Is Omnichannel Even Possible?

I believe that 97.5 percent of today’s traditional retailers will NOT survive the earthshaking transformation that is currently occurring in their industry. Changes in the customer shopping behavior and preferences, rise of on-line shopping, local and state government push to increase minimum wage, and uncertainty in the global economy have placed quite a few obstacles in front of retailers.

In 2016, a significant number of store closings and bankruptcies are an indication of both shifting consumer preferences, and an unsteady economy. U.S. retail is an approximately $5 trillion dollar industry, and approximately 16 million people are employed in the U.S. retail industry according to the U.S. Bureau of Labor Statistics. An estimated two-thirds of the U.S. gross domestic product (GDP) comes from retail consumption. Therefore, store closings and openings are used an indicator of how well the U.S. economy is doing overall. However, total annual U.S. retail sales have increased an average of 4.5 percent between 1993 and 2015, with 2015 being effectively flat with ~3 percent growth; according to the U.S. Census Bureau.

Roughly 30 percent of the annual sales of the largest U.S. retail chains and almost 20 percent of the U.S. retail industry’s annual sales come from the Christmas holiday shopping season. This past holiday season, 2015, saw for the first time more shoppers choosing to shop on-line than in-store with 103m choosing on-line, vs 102m in-store; over the holiday shopping “opening” Black Friday weekend. Internet sales rose about 23 percent in 2015. Amazon continues to dominate U.S. retail. Amazon represented 51 percent of every growth dollar in on-line sales, and 26 percent for retail as a whole, up from 22 percent last year. Also, Amazon is far and away the most dominant mobile shopping app out there, boasting installation on 36 percent of all U.S. Android devices and ranking first in shopping app searches on Google Play during the critical holiday and Super Bowl selling seasons (October 2015-February 2016. If this rapid transfer of business from store sales to the Internet continues, and it seems it will, traditional brick and mortar retailers must look closely at their current business structure and decide where to cut/add administrative staff, which stores to close and where to open, in order to survive.

Labor represents approximately 30 percent of a retailers operational expenses. After years of national debate about the need to raise pay so families can earn a living wage, there is a push across the country to increase minimum wage rates. In July 2015, New York Gov. Andrew Cuomo announced a plan to raise the minimum wage for fast food-chain employees statewide to $15 an hour over the next few years. Over the past year, several other states have raised minimum wages, but all fall below $10 an hour, according to the National Conference of State Legislators. The city of Seattle is phasing in a plan to raise its minimum wage to $15 per hour, as has California. Going to $15 an hour represents a 50% rise from California’s current minimum pay of $10, and a 67% jump for New York. This certainly is a double edge sword for retailers, whereas on one end they should see an increase in consumption in these communities; they will also have to accommodate an increased cost component to operating their business.

Uncertainty and pessimism have dominated the economic and business news in recent months. While at face value the mood seems justified as many negative factors (China’s financial gyrations, volatility in oil prices, and the further weakening of the US economy) are colluding, the recent developments by themselves do not yet signal an imminent global economic recession. In the U.S., Solid domestic demand will help overall GDP growth at 2.0 percent in 2016, which is slightly lower than 2015 growth rate. In Europe, despite increased political risks, the short-term economic environment has actually improved faster than expected. As is the case in the U.S. economy, the European domestic demand continues to drive the current moderate recovery. In Asian, the growth rates of China, India and Southeast Asia are unlikely to see significant improvement in 2016 compared to last year. Chinese growth in 2016 is expected to stay the same as that of 2015 at 3.7 percent. In Latin America, rapid declines in oil and commodity prices negatively impacted Latin American economies, and exacerbated the ongoing troubles in the biggest economy in the region, Brazil. Africa is looking positive but uncertain. The prolonged decline in commodity prices, as well as weak growth in Nigeria and South Africa, will cause overall growth for the region in 2016 to come in at 3.7 percent – which is, though still an improvement from 2015, well below the average growth of the last few years. When it comes to international expansion, retailers need to maintain a sharp focus on those regions that will afford the greatest top-line growth for their core business.

Although the U.S. retail industry is slowly expanding, not recessing, the lingering effects of the Great Recession of 2008 can be seen in the dramatic shift in consumer buying habits and preferences. The post-recessionary retail industry is all about the empowered consumer. Traditional retailers are aggressively trying to meet the needs of today’s shoppers by implementing a number of service capabilities under the umbrella of Omnichannel, working to make broad based system changes to integrate various departments, leveraging Unified Commerce platforms, and reimagine the store at a reduced sq. ft. “experience center.” The most successful U.S. retail chains will need to be able to deliver what consumers expect or die.

I’m a student of retail history and disruptive innovation theory, and neither are favoring retail incumbents. In 1960, 316 traditional department stores existed. This included the likes of Macys, Dayton-Hudson, etc. Well, in 1962 discounters started to dominate the market (e.g. Zayres, Arlans, Gibson’s, Masters, Two Guys, Korvette). Of the original 316 traditional retailers, only 8 survived the insurrection of the discounter (2.5 percent). Many traditional retailers also tried to operate both a traditional model and discount model; all but one failed to make this transition. The only one of the 316 traditional retailers that successfully transitioned into a discounter, was Dayton-Hudson, which created the separate business unit named “Target.”

What many of the traditional retailers tried to do was effectively disrupt themselves; rule #1 of disruptive innovation theory is “an organization cannot disrupt itself.” The reason why an organization cannot disrupt itself is because at its core, a disruptive innovation must be separated from the core business, it cannot happen within the existing organization’s Resources, Processes, and Profit-formula (RPP) – RPP determines what a company can and cannot do:

  • Resources: Usually people or things – they can be hired and fired, bought and sold, depreciated or built, includes cash.
  • Processes: Include the ways that products are developed and made and the methods by which procurement, market research, budgeting, employee development and compensation, and resource allocation are accomplished. Your company’s culture is process manifested.
  • Profit-formula: The profit formula is how organizations internally determine which projects to select. Often consists of specific ratios targets, i.e. X% gross margin, IRR of Y, etc.

There are three main types of innovation:

  • Sustaining Innovation: Offering ever better products, to sell at ever better margins, to your very best customers; Incumbents fight new entrants; Innovation aligns with existing business model.
  • Low-end Disruptive Innovation: Offers “good enough” but not much more; targets “over-served” customers; figured out a fundamental different business model.
  • New-market Disruptive Innovation: Targets “non-consumption.” people who did not have ability or access to incumbent product; Make profit for lower price-per-unit sold than incumbent tech. Think dollar vs percentages; Product provides lower performance for the existing market but higher performance for non-consumers.

An innovation is not inherently disruptive, it gains the disruptive designation based on its deployment. In the case of ecommerce to traditional retail, ecommerce has elements of both a low-end and new-market disruptive innovation to traditional retail. In that it serves an over-served consumer with an option that allows for the purchase of goods and services at a lower than average price, with good enough service with respects to delivery service’s SLAs; while also making retail goods and services accessible to non-consuming customers due to the ubiquity of Internet access and through leveraging existing delivery services (USPS, FedEx, UPS).


Traditional vs. eCommerce
  • Fixed
  • Variable
  • Supply-Driven
  • Demand-Driven
  • High Margin
  • Low Margin


In the mid to late 90’s to early 2000’s, when retailers initially launched their fledgling ecommerce initiatives they established the new channel as a separate business unit. At the time, the idea was that it was such a foreign and high-risk initiative that it made more sense to keep it separate, and thus easier to dissolve without impacting the core business being brick and mortar. Now retailers have adopted an ideal that integrating ecommerce into their core business will help them in servicing the customer. There is a lot that is true with this ideal. If you have a single view of your customer, products, and inventory then theoretical you should be able to orchestrate a consistent experience indifferent of the consumer interaction medium (stores, on-line, mobile, social, games, devices, or call-center). In the early days of an ecommerce initiative taking place within a traditional retailer, where it receives secondary focus and contributes sub-par revenue, this can work. It will still have inefficiency, but scale has a way of masking waste. However, as customers engage more with a retailer’s ecommerce business, causing leadership to encourage more internal attention be paid to it, yet it still does not compare to traditional sales profitability, the impact of the diverging resource needs, processes, and profit-formula start to weigh heavy.

Leaders in traditional retail organizations need to rethink their corporate structures, allowing for their traditional and digital businesses to be separate business units. This will allow the ecommerce business to develop the resources, processes, and profit formula needed to win! If a disruptive innovation is moved into the “old” business, the existing business will implement the innovation in a way that serves the existing company, making it a sustaining innovation, or ruin the innovation that was built/acquired.

This may be painful; there is a possible path to divert this existential issue. If retailers continue down the path of putting their ecommerce business under the same roof as their traditional business there is a high likely hood that it could cause both businesses to fail, or otherwise be negatively impacted. Retailers should take the initial step of taking a deliberate strategy of separating the two businesses, allowing them to operate independently with their own resources, processes, and profit-formula. Given the particular nature of the customer interaction, each business should focus on the customers’ “Job to be done.” A job-to-be-done is a circumstances-based description of understanding your customers’ desires, competitive set, anxieties, habits and time-line of purchase. This is key to aligning on the customer and being customer centered organizations. Provide your traditional and ecommerce business units with “Good money,” which is money that encourages a focus on driving growth and profits, respectively. The two businesses should have independent administrative functions, including finance and HR. However, they should share customer data, product information, marketing assets, inventory insights, and fulfillment services. All interorganizational shared services should be accessible via discreet web services. In addition, ecommerce should leverage the core business’ supply chain where appropriate; augmenting to meet its unique needs, up to and including leveraging services like Amazon’s Fulfillment by Amazon (FBA), in order to support scaling. On this last point, the amount of capital and complexity of Amazon’s supply chain/fulfilment services should not be underestimated, and retailers should take a serious look at how Amazon should best be leveraged for success.

