In this episode:
Wendy Liebmann talks with Dan O’Connor, founder of the Future Commerce Initiative and Executive in Residence at the Harvard Business School, about the future of commerce and retail.
- How retail is fast moving into a 50:50 (in-person vs. not-in-person) world.
- The dramatic complexity of the retail landscape with some 70 different store types around the world and 15 digital models.
- The implications for CPG companies and large retailers.
- How space in stores will need to be redeployed.
- The impact of conversion marketing channels like TikTok and Instagram, and the power of Instacart.
- What Amazon’s disappointing sales results mean for it, and the future of e-commerce.
- And how data digitalization will be critical to support supply chain, localization, and personalization in order to deliver a highly improved shopper experience.
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Watch the video episode:
Hello, everyone, it’s Wendy Liebmann. I’m the CEO and chief shopper at WSL Strategic Retail and this is Future Shop. This is where I interview innovators, provocateurs, disruptors about the future of retail.
Today, my guest is all three. His name is Dan O’Connor, someone I suspect is very familiar to many of you. He was the founder of MVI and the combined MVI/Kantar, which he sold to WPP. He’s all involved and creator of RetailNet, which is the RetailNet Group. He’s an executive fellow at Harvard. So lots of fancy credentials here and more and many more. And he spends a lot of his time teaching us all and big CPG blue chip companies around the world about the future of commerce, and about the future of work. So I am delighted to have him here today. A provocateur on the stage. Welcome, Dan.
Hi, Wendy, thank you very much good to be with you.
It’s always a pleasure, Dan, you and I kind of verge and separate and come back together around friends, clients and industry events over the years. And what struck me I think was asked for was where you were talking to a group that I was part of about this rather provocative notion of this concept or reality may be of what you were talking about as 50:50 Retail and 50:50 Retail or 50:50 Commerce being 50 in digital and 50 in physical retail, and I was the whole room of like, Oh, my heavens, are we ready for this? Or is this just a provocation to get us ready? So how did you come to that point? And is that more to get us ready in scenario planning? Or is this really what we should be thinking about right this moment?
Interesting. And I’m glad that stuck with you one day what’s all understand I think we well understand actually that digitalization is happening in every industry and digitalization is happening and enabling e commerce obviously and at the same time, digitalization and mechanization is coming to the physical store environment. And so when we think about digitalization, then it transcends all parts of the value chain both in person and not in person retailing, and my forecast on the 50:50 world was really that 50% of Commerce would happen not in person, and 50% of commerce would happen in person. And that would happen initially in the b2c world. But with about a five or eight year lag, it will also happen in the b2b world, which is six times bigger than b2c, it’s really a profound shift when you begin to think about the implications of how products get to market, both the b2b elements as well as the b2c elements.
And as I thought about that, after that session that you ran, I thought about all the ways even in this sort of physical space, that digitization, digital, whatever, however you define it, will really have an impact as well. Because really, we know, right, we walk into the store with our phone, and we do homework or check prices, or look at a review and all of that. So even if we’re walking into a physical space, so often that digital factors having an impact on that,
right, yeah, it really does. And you know, digitalization, of course, enables things to happen both with humans involved, but also in an automated way, as we’re all beginning to understand in a very clear way, the byproduct of digitalization is data. And so data by definition, then is historical. And so the key enabler here is to be able to leverage that data using automation and analytics, in order to speed and improve the quality of decisions, whether it’s an effort to personalize and better communicate with consumers or simply stay in stock, whether it’s in a fulfillment center, a distribution center or a store. So you’re a digitalization in and of itself is transformational. And and again, enables new models within e commerce.
I was really struck by that because I know you’ve done a tremendous amount of work in China and understanding the Chinese market. And it struck me when one of our scouts when one of our team were at Hema in China and looking at their supermarket there, which I think is owned by Alibaba if I get my foot straight today. And within that context, I mean, they were the digitisation was helping them manage the stock on the shelves, helping me as a shopper decide what I was buying, helping with pricing, checking out so many aspects of that from sort of what I would call the operational piece to the piece that we are so involved in, which is The shopper. And so the way you’re describing it really is the state of things increasingly everywhere, right? Not just in China.
