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Musings in Amazon World

I am probably the last one to write after Amazon’s blockbuster takeover of Whole Foods. I have no bold predictions, just a lot of thoughts and what ifs. So please forgive me if the below is not my usual tightly spun and clear logicJ

It’s not just Whole Foods making the news. Consider Walmart’s buyout of Bonobos-strange bedfellows, so what’s the logic?

And I just read that Nike has agreed to sell its shoes through Amazon. How’s that for putting more nails in the brick and mortar traditional retail coffin?

So here are my thoughts and questions:

What does Amazon really want with Whole Foods? It seems pretty sure that Whole Paycheck as we knew it is going to disappear. Will it be a showcase for Amazon products other than food? Will it be a $14billion testing ground for Amazon Go, the automated supermarket service system which has yet to be perfected? I think, no matter what Amazon does, people will still want to squeeze the melons-which will have to be bought and delivered fresh and are highly unlikely to be bought on line. AND require a different kind of category expertise.

And what happens to the traditional supermarkets? According to one writer, their fatal flaw is that they need and want to make profit, while Amazon doesn’t. If that is the case, they are going in the wrong direction, especially if you look at the hundreds of items on the weekly circular, all competing with each other for the same brand, same product, and surely losing money just to bring customers into their store to compete with other traditional supermarkets who are trying just as hard to lose money.

But voila! And nobody has really talked about this- in come some category specialists like Trader Joe’s (Aldi) that have developed their own brands to such a degree that they are trusted at higher (but fair) prices. What is more, they compete (usually well) on a product by product basis while not needing to compete brand by brand. Just like Zara and Uniqlo in the apparel world, their stores are interesting and fun (Trader Joe’s treats us to a California surfer atmosphere even down to the Hawaiian shirts) and clearly well merchandised to sell what they sell- which is not everything and is category focused. Easy to shop and easy to like. And customers trust them. How will Amazon compete with this? Or maybe no need to compete, just buy it.

Amazon is also developing private label in non-foods, and has been very successful so far. Will these items find their way into Whole Foods (or whatever it will be called in the future-ie, Amazon Market)? I am not sure even Jeff Bezos knows-it will be fun to watch. What I do know and I am sure Mr. Bezos does as well- the return on selling other people’s goods, like the Nike deal, is sure and sure to grow as more brands decide if you can’t beat ‘em, join ‘em. Which funds these bold experiments.

Let’s jump to Walmart. What could Walmart want with Bonobos? $70ish custom made shirts has as much relationship to Walmart’s business as penny candy has to Tiffany, it would seem. I believe this acquisition has nothing to do with the product-it is the unique system of integrating apparel retail with brick and mortar which is more interesting. As with other technology companies recently purchased by Walmart, this is about an integrated vision of online and offline so Walmart doesn’t lose a sale. The product or products are collateral damage.

So that is what Amazon and Walmart have in common-they are paying what they need to pay in hopes of finding the Magic Kingdom of future retail, and they can afford it.

But if I were to be offered a bet on the future, or buy stock, I would place my money on the category experts-like Uniqlo, Inditex/Zara, Trader Joe’s. They have captured the attention of customers in the best way-with exciting, unique and proprietary product. And, by the way, they all have web sites so you can order online as well. But their stores are too much fun to miss. Maybe that’s the ticket-fun..

Another question that comes to mind is, I wonder if Amazon or Walmart has the category experts in house for all the diverse private label categories they are adding. Recently, I looked at Amazon’s offering in their dress shirt brand, Buttoned Down. Admitting that to make any conclusion I really need to see the products up close and personal-which I didn’t-my viewing as a potential customer and a category expert showed up some clearly visible points of concern for a $39-49 shirt (expensive for Amazon). Maybe I am wrong about the shirts, but it gave me legitimate grounds for wonder about the management of category expertise in new areas in which Amazon seems to expand daily.

It would take some serious mathematical models, guesswork and clairvoyance to make concrete predictions for the future, of Whole Foods and the bigger world to come. Too many variables. The final vote will be cast by the consumer. As said, I bet even Jeff Bezos is not sure-nor should he be. My bet is that there is still a lot of room for brick and mortar-but not the way it used to be. The world has changed and keeps changing daily.

What is sure is this: It’s Amazon’s world, and we are just living in it.

What Is Your Best Sourcing Solution?

Before we start, let’s lay three ground rules:

1.     Every situation is different; there is no cookie cutter solution.

2.     Any solution needs time to show it is working, even if it looks good at first; that being said, clearly, not working can show up quickly. Know the signs and don’t throw good money after bad.

