The Network Garden - Mark Sigal's Blog

Ruminations on Retail: Why We Launched BrightStreet Ventures

(Guest Column: Western Real Estate Business - July 2014)

Consider the plight of the retailer: the rise of Amazon has attacked the margins that local retailers count on for survival.

As a result, numerous segments, including video stores, music stores, computer stores, bookstores, electronics and office supplies are either dead or dying. Sadly, this is a trend that is permanent and accelerating.

Meanwhile, the ascendance of the smartphone, led by Apple’s iPhone and Google’s Android is changing everything.

There are about five billion devices creating universal experiences that are social, real time, data smart, perpetual, personal and just-in-time capable via millions of mobile apps.

This emerging reality gets to a universal truth of our time; namely, that software is ‘eating the world,’ and in the process, reshaping virtually all industries.

It’s given rise to Uber, Amazon, Airbnb, Google, iTunes, Facebook, Maps, and Yelp, but can there be any doubt that retail, media, marketing, manufacturing, transportation and telecom are being forever changed in the process as well?

In retail, for example, mobile has given the consumer the power of all knowledge at their fingertips. With this power, he or she can discern fair price or pursue a better deal – often online – in very few clicks.

It’s also empowered consumers to act as social amplifiers of reputation and experience. An extra half-star rating on Yelp can cause restaurants to have a full house 19% more frequently.

Critically, though, mobile plays a game-changing role in what is known as omni-channel. In the world of omni-channel, the consumer’s frame of reference encompasses online, bricks-and-mortar and mobile possibilities.

When done right, omni-channel can yield a 6X sales lift from the customers that engage with the merchant on all channels, including online, via mobile and in store. Such has been the experience of Walgreens.

Similarly, the rise of big data and data science is changing the means of analyzing, targeting and customizing the field of play that exists between retailers, consumers and shopping center owners.

Mobile has also disrupted the traditional ways that merchants acquired and connected with customers.

The customer acquisition tool kit used to consist of yellow pages, direct mail and newspaper ads. While your eyes can tell you that these marketing segments are decidedly unhealthy, there’s an even more obvious barometer: ask yourself if your children have ANY connection to yellow pages, paper mail, or print newspapers?

This is the new reality for retail. Mobile, when combined with data and the cloud, completely changes the game.

This is also why is a shopping center developer decided to launch a technology affiliate like BrightStreet Ventures.

The simple truth is that we are working backwards from the consumer, what they expect and what is possible in this new era. We are also looking at the challenges that retailers face, and our role as owners and operators of shopping centers in fostering their success. That’s the defensive side of the equation.

In terms of offense, we believe the convergence of bricks and clicks represents one of the great opportunities of the next decade.

That is why every venture that emerges from our model needs to make sense as business offering enduring value.

We also believe that by sharing what we learn with our peers, a rising tide will lift all boats, which is very much in our interest.

That’s the backstory on why we created BrightStreet Ventures. The larger market has validated where we’re headed with mobile marketing innovation and real estate business intelligence (our company portal, powered by our Datex Property Solutions affiliate, garnered an ICSC MAXI nomination).

We had the opportunity to unveil this vision, and formally launch our new venture at ICSC RECON in Las Vegas, and the response was incredibly encouraging.

Mark Sigal is the Managing Director of BrightStreet Ventures in Woodland Hills, California.

Related

1. Understanding Retail's Reboot: Four 'Big Picture' Trends
2. Retail Needs a Reboot to Survive
3. How Uber is like Southwest Air - The Art of Reinventing an Industry

NIKEiD and the Uber-ization of Global Logistics

"Any sufficiently advanced technology is indistinguishable from magic." - Arthur C. Clarke

"You mean, I simply push this button, and it just shows up?"

**It**, in this case, is the magical Uber Black Car; magical being relative to the pedestrian, unreliable yellow taxi.

What Uber did in re-thinking the gray space between taxis and private car services is instructive.