You’re right, Wendy. And I think you’re referring to the Hema model that’s owned by Alibaba, which we first experienced, I think it was in 2016. And the interesting thing about this retail venue is that, you know, most products had a facing of one, maybe two, the entire baby section was about four feet wide, maybe six feet wide, that included infant formula, and diapers, and so on. And more than half the restaurant was a series of in store restaurants and different experiences. And the reason is because they only carry the first sort of 234 1000 highest velocity items, which candidly, for most consumers is over 50% of what they bought. Some cases, it’s 60, and 70%, of what they buy. And they use nearby fulfillment centers, to supplement what goes on in their stores. So they were the first ones really to model, this new infrastructure of stores, fulfillment centers, really automated, facilitate proximate fulfillment centers in the neighborhood. And then those in turn married to larger scale fulfillment centers and distribution centers. So it’s a very interesting end to end solution with a very different consumer experience, really different.
And I didn’t really intend to get into the middle of that. But as you say that it reminds me of that Ocado support for Kroger, and all these smaller Hub and Spoke distribution centers, they’re creating Kroger markets around the US already. So that seems to be some kind of replica of what you’re talking about in China, as well.
It’s interesting in most categories of especially faster and consumer goods, in the aggregate, you know, the per capita consumption is reasonably flat, some categories grow. And so if you assume that 100% of that used to be sold in person, and now in some categories, as much as 50% is being sold, not in person, you can realize that has a profound impact on the previous physical distribution network, the store and the fulfillment centers that are distribution centers that were connected to stores. And at the same time, and what’s so profound about what they’re doing at Kroger is they’re creating a parallel, but very different fulfillment model to reach the consumer leveraging what I think is a very advanced and sophisticated technology from Ocado.
Yeah, it is amazing to watch those little automatons run around a distribution center is just mind boggling. It’s a stunning example of technology. Alright, so back to some of the basics of the moment. So at least on the E commerce side, one of the things we saw clearly through the pandemic was the acceleration, the much overused word of people buying online and having it delivered. And there was a sense then that Oh, wow, you know, when you talk 50:50, which your discussion was slightly different from what we’re talking about now. But that 50:50 piece, you could have looked at the scale of which sales from ecommerce grew. And then now we come three years, almost to the day of the beginning of the pandemic, and we see this decline or at least fall back to a more normal, quote unquote, level of E commerce growth. How do you see that? How do you account for that? And what are we seeing, particularly in these economic times?
That is super interesting to me, as I look at the world today, because as you know, Amazon just reported its first sort of flat to down quarter, it was profound, and caused everybody to pay close attention. I think, as you also know, it caused their stock along with others to, you know, their market cap to fall by 40, 50 60%, at least, against my basis. But the important thing is that there’s no business model that we’ve ever experienced that went straight, that is right up to 100% household penetration, and said, as you’ve seen me teach in the past, we’re a big believer and eskers that businesses grow and plateau and grow and plateau. And at the same time, if you just think back, Wendy about the advent of the Super Center, for example, that ran at a or even warehouse clubs, in the aggregate, those had an incredible 20 and 30 year run, in most cases continue as a collective way to gain a lot of share. Well, when we reflect back on the launch of Amazon and the launch of eBay in the launch of Alibaba, these companies are now 20 plus years old. And the business model continues to grow and continues to capture share. There are moments in time where there is a flattening and for some players, as you can see here today, there are some some winners and some that are not winning quite as effectively. Secondly, I think we have a lot of new competition in the market today. And it’s important for us to remember that Walmart.com is a consideration in the North American market, it’s not just Amazon, Target.com as consideration. And as importantly, we have, especially as consumers become adjusted to the idea of buying fresh foods and grocery online Instacart is having an amazing impact on the size and scale. That is the level of engagement that consumers have, from a digital retailing point of view. So the alternatives and competition are really out there. And at the same time, Wendy, if you can accept this, we’re beginning to see a movement, especially in high impulse fashion categories, for example, including, interestingly, in consumer electronics, sort of the movement to what I call conversion marketing channels. And these are the TikToks and the Instagrams of the world where, as you well know, as you sort of scroll through, and look at your short reels and videos that you’re prompted to buy products. And it’s surprising to me as an individual, just how often I go look at something and end up buying some shoes or something, and then click right. Yeah. So there’s real substitutes that are happening out there. And the very nature of competition is fragmenting the very nature of the, and spreading the growth out of the digital marketplace, across more players.
