Presentation given to International Trade and Marketing Advisory Board of FIT, 9 November 2017-Sourcing in the World of Amazon and the Category Killers

To begin, let me set the scene of today’s world of retail- Here’s an image:

Godzilla rises above Tokyo Bay.  People scream and run helter skelter, in total panic. How did this happen? Surely we are dead now….

The name of this horror movie is “Amazon and the Category Killers.” By Category Killers, I refer to breakthrough companies like Inditex, Uniqlo, H&M, Lidl. They are commonly referred to as “disruptive.”

Actually, they didn’t disrupt anything; they just EVOLVED. And others didn’t.

The state of retail today follows Darwin’s theory of “Survival of the Fittest.” Per Darwin, those who figured out a new tool or technology better than others survived. Those that slept, ignored, or were ignorant, didn’t.

The rise of these companies who will doubtless dominate retail in the future has followed a clearly predictable pattern of evolution. And they themselves have evolved into their present state over as much as 40-50 years time. Let’s take a brief tour through the recent evolution of commerce that brought us to where we are today:

Today, with enabling technology, it is no longer necessary to run to the shopping mall to buy what you need; You can sit at home, just as people did more than 100 years ago with the Sears Catalogue. If you want to go out shopping for the entertainment or experience, you also have choices. Simply put, brick and mortar shopping with the department store as anchor has EVOLVED to, “ I can get what I NEED online. For my store shopping experience, I only have time for a laser-focused, clear, concise and pleasant presentation of what I should want now or this season.” No more boring trips to the department store sifting through too much inventory at too many prices. Solution: Amazon and the Category Killers.

People shopping remotely is not new.

Sears, enabled by Rural Free Delivery, mailed its first catalog in 1896, almost 30 years before it opened its first store. Sears even sold houses through their Modern Homes catalog starting in 1908. JC Penney produced its first catalog in 1925.

Quick-when did Ecommerce first appear? How many of you said 1983?

AT&T produced and distributed Viewtron, beginning with a test in Florida, from 1983-1986. Viewtron was a remote terminal on which you could order merchandise, book flights etc. based on NAPLPS graphics language and sent over phone lines.  The idea failed, as people were not accustomed to using technology and did not want to spend the $600 cost.

From there, we can clearly see the EVOLUTION of what we know today as ecommerce. Here are a few key dates and events:

1984- Tesco First B2C online shopping platform in UK and Compuserve Electronic Mall debuts in US.

1990- Berners-Lee introduces the first web browser, World Wide Web.

1994- Netscape Mozilla, first secure transaction.

2016- Amazon aided more than 10,000 sellers to generate more than $1million in sales on the Amazon Marketplace.

Wait- How did we get to 2016? When did Amazon start? Answer: In 1994. So Amazon has been EVOLVING along with the enabling technology for almost 24 years. 

So where was everyone else? Why does Amazon account for almost half of online sales today? Jeff Bezos even said, “There is nothing about our model that can’t be copied over time.” Yet today, 24 years later, there is only ONE Amazon.

Inditex, corporate home of Zara, Massimo Dutti, etc. started in 1963. More than 50 years ago. The first Zara store in US opened in 1989. Almost 30 years ago. By 2010 Zara had 5000 stores worldwide. Today Inditex operates in more than 90 markets. However, only very recently is there frantic talk about “fast fashion” as a force in the retail business. Inditex did not get to where they are in a magic burst. They EVOLVED over time. And those that are frantic now-didn’t.

Other category killers such as Uniqlo, H&M, Lidl also evolved; those department stores that are closing daily-didn’t.

It can be clearly seen that the phenomena that are Amazon and Inditex did not suddenly appear over Tokyo Bay-they EVOLVED over time with enabling technology.  Everyone else had the same opportunity to evolve-but they didn’t.

As we follow Darwin’s principles, those who adapt best to the changes and challenges over time, survive. Those who do not, don’t.

My conclusion is: Amazon and Inditex are NOT the problem. They are the SOLUTION-the EVOLUTION SOLUTION.

But what is Amazon today?

Amazon is much more than the monolithic force it appears to be. Let’s take a look:

Of the whole of $135.99 billion in global revenues in 2016, about $91 billion is from Amazon itself, selling its own or other brand products directly; 22.99 billion was generated by the Amazon Marketplace, third party sellers selling THROUGH (not TO) Amazon; most of the balance of revenue was generated by Amazon Web Services and Amazon fulfillment.