3.     You are not excused from managing. Your attention will help to make sure the solution works the way you want it to, lack of attention will almost certainly make sure it doesn’t.

The Golden Rule: Throughout the process, you need boots on the ground. Just sending a QC to check production at the end is too late. Everything that went before leads to that moment.

There is no doubt that having a staff in country who will handle everything from product development to shipment is the ideal way to manage. However, many companies cannot afford to have permanent staff in one or many countries where they source product. So what are the alternatives and their pros and cons?

1.     A Trading Company- This company will sell and ship the product to you, including their profit in the price. They typically have staff enough to manage your orders (along with others). Pro: professional (we assume and hope) staff is included in your price. Con: Trading companies can take 25% or more for their efforts. Con 2: Trading companies are notorious for cheating customers to make more money for themselves.

2.     An Agent- Agent will manage your production for a commission. In this case, the factory price should be transparent to you. If the price including commission is acceptable, then it may be a good alternative. Pro: Agents are typically specialists in one or more sectors within a country. They will have staff that knows the product and the factories. The best agent should be seeing with your eyes (after you thoroughly train them, of course). Pro: Professional staff for a known cost. Con: Many agents “double dip,” meaning they will also take commission from the factory, which not only raises your cost but, most important, divides their loyalty so they cannot serve you as their only master.

3.     A Sourcing Company- There are many of these which offer a “complete solution.” Just sit back and relax (?) while your order is processed and delivered. Pro: None, unless you are lazy. Con: You lose transparency and control of your product. Con 2: As with trading companies, you never know how much profit they are taking. Considering the size of some of their offices, it may be a lot.

4.     A Surrogate Sourcing Office/Consultant- This type of company will help you with the entire process for a retainer/fee. Pro: Costs are known and product cost is net. Pro: There is no question of commitment- most similar to having your own staff. Con: If you source in more than one country, you cannot afford to pay this type of consultant in multiple countries or fly them around the globe. This solution is also difficult to manage in disparate time zones. Con 2: Some consulting companies are not category experts, just consultants-not good enough.

Whichever solution is right for you, there are some more rules that are necessary for success:

1.     You must train whomever you choose. They need to learn your systems and procedures, rather than you learn theirs. This means everything from hand feel to quality. If they are good, they will embrace this and work hard at getting it: if they resist, get rid of them.

2.     Make sure you thoroughly know both the surrogate and their factories. Don’t trust anyone-only what you see is real. Maybe this means that, in the beginning, one of your HQ merchants needs to go to the location and live with them for a time, at least a month.

3.     Make sure your HQ merchandising staff is qualified and experienced enough to manage remote sites. In the best case, they have done the job of the surrogate before, in the country. If not, experience in working these situations is critical. Most important: pay what you need to pay to get someone who will follow up and manage all details with no gaps and no mistakes.

4.     Build relationships with the factories, not just the surrogate. When you source directly, the factory has a clear picture of you as the customer and of your requirements. Using a surrogate, this should be no different. Most important, in the worst case where the surrogate is not working out, you can avoid difficult or catastrophic situations with your goods.

5.     Test first. No matter how excited you are or how severe the sales pressure, you must first give them a test order and wait the entire cycle before increasing. Besides mitigating your risk, it is not fair to the factory or the surrogate to put big pressure on them before you learn, train, and get things running smoothly. If you give big orders up front due to sales pressure or get seduced by the price, you are setting yourself and them up to fail.

6.     Don’t overassort your efforts. Many growing companies give in to pressure from management, buyers, investors, etc. to matriculate their success in one category into more before they have fully conquered the first one. This will require more staff or distract your existing staff focus, which is most badly needed if you are still in building mode. Land one plane at a time.

7.     People. People design things, people make things, people sell things, people buy things. Most important, people follow up and manage the entire process. Have an animate view of all people involved and how they are managing.

8.     Process. It is not just the quality and productivity of your staff work that is needed for success, but the systems and the process that they use to get it done. If your process is flawed, your staff work will be, no matter how good they are. Keyword: Simplify.

Whatever you do will take time and attention on management’s part to choose and then set up for success. All above solutions need a lot of hand holding until they are running smoothly (quality product delivered on time with no fires to put out).

BTW, maybe restating the obvious, but the above is just the beginning of the story. The rest of the story depends on right choices, right execution, and right people.

