Grocery Retailers – Should grocers launch their own marketplaces?

Mercatus Radio presents the Digital Grocer - Season 3, Episode #7

We’re joined this week by Rick Watson, marketplace expert and CEO and Founder of RMW Commerce Consulting. This podcast, we’re talking about marketplaces: how they work, what can we learn from Amazon and should grocers launch their own marketplaces?

We start by talking about why FedEx walked away from last-mile delivery with Amazon, and how this impacts both companies. Rick speaks to this topic in the podcast, and regularly on LinkedIn. FedEx has also discussed how eCommerce is impacting their business, in an interview with eMarketer.

The conversation turns to marketplaces and Rick offers his thoughts on how a retailer could benefit from launching their own. “…[A] marketplace is a supply chain tool, at the end of the day. It’s a tool for more supply. If you have more demand than supply, then a marketplace is a fantastic idea. Because it will allow you to grow your market share by offering more selection to your consumers. Then you can become a one stop shop. Which allows buyers to come back, which allows you to acquire more supply and sort of start that flywheel.”

While there’s opportunity, there is also risk. “One of the ways to think about a marketplace, it’s always a race between selection and trust. Selection always has to lead trust because if you don’t have the products up there … you could have a trusted store where you have no consumers. So it’s pointless. You need to always be on that bleeding edge of pushing the boundaries, getting more traffic, getting more selection. But then at the same time, you need to be running as fast as you can to improve quality and trust. I think the times where there are risks is that people forget about the second angle. Or they aren’t investing quite as much as their consumers expect regarding quality and trust.”

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Enjoyed this podcast? Then you might like these resources:

• Podcast: Competing with Amazon: The customer-centric approach to grocery eCommerce, featuring Kevin Coupe
• Blog Post: Understanding Online Grocery Shopping Behavior

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PODCAST TRANSCRIPT

Sylvain Perrier: Welcome ladies and gentlemen to the Mercatus podcast, Digital Grocer. I can’t believe it’s episode 30. I’m your host, Sylvain Perrier, President and CEO of Mercatus Technologies. Joining me, literally in the studio today is Mercatus’ very own Senior Director of Marketing, Mark Fairhurst.

Mark Fairhurst: The big three-oh, dude.

Sylvain Perrier: The big three-oh. I can’t remember being 30.

Mark Fairhurst: No, it was a long time ago.

Sylvain Perrier: It was a long … well much longer for you. Unless-

Mark Fairhurst: There’s this running joke, I’m slightly older than Sylvain.

Sylvain Perrier: Yeah, slightly. We look alike though.

Mark Fairhurst: Yes.

Sylvain Perrier: It’s incredible. We attended a couple of events not too long ago and people were coming up to you asking for your business card. Coming up to me asking for-

Mark Fairhurst: Oh, they shake my hand, they say, “Sylvain?” I said, “No, he’s over there.”

Sylvain Perrier: They’re asking me for our PowerPoint presentations.

Mark Fairhurst: That’s right.

Sylvain Perrier: Which I find quite hilarious.

Mark Fairhurst: We have yet though to do it on purpose.

Sylvain Perrier: Thank you for stepping into my cousin’s wedding for me because I did not want to go. My family was elated with you.

Mark Fairhurst: I made a definite good impression.

Sylvain Perrier: Thank you.

Mark Fairhurst: Salvage your reputation in the family.

Sylvain Perrier: You did. You did. Thank you. Thank you. Well you couldn’t have done worse than what I’ve done.

Sylvain Perrier: We’re actually in the big Apple and I’m not really sure if people still call it the big Apple. Or is it just another tourist trap, kind of like going to a restaurant in times square. But we are at Mouth Media.

Mark Fairhurst: Yes.

Sylvain Perrier: Our studio.

Andrew: First time.

Sylvain Perrier: First time which is great to be here. Andrew’s at the board and running everything for us, which is great.

Sylvain Perrier: You know the one thing Mark, that’s kind of interesting. When you’re in our space, it’s always about these battles between regional retailers and the super beast, large retailers against the Amazons and the Walmarts. Now we’re hearing more of how Amazon and Walmart are playing off of each other. Who can innovate faster, who can acquire what, and integrate into their whole e-commerce thing. But the one thing that people aren’t talking about is … I think maybe they are to a certain extent, some the analysts. But is how Amazon’s really shifted their program in terms of long haul shipping and the last-mile. Specifically some of the news that came out back in 2019 in August, where FedEx made that key decision of walking away from Amazon. Then there was this whole acquisition that Amazon did in the Canadian space with some sort of small shipping airline to be able to help them out.

