Peter:
Peter Crosby coming to you from the digital shelf institutes Cape Cod office. Rob's on from the Berkshires. Hey Rob.
Rob:
Hey Peter.
Peter:
Hey, before we dive in, we had a fantastic discussion last week with Chris Parsons. Who's the president of America's of the Mayborn group around the new digital first omni-channel and how his company is rapidly evolving to take advantage of the opportunities there. It's a must listen. So we're going to put the recorded link in the show notes for you to take a listen to, because it's awesome. Hey, Rob, I wanted this week to do a deep dive into the mind of Benedict Evans. He's one of our favorite tech analysts and writers, a recent newsletter of his was entitled resetting online commerce. And so naturally that caught my eye a lot more questions and answers in it, but really good ones that I thought would be worth going through. Uh, I think there are questions that are going to shape brand strategy going into this next digital first omni-channel world that we're focusing on right now. So you read it Ben Evans, do you want to kind of kick us off?
Rob:
Yeah, let's take a step back from this particular article, just to frame Ben Evans for listeners that aren't familiar with him. He does, by the way, a lot of retail industry analysis as well, and doesn't, uh, annual retail report with a ton of data that I recommend everybody looking at, um, the way that he thinks. And the thing that I love most about him is that he looks for the next order of impacts of a major industry change. So for example, the, the first major article that he wrote that I remember thinking, yeah, this is, this guy is smart. This is interesting. He said, well, let's assume electric cars and let's assume self-driving cars. What then? And the questions that he then asks are things like 25% of Los Angeles is square footage and is dedicated to parking spaces. Well, if you've got self-driving cars and they're electric, they don't need to park in the city anymore.
Rob:
What happens then? And so he, he kind of goes through that, that thought process with the next thing and the next thing after that, and the next thing after that, and I love that model because most people are just thinking about what's happening tomorrow or this quarter and in reaction mode. And, um, I think too few of them think through what happens in five years, like what happens to a mall when both anchor department stores closed out, what happens to the rest of the stores in that mall and so forth. So this article had a lot of those. What if scenarios? And I think it's, I think it's useful for folks that are trying to plan out three or four or five years of a change in this market. That's just going crazy now. Um, these questions are good questions to have in your mind.
Peter:
I loved the quote that opened, uh, the whole piece was from PG warehouse. And, uh, and it goes like this onto Agatha's demeanor. Now it was rather like one of hu picking daisies on the railway had just caught the down express in the small of the back. And when I think of whether you are a retailer and advertiser, a brand, a consumer, everyone has gotten run over by these shifts that are happening in particular in COVID. So, uh, there's, there's good stuff to talk about here, but the downstream,
Rob:
I would like to request you just do the whole rest of the episode in that voice,
Peter:
Physical retail itself has been a boiling frog is,
Peter:
Uh, I can't, I can't, I could, but I won't. All right. So, take us in. So, well, one of the things, one of the themes that he started off with was that physical retail has been, you know, certainly especially in the U S you know, over, over housed. Um, it's been just being nipped away at, for the last 20 years. Um, and, but for that time, you could always tell yourself, he says that sure people would buy that other industry's product online, but not yours. You don't need to worry about that. And then, uh, the, the thing that really stood out to me, I think we all understand now that anyone will buy anything online, given the right experience. And if your retail model is based on being an endpoint to a logistics chain, then you have an existential problem.
Rob:
Yeah. And this is, you know, ever since 2008, we've been in a bit of a physical retail reset, apocalypse evolution, you know, whatever, whatever frame you want to make. But yeah, 2019 had the largest number of store closures ever inclusive of the 2008, 2009 recession in the us. And 2020 was looking to be bad too. So, um, and this is after the LAR largest bull market, basically in history, you still have physical retail closing at a record rate. On the other hand, you also have places like Dollar general or some of these DTC brands opening a lot of stores. Uh, and so there's, there's, there's this kind of weird shift where there's more store closings than store openings, but there are store openings, but the store openings are different kinds there, you know, the, the different store footprint models from a Walmart or, or target or, or whatnot.
Rob:
And, and, and people have been just asking, what's going to happen next. And Ben's point here is this has been playing out for 12 years. In those 12 years, a lot of stores closed, and it's just sort of this evolutionary model where there's change, but the change is slow enough. You know, a few percentage points a year, a few percentage points there, companies can adapt. Um, and so the analogy is boiling a frog, like you put a frog in hot water and it jumps out at you like a frog in cold water, and you turn on the heat and the water slowly and slowly heats up the frog. Doesn't notice it. And, you know, at some point the products boil, right. Um, and so the shift here is one where we're taking, you know, his, I think his point is that we're taking a step function change at this point. We're not boiling the frog anymore. We're just, we're just throwing the frog in the hot water right now, um, with, with COVID. And if there were any categories that people were unsure of, that would go online, like alcohol, you know, Oh, there's all these regulatory constraints and this and that. They've got online. So now it's, it's a matter of all right, well, nobody's safe from this thing. There are large ancient department stores like JC Penny that are going bankrupt. Um, what
Peter:
The Amazon dark stores, by the way,
Rob:
Right? Yeah. And if you've got a JC penny, that's in a mall, that's an anchor, one of the anchor tenants for the mall, and that becomes effectively an Amazon warehouse. That's not good for foot traffic.
Peter:
Right. Right. And, and, and the second point he makes, or the, the, the next point we pick up on there is, you know, when that channel gets changed, when the, when the consumer disconnects from the, the, the retail store, when they have that opportunity to change the channel, as, as Ben puts it, they may, in fact, uh, won't automatically go to those retailer websites. They might even go to entirely different categories. Uh, his point is, if you change the channel, then you change what gets bought.
Rob:
Yeah. I mean, I, this to me is one of those second order insights that he has, that I wouldn't have been able to come up with on my own. So you, you think about going to a mall, for example, let's say that you have to pick up clothes for back to school and, you know, your, your, uh, middle-class American JC penny is a good store to pick up clothes for your kids for back to school. Right. It's, it's got good prices. It's targeted at you and so on and so forth. So you go to the mall to go to JC penny while you're at the mall. There's other stuff in the mall that you might go pass, right. And let's say that there's like, um, your nephew is having a birthday or your uncle is having a birthday or whatever. And so while you're there to pick up the clothes from JCpenney, you just kind of Prowse around a little bit and see what you can pick up from their stores.
Rob:
My examples, these are personal to me, there's stores like a sharper image or a Brookstone that are really just discovery stores. Like you go into a shop or image in Brookstone, and there's just crazy stuff in there, right. There's weird book massagers, and there's weird, kind of crazy three-dimensional chess sets and there's stuff that you just wouldn't even think of to look at. And so you buy a gift there, or you go to your entertainment FYE, which is still around these days, FYE, uh, you know, when I, when I was in high school, FYU sold CDs these days, it sells a lot of kitsch, right. Itselves, um, you know, like X-Men memorabilia and stuff like that. And so you might go in there and you might buy like the next minute thing. There's a lot of these purchases, the crazy stuff at Brookstone or shopper images or the X-Men dolls or whatever that happened because of the foot traffic that's already in location. Serendipitously it just typically, right. But if it let's say that in, in, in the new era, JC Penney's is bankrupt. So you're not going to go there to buy your back to school clothes. Instead, you go online and buy back to school clothes online, and then you've got to buy the birthday present. Like you're not going to go to sharper image.com and you're not going to necessarily buy some rando electronic gadget instead, you're going to do something else. And so
Peter:
An Instagram ad or whatever discovery has changed,
Rob:
Discovery's totally changed. Right. And then there's the whole conversation on impulse and, and how that works. And so change the channel. You change the category. It's not just that dollars move online. It's that the dollars that are online or different dollars than the dollars that were offline.
Peter:
And, and I think, you know, to continue the, sort of the shift in retail, one of the things he talks about is also the donut effect. As, you know, as, as workers go remote and some percentage of that will remain, uh, again, the, where are the places of discovery in our lives and, um, city office districts, or, or work areas in, in suburban areas. They're, if they're hollowed out, that's a permanent change to retail. You know, um, if people only work home from home only one to even one only one day a week, well, retail has experienced that as a 20% decline in footfall and how many can survive. Even that shift, let alone people shifting completely to remote work.
Rob:
I thought that insight was brilliant, man. I hadn't, I hadn't really put, put that type of thought in my mind. I mean, uh, at our business, we've been surveying employees about their intended return to work habits. And back in April, may, June in that timeframe, there was a set of employees like five, 8% that said, yeah, if I could work remotely forever, I would totally do it. And most people thought I hate being at home. This is a pain. I miss seeing people. I just want to go back to the office. So there's a lot of people that really just want it to go back to work. Now we're in November. People have been working home a long time. You know, I I've been watching, uh, various folks. I work with, you know, look at their zoom backgrounds and they started off in a closet and it looked miserable.