Social Compliance- A Needed Reevaluation

Don’t get me wrong. I agree that the customer of a factory, foreign or domestic, has the right to evaluate their suppliers.  What I believe needs reevaluation is the attitude and focus of these efforts with the original goal held dear- protect the workers.

The practice of social compliance today is a very sophisticated form of ass covering-especially for major retailers who don’t want to take any chances of being associated with a factory which engages in “questionable” labor practices or who suffers some catastrophic event, such as a fire. There is little thought given to the workers themselves and what is good for them (such as getting orders).

Same thing, you say. Making the factory adhere to certain labour and safety standards does protect the workers. The problem is, if the standards are too over the top by being too many or too complicated or unattainable, a factory may fail an audit even if they have basic and common sense standards in place. Let’s take fire, for example. After a catastrophic fire at a factory in Bangladesh (which never should have been used in the first place—another problem to be discussed later), Walmart went over the top with fire protection. One factory I was working with which was two floors high with a small staircase to the street level was forced to install smoke alarms on a 30 foot ceiling (huh? By the time the smoke gets up there, everybody already knows what is happening), and a fire alarm bell in each room—like some hero is going to stand there and ring the bell instead of yelling fire and getting the hell out himself. Fire marshalls , fire drills, more and more. This all could be simply solved by making the factory supervisor in that workshop responsible for safety in case of a fire. Fire extinguishers, exit signs- these are the basics. And, most of all, basic, common sense fire safety like not putting oily rags near a heater. I assume the Bangladesh factory passed a social compliance audit before it was allowed to produce orders, so something else was missing.

Compliance standards get more complicated every year. Which makes audits more difficult to pass and punishes the workers you are trying to protect. Very few factories I know can pass an audit cleanly because there are too many issues and many are not relevant to real life (my favorite is the Environmental Impact Report-huh? This is an example of the arrogance and lack of reality-based standards). They need to be simplified to the few things that really count, and which can be carried through to daily life in the factory-current ridiculously overcomplicated and unrealistic standards result in the factory dressing up for the audit day and not taking any of it seriously. Next day, back to business as usual. But there is much to be taken to heart. The goal of compliance audits should be to get the factory to understand and embrace a few key and simple cost-effective common-sense principles in each area- so they understand how it benefits them and make it part of their daily practice. Today’s reality is far from that goal.

Another main problem with compliance is the arrogance with which it is approached. Those who create and approve the audit criteria insist that every factory should be able to meet these standards every day-that without consideration of the realities of your average low-cost third world factory today. Those of us who have lived with these factories for years can clearly see the futility of many of these standards and the overall process. I strongly suspect that those writing and approving the standards don’t know or don’t care.

And, when the factory makes the news, such as the shoe factory in Dongguan who made the news recently due to suspected labour abuse and the arrests of some activists who tried to surreptiously document these abuses—made more juicy and newsworthy because it is Ivanka Trump’s shoe factory (no it isn’t- her shoe line is licensed and she not only never heard of the factory but surely has no role in which factories are chosen by the licensee) it becomes “China” not “this factory in China.” So the whole country is implicitly accused of labour abuses and uninformed readers will believe that is the case. With all due respect, when the US largest employer (Walmart) is also accused of labour abuses, should the Chinese people carry this as the impression of American management and not shop in Walmart China, or should the supplier refuse to sell to them?

In all of this, one key point is lost. The average worker, whether they are in China or another country, the same ones who the compliance regimen is supposedly geared at protecting, those who need to make money every day to feed their families, are the ones to suffer when compliance standards cannot be met and their factory cannot get orders. They also suffer because the good lessons of social compliance are lost in the overcomplicated mess of the practice today.

What should be done?

1.     As I said before, simplify. Reduce the audit criteria to the few basic, common-sense principles that will ensure safety and fairness to workers, and which factories can learn and practice.

2.     As a customer, don’t choose factories whose situation and management attitude guarantees they never will be a safe and happy place to work-even if their price is seductively low. You know who they are.

3.     This is far fetched and may never happen, but I think that countries themselves should set basic audit principles and provide approval grades and ratings (like the health department) which can be viewed publicly, so that potential customers can see them before they consider placing orders. Most important, if the nation is taking responsibility for social compliance (and not letting it fall prey to corruption-that is the tough part), the retailer or manufacturer’s ass is covered.

The best part of the above scheme is that the millions of factories making goods for domestic consumption should also be subject to these rules. That, dear readers, will be a victory for social compliance that we will never see under the current regimen.