The Marketplace segment is comprised of more than 2 million sellers worldwide, selling their product THROUGH the website. While some reached as high as $10 million volume, the raw number is $22.9 billion volume/2million sellers-$11,450 average volume per seller.

So this “monolith” now looks like a community where even the smallest sellers can market their product. Compare that to the world of Walmart, where a half million square feet store presents “everything”, to the detriment of local and neighborhood business; Amazon has offered the opportunity to more than 2million entrepreneurs, family businesses, and small enterprises worldwide (in more than 100 countries) to be successful; one cannot imagine another affordable route to success for them if not for this Marketplace.

What is more, a whole new industry has evolved strictly devoted to facilitating these 2 million sellers manage their business- Repricers, SEOs, 3PL, and more.

Other companies recently have, in fact, copied the Amazon model, and their numbers are growing.

Oh, and Amazon Smile has given more than $62million to various charities based on subscriber purchases.

All of a sudden the Evil Empire looks like the Happy Kingdom. Not to those who slept or failed to evolve while it was growing, but to those who have or have had the sense and foresight to benefit from the Amazon business model, and all of those who benefit from the beneficiaries.

But how about sourcing? The $22.9 billion and growing of Amazon Marketplace 3^rd party sellers is composed of products that need to be made and delivered. Gone are the days when sourcing was about a few big companies making lots of the same thing in the same color and telling the consumer what to buy. Now we face sourcing, for Amazon alone, $22.9 billion from millions of different sellers. How many SKUs do you figure that amounts to?

So the Amazon Effect, as well as the effect of fast fashion like Inditex, is MORE SKU and LESS QUANTITY/SKU. So how does a factory or those in the business of sourcing for others, like Li&Fung, deal with this? It is not easy to switch the sourcing of entire industries or portions thereof from a volume-based model to a style-based model.

The entire supply chain and sourcing process has been turned on its ear. What remains is a huge challenge and a huge opportunity. EVERYTHING needs to be renewed-people, procedures, systems, factories and factory business models, logistics, transportation. The paradigm now is to get a product that the consumer wants quickly, and likes to see (in fashion) renewed every couple of weeks, without any compromises to quality, for the right price. Hmmm..

Again, this is a huge challenge and a huge opportunity for anyone who boldly embraces the sourcing requirements of this business model. And for those who wish to catch up with evolution or face a dim future.

Amazon itself could doubtless open a new business segment to support this new world, completing and controlling their own business model. But I dare say even Amazon has no solid processes or organization in place to deal with this new world of sourcing.

BTW—Inditex has already figured this out. But they’re not telling us how.

It CAN be done. But it will take a major reorientation, reorganization, and a true overhaul of processes at the sourcerers and factory level. Creative destruction-kill what needs to be killed, leave the past and your ego at the door. Build something new. Evolve…

                                                                                                                       

Amazon Universe: The Evil Empire or a Brave New World of Opportunity? (And an Upside Down Sourcing World)

1. Brave New World

The Evil Empire. The 800 pound gorilla. The elephant in the room. These are but a few of the phrases used lately, to refer to Amazon, by the many who have been left to eat its dust.

So is that it? Amazon is some evil conspiracy to take everybody’s business for themselves, leaving nothing but a barren wasteland for those who fell behind.

What we commonly refer to as “Amazon” was worth $135.99 billion in revenue in 2016. Compare this to Walmart at $482.1 billion and Costco at $118.72 billion.

So what is this creature that took over our world and why did it happen?

AS proven in my last article, from an evolutionary business standpoint, Amazon did not just appear; it EVOLVED with the enabling technology. It is not the problem-it is the most successfully evolved company- THE EVOLUTION SOLUTION.

Amazon is much more than the monolithic force it appears to be. WE always use the collective “Amazon”, but there are many elements to this business. Let’s take a look:

Of the whole of global revenues in 2016, about $91 billion is from Amazon itself, selling its products directly (whether Amazon private label, or other brands selling TO Amazon); 22.99 billion was generated by the Amazon Marketplace, third party sellers selling THROUGH (not TO) Amazon; most of the balance of revenue was generated by AWS (Amazon Web Services) including Amazon fulfillment.

The Marketplace segment was comprised of more than 2 million sellers worldwide, selling their product THROUGH the website. While some reached $10 million, the raw number is $22.9 billion volume/2million sellers-$11,450 average per seller.

So this “monolith” now looks like a community where even the smallest sellers can market their product. Conversely to the world of Walmart, where a half million square feet store presents “everything”, to the detriment of local and neighborhood business, Amazon has offered the opportunity to more than 2million entrepreneurs, family businesses, small enterprises worldwide (more than 100 countries) to be successful; one cannot imagine another affordable route to success for them if not for this Marketplace.

Amazon will even warehouse and ship the goods for these small sellers (FBA-Fullfilment by Amazon).

Then, a whole new industry has evolved strictly devoted to helping these 2 million sellers manage their business- Repricers, SEOs, 3PL, even sourcing the product itself.

Not to mention the nascent industry and opportunity for other companies to copy Amazon and to build web sites based on the Amazon model just to handle overload and growing business.

Oh, and Amazon Smile has given more than $62million to various charities based on subscriber purchases.

All of a sudden the Evil Empire looks like the Happy Kingdom. Not to those who slept or failed to evolve while it was growing. Happyness is to those who have or have had the sense and foresight to benefit from this model, and all of those who benefit from the beneficiaries.

2. And An Upside Down Sourcing World

But how about sourcing? The $22.9 billion and growing of marketplace 3^rd party sellers is composed of products that need to be made and delivered. Gone are the days where sourcing was about a few big companies making lots of the same thing in the same color and that was about all she wrote for the sourcing market. Now we face sourcing $22.9 billion, literally hundreds of thousands of SKUs, from 2 million different sellers (just Amazon sellers, there are more). How many SKUs do you figure that amounts to?

So the Amazon effect, as well as the effect of fast fashion like Inditex (we will deal with that in a later piece) is MORE SKU and LESS QUANTITY/SKU. So how does a factory or those in the business of sourcing for others, like Li&Fung, deal with this? Take as a given that most of these small sellers have little idea how to source and manage a product. It is not easy to switch entire industries or portions thereof from a volume-based model to a style-based model.

In a recent article in Sourcing Journal, Rick Darling, Executive Director of Li & Fung, was candid:

“Amazon quantities, Kohl’s quantities, Macy’s quantities, are all coming down per style and their SKU counts are all broadening, some more extreme than others. And that’s not being driven by their choice to control inventory, it’s being driven by consumers’ demand to get things faster, quicker and more unique than they ever had in the past,” Darling said. “And the reality is, while that’s happening and retailers buy less product and they need to do it faster and they need to do it in smaller quantities, none of us, and I will say none of us—including Li & Fung, who’s supposed to be the supply chain leader—really has a supply chain that’s been built for that.”

Clear. And True. The entire supply chain and sourcing process has been turned on its ear. EVERYTHING needs to be renewed-people, procedures, systems, factories and factory business models, transportation (less full containers for sure), logistics. All to get a product that the consumer wants quickly, and likes to see (in fashion) renewed every couple of weeks, without any compromises to quality, for the right price. Ummm..

That is a huge challenge and a huge opportunity for Amazon, especially its marketplace sellers. Amazon would be wise to open multiple sourcing offices around the globe based on the processes and technology needed to support this new world. But I dare say even Amazon has no solid processes in place to deal with this new world of sourcing.

BTW—Inditex has already figured this out. But they’re not telling us how.

THE EVOLUTION SOLUTION

Godzilla rises above Tokyo Bay.  People scream and run helter skelter, in total panic. How did this happen? Surely we are dead now….

Thousands of articles written, speeches made, forums held recently about Amazon and the Category Killers (see http://www.isourcerer.com/2017/08/the-category-killers.html) like Inditex, Uniqlo, H&M, Lidl. Many if not most refer to “disruption,” “unprecedented challenges” and cast those companies as if they hatched some sinister plan to destroy retail. OR they just ominously appeared, like Godzilla.

My questions to those sky-is-falling moaners:

1.     What exactly did they “disrupt” except for your business?

2.     When did they start disrupting, or

3.     When did you first realize what they were doing and what effect it was having on your business?

4.     Do you understand any of what is happening to you?

Actually, they didn’t disrupt anything; they just EVOLVED. And you didn’t.

The state of retail today follows Darwin’s theory of “Survival of the Fittest.” Per Darwin, those who figured out a new tool or technology better than others survived. Those that slept, ignored or were ignorant, didn’t.