Rob:
And now they've invested in a standup desk. We've invested in a comfortable chair. They've, they've repainted the closet, they put up artwork and they put a speaker in there. And now, you know, they're like, this is pretty good, dude. Like I like, I like working from home. And so we're steadily seeing in these surveys, people not, not saying I'm going to work remotely forever, although there's, there is a lot more of that. But seeing people saying, yeah, working from home one, two days a week, perfect. I definitely want to work from home a couple of days a week. I do want to go back to the office. But, and so, so Ben Evans is looking at these trends and saying, look, if you don't forget the companies that are going to go full-time remote, what's going to happen is most companies will have part-time remote workers. And if you think about that, then 20%, 30% of the footfall for all of these downtown shops, the foolish, not just the lunch places, but the flower shops, the chocolate shops, you know, where you buy gifts for people on the way home and so forth are just not going to, you know, their, their bottom line is going to drop by. I mean, you could maybe 20, 30%, but literally, maybe 80%, right? If they're, if they're working from home two days a week, instead of going to the tailor every downtown, and you go to the tailor in your own town and so forth. And so there could be just an absolute giant Exodus from these office centers that is much more durable and long lasting than, uh, than just the short-term shock that they're feeling right now with the offices being closed. Yeah.
Peter:
But it's that, that sort of looking at it, not just it, like it's an on, off switch, we'll go back to the way we were, but just the, the death by a thousand cuts of, of remote days, uh, is a really interesting one. And, and makes one wonder, not only about where does that business of buying lunches and getting gifts go to maybe online, but also what does that do to the vibrance of city centers? And does it make it a place where people now want to go into every day?
Rob:
So, yeah, it's going to be tough. I mean, like there was where I was living right in downtown crossing, right in the middle of, right in the middle of Boston. Um, there was a coffee and bagel place called Boston bean. And about 18 months ago, it shut its stores. They'd been there for years, but it shut its doors because rents were rising in the area. There've been a lot of developments. There's a bunch of new towers that have gone up and just like any other downtown, basically anywhere in America, right. And the, uh, landlords thought that they could get tremendously higher rents than Boston bean had been paying. And a coffee shop can only support so much, so much rent on real estate. Right. It's, it's, um, a lot of these are not high margin businesses. And so they, they shut, they shut, they had to shut the doors that space remained closed through the beginning of COVID.
Rob:
So the landlord thought they could get a lot higher rent. They were still holding out for a tenant to move into that space. And now COVID right. And they weren't the only ones in that area. There were a bunch of landlords basically that were holding empty space that were previously restaurants or previously shops that thought they could, they deserved, or, you know, honestly, entitled to large reds. And in order for these downtowns to revitalize, these landlords are going to have to really dramatically lower their expectations to allow businesses to go in there profitably. And that might be a really tough pill for a lot of them to swallow. I mean, a lot of these companies are high leveraged, high debt, real estate firms where the debt and the leverage was, uh, um, procured at a certain, certain rental expectation. So I, man, I think we're in, you know, I'm a little pessimistic here. I think we're in for years of turmoil in these, in these city centers and they, Ben Evans uses the doughnut analogy. It's just like, uh, you know, all those out. Yeah.
Peter:
Yeah. Uh, we have an interesting report coming out in the next few weeks. Uh, we, uh, the DSI is lucky to have an economist in residence. I don't know if you knew that, but, uh, Stefan Willis, uh, is, is his name. And he's done a report for us on comparing the great recession of 2008 and the impacts that we saw there folding in COVID to come up with a, you know, a data based, uh, interesting look at what we can expect. And I mean, his top line thing is that we're in for it for several years. Like, uh, this is not, this is not gonna change, uh, is not gonna bounce back in some dramatic way very quickly. And he goes into a lot of detail about why he believes that is true. And then where are the areas of opportunity and, and, and goodness that can be seen. And, um, one of those is sort of courage to act in a downturn. You know, when he looks at a lot of the companies that actually invested in things like marketing and advertising during the downturn, and they came out doing dramatically better than their peers who sort of crouched back. And, um, so it's, uh, and that kind of goes to the next point, which is among those sort of dealing with new situations and expectations shifting is certainly the traditional brand owners who are our listeners and, uh, and they are scrambling.
