TED2009 Part VIII - Twitter, WalMart, VRM and The Future of Retail

Tuesday, February 10. 2009

TED2009 Part VIII - Twitter, WalMart, VRM and The Future of Retail

This piece on Twitter monetisation via charging brands to use it, allied to a factoid that emerged a week or so ago that Twitter was ahead of Facebook in driving traffic to Etsy.com, plus a lunch meeting at TED where WalMart talked a little about how they had redesigned their packaging to be more eco friendly, made me think.

To explain - most retailers have spent the last 10 years at least ensuring they get as close as possible to "just in time" systems to get goods into the shops. However, at that point they are then at the mercy of what customers actually buy, and thus will often run overstocks (extra cost) and understocks (lost sales). Add to this WalMart's clear response to "green" concerns and trying to grab the benefit of lower cost packaging, at the risk of higher damage in the talk.

Also, as part of this WalMart had to talk about some of the logistics issues from shop to customer, which led me down a different path of thought at the time. To explain:

Some retailers of higher value items pioneered Just in Time delivery down that last link, direct to client, by allowing them to trade off a bit of immediate gratification in exchange for being able to specify what they wanted for a discount of some sort (posterchild: Dell).

But this was for higher value items - however, all those transaction cost reductions that allow startups to get going cheaply also favour retailers who want to get a direct to user channel going from the warehouse.

The savings if one can do this are - from what WalMart was implying just from packaging issues - potentially very large for volume retailers of even fairly low cost goods.

So what is different between what I'm proposing and todays e-Commerce sites? The answer is that just in time capability of supplying to order. which potentially allows them to reduce costs by:

- holding inventory farther back in the value chain, reducing holding costs as its at a lower cost level and potentially still even in subcompinent level

- reducing waste by potentially being able to supply to order rather than to prediction

To entice the customer into what is probably a slightly longer supply chain, they will need to offer a discount, and get a better idea of what the customer's requirements are upfront - is get the customer to hand over data ideally at point of, or even in advance of ordering. That also has the benefit of further dropping end to end transaction costs.

The time honoured way to do this is to scrape data and mine via the CRM systems, but customers by and large are resisting this where it becomes too apparent (think Facebook Beacon). The answer of course is to make them want to do this.

Which is where Vendor Relationship Management (VRM) comes in - the VRM logic is that the customer keeps a large tranche of retailer relevant data themselves, which is handed over as part of a conversation that could happen before, during and after purchase. Clearly there would be a major opportunity to offer sufficient data for retailers to take just-in-time benefits from the "last link" part of the supply chain.

Allowing large volume retailers to behave like Dell and get end to end supply chain benefits for the % of their customers who can order online is probably a significant saving as well as having a Green benefit (more predictability equals less defensive packaging), very useful in tough times.

Now, how to execute one wonders - so far the VRM movement has been in DiY mode as no systems really exist, but RSS feeds, real time comms and social nets have been identified as key components.

Which is where Twitter comes in - at a stroke it delivers the transport layer and an initial form of authentication. An open API allows a VRM style service to be built on top with higher safeguards. You may imagine a scenario that if I choose to "follow" WalMart then a set of data is transferred at that time (maybe in exchange for some form of clubcard), with further data exchanged at point of order and beyond.

Update - nice commentary on this paper by Doc Searls over here:

Posted by Alan Patrick in Business Models at 17:16 | Comments (7) | Trackbacks (0)

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Just-in-time was built upon the idea that we can model real-life behaviour and processes into formulas, but the realities have never truly met the promise.

What you're talking about is a shift from guessing what customers want to giving people what they want; accepting that we lack the ability to completely estimate what people want, what is the best way to create flexible, adaptable systems?

What Twitter brings in is the idea of an open communication platform to enable the VRM "exchange". It's interesting in that this combines two disparate but related conversations: what is the best revenue model for Twitter, and what is the revenue model underlying VRM.

My guess is that the answer (facilitating communications and taking a bit of the value created) doesn't involve advertising

#1 Taylor Davidson (Homepage) on 2009-02-10 18:14 (Reply)

Great post Alan - we've done quite a bit of thinking around this...and have done some initial work

drop us a line - happy to share

btw, do you have any links re: Etsy/twitter traffic piece

talk soon
fergus

#2 Fergus Burns (Homepage) on 2009-02-11 00:22 (Reply)

You are right on the button Alan (as usual). The average out of town superstore in the UK carries 40,000 items. In a year, the average shopper buys about 400 of them. That means they don't buy 99% of what the store offers - yet the retail has invested huge amounts of money distributing, shelving and merchandising these goods. If you analyse the rates at which items sell, in most stores a small number of items sell huge volumes, consistently day in, day out. It is worthwhile stocking these items with continuous replenishment systems. However, the vast majority sell quite slowly. HUGE amounts - we are talking a transformational business model here - would be saved if customers could be persuaded to order these slower selling lines in advance. But there are two big hurdles to overomce: a) the change in customer buying habits (being prepared to think and order in advance), and b) getting the stock monitoring systems and logistics infrastructure right to distinguish between fast and slow selling items, and fulfil orders within acceptable (i.e. 24 hour) time frames.
You can bet these hurdles are being worked on by some players right now.

#3 Alan Mitchell (Homepage) on 2009-02-11 11:36 (Reply)

Do not overlook the power of impulse purchasing that fuels stores like Target, Walmart and the large Warehouse Chains (Sam's Club and CostCo.)

When you supply less goods on the shelf, even those that are not quick turn-over items, consumers are only able to purchase exactly what they need instantly on shopping trips (even less if certain supplies are shifted in the supply chain into an 'advance order only' status.)

I can not imagine how much less i would spend per year if i only purchased exactly what is on my list each time i go out for 'a few items' to somewhere like Walmart. Good for me? Maybe... Bad for Walmart- Definitely! And purchasing less items on impulse is only logical when less items exist at point of purchase.

Impulse buying is what allows retailers to maintain higher cost brick and mortar locations. And the ability to touch and feel products is in part what fuels our confidence and ability to order for less money on the net in exchange for instant gratification.

I agree in theory with what you are alluding to, however logic and consumer buying patterns sometimes do not meet. For this reason, new cars still sit without reason on car lots (when all you need in theory is one of each model to test drive at the dealership) and the ability to order when you pick what you like. And clothing, seemingly something you would want to touch, feel and try on, continues to be purchased over the internet each day.

#4 john on 2009-02-11 19:08 (Reply)

I agree with you John. The key here is distinguishing between different types of purchase. A lot of chocolate is purchased on impulse. Not many 5 kilo bags of potatoes though. Retailers have a strong incentive to move to a pre-order mode on the low impulse items.

#5 Alan Mitchell (Homepage) on 2009-02-11 19:13 (Reply)

Agreed Alan. Types of goods that can be moved to pre-order must be segmented, but i think we would all be surprised by though the amount of things that people buy simply because they are in front of them. Couple putting a product in front of someone and on sale- hard to replace that buying impulse through any mechanism.

Great post and comments. This has really made me think!

#5.1 john on 2009-02-11 20:02 (Reply)

Goodness - lost of good thoughts, will respond later.

@ fergus re etsy - blogged it here:
http://broadstuff.com/archives/1532-Social-Networks-as-drivers-of-Traffic.html

#6 alan p on 2009-02-14 00:38 (Reply)

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