Logistically speaking, they rejiggered the following:

1. The Ordering Process (it's push-button simple via an app; no interminable waiting on hold for a dispatcher)
2. The Transparency of Availability (you can literally see how many cars are nearby, and how quickly your car will arrive)
3. The Nature of the Transaction (no money ever comes out of your pocket; you never have to think about the tip again)
4. The Reliability of Your Order (you are notified on your mobile when Uber arrives, the driver confirms that you are indeed the orderer; no more pickups that don't show up, or taxis 'stolen' by pedestrians on the street)
5. Your Relationship to the Driver (most drivers feel like entrepreneurs; Uber is a new revenue source for them; all drivers are identifiable, and subject to being rated and reviewed)

Part of the magic of Uber is that the company is able to create this transformative experience without owning any of the cars or hiring a fleet of drivers.

Given the above, is it any wonder then that "uber-ization" has become my go-to term for industry re-invention through new combinations of design, user experience, workflow and logistics -- as enabled by broadband, mobile and the cloud. 

NIKEiD: Re-Thinking What a Shoe Can Be

The power of great technological waves and re-invention in general is not merely that they change how things are made, or what they cost. 

Rather, it's that they change our concept of what is possible, and what a given medium can be.

In the realm of motion pictures, adding sound (and talking) to films, completely transormed the industry.

In the case of ecommerce, the boundarly-less and friction-free nature of Amazon, has completely disrupted retail.

In the realm of mobile, building a unifed platform around iPhones, iPads, iTunes and iOS, has catalyzed the post-PC era. 

I thought about this truth yesterday, as the pair of fully customized NIKEiD shoes showed up at my door.

Not only were they beautiful (okay, beauty is in the eye of the beholder), but what left me feeling awed was the fact that what had begun as a series of push-button simple clicks in San Francisco, had traveled across the globe, navigating an unimaginably intricate manufucturing and logistics process to find its way back to my front door.

The UPS route home alone (see above) shows stops in China, Hong Kong, Taiwan, Philippines, back to China, Alaska, Kentucky, Oakland, and finally, San Francisco. 

Simply magic, and I wonder how many other products, services and industries are ripe for such reinvention. 

If you are sitting in an industry where commoditization and/or disruption is your future (through de-localization, re-invention and digitization, you need to heed the words of Google CEO Larry Page.

His guidance? "I encourage more companies to do things that are outside their comfort zone. It gives you more scalability."

Food for thought.

Related:

1. Uber-ization: The art and science of reinventing an industry (GigaOM)
2. Retail needs a reboot to survive (GigaOM)
3. You say you want a revolution? It's called post-PC computing (O'Reilly)

Pattern Recognition: Apple Vindicated; Retail Schadenfreude; Disruptive Paradox

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Apple Vindicated: What protection does the industry's innovator merit against shameless knock-off artists? Does anyone really want to argue that what Apple has created is NOT uniquely proprietrary? That it merits less consideration than a Gucci bag or a new erection pill? Yes, I get it. Our patent laws suck, and there are ridiculous numbers of frivolous lawsuits, but Apple v. Samsung is not one of them. Feel free to pick apart this aspect or that of the IP that Apple is claiming, but know this. Apple has built proprietary differentiation, and by simple sniff test logic, they've earned the right to protection. It's not a god-given right that I can enter your house, eat from your refrigerator and not pay for it. To me, there is justice in this ruling; and vindication for The Legacy of Steve Jobs. No less, it's one year to the day from when he resigned as CEO of Apple. Talk about tributes!
2. Retail Schadenfreude: I love retail. My first career was in retail real estate. My brother is a shopping center developer. I can wax poetic about the magistry of Cheesecake Factory. But, I also love Amazon, and feel that they are a great retailer, and consistent innovator. Obviously, bricks and mortar has a place, wherever it can create differentiation. Otherwise, it will get Amazon'd on price. That's why I have little pity for Staples, just as I had little pity for Circuit City or CompUSA before that. These are businesses that either never had heart (CompUSA and Circuit City), or simply lost it (Staples); who killed the Mom and Pop just because they could. Now, Amazon is killing the Big Box. Karma's a bitch, isn't it? 
3. The Disruptive Paradox: In the movie 'Joe Strummer: The Future Is Unwritