
Amazon continues to make digital investments in its stores with cashierless technology and display advertising
Grocer Albertsons starts a strategic review of its business
Target 2021 Q4 earnings roundup highlights continued focus on employees, stores as hubs and merchandise
- and finally, The Investor Minute, which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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BUT FIRST in our shopping cart full of news….
Brands may need retailers more than they realize
While there have been entirely too many people depicting the demise of Direct to Consumer eCommerce over the last few months, it’s still useful to think about what the right mix of wholesale exposure is for most brands.
Let’s start in the opposite direction. If you were a brand that started over 20 years ago, you obviously are not digitally native. You either grew up with your own stores, or selling through other people’s stores.
If you didn’t have your own stores, then you likely never developed any real connection with your customers, and as a result, designing experiences and capabilities to serve customers is completely foreign to you.
The rise of the Internet and eCommerce disrupted quite a number of these older pre-eCommerce brands because it’s easy enough for a new brand to throw up a website if they have digital skills.
On the other hand, is it really that easy?
Digitally native brands struggle with scaling nationwide and name recognition more than anything else. Retail is still one of the primary ways that people discover new brands so doing without it means forgoing the lower customer acquisition and supply chain costs that come with retail store distribution.
Direct to Consumer brands trade all that for temporary higher margins by cutting out the intermediary, but I think a case study is happening before our eyes in AllBirds. The company has grown up a Direct to Consumer darling, probably took too much money and expanded too quickly. AllBirds opened a few stores and is now saying it is experimenting with picking the right retail partners for further expansion.
If AllBirds chooses the wrong partner, the company risks hurting its brand with markdowns and losing control of its experience. On the other hand, choosing the right partner could shoot the business out of a rocket if it’s willing to expand slowly as its own stores and merchandise expand.
In the short-term this is a much faster path to growth for AllBirds, which still doesn’t have enough viable SKUs to populate a great retail experience on its own, in my opinion.
If someone were asking me - and they certainly are not - Nordstrom’s feels like the ideal first partner. Nordstrom has a best-in-class merchandise experience and is just high-end enough to be able to design the experience that AllBirds wants to provide.
[References:]
Our Second Story
Amazon continues to make digital investments in its stores with cashierless technology and display advertising
Two announcements recently out of Amazon show its digital investments in the future of the stores business.
Amazon is now offering its Just Walk Out checkout experience in its Whole Foods Market stores – something I’ve been surprised hasn’t been rolled out until now.
Enabled by the platform’s computer vision and deep learning, customers can shop in three ways: by scanning a QR code in the app, using Amazon's palm-based payment system or inserting a credit or debit card linked to their Amazon accounts. This is similar to the Amazon Go convenience stores.
Amazon plans to open two Whole Foods stores with this Just Walk Out shopping experience.
This is still a great idea, even if the pandemic never happened at all. Obviously, I hope it actually works, but who wants to stand in line?
It’s super convenient and you walk out feeling like a gangster who just stole some groceries.
In other store-related Amazon news, according to internal documents obtained by Insider, the company plans to sell digital advertising on the screens within its physical stores to boost profitability and expand its media capabilities.
Ultimately this is about helping give Amazon a financial edge in its store profitability journey.
Keep in mind, of course, that Amazon’s advertising business is one of the fastest growing parts of Amazon, reaching $31 billion in 2021 growing 32% year over year. In-store physical retail gives Amazin a way to further accelerate advertising growth, while giving more options for its advertisers to reach customers. This can attract more advertising supply.
If Amazon could attract enough advertisers interested in physical stores, the company could then start reselling that ad inventory to other stores players, kind of like a real-life digital ad network.
Any kind of enhanced advertising revenue is expected to help Amazon’s grocery business in the long run given the low margins there.
With all these Amazon moves, I can’t help but think that what the company has more than anything now is this huge basket of experiments that it’s still working on. None of which are truly ready at this stage for nationwide scale.
And through that lens, it could still take four to five years of investment before some of these moves start to really bear fruit for Amazon.
One more bit of Amazon news that just ran across my desk is that the company is closing down all of its Amazon 4-Star stores and Bookstores, which amounts to about 57 stores. To be honest, I’m not that surprised but it’s a rounding error at Amazon.
In exchange, Amazon is doubling down on grocery primarily through Amazon Fresh, its new Amazon Style concept –Amazon Go convenience stores – as well as its Just Walk Out technology.
[References:]
https://www.chainstoreage.com/amazon-opens-first-whole-foods-store-cashierless-technology
https://www.businessinsider.com/amazon-to-sell-digital-ads-inside-fresh-go-physical-stores-2022-2
https://au.finance.yahoo.com/news/amazon-closing-bookstores-shops-focus-190224960.html
Our Third Story
Grocer Albertsons starts a strategic review of its business
Grocer Albertsons has announced that it is partnering with both Goldman and Credit Suisse for a strategic review of the business.
For those who aren’t familiar with this process, strategic review is code word for “all bets are off.” The company could decide to do any number of things.
First, it could sell the entire business.
Second, it could sell off one or more parts of the business.
Third, it could even acquire a new business.
Many analysts think that Albertsons is really only considering selling off underperforming assets, but I think its problems run much deeper than that.
The fact that these are high-end bankers to me means they are seriously discussing either selling the entire business, or merging this business with another medium-to-large player in the space. That latter seems most likely to me.