So as we think about that, and look at it, how do we as companies, whether it’s CPG, or fashion companies, or tech companies, how do we have to or retailers, of course, we have to think about this sort of fragmentation. I mean, I often think that, of course, our bias is through the lens of the shopper, and how that they need what they need when they need it. And then, you know, 11 o’clock at night, oh, gee, I forgot the diapers, versus Oh, it’s 11 o’clock at night, and I have a moment to myself, Oh, look at those fabulous shoes, that kind of thing. So then there are category dynamics, right, and maybe channel dynamics. I mean, you spend a lot of time thinking about these things, and your Harvard lens and other examples of the work you do, how do I as as big CPG company, or a big retailer really need to think about that city, that ecosystem. Now, as we move forward,
you know, Wendy, I’m gonna come at this from two different angles. First, I’m going to come at it from, you know, just a very big picture point of view, you know, we’ve migrated through this world of physical retail. And we’ve seen lots of great ideas that continue to flow, and again, in the world are the majority of all consumption. You know, we’ve also seen the evolution of not in person retailing, from the world of catalogs to the world of marketplaces, and walmart.com, and so on. And now we see the evolution of large scale platforms. And as I’ve described, the sort of conversion marketing channels, and I think there’s more to come. And again, what we’re doing here is that we’re just spreading a certain amount of volume, over an increasing number of channels. I’m in the middle of a case right now writing about what I call super sellers, Wendy. And I’ve isolated a certain number of brand companies, and sort of track their progression, because these are companies that have gotten from zero to 100 million, or two or 300 million or more digitally. And yet, even today, even the super sellers, instead of growing at 30%, a year or 20% of the year are seeing single digit growth or slower growth rates. And so what I’m really trying to understand is what stands between them and getting back to 30% growth. Some of that is the consumer, some of that is optimizing the way that they sell on their existing platforms. But some of that is also eyeballs are moving to alternate ways of engaging with product. And as you well know, when the when eyeballs move, so does consumption. And that’s what’s going on in the marketplace today. TikTok, Instagram, and lots of other conversion, marketing channels are really having an impact. And most recently, we have picked out entering the US with a model that is, I believe, going to have a profound impact on low value, imported goods. It’s very interesting how that’s how that’s unfolding.
And you do get to look at some of these things now and save yourself and your lens of, really eyeballs on this. And the sharper, there is some sort of sense that, well, people don’t have time, we’re all you know, we’re all looking at a time while at discussion. People don’t have time. So they want to do everything under one roof. And actually, what we’re realizing through our research is that people will shop in more places, because in many, many times many days, it is more efficient for them to be in more places. And by that I don’t mean jumping in the car and driving to the super center. But it could be right sometimes. I mean, as you said, Walmart sometimes I’m walmart.com Sometimes Walmart’s delivering to me all of those sorts of things, which from a retailer standpoint and a manufacturer standpoint is a challenge and then manufacturers doing is as you and I have talked about marketplaces, their own marketplaces. Third party, how are they doing all of that, and the complexity of that model, which is really interesting, we keep talking about this kind of personalized toolbox that shoppers have. And we think about all the steps in the process. And what a day in the life of a shopper can look like. It is really extraordinary in terms of the different touchpoints. So how do you think about that if you’re advising a company to either step back or step into this new world that we’re talking about?