Sylvain Perrier: Then in December of 2019, Amazon actually blocks its own sellers from using FedEx ground for shipping purposes. Citing that there was a decline in performance. I’m intrigued by this subject because I think there’s going to be some sort of bleed over into the retail space, into their grocery retail space. How is this going to really affect, not just the broader market, but more so some of these companies that are actually trying to do delivery?

Mark Fairhurst: Those are all great questions.

Sylvain Perrier: We’re not the experts at this.

Mark Fairhurst: No.

Sylvain Perrier: We have somebody in the studio today who’s going to help us out. His name is Rick Watson. Rick’s a smart guy. He’s an e-commerce technology executive. He’s the founder of RMW Commerce Consulting and he’s an amazing strategist. He’s actually one of the world’s foremost experts on online marketplaces like Amazon and eBay. He advises tons of big companies around big platforms of what to use and things that they really can’t ignore to be competitive in this space. He’s also, if you follow him on LinkedIn, this guy just cuts to the bone really quick.

Mark Fairhurst: He’s prolific, he is writing like two, three, four, five times [crosstalk 00:03:55]-

Sylvain Perrier: And in the stuff that he wrote a couple of days ago, about Ikea pulling out of Amazon. I’m like, “Whoa, what are you talking about here? I got to dig into this.” When I’m reading his stuff, I put his posts up on one monitor in my office and then I’m like deeply researching. I’m like, “Where’s this guy getting this stuff from?” It’s crazy.

Sylvain Perrier: Rick, welcome to the show.

Rick Watson: Thanks so much. I appreciate being on.

Sylvain Perrier: Awesome.

Mark Fairhurst: Great to have you.

Sylvain Perrier: Let’s rewind the clock and talk to us about why did FedEx make this decision to walk away from the last-mile delivery with Amazon?

Rick Watson: I think the answer is not as simple as it might seem. I think there are a few layers to the discussion. One is, the personality of the CEO’s. You have two big personalities. Fred Smith, ex military pilot, big personality. When he’s not going to be pushed around by Congress, if you’ve ever followed him in the past 20 years. Riding on the WSJ, haranguing the government about they’re being disadvantaged by UPS. His personality is, “I’m going to do what I’m going to do and you’re not going to push me around. Or tell me what to do.” That’s sort of the personality subtext, I think to the discussion. It’s important not to lose sight of that it’s not a partnership oriented company when someone is threatening them. That’s not a military man’s response to a threat. That’s first.

Rick Watson: I think second, the main thing is they could. UPS couldn’t. UPS is a significant portion of Amazon’s ground network next to USPS. FedEx, any analysts estimates I’ve seen never put the number of greater than 2%. Of FedEx parcels, air or ground, that are carrying Amazon boxes. If you play out any scenario in close Amazon partnerships that don’t end up with acquisitions, there are a lot of things that end badly. To put it mildly for some of the competition. Starting with Toys R Us and Target being the prime examples in the last 15 years I would say of that happening. That’s kind of the beginning of it.

Sylvain Perrier: Do you think Amazon was ready for that decision to come down from FedEx?

Rick Watson: I think Amazon could care less, to be honest. I think they were ready. I think it was such a small percentage of their network that … the reality is, lots of delivery carriers bid on Amazon business every day. They want to carry Amazon parcels because it’s where the volume is. They’re not going to make hardly any money on it. Just like what a lot of people don’t know about Amazon’s delivery marketplace, is it’s also a performance based bidded marketplace. You’re not going to carry a parcel from Los Angeles to Toronto if you’re not the lowest price, highest performance carrier, period.

Sylvain Perrier: When I look at the trades and so on and read some of the analyst reports, it’s my sense that FedEx underestimated Amazon. There’s a risk here that Amazon could be entering into the market simply to be a delivery company, some sort of a spinoff. Do you think that’s the case?