Albertsons has arguably been innovating faster on its platform than its competitors like Walmart and Kroger, but ultimately it needs much more capital to compete with those players in the long-term. Both Walmart and Kroger are making significant investments in nationwide facilities and coverage that are difficult to match without a fresh injection of capital in the billions of dollars range.
[References:]
https://www.albertsonscompanies.com/newsroom/2-28-2022-Albertsons-Companies-Announces-Review-of-Strategic-Alternatives.html
And Our Last Story
Target 2021 Q4 earnings roundup highlights continued focus on employees, stores as hubs and merchandise
Overall, Target continues to go from strength to strength. Here are a few things I took out of the recent earning report from the company:
First, the company is executing very well. Since 2017 when CEO Brian Cornell took over, the company has gone from $70 billion in sales to $106 billion today, and has just completed 19 consecutive quarters of comparable store sales growth.
In Q4, its comp sales growth was 8.9% capping a full year 2021 sales growth of 12.7%.
Second, digital growth continues to expand based on Target’s stores investments and has now reached 21% penetration, with 95% of orders being handled by its stores fleet.
Going forward, Target expects to have a return on invested capital of approximately 30%, which is pretty unheard of for the industry in which Walmart is sitting at around 14% of the same metric.
It’s almost like three years ago Target turned on a video game cheat code that other retailers just can’t seem to unlock.
I ask again, why aren’t other players following Target’s lead? I see Bed Bath and Beyond as the only ones trying, but with a brand that may take too long to transform before investors run out of patience.
In terms of its 2022 guidance, Target continues to expect around $4-5 billion in capital expenditures, and slightly higher markdowns and inflation pressures this year.
Let’s walk through its major wins in three areas: Employees, Supply Chain and Merchandise.
With regards to employees, the main news here is that Target is investing about $300 million in setting a new starting wage for employees between $15 and $24 per hour. This includes expanded and earlier access to healthcare benefits, even for hourly employees.
Target’s goal is to be a wage leader in every market it competes in. Sounds like bad news for the competition.
In terms of supply chain, recall that Target’s main strategy is to treat its stores as a massive fulfillment network.
Target recorded a 45% year-over-year growth in same-day services, led by its industry-leading same-day fulfillment and curbside pickup experiences.
Target opened 32 new stores in 2021, with 30 more to come this year.
Now here are a few mind-blowing stats for the logistics people in the audience. I know you’re there!
* Shipping from Store saves 40% per unit fulfillment costs compared to upstream shipping.
* Average per unit digital fulfillment costs declined more than 50% in last few years. Let’s be honest, same-day service penetration like Buy Online Pickup in Store cannot be compared apples to apples across retailers like Walmart and Macy’s. Target is just plain better at it.
Remember that the next time you hear Macy’s has 25% store pickup.
As far as Target’s merchandise mix, its private label brands are now up to 28% of sales, and growing at 18% year-over-year, which is much faster than the rest of the business. Q4 produced approximately $30 billion in private label brand revenue, which is an incredible performance.
Let’s just say it: Target is crushing it right now. What’s the secret to Target’s success? A few things drive its growth:
1 - Better merchandise mix, combined with a mix of owned brands and national partnerships
2 - New stores plus store remodels, which greatly improve guest experience
3 - Improved operating margins relative to the industry due to greater store productivity and fulfillment efficiency
4 - Superior staff retention compared to competition, enabling better service
[References:]
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
Nogin, a Commerce Service provider which I remember as OneStop Internet, recently filed to go public using a special purpose acquisition company or SPAC.
The fact that it is going public via SPAC is telling. There aren't a lot of these happening now.
IPOs and SPACs in the last year have not had great outcomes, so it will be interesting to see how it fares going forward. The listing is just the beginning, not the end of the journey.
Second
eCommerce enagement and discovery provider Bloomreach recently raised $175 million dollars and doubled its valuation in the last year to now over $2 billion dollars.
This is a good datapoint for the eCommerce industry for the application vendors in the audience.
Third
Fabric, an API-driven or headless platform provider, raised another $140 million in a Series C, vaulting it to a $1.5 Billion valuation.
The funding is led by Softbank. In this space, the leading players in the developer-focused corner of eCommerce are starting to separate themselves in their funding a little bit between commerce tools, fabric, and more recently Elastic Path raised a good bit as well. Each of them has a slightly different approach.
Fourth
KYX World, a sneaker rental platform, raised $3 million.
A sneaker rental platform?
Now I’ve seen everything. Who wants to rent used sneakers? The sneakerheads of the world don’t even wear their own sneakers!
https://www.wsj.com/articles/kyx-world-a-sneaker-rental-platform-raises-3-million-11646047800
AND FINALLY ….
Retail media agency Bobsled Marketing was recently acquired by digital agency Acadia.
This is a feel good story if I ever heard one. I am so proud of my friend Kiri Masters for building such a great agency and I look forward to seeing how she helps continue the company’s growth.
What’s happening here, though? Ultimately, retail media expertise is in high demand, and traditional agencies and media buyers are caught flat-footed if they are not able to navigate the retail media world dominated by players like Amazon, Walmart, and Instacart.
Congrats again, Kiri!
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That’s all for this week! Till next time Watsonians.....
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Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.
Our show is produced by Citizen Racecar. Alex Brower is the producer and also wrote our theme music. The Executive Producer is David Hoffman.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.