Yeah, Wendy, I think that look at the evolution of not in person digital commerce. In the beginning, we saw these categories that were low weight, high dollar density, no temperature control, so music, video, apparel, these are categories that move first. And that’s the first wave of digitalized merchandise, and then following that was product that was maybe a little bit lower dollar density, I call it sort of center of store merchandise. And more recently, as you well know, it’s now included is you’ll find in all those Ocado centers that you’re referring to a full array of perishable and temperature control products, all of that can be married into a single load. Now, what I’m suggesting to you, however, is that as I look at the evolution and fragmentation of the digital market, just the same way, we have 70 different store types in the world today, we started off having one or two primary digital models, and we’re on our way to 15 and 16 different digital models. So if you think about this from a brand, or a seller point of view, my gosh, 70, store types, 15, or 16, digitalize mechanisms, we’re getting to the consumers selling models. And you find all of a sudden, you’ve got lots of complexity, all of which have their own nuances, not just in terms of cost, but in terms of content and promotion. And the way you support the product in each of those platforms. So as a seller, this world is not getting easier. It’s getting more complex. Yeah. And I
know you do a lot of training around that. And that whole sense of helping me learn how to even think about these things. In a world where we’re looking for efficiency, where, you know, we’ve got shoppers who are looking for low price, where we’ve got, at least at the moment, and there’s so many technologies that people are looking at, and we see in our certainly CPG clients, you know, where are the white spaces for distribution opportunities, marketplace for that one P, three P, What should I be doing? And then, of course, the whole conversation around retail media, and this talks to your comment about data, and all of that amount of data that’s supposed to help us personalize the experience for shoppers, which sometimes works sometimes, and sometimes doesn’t. So as you think about that some of these issues, how should we step back now? And think about how to think about these things? Is it just awareness? And then looking at the structure you need?
That’s a very good question. And honestly, Wendy, I’m in the middle of this case, and it’s one of the hardest ones I’ve written. And the reason that it’s hard is that even some of these great sellers in the world are really trying to figure out how you optimize, for example, selling through their own.com, optimize selling through marketplaces, such as Amazon, and at the same time, then have the capital and the people because it’s different skills, and it does require money to go become efficient settlers in these other environments. So you’re layering on this continuum of capabilities that requires funding and requires these capabilities to be effective. And even, for example, changes in the product. A more recent development that you might find interesting, Wendy, through this research that I’ve been doing, is the valuations on pureplay digital companies, companies that are selling through this continuum of marketplaces and in other digital opportunities, the valuation of these companies is actually very challenged right now. And what’s so interesting is that what the capital markets are coming to discover is that the stability in the consumer base of a store based retailer has great value, where we talked about lifetime value of a consumer and alternate or digitalized shopping, and, gosh, you’re lucky to have somebody three years later, four years later, whereas you will know when you have a neighborhood grocery store, even if you’re only penetrating 30, or 40% of the neighborhood around you, you tend to get a pretty good and a stable base of consumers and with a capabilities such as Instacart, supporting that, you can in effect, you know, maintain and lock in on that consumer. So the value today from a digitalization point of view does include your ability to satisfied local meet, gosh, there’s 1000 items that are you know, 60 or 70% of what most people buy, you’ve got to be proximate You’ve got to be fast. But what’s really important is you’ve really got to hold on to that consumer, you’ve got to lock a man. And you’ve got to hold them. And it’s not a loyalty program issue. It’s a way of competing in the different ways that consumers want to buy. And this is the complexity Wendy. So as I look at the world today, I started to think about who the winners were Bay. And I think we’re sort of past this mindset of omni channel, you know, this notion of harmonizing on and offline. So you have a common experience. I think that’s a great idea. People have worked really hard. And I think they make good progress. And now I think what a lot of, for example, large grocers and companies like Walmart, people like Walmart, companies, like Walmart are going to go all the way towards I predict, building out a platform that looks a lot like maybe what an Alibaba would have, or one of the large scale Jingdong, its partner in China. I think that the Wegmans of the world in the ShopRites of the world, I think that they’re going to find themselves in these Federation’s, they’re not going to build out quite as much of the capability. And they’ll find themselves renting and connecting with capabilities, maybe even capabilities that Walmart is renting out to them. Or, in fact, what I predict what will happen is companies like Amazon will pull back from the retail store based retail world, they’ll run this marketplace, but it’s really going to be in the business, I believe, through its cloud services. I’m enabling these retailers that I’m describing the store based retailers to compete in this new marketplace that I’m describing.