In taking the Disruptive Innovation course through Harvard Business School, one of the first things that Prof. Christensen presented was that it’s surprising how many brilliant managers dismiss disruptions to their industry, or business, until it is too late. Omnichannel is possible; I believe that there will unfortunately be a large number of organizations who will not execute an effective deliberate strategy [top-down, thoughtful and organized initiatives], and will dismiss emergent opportunities [unplanned initiatives that bubble up from within]. If you want to see the real strategy of a company, don’t listen to what they say; watch what they do. It is the profit-formula (not leadership) that controls the resource allocation process. Leadership must understand that managing the resource allocation planning criteria is key as it will guide what you do; do not believe that as leadership what you say will just happen. Strategy is temporary. Never believe that the strategy that helped you to be successful, will always be the strategy that keeps you successful. Skate to where the puck is going.


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Did Amazon just patent tech that could end showrooming in its stores?

“I would be shocked if Amazon implemented this tech as described. I do think they would implement the tech to monitor in-store web traffic to gain insights to make the overall shopping experience better. I would recommend other retailers do the same; many are still struggling to make sense of the data they have.” ~ Shawn Harris

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“Jeff, what does Day 2 look like?”

“It’s all about culture, culture, culture.” ~Shawn

Jeff Bezo’s 2016 Letter to Shareholders

April 12, 2017

“Jeff, what does Day 2 look like?”

That’s a question I just got at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic.

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.

I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization?

Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.

True Customer Obsession

There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality.

Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples.

Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen.

Resist Proxies

As companies get larger and more complex, there’s a tendency to manage to proxies. This comes in many shapes and sizes, and it’s dangerous, subtle, and very Day 2.

A common example is process as proxy. Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing. This can happen very easily in large organizations. The process becomes the proxy for the result you want. You stop looking at outcomes and just make sure you’re doing the process right. Gulp. It’s not that rare to hear a junior leader defend a bad outcome with something like, “Well, we followed the process.” A more experienced leader will use it as an opportunity to investigate and improve the process. The process is not the thing. It’s always worth asking, do we own the process or does the process own us? In a Day 2 company, you might find it’s the second.

Another example: market research and customer surveys can become proxies for customers – something that’s especially dangerous when you’re inventing and designing products. “Fifty-five percent of beta testers report being satisfied with this feature. That is up from 47% in the first survey.” That’s hard to interpret and could unintentionally mislead.

Good inventors and designers deeply understand their customer. They spend tremendous energy developing that intuition. They study and understand many anecdotes rather than only the averages you’ll find on surveys. They live with the design.

I’m not against beta testing or surveys. But you, the product or service owner, must understand the customer, have a vision, and love the offering. Then, beta testing and research can help you find your blind spots. A remarkable customer experience starts with heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.

Embrace External Trends

The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly. If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind.

These big trends are not that hard to spot (they get talked and written about a lot), but they can be strangely hard for large organizations to embrace. We’re in the middle of an obvious one right now: machine learning and artificial intelligence.

Over the past decades computers have broadly automated tasks that programmers could describe with clear rules and algorithms. Modern machine learning techniques now allow us to do the same for tasks where describing the precise rules is much harder.

At Amazon, we’ve been engaged in the practical application of machine learning for many years now. Some of this work is highly visible: our autonomous Prime Air delivery drones; the Amazon Go convenience store that uses machine vision to eliminate checkout lines; and Alexa, our cloud-based AI assistant. (We still struggle to keep Echo in stock, despite our best efforts. A high-quality problem, but a problem. We’re working on it.)

But much of what we do with machine learning happens beneath the surface. Machine learning drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more. Though less visible, much of the impact of machine learning will be of this type – quietly but meaningfully improving core operations.

Inside AWS, we’re excited to lower the costs and barriers to machine learning and AI so organizations of all sizes can take advantage of these advanced techniques.

Using our pre-packaged versions of popular deep learning frameworks running on P2 compute instances (optimized for this workload), customers are already developing powerful systems ranging everywhere from early disease detection to increasing crop yields. And we’ve also made Amazon’s higher level services available in a convenient form. Amazon Lex (what’s inside Alexa), Amazon Polly, and Amazon Rekognition remove the heavy lifting from natural language understanding, speech generation, and image analysis. They can be accessed with simple API calls – no machine learning expertise required. Watch this space. Much more to come.