The rise of these companies who will doubtless dominate retail in the future followed a clearly predictable pattern of evolution. And they themselves have evolved into their present state over as much as 40-50 years time. Let’s take a brief tour through the evolution that brought us to where we are today:

1.     Brick and Mortar- The Shopping Experience

The shopping mall, which is an iconic and important part of our shopping experience, is not a new phenomenon. It can be traced back to the Roman Forum, the Greek Agora, and the medieval market towns. (Smithsonian Magazine). When Congress allowed companies to accelerate depreciation in 1954, this made the upfront investment in building malls much more feasible and possible. Coupled with rural population growth, this was simply the evolution of shopping habits beginning in the 1950’s. Enabled by social and legislative changes.

Why did people flock to shopping malls? For the shopping experience. This is no different than the motivating factor going back to medieval times. In the 19^th and early 20^th century, local neighborhood shopping areas afforded people the opportunity to buy what they needed as well as have a pleasant social experience.

Then, department stores evolved from the neighborhood, promising a big selection, dependable quality and better prices. Sears opened its first department store in 1925 in Chicago, JC Penney some years before that.

The first shopping mall in the US was built in 1956, the Southland Mall in Edina, Minnesota. The last one was built in 2006. (Wikipedia). IN the meantime, more shopping malls were built than was needed given the population, mostly due to the whopping real estate profits that could be made.

Now, with enabling technology, it is no longer necessary to run to the shopping mall to buy what you need; if you want to shop for the entertainment or experience, you also have choices. You can sit at home, just as people did more than 100 years ago with the Sears Catalogue. Simply put, brick and mortar shopping with the department store as anchor has EVOLVED to, “ I can get what I NEED online. For the balance of my shopping experience, I have time for a laser-focused, clear, concise and pleasant presentation of what I should want now or this season.” Solution: Amazon and the Category Killers.

2.     Ecommerce-M commerce?

People shopping remotely is not new.

Sears, enabled by Rural Free Delivery, mailed its first catalog in 1896, almost 30 years before it opened its first store. Sears even sold houses through their Modern Homes catalog starting in 1908 (For $930-$3500)!(Sears Archives) JC Penney produced its first catalog in 1925. (Wikipedia)

Quick-when did Ecommerce first appear? How many of you said 1983?

AT&T produced and distributed Viewtron, beginning with a test in Florida, from 1983-1986. Viewtron was a remote terminal on which you could order merchandise, book flights etc. based on NAPLPS graphics language and sent over phone lines.  The idea failed as people were not accustomed to using technology and did not want to spend the $600 cost.

From there, what we can clearly see the EVOLUTION of what we know today as ecommerce:

1984- First B2C online shopping platform in UK- Gateshead SIS/Tesco

1984- Compuserve Electronic Mall debuts in US

1990- Berners-Lee introduces the first web browser, World Wide Web.

1994- Netscape Mozilla, first secure transaction.

2016- Amazon aided more than 10,000 sellers to generate more than $1million in sales on the Amazon Marketplace.

3.     Amazon and Inditex

Wait- How did we get to 2016? When did Amazon start? Answer: In 1994, as Cadavra, later changed to Amazon with the oh so familiar A to Z logo. So Amazon has been EVOLVING along with the enabling technology for almost 24 years. 

So where was everyone else? Why does Amazon account for almost half of online sales today? Jeff Bezos even said, “There is nothing about our model that can’t be copied over time.” But they didn’t. In 24 years.

Inditex, corporate home of Zara, Massimo Dutti, Bershka, Oysho, Zara Home etc. started in 1963. More than 50 years ago. The first Zara store in US opened in 1989. Almost 30 years ago. By 2010 Zara had 5000 stores worldwide. Today Inditex operates in more than 90 markets worldwide. Only very recently is there frantic talk about “fast fashion” as a force in the retail business. Inditex did not get to where they are in a magic burst. They EVOLVED over time. The shopping experience and the value proposition are what customers want. No discounts necessary to attract customers; the values are there everyday. But when they DO have a sale, well, have you seen pictures of piranha working together to devour a prey?

Other category killers such as Uniqlo, H&M prove that this model, too, can be copied over time. These companies also evolved; those department stores that are closing daily-didn’t.

It can be clearly seen that the phenomena that are Amazon and Inditex did not suddenly appear over Tokyo Bay-they EVOLVED over time with the enabling technology.  Everyone else had the same opportunity to evolve-but they didn’t.

As we follow Darwin’s principles, those who adapt best to the changes and challenges over time, survive. Those who do not, don’t.

My conclusion is: Amazon and Inditex are NOT the problem. They are the SOLUTION-the EVOLUTION SOLUTION.

                                                                                                                       

(Next up: How The Evolved create business opportunities and welfare- and how that changes everything about the business process, including sourcing)

HOT TOPIC- Is "DISRUPTION" just another word for "EVOLUTION"?

The word “disruption” has become so PC that it is effectively losing its meaning. The term is being so overused that it is hard to take those who go on about it seriously anymore.

Disruption- When something is removed from or added to the current order or mix, resulting in a new and unforeseen situation or opportunity. This, by its nature, is a rare and serious occurrence. Looking at it another way:

Donald Rumsfeld laid out three levels of information available to us today, in business or politics:

1.     Known knowns- We know all the information about something or someone, with no gaps or assumptions;

2.     Known unknowns: We know that there are gaps in our knowledge, and we usually know where the gaps are;

3.     Unknown unknowns- This is the Black Swan that nobody expected or saw coming.

To qualify to be “disruptive,” the result or action, when known, should be from the last category.

The concept of the Black Swan implies the presence of a difference maker among a world of White Swans.

But then what happens when everyone uses the term “disruption” or “disrupted” daily, and the term gets separated from its actions, becoming only meaningless words? The term loses its meaning when it is so widely used, in so many places and by so many people.

When a bank sponsors a poll of the C-Suite about disruption and asks the disrupted whether they think they will be disrupted, or disrupt, and whether either is a good thing, the concept has been so diluted as to have lost its original value; if you have to talk about it and study it before you do it, you probably are not disruptive. But you may be disrupted.

IN this case, the Black Swan becomes indistinguishable from the other swans, they having done the PC thing and dyed their feathers black.

The name may be marginalized by all the discussion, but the idea of disruptive change is not new. In fact, it goes back through evolution to our very beginnings as erect beings and before. What we can tell from evolution, and as Darwin tells us, the being that appears with a different and better trait, or who acquires some knowledge or ability that makes it superior, such as the use of fire, tools, technology, etc. is disruptive.

So the word disruption or disruptive itself is not the point. And those who use it or overuse it cannot take satisfaction from their indulgence in the term. Only those who find that fire when nobody else has really ARE disruptive-and they probably don’t care what you call what they are doing.

It turns out that the current use of the word is new (and now PC), but the concept is not. The idea of someone doing something that disturbs the current order, and, when it is successful whether through popular acclaim or results, is as old as history.

Let’s go back a little bit in time and see what disruption looked like in our recent history. Late 1960’s, the established world order is disrupted by the Vietnam War. That was the Black Swan for our society. The Unknown Unknown was the level of involvement, the tens of thousands of deaths, and it had a disruptive effect on society. Its effect on the fashion world was a pivot (another PC word) in the way young people dressed. From preppy perma press to bell bottoms and halter tops. Who was the disruptor who marketed the first pair of bell bottoms?

Today’s disruption is NOT caused by Amazon, Zara or any other of the category killers. It IS caused by the evolution of technology which enabled the disruption. So, in the end of the day, the incredible evolution of technology caused the Amazon phenomenon, not the other way around.

This is no different than Homo Sapiens learning to use fire or tools. It is today’s evolution story. The human race continues to evolve, and technology is the enabling tool.

So we should not be annoyed or distracted by the fact that anyone with a mouth or pen is free to use the word “disruptive” even if it is just talk. Let’s look at today’s evolutionary actions and where they are headed. That and only that will enrich us, or at least save us.

For example, given Amazon’s information database, the danger to its competitors is no longer disruption-it is domination.  And, as Steve Dennis said on Forbes.com, the buzzword ecommerce has lost its meaning when separated from all other commerce, and has merged into the singular concept of-commerce.

When something occurs that truly changes the status quo, everybody who failed to be on the front end of that change wants to talk about it—as if, by using the PC word, such as disruptive, their failure to be the first one with the new tool or the first to use it is forgotten or forgiven.

So what is the moral of this story? Simply that words will come and go, but what really counts is the action. If you don’t want to be part of the crowd who is talking about something they didn’t have the vision to do and who is figuring out how to catch up, be the first with the tool. OR, take the appropriate actions to get in front of the evolution. Talking can’t do that.

Finally, disruption is really just evolution. Enabled by some force or development that has evolved, the disruptors are the carpe diem actors who seize the opportunity to lead the pack in our next step of evolution.

Where are you on the evolutionary scale? As in Darwin’s work, those who fail to evolve, or do so too late, are headed for extinction.