Friday, June 16 was a momentous day in the retail world. Anyone with any pulse on markets, retail, e-commerce or tech (or who was breathing) watched Amazon announce its bold acquisition of Whole Foods for $13 billion, followed shortly thereafter by Walmart’s announcement that it was buying digitally native fashion brand Bonobos.
In the first deal, the world’s largest online retailer acquired a grocer-retailer operating with a conventional brick and mortar model. While Whole Foods has made attempts at building a direct-to-consumer online presence, most notably through its partnership with Instacart, one need only take a gander at Whole Foods’ website to get a clear sense of how disparate the pair’s digital footprints truly are. This was a seemingly odd-couple marriage, prolific market hype aside.
In the latter case, Walmart was acquiring an online men’s fashion brand increasingly focused on building a vast physical retail footprint through its showroom concept — essentially storefronts without inventory. This was hardly Walmart’s first foray into online retail: only last year it made an aggressive push into the space with its acquisition of Jet, along with this year’s Shoebuy and Moosejaw purchases. To be certain, Bonobos is unique among those prior acquisitions, as it has cultivated a consumer focus fortified by deep customer affection and a subculture of Bonobos brand loyalists. But this, too, seems a somewhat unnatural pairing: could Walmart, a physical retail juggernaut that has been crushing brands for the last half century, evolve into a platform that can nurture and mature a vertically-integrated, direct-to-consumer brand?
Amazon and Walmart are realizing that the future state of American retail commerce, both online and offline, is more than simply a world of distribution hegemony, where all brands have been reduced to undifferentiated products and “always low prices.”
On the surface, one would be forgiven for assuming the Amazon-Whole Foods and Walmart-Bonobos deals are merely efforts to achieve a more balanced omnichannel approach in the tireless pursuit of brand ubiquity. This has certainly been the press’s focus to date. But I’d argue that something more nuanced is happening. Amazon and Walmart might actually be changing, or at least modifying, their world view. Amazon and Walmart are realizing that the future state of American retail commerce, both online and offline, is more than simply a world of distribution hegemony, where all brands have been reduced to undifferentiated products and “always low prices.”
Natural Born (Brand) Killers
Amazon and Walmart were born of distinct generations nearly half a century apart. The divergent origins of Walmart’s and Amazon’s respective growth tracks were grounded in the best business practices and technological advancements of their birth eras. Walmart thrived under the necessarily offline (pre-internet) brick-and-mortar big-box ground game, whereas Amazon has replicated a similar scale in the online realm propelled by the tailwinds of consumer internet growth. But frankly, these retail hegemons have more in common than serendipitous deal timing.
- For one, both are built on supply chain efficiency and scale. Walmart and Amazon are the undisputed retail distribution juggernauts of the modern age. Their ability to approximate omnipresence to the shopper has birthed incredible statistics: perhaps intuitively to some, there is a Walmart store within 20 miles of 96% of all US citizens, and this footprint continues to grow (if slowly). Meanwhile, Amazon leverages an estimated 105 fulfillment centers to address hundreds of millions of orders placed each year no further than a customer’s fingertip or voice (through Alexa) at delivery times increasingly closer to “Now”.
- Both are (in)famous for depressing costs. Anecdotes regarding the tactics used by both Walmart and Amazon are something of retail lore, with company presentations and embedded pricing algorithms relentlessly pushing suppliers. Suppliers are often mired in a love-hate relationship they cannot end: dependent on the Walmart and Amazon’s scale of distribution, yet faced with ever-increasing pressures to deliver more cheaply for the outsized implications on their business, brands, and products. For both firms, their market power and negotiating tactics are highly lucrative: for each of Walmart’s more than 1.1 billion square feet and Amazon’s more than 94 million square feet, the firms earn an average of $436/sf and $986/sf, respectively.
- And both are what I call “natural born brand killers”. Both Walmart and Amazon are about championing a massive assortment of products, ever lower prices, and an ease of purchase distribution; they are most definitely NOT about championing brands. Shelf-placement premiums, SEO, and number of product lines notwithstanding, the logos working hardest to cultivate and sustain their brand equity become heavily commoditized in the context of these two firms: physical and digital searches for soda are as likely to produce Hansens or Bai Bubbles as Coca-Cola. Or take the example of Nike. As you’ll quickly see from their website, social media, or stores, it is (intuitively) the Nike brand at the centerpiece of each marketing channel; swooshes, sponsored athletes, and highly programmed Nike content is ubiquitous throughout. This contrasts sharply with the Amazon Nike page: product, utility, and price is featured over brand. Amazon even recommends competitors’ products, like Under Armour and Reebok, right alongside Nike’s offerings. Amazon’s characteristic emphasis on baseline features over aesthetic form and basic descriptions over brand mythology are perhaps compelling reasons by which Nike was able to resist the pull of Amazon for so long. (And yet Amazon’s own characteristic power as a consumer retail channel gatekeeper was perhaps a compelling reason Nike finally coalesced).
Amazon and Walmart are like a “black box” for brands: brands place product into the Amazon/Walmart distribution engines and sales come out on the other end. But in the shopping/discovery process, brands have very little visibility or control of what happens within their respective realms: how customers are searching for their products, how they compete with other brands or products and how consumers are engaging with their brand. As a result, for established brands, their highly curated aesthetic is forcibly confined to their proprietary physical stores and/or websites and social channels. For upstart brands that must constantly refine product-market fit and their brand proposition to the consumer, Amazon and Walmart are opaque, yet powerful, engines. To one CEO’s point, selling in such giants as Amazon is like “throwing a stick into class V rapids”: it immediately disappears in the voracious current with no idea of where it went — or why.
Prioritizing Consumer Intimacy
In light of the impersonality Amazon and Walmart have engendered from a relentless focus on distribution dominance, I firmly believe that these companies and others like them are aiming to achieve deeper brand-consumer intimacy. Brands born of one channel — that is, online or offline exclusively — are beginning to realize that their market power and their blind focus on distribution has both limits and future vulnerabilities.
Consumers want brands that are accessible — not in terms of affordability, but in terms of their character — and smaller brands provide that in spades.
In an era predominated by Millennial preferences, individual customization by the consumer has created proliferation and “miniaturization” of brands, and a fragmentation of once established brand equities. Etsy counts some 1.8 million active “shops” and more than 200,000 projects were funded on Kickstarter in 2016 alone. VCs and other funders are betting heavily on an acceleration of this trend: according to CB Insights, since 2012 $2.5 billion of venture capital investment went in directly to consumer brands and consumer hardware, including to brands like Casper, Warby Parker, Allbirds, Everlane, Bonobos, Interior Define, and Outdoor Voices that have since exploded. Consumers want brands that are accessible — not in terms of affordability, but in terms of their character — and smaller brands provide that in spades.
This is why my company Fifth Wall invested in brands like b8ta, which uses retail-as-a-service to highlight emergent electronics brands in brick-and-mortar fashion. With b8ta, and Bonobos before it, the physical storefront and retail experience gives consumers an opportunity to connect with the product live. Mall owners and big-box retailers recognize this and are actively courting concepts like b8ta. Case in point, in the last year the company has grown from one store to eight, signed a strategic partnership with significant Macerich (the nation’s third largest, and arguably most innovative, mall owner as well as one of Fifth Wall’s investors), and will soon be launching a nationwide deployment with Lowe’s (another Fifth Wall investor) for a store-in-store concept. As Amazon acquires Whole Foods, and as Walmart acquires Bonobos, each company aims to buy community, to buy intimacy, to buy into a channel that not only complements its hallmark distribution, but also helps it crossover into clear consumer and branding trends.
Physical Space and Technology are Mutually Supportive
Many people in venture capital like to use Marc Andreessen’s “software is eating the world” paradigm to suit their own ends; but what we may be seeing is an end to the absolutist all-or-nothing era of online vs. offline retail strategy. What omnichannel gets right, for all its recent fanfare, is that it pushes products closer to the consumers. What it gets wrong is its obsession with why that works.
Amazon was once a company belonging only in the digital ether of an internet not fully understood by the average consumer. Now, it will be close enough for consumers to touch, taste, and sense the products they buy — not only fruits, bread, and cheese, but also tailored clothing, high-end speakers, and customizable furniture — before they buy them in Amazon stores that are opening up globally across a variety of concepts (AmazonGo stores, AmazonFresh, Amazon bookstores, and in-store kiosks). What many of us once gleefully ignored was that e-commerce, especially on the scales of Amazon or Alibaba, can have a neutering effect on brands — often to consumer chagrin; and that physical retail, ominous soothsaying aside, will continue to be an important player in our personal lives and commercial decision-making long into the foreseeable future.
I admittedly don’t know how this strategy will ultimately play out. But these massive moves — some of the most mulled-over market movements in months — are nothing if not validating to our belief at Fifth Wall that the economic importance of physical real estate, and the deployment of innovative technologies on this same asset category, are in fact mutually supportive. As a result, we expect bold omnichannel strategies to continue to emerge over the coming year.
Change is the only constant, so individuals, institutions, and businesses must be Built to Adapt. At Pivotal, we believe change should be expected, embraced, and incorporated continuously through development and innovation, because good software is never finished.
Brick and Mortar Retail is Not Dying: The Future of Brands in an OmniChannel World was originally published in Built to Adapt on Medium, where people are continuing the conversation by highlighting and responding to this story.