High-Velocity Decision Making

Day 2 companies make high-quality decisions, but they make high-quality decisions slowly. To keep the energy and dynamism of Day 1, you have to somehow make high-quality, high-velocity decisions. Easy for start-ups and very challenging for large organizations. The senior team at Amazon is determined to keep our decision-making velocity high. Speed matters in business – plus a high-velocity decision making environment is more fun too. We don’t know all the answers, but here are some thoughts.

First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you’re wrong? I wrote about this in more detail in last year’s letter.

Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.

Third, use the phrase “disagree and commit.” This phrase will save a lot of time. If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?” By the time you’re at this point, no one can know the answer for sure, and you’ll probably get a quick yes.

This isn’t one way. If you’re the boss, you should do this too. I disagree and commit all the time. We recently greenlit a particular Amazon Studios original. I told the team my view: debatable whether it would be interesting enough, complicated to produce, the business terms aren’t that good, and we have lots of other opportunities. They had a completely different opinion and wanted to go ahead. I wrote back right away with “I disagree and commit and hope it becomes the most watched thing we’ve ever made.” Consider how much slower this decision cycle would have been if the team had actually had to convince me rather than simply get my commitment.

Note what this example is not: it’s not me thinking to myself “well, these guys are wrong and missing the point, but this isn’t worth me chasing.” It’s a genuine disagreement of opinion, a candid expression of my view, a chance for the team to weigh my view, and a quick, sincere commitment to go their way. And given that this team has already brought home 11 Emmys, 6 Golden Globes, and 3 Oscars, I’m just glad they let me in the room at all!

Fourth, recognize true misalignment issues early and escalate them immediately. Sometimes teams have different objectives and fundamentally different views. They are not aligned. No amount of discussion, no number of meetings will resolve that deep misalignment. Without escalation, the default dispute resolution mechanism for this scenario is exhaustion. Whoever has more stamina carries the decision.

I’ve seen many examples of sincere misalignment at Amazon over the years. When we decided to invite third party sellers to compete directly against us on our own product detail pages – that was a big one. Many smart, well-intentioned Amazonians were simply not at all aligned with the direction. The big decision set up hundreds of smaller decisions, many of which needed to be escalated to the senior team.

“You’ve worn me down” is an awful decision-making process. It’s slow and de-energizing. Go for quick escalation instead – it’s better.

So, have you settled only for decision quality, or are you mindful of decision velocity too? Are the world’s trends tailwinds for you? Are you falling prey to proxies, or do they serve you? And most important of all, are you delighting customers? We can have the scope and capabilities of a large company and the spirit and heart of a small one. But we have to choose it.

A huge thank you to each and every customer for allowing us to serve you, to our shareowners for your support, and to Amazonians everywhere for your hard work, your ingenuity, and your passion.

As always, I attach a copy of our original 1997 letter. It remains Day 1.



Will a new TJX concept put more hurt on department stores?

“The key to TJX’s success is their merchants. They are constantly on the hunt for high-value, on-trend, opportunistic buys. This creates the treasure hunt, and a compelling reason to shop … frequently. I think TJX will launch a full assortment off-price furniture chain, instead of it just being a department in HomeGoods. It’s not department stores that should be worried, it’s full-priced traditional furniture stores who should keep their eyes wide open.” ~Shawn Harris

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Do consumers want to follow grocers on social media?

“I think that the key reason people follow retailers and brands on social media is for reasons of lifestyle projection. Either the consumer is living, or wants to live, the brands ideals. For grocers, this would be things like healthy living and sustainability. With the brand ideals as the backdrop, consumers will become sticky if the social feed is educational, informative, entertaining, will save them time and/or money or is otherwise a utility — very much similarly to why consumers want and keep a mobile app installed.” ~ Shawn Harris

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Digitization and the Retail Revenue Reset #retail #economy #leadership

Retailers are feeling significant pressure as digital takes a greater and greater hold of the industry. Many say that digitization actually brings demonetization. This will result in a massive shift in the share pie for retailers. What once was a great traditional retail business, will become a much smaller primarily online business. I thought I’d take a stab at visualizing that. Thoughts?

What is Supply Chain Management? Quick Definitions…

While Supply Chain Management is a new term (first coined in 1982 by Keith Oliver from Booz Allen Hamilton in an interview with the Financial Times), the concepts are ancient and date back to ancient Rome. The term “logistics” has its roots in the Roman military. Additional definitions:

  • Logistics involves… “managing the flow of information, cash and ideas through the coordination of supply chain processes and through the strategic addition of place, period and pattern values” – MIT Center for Transportation and Logistics
  • “Supply Chain Management deals with the management of materials, information and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers” ‐ Stanford Supply Chain Forum
  • “Call it distribution or logistics or supply chain management. By whatever name it is the sinuous, gritty, and cumbersome process by which companies move materials, parts and products to customers” – Fortune 1994

According to the Council of Supply Chain Management Professionals…

  • Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.
  • Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.