Rick Watson: I think it’s been the case. I think it’s been … Amazon has a relatively well established playbook, too. It’s really based on what the internet demands in today’s game. If you’re not at internet scale, then you’re a regional player. For a company to be at internet scale, you can’t just manage your own volume. Ultimately Amazon has been smart about its investments. Is that when it builds something, it builds it so that other people can use it, too. That’s just for costs. But I think what’s under looked is the innovation benefits that that has. AWS is the prime example-

Sylvain Perrier: Absolutely.

Rick Watson: Of that.

Sylvain Perrier: Well kind of like Amazon has positioned itself to be in the operating system to business period. Quite frankly, what business today is not using AWS?

Rick Watson: AWS is unbelievable. I mean, I think most people don’t know how huge AWS is.

Sylvain Perrier: We use it at Mercatus with … listen, we have geographical fail-over. We can spin up an instance based on volume in under five seconds. It’s incredible this stuff we can do. I know we’re just scratching the surface even where there our new AI tool sets that we just released. You talk to some of the other organizations that are out there, that are using it at a much more phenomenal rate of involvement than what we do. It’s obscene.

Rick Watson: I mean I think most people don’t know today how amazing the business is that they created from thin air.

Mark Fairhurst: From nothing.

Rick Watson: From nothing. I remember in the year 2000, my background was electric engineering. We set up our first hosted colocation facility at Channel Advisor back in ’99, 2000 somewhere around that timeframe. You had to buy and rack your own servers and wire them all. When we had to move to a new facility because the other one wasn’t performing, we shut the site off for six hours. And gloated all the servers and wires into a back of a truck. Hoped we could put it back together before the site window came back online. It usually didn’t work very well.

Sylvain Perrier: No it didn’t. I used to work at Exodus Communications in Jersey City at the Exchange Plaza. Which was an amazing data center. But when 9/11 hit, we made the decision to repatriate back to Canada. Do you know how hard it is to take a truck across a border to load servers? We were down for 48 hours and all of our providers that were using are technology. It was brutal.

Rick Watson: I believe it.

Sylvain Perrier: Brutal. Now it’s like you can spin up a server in seconds … I don’t know, Ireland, Portland, Virginia, it doesn’t matter really. When I think of all these innovations in what FedEx has done. There was a recent publication from the folks, I think it would have been Yahoo Finance. I can’t remember the actual reporter. But they’re saying that FedEx has prime to be acquired. Does that resonate with you?

Rick Watson: I’m of two minds about this. Originally, I agreed with those reports. Scott Galloway, among others, have been talking about this for a while now. He wasn’t the first to talk about it. But he’s the most vocal, probably. I think FedEx needs to be acquired, but I think most companies don’t need to acquire FedEx.

Sylvain Perrier: Interesting.

Rick Watson: If you look at what FedEx is, they wouldn’t even have a ground network unless they acquired RPS 15 or … whatever it’s at ’98 now, something like that.

Sylvain Perrier: ’98, I think.

Rick Watson: They still haven’t integrated their air and ground networks. Which gives you some idea of the legacy that both companies probably have. Anyone who’s been in corporate America for a long time for a Fortune 500 company knows that things stage extremely slowly if you’re not named Amazon. The chances for anyone to look at … like if you’re an e-commerce company, you need a logistics network. What do you need? You need last-mile. That’s what you really need. Especially if [inaudible] at Walmart, you have a lot of stores. You have the first mile, in between, long haul, short haul. You’ve got to covered. What do you need his last-mile. That’s why target acquired Shipt. But that’s what FedEx isn’t really great at. What percentage of FedEx balance sheet do you think is planes?

Sylvain Perrier: Obscenely high.

Rick Watson: I don’t know the answer. Maybe one of your listeners does. But I’m sure it’s an obscenely high number. What percentage of their innovation goes into their ground network? As a percentage of the entire FedEx business, what does Walmart need the other 90% of it? That’s the part that strains credibility for me. Even though, I think from a Lego block point of view, it kind of makes sense. Logistics, Walmart, they need each other. But I think Walmart needs it less than people think.

Sylvain Perrier: Or if Amazon’s building out their long haul air freight service, maybe acquiring FedEx would make sense. That’s a stretch. I don’t know. I don’t know. We’ll let the analysts worry about that.

Sylvain Perrier: I want to switch the topic here because I know you’re an expert at marketplaces. Marketplaces have been the buzz certainly for the last 18 months. We’ve talked about in a previous podcast and some of this stuff that we’ve published about what I call the reverse-Amazon model. Reality is, if you look at the grocery retail industry, the household penetration rate is significantly high. It’s higher than 96%. People are frequently going into a store to buy food. That means you’re collecting data, you’re getting a lot of great things. Amazon buying Whole Foods, again, make sense. Great data play, blah, blah, blah, blah. Expanding into brick and mortar again, completely makes sense.

Sylvain Perrier: Knowing that, you see a lot of grocery retailers today that have either flocked over to the concept of the Shipt or Instacart marketplace to get those additional eyeballs. You have some retailers that have decided to integrate their own marketplace solutions, either a dot com. Loblaw in Canada a great example where the recent acquisition they made and the ability to sell third party products on their website that normally wouldn’t include in their own brick and mortar or they’re on their own dot com. The complexities involved with logistics side and so on, it’s pretty interesting.

Sylvain Perrier: Can you define for our community of listeners, the basic concept of a marketplace? Because I think that word is thrown around so much.

Rick Watson: When most people say marketplace, what they mean is you’re not holding any inventory. The traditional retail model is to buy wholesale, hold it in a distribution facility, and then ship it direct to consumer. That’s a traditional sort of e-commerce retail model. Marketplace flips that model on its head. What that means is, your supplier is holding inventory in a “pure marketplace model”. The website is only making a commission on those sales and that’s the revenue that they’re booking. Many people call a marketplace different things including drop ship or vendor managed inventory, where the retailer is booking 100% of the revenue. From a pure definitional point of view, those aren’t strictly marketplaces. But for practical purposes, they’re almost marketplaces.

Sylvain Perrier: Does it make sense for a grocery retailer to get into this space? Because I think if like their minds are so oriented towards food. And there’s a few retailers that have expanded out into housewares or other stuff. But does it make sense for them to consider this?

Rick Watson: I mean essentially a marketplace is a supply chain tool, at the end of the day. It’s a tool for more supply. If you have more demand than supply, then a marketplace is a fantastic idea. Because it will allow you to grow your market share by offering more selection to your consumers. Then you can become a one stop shop. Which allows buyers to come back, which allows you to acquire more supply and sort of start that flywheel.

Rick Watson: Those are the basic things that need to be in place for a marketplace … I would say a marketplace at scale to be successful. You can build a marketplace, yes, sure it’s a boutique thing and that’s fine. But I’m talking mostly about competing with the big players.

Sylvain Perrier: In my world, when I think of a real grocery retailer doing this. One of the risks could be that they may dilute their brand. There’s that notion if you build it, they will come and they may just not show up. Can you think of any other risks that may exist?

Rick Watson: When I was running Barnes & Noble’s marketplace, I thought about this all the time. One of the ways to think about a marketplace, it’s always a race between selection and trust. Selection always has to lead trust because if you don’t have the products up there … I mean you could have a trusted store where you have no consumers. So it’s pointless.

Rick Watson: You need to always be on that bleeding edge of pushing the boundaries, getting more traffic, getting more selection. But then at the same time, you need to be running as fast as you can to improve quality and trust. I think the times where there are risks is that people forget about the second angle. Or they aren’t investing quite as much as their consumers expect regarding quality and trust.

Sylvain Perrier: Did you find like when you’re at Barnes & Noble and you have the marketplace, that you had customers coming into the store and saying, “How come some of these products aren’t available in the store?” Did you find that marketplace would bleed into the brick and mortar?

Rick Watson: The scale wasn’t big enough for us to get that question.

Sylvain Perrier: Okay.

Rick Watson: It was interesting from a fraud point of view, because we had no system, I was the system. Where Amazon has AI and algorithms. I had me looking on our most popular products and I could instantly look at, for instance at the time 2011, Lord of the Rings trilogy books box sets were huge and they were like $100. I knew in five seconds if I can look at the marketplace sellers on that item, if they were selling this product for $50, 100% guaranteed fraud.

Sylvain Perrier: Wow. Okay.

Rick Watson: Every morning I would come in and shut down sellers.

Sylvain Perrier: Really?

Rick Watson: And the number of emails I got from doing that is exactly zero because they were all fraud.

Sylvain Perrier: It’s interesting, I mean the cost of it operating these platforms can’t be overlooked in any case. In your role when you’re advising, a retailer or a brand. I mean, everyone always leads with, “Hey, we want to do this because it’s really cool. It’s technology and so on.” How do you balance customer centricity in terms of doing the right by the consumer?

Rick Watson: I think we’re kind of beyond the phase where most people want to do things because they’re super cool. E-commerce in general, not in every … in every industry it’s a little bit different story. But e-commerce, broadly, is maturing relative to 10 years ago. I think people are getting a little bit more clear eyed about their investments.

Rick Watson: My personal opinion with no scientific data, is that we hit peak direct to consumer hype about January 2019. That was the peak of the investments and everyone wanted to do that. Which was exactly about eight years before … if you back up about eight years in history. We hit a peak for the same idea back when like Andreessen Horowitz was investing in fab.com and these crazy things.

Rick Watson: I think it’s easier … it’s not that hard is the short answer to your question. Because if you’re an investor in a board, one of the first things you want is a financial model for, how is this going to look like? That’s something I can help them with because if they’re just used to selling wholesale, they don’t know the economics, they don’t know how much it’s going to cost. Who are all the vendors that I’m going to need to hire to make this work? Who are all the people I’m going to need to hire? Who are all the agencies that I need to hire? All these things play into a profitable model.

Sylvain Perrier: When you look into your crystal ball and you look down out maybe 18 months, what do you see? What’s out there that’s getting you excited? Or you’re like, “This is a big red flag that’s coming.”

Rick Watson: I think grocery retailers and marketplaces are going to go through the same evolution that a lot of the traditional marketplace retailers have gone through. In that, first it’s a threat, we don’t need it. Second, it’s okay we’re going to do it, but we’re going to do it for non core products. Then 99.9% of them are going to struggle with intermingling or selling against their own core units. There are almost zero retailers that have actually solved that problem outside of Amazon. There are actually, I mean a couple of famous stories, if you go back to the 2000’s where Jeff Bezos himself, had to resolve these conflicts between the marketplace team and the merchandising team. That gives you an example of like, if probably like the greatest internet visionary in a generation had to resolve these at Amazon. Most retailers don’t have a shot at resolving that channel conflict problem.

Rick Watson: I think it’s going to be a harder problem than people think. This is why I think when you see some of these grocery marketplaces starting to pop up, they’re like, “Oh, we want to do apparel and home.” I’m like, “What? What? I mean, it seems like sauces might be an interesting place to start because it’s a hot space. There are lots of interesting innovations happening, and new flavors, and tastes, and consumers. Like why wouldn’t you offer?” “Well I don’t know. We can’t cannibalize our SKU.” I mean, it sounds like very familiar.

Sylvain Perrier: Yeah. They’ll branch so far away from what they’re somewhat knowledgeable about. Thinking that there’s an opportunity here and lose complete sight of what’s right for their own business. That’s really interesting. Now the one company I’m not hearing anything about it, and I don’t know if you are, Mark. Where’s eBay?

Mark Fairhurst: That’s a good question.

Sylvain Perrier: Where is … like I haven’t used. Have you used eBay lately?

Mark Fairhurst: Not in years, no.

Sylvain Perrier: No. Where is eBay?

Rick Watson: Where are they? They’re still in Silicon Valley. But eBay is, I would say, one of the sad case studies in the last 15 years. I mean they’re currently without … they have an acting CEO. Their CFO is functioning as their CEO. Everyone’s waiting on what’s going to happen in the next three to six months for what direction they’re going come in. They are essentially slowly declining.

Sylvain Perrier: The lack of strategic direction really. Wow.

Sylvain Perrier: Great. Rick, it was a pleasure having you on the show. How do people get ahold of you?

Rick Watson: The best way to get a hold of me is either on LinkedIn or my website, rickwatson.io. My email address is [email protected] and that’s the best way to get ahold of me.

Sylvain Perrier: Perfect. Thank you so much for joining us.

Sylvain Perrier: Ladies and gentlemen, thank you for listening. Don’t forget to download our next episode. We’ll be tackling another key subject or something that’s happening in the industry in near real time. Mark, how do people get ahold of us?

Mark Fairhurst: Great show. Thanks Rick, mercatus.com, our social handles are at the bottom. Looking forward to chatting with the audience next time.

Sylvain Perrier: Awesome. Thanks guys.