Rob:
Yeah. I think this is the quote that is directly from the article. Let me, let me just, um, get this exactly right. Um, those traditional brand owners are also scrambling many of the big consumer brands. We all know have historically been B2B businesses, P and G doesn't sell soap. It sells pallets of soap. Now all of these companies are trying to work out what a customer relationship would be and how many companies can have that. Hence for example, Lulu lemon buying mere for $500 million earlier this year, what does it mean to be a brand or a brand owner or for manufacturing, distribution, and capital those brands when all of that is being unbundled and bundled, so that's the quote. I think it's, I think it's absolutely brilliant. Um, Coca-Cola, I'm going to credit them for the following phrase, which I think is just an absolutely brilliant reframe.
Rob:
10 years ago, 20 years ago, during the mass market era where these large manufacturers really are B2B businesses, they use the word customer to refer to Walmart. So if your P and G or your Coca-Cola Walmart is your customer target is your customer, right? Um, me Rob Gonzalez, who buys Coke at Walmart. I have Walmart's customers, but I'm not Coca-Cola's customer. So the way that Coke is talking about changing their vocabulary and their mindset for years now, they've been doing this is Walmart's no longer their customer. Exactly. I mean, they're still their customer, but, you know, starting to use the word customer to refer to Rob, right. And rather than sell to a retailer, they're framing it as selling through a retailer. So the fact that Walmart is a channel to Rob is a framing for Walmart as a channel to Rob, but ultimately Coca-Cola's relationship should be with Rob, not, you know, to the extent that it's possible, not with Walmart.
Rob:
And that's, that's a, that's a total reframe of the way that these businesses operated for quite some time now. Um, and so that's, that's the big challenge here, your, your Procter and gamble, your Unilever, your Coke, your whoever that has operated for many decades in a mass market world, where Walmart is your customer and, and Walmart has really disintermediated the relationship with the end shopper. And, and now you've got to figure out how to build that relationship yourself with you with the end shopper, especially because a lot of these physical retail, um, customers that you have are just not going to exist, um, or exist in a very different format in the next few years. Uh, so that that's a massive, that's an absolutely massive shift in self identity and customer identity and,
Peter:
And data like what data do you need to be able to run that business efficiently? And, and you now need to understand your individual consumers. And that takes us to the next thing, which is really the, um, he talks about, there was arguably a bubble in so-called direct to consumer brands and it burst at the beginning of this year. And I think that was when a lot of these, um, you know, the sustainable customer acquisition model to grow and to continue to scale kind of started to fall apart for a lot of these brands. They just couldn't without shifting their business model. Uh, they really had to sort of explode out and, and start selling through wholesale, like almost becoming more of a traditional brand because they couldn't make the numbers work. Um, as an only internet address advertising fed business. Um, yeah, there's a key
Rob:
Part of that, which we talked about before. He says one part of the question did these kinds of companies produce venture returns? It's basically, you know, when there was a period of time, six, seven years ago when customer acquisition through Facebook in particular was cheap and now customer acquisition through any channel is not cheap because a new channel opens up like Tik TOK and Proctor and gamble is all over it. I mean, businesses have figured out how to jump on new digital channels very quickly. Um, so, there's no longer these, there are no longer cheap customer acquisitions. So, you know what for probate, for a lot of the, a lot of the deep D to C brands hit an economic wall where they didn't really have a good customer, good scalable customer acquisition model, that yielded unit economics that were remotely attractive to anybody.
Rob:
Um, but it's also, it's equally clear that DTC is going to be a big thing going forward. So like, you know, my, my whole view of the future of the world is one where there's market fragmentation, where increasingly there's more and more spaces. Ben Thompson calls this never ending, never ending niches. There's more and more spaces where perfect brands for perfect segments can win, you know, and the devil that we use over and over again is peak design, uh, our travel bags for photographers. And they're just, if you're a photographer and you travel full stop, they're the best product that you can buy, right? Um, or, or, uh, uh, noble for people that are CrossFitters. You know, you're, you're working hard every single day and you need a certain amount of stability in your shoe and, um, you're married and you want to be able to keep your ring on when you're dead lifting and stuff like that. There's products for you that are perfect for CrossFit or CrossFit style workouts that are not, that are not just general purpose, workout gear, you know, and, and so, but these, these folks, customer acquisition model is very different. And also their ambition on scale is very different from the traditional D to C brand traditional DTC brands. We're trying to be the next billion dollar brand. Don't care about billion dollars. They care about serving their small set of customers extremely well and being paid fairly for it. And that's it. I mean, that's a totally different model here. Um, that's, I think, you know, what COVID has done and really what the DTC brands hitting the wall earlier, earlier this year has done is just forced that point of view shift.
Peter:
Yeah. And, and don't you think though, that's also, um, forcing into the traditional brands, more of a, of a different way of thinking about their product ideation and life lifecycle that they also will, will need to, that their reliance on billion dollar brands just won't even work for them anymore. I mean, not anymore completely, but that they're also going to need to start thinking about revving up the product ideation cycle or acquiring a product ideation cycle that gets them more of these niche brands that together add up to
Rob:
A billion. Yeah. I mean, Sam at IRI and Jason Goldberg over at publicists and both made the following point, which is the top hundred CPG companies have created zero billion dollar brands in the last six years and targets created six. And yeah, I, the way that I sort of framed that is those big, massive consumer brands like where you're creating a good enough product for a, for a mass market. That's going to be a private label for a lot of categories. Right.
Rob:
And it's just one of those things. Like you go to the store,
Rob:
You don't really care that much about the product you're shopping on price, your consumers now trust private labels in a way that they didn't 20 years ago. And so you see a private label brand and it's cheap. You assume that it's going to be good quality these days. And so you buy it. Um, and so the, I think private label is the future of a lot of these, a lot of the, the large scale brand approaches. So if you are a mass market manufacturer, the path forward is going to be, how do you create highly differentiated products for a smaller market segment where you can be utterly dominant within the market segment and get high margins there, right? It's like an Elmer's glue, creating the slime version of Elmer's glue, uh, you know, that, that type of thing, but multiplied over your entire product portfolio. So that's, I think that's going to be different, right? That's going to be difficult. I mean, I'll give you one kind of funny example of I'm going to, I'm going to WhatsApp dad's group with a bunch of my, a bunch of my friends in college, there's like 15 dads on this list. And one of them was talking about how guys are just me or the green Skittles taste different?
Rob:
I don't, I'm not sure I liked them, you know? And so then people were like, yeah, they do taste different. People went out and bought new Skittle packs and said, God, I did something different. I can't put my finger on it. And then we, you know, we looked up on Wikipedia and it turns out that the green Skittle used to be live in the United States and was changed over to green Apple in 2013. Right. And then, so we, we reached out to Mars and the Mars had been running a couple of different green flavors. One was a green Apple in China. And then, you know, they were running lime in the U S and they ran a bunch of consumer panels and green Apple just sort of individually and in a skillset beat, Lyme, pretty handily. And so they, they sort of, you know, went back to green. They went to the sun, standardized and green Apple. That's a traditional mass market approach. And then, you know, on the other hand, you've got a bunch of my friends who love the lime flavor. And they're like, why did they do this? And, and it's sort of alienating to them. And so there's this kind of future tension world where, you know, product line extension, where you're, where you're, where you're really kind of getting specific about small sets of customers is the path to differentiation versus going to the mass market. Yeah.
Peter:
Personalization, come, come choose your Skittles. And can you do that with a, can you do that sort of thing at scale, and with margins that still work with,
Rob:
But that's the big thing it's like, you don't want to, I think, personalization where you produce like a thing per person, that's a, that's a, uh, strategy, a small DTC brand can take to be safe from Amazon, be safe for private label, have market differentiation have good margins. There's, there's small private equity groups in New York that invest specifically in manufacturers that do personalization as a strategy. But, you know, the companies that we're talking about are not going to do personalization, you know, the companies we're talking about, the question is like, instead of creating a, another brand, that's going to be 2 billion a year in sales, or 1 billion a year in sales, you know, what's the size of market segment that's that you can attractively address and is it a hundred million? Is it 200 million? Is it 500 million? Right. There's, there's sort of a step down in, in a market segment that allows for healthy competition in w in the world where the private labels are, you know, becoming a default option.
Peter:
Yeah. Yeah. Well, I think Ben raises a lot of questions. A few hints said where to look for answers over time. But, uh, I think all of these questions point towards a continuing disruptive industry that, um, one will be exciting to be part of and, and fascinating to, to watch and discuss. And so we're gonna keep doing it, uh, now in our second year here at unpacking the digital shelf. So Rob, thanks for, thanks for walking us through that. That was great.
Rob:
Yeah. Well, thanks to Ben, Evan for writing the article. I'll post it on LinkedIn as well. It's just a, it's a really, really great read. It gets your mind turning in a thousand different directions.
Peter:
Yeah. We'll have it in the show notes as well. So, um, as always make sure you find your way to our LinkedIn page at the digital shelf Institute. Uh, we're on Twitter at the digital shelf. Uh, and, uh, if you, if you feel so moved, please leave us a review wherever you get your podcasts, it's helpful to continue building our audience, but, uh, thanks as always for being part of our community.
