26 September 2012

(apologize for typos in advance.. send corrections to my editorial staff)

In last 2 weeks, I was with a fantastic group of payments people: execs, investors, innovators, advisors, speakers… It struck me that most of the people in payments have been in the industry for quite sometime.. just as the execs in telecom have stayed in that industry… likewise with the execs in retail. There is very little cross pollination of talent across industries. Thus ideas and innovation is very “biased” toward a market understanding of the company which is guiding it.  Sure business heads can bring in a consulting group like McKinsey to help them build an informed strategy, but the pace of change in mobile, payments, advertising, social, …etc has put the real cutting edge of innovation inside companies.. not within consulting groups. One reason: if any consultant had a really great understanding of the market and a new idea they would go start a company… after all the investors are willing and the personal wealth equation is much better.

Today’s thought for the day is Retail. I’m certainly no retail guru.. back when I was at Oracle (98-02) our ERP suite was much more geared toward discrete manufacturing with Cisco, Sony, Motorolla, TSMC as some of my key accounts. In banking I can only recall one direct retail conversation, it was with Jane Thompson (former CEO of WMT Financial Services, now a good friend) her team came to visit Charlotte and I can still remember someone asking WMT what they thought the right rate of interchange should be. Their answer: 0%.. all the bankers laughed… but then we suddenly stopped when we realized WalMart wasn’t joking.

Over the last few years I’ve taken a crash course in retail, both through my time with Google and with people like John Buchanan (former founder and CEO of Retek)…  I have new respect for the world of Retail. Certainly one of the toughest business I have ever touched. Many of my thoughts about retail, and investment hypothesis, were laid out back in January – Remaking of Commerce and Retail.

During my meetings this week, I was struck by the biased views in the room. For example, contactless will take off because it is part of the Visa mandate to retailers (see this week’s EMV blog), obviously the bank issuers were not aware that the top retailers are moving only with Chip and PIN.. not contactless. Why is information here so poor? Well it is certainly not in Visa’s best interest to advertise it… and the banks have other things to do.

Another example is Card Linked Offers (CLO); assume you own a brand restaurant like Applebee’s .. do you want to discount your food 10% every week to every customer? Of course not! What these restaurant chains want is customers.. loyal customers.. just like any business. Yet they are being approached by 6-10 CLO start ups every week for a “deal”.  Its like no one ever heard of CRM… No retailer wants to compete on price.. they want to compete on quality, brand, experience.. they want to move away from price as the basis for competition. Sure some retailers do want to manage excess inventory, or a loyalty program (see LevelUp), or mark downs, but they don’t want to compete on price.

Reid Hoffman is a brilliant investor, but I shake my head at the thought of the Card as the next App Platform (see Forbes Article).   Why? Well card companies have no understanding of what you bought (item level information).. only your merchant preference. One other piece of information (sorry for the repetition here), retailers spend very little of their own money on marketing.. it is manufactures that spend the ad dollars. 

So this results in a CLO focus on Restaurants and Services.. both of which are require tremendous execution in hyper-local sales. Ask Groupon how easy that is.. but its worse for CLO companies as a basket level discount offered through a card is not performing as well…  due to brand, value, redemption experience, …

Retailers have a CRM strategy… believe it or not they have a price promotion strategy as well with digital, direct, and mass media components. Retailers want customers.. but not at any price, and certainly in support of their brand (one of the few things they have left). When I look at any “offer” or “payment” company, targeting physical retail, I look at how it can fit within a Retailer’s existing business model. How can X improve Y’s execution. Good news is that there are 100s of opportunities out there.. as advertising is fundamentally broken for most retailers. As a corollary… PAYMENT IS NOT BROKEN.

Key questions I ask

• Customer Acquisition
• Customer Loyalty
• Distribution of Incentives (reaching customer where they are)
• Brand impact – improve retailers brand or not? Is it white label?
• Consumer Value
• Consumer Experience (Acquisition, In Store, Checkout, Support, …)
• Merchant Value/Cost
• Impact on Retailer Competitive Dynamics (ex increase price competition?)
• Require change in consumer behavior
• Flexibility (one flavor for all..? )
• Existing footprint
• Privacy/Data Protection (likely to change substantially)
• Data flow/participation by key participants
• Value shift (ex. From Mass media to targeted)
• … I could go on (see the NRF.com or Shop.org for more details here)

Retailers all have very distinct strategies.. after all its very challenging to sell a commodity good based on anything but price. For example CVS has the top loyalty program in the country. They certainly don’t want to throw it out the door for someone else’s … their loyalty program manager is Catalina… one of the best data analytic companies in the world, run by former CEO of DoubleClick and meshed with Neilsen. Take a look at their participation in something like MCX. My guess is that they will want to enable payment on their CVS loyalty card.. to make it operate like Target’s Red Card. They don’t want PayPal running it.. or Visa… they want to run and control it themselves. MCX will provide dumb pipes (low cost payment routing/clearing) to a smart loyalty program. This goes to my last bullet above: Value Shift… If retailers are smart they will realize that their decisions on data are far more important than their decisions on payment. Data is key to orchestrating value.

For physical retailers to succeed the orchestration of value must move from a focus on price competition. A challenge for Retailers is that Orchestration requires a network… primarily a demand generation (advertising) network (although orchestration could also include other like: entertainment,  custom manufacturing, …etc). What else can physical retailers do? What does the future of retail look like? Well the NRF just completed its conference on the subject so you should chat with some of the attendees. My answer is that the market is: ripe,  highly complex, heterogeneous, with privacy and data as key.

My actionable recommendations to Retailers:

• Start with demand generation, consumers that do not currently shop with you
• Ensure your partner emphasized your brand front and center
• Find a Partner either IN CONTROL of the consumer experience (Apple/Google) or one that already has massive consumer adoption (ie Facebook).
• Focus on creating a fantastic customer experience from end-end
• Minimize the number of partners involved
• Throw out partners that don’t know how to manage campaigns, data or your business
• Have a plan “post acquisition”.. how do you retain them?
• Ensure your partner can reach/influence consumers WHERE THEY ARE.. not where you want them to be. Email address is not influence

[youtube=http://youtu.be/t49JkakYAoE]

Fantastic must see from Tesco Korea if you haven’t seen their virtual subway store

[youtube=http://www.youtube.com/watch?v=fGaVFRzTTP4]