It’s interesting, you say that we had Justin Honaman, who hits up one aspect of Amazon Web Services. And we were really talking about that whole aspect of their business and you know, what they’ve learned from their physical stores, but that that’s not where they understand their growth is coming from in the longer term and disability, you know, even this confederation, I think about a lot with the regional grocers, who are perfect example, who did very well during the pandemic and continue to do well, because they’re low full, it’s exactly what you said, there in my community, I know them the balance of, as you say, hidden person, and not in person offerings they have, but they’re part of that very intense relationship with their shoppers in their communities. And the partnerships they create even a HyVee with shoes services or manicure services, or whenever there’s sort of flesh out their offer. And you know, some of that you can see, which seems sort of antithetical to the digital world we’re looking at, and yet, it’s very much enabled by a lot of that. So that, to me, just supports what you were talking about more and more about the complexity of all of this. And then I look at, you know, the Aldis and Costcos of the world around the world. I just came back from Australia. And look at how quickly Aldi over a 10 year period just took a huge chunk of the grocery market in Australia as does Costco and you say, wait a minute, we’ve got all this digital stuff going on? What is it? These are, you know, physical retailers, for the most part, so, so much of that landscape. But that picture you’re painting is really right in front of us.
Yeah, it’s very interesting you mentioned the discounters and the club cash and carry the cost curves of the world. Because for both of those outlet types, they provide such extreme value at the quality that they choose to compete at. The consumer, you know, is interested in digitalization, but not as dependent. And yet, if you look at mainstream retailers here in the US and Europe, for example, you know, it’s really interesting when they there’s some of these retailers, they have 60 and 70% of the volume. And some of these large scale Super Centers is being sold digitally but being fulfilled in the store. And so I think you’re gonna see a lot of change in the US market and European market in particular, you know, North America, Europe, in that that space will be redeployed from consumer space. And I think you’ll see a lot more in store micro fulfillment centers, or adjacent ATB, for example, and companies like HyVee are making a real commitment to try to figure out how to cleverly create a fine in person experience without having all the pick and pack people running up and down the aisles. And so I think the advent of this hybrid environment is going to really change the role and the probability of success of companies such as those I’d mentioned,
I also see that within the context of in thinking a lot about the digital health lately, and you know, as we think about all the digital services that were in place, but not really growing, and of course, now that through the pandemic, we saw the use of digital doctors and mental health professionals and nutritionists and just the fact that so many, particularly younger shoppers, but younger or patients younger or busy household, the ability click on and talk to the doctor before you actually have to go in somewhere. So I think a lot about that. to in terms of the digitalization of healthcare, and how that impacts, particularly the drug chains, but also any retailer that is offering or to health care services. So are you seeing that around the world to and some of the work you’re doing how healthcare is becoming much more digitized in terms of support,
you know, Wendy, that from a GED at a very big picture, you know, retails about 20% of GDP, and healthcare is about the same, maybe slightly bigger. And once you I don’t want to call it dominated, but once you have significant share and a growing understanding of the consumer, from one business or another, there’s a lot of synergy back and forth. Common denominator is the consumer. And secondly, you know, as I do, the things we eat have a huge impact on our health outcomes. So I think the future of healthcare and food, for example, in particular, will go hand in hand, maybe more than the delivery of health services, although, as you well know, companies like Walmart, have committed now to expand the number of types of clinics they have on premise in their stores,
even Dollar General talking about you know, so there we have small format value retailer, understanding that they have many underserved communities in the health space. So is that fresh? Or is it services? Is it drive around vans that will help people get clinic services? I mean, it is extraordinary. You’re right, those two pieces to this huge opportunity for the fed to grab that are so well. Yeah, they absolutely do. So I would be remiss if I didn’t ask you about all our discussions around the ether about the metaverse and chat GPT and the latest buzz words of the world. What are your thoughts on all of that bright, shiny things of the moment useful tools for shoppers? What do you reckon?
Let’s first say that the metaverse and everything around that I think is at the very early days, I think even you know the world’s biggest sponsor of these initiatives, Meta has repositioned its commitment pretty seriously and saw its stock rebound significantly. And at the same time, I will say when they all of us know that the pressure on our cost structures, and the need for deeper consumer insights and the need to compete with speed and with install conditions and order fill rates, all of that. We all need to learn how to leverage data much more quickly to meet those goals. And so when you think about what Amazon’s been doing, are Procter and Gamble has been doing all sorts of large companies in terms of understanding what the biggest questions are and where the interruptions are in terms of the value delivery, they’re often finding that using automation across the supply chain. And that includes automating cognitive tasks, for example, changing the way that things are forecasted. But also, as you well know, using mechanization all along that supply chain, I think the world of data, digitalization, automation is just going to accelerate the opportunities are just enormous.
And you know, well, some people find it very spooky. I talked to people while I was traveling, Australia and New Zealand, you know, small companies that are looking at their ability now to use data in ways that they couldn’t have afforded to do that will avail them of opportunities and growth insights, you know, there was a tremendous level of excitement. It wasn’t just about kids faking their exams.
Wendy I can’t believe the number of digital first companies that really are moderate users of their data. It’s incredible. It’s incredible. And where are they in the last two years, they’ve started to figure out what real personalization looks like, and so on. So you know, the data use case, but what I would say is, from a human point of view, whenever an organization enters into an automation agenda, our friends at P&G, we wrote a case with them about automation. And I think they would say to you that 20% of the workforce has low or no interest and other words, you can bring 80% of your workforce, and you need to bring 80% of your workforce into this future world. At the same time, you’re going to have a percentage as much as 20%, it could be higher, that you just have to realize that they’re going to work in place in the same role for as long as you need them with some understanding. But we’ve seen this in Japan, we’ve seen this in different markets around the world where it’s real work to transform an organization. It’s real work. What’s in front of us, Wendy is going to be an incredibly improved consumer experience. I really believe that. And also, I think, the very nature of how brands and retailers work is going to be redefined here in the next couple of years. As you’ve heard me say today, several times that the curriculum I’m working on now is is called the next 2500 days. And the next 2500 days is the time between today and the year 2030. And if you think about the transformation you’re going to have to make by 2030, you can start working day by day and understanding, it moves pretty quickly. And there’s a lot to do. So I think we’re gonna see a lot of transformation a lot.
And I actually what’s perfect wrap up, but when you first talked about 50:50, a few months ago, October or something, and I thought about that after and you were talking, I think, at least in China about 2025. So that’s been stuck in my head. What do we all have to do? I’m not even taking your 2500 days, I’m thinking about what is the next 1000 days for play? And what do we need to do? What can we get off our plate because of digital tools? And what can we take on our plate? And how do we use people more effectively in retail or in companies, where they really can have the power to impact things. And so I don’t think it’s scary at all, my brain is exploding. But as always, you bring it into our perspective, you provoke us first, and then you help us see the road ahead. So I thank you for that. Always a great opportunity to chat with you. And I’ll talk to bet the next 1000 days before we get to 2500 if that’s okay.
Okay, fair enough.
Thank you, Dan, a pleasure. As always, by Wendy, as always, Dan, incredibly provocative, that notion of what is the future of retail and shopping really look like 2500 days from now he says it’s going to be all totally different. I would suggest to you better start thinking about the next 1000 days, because you don’t start right away, you’re never gonna get to 2025 and that notion of digitization and how it’s touching every aspect, not just 71 different points of distribution or physical channels, but another 16 digital channels, that doesn’t make your head spin about the future of retail. I don’t know what will or does. So see you in the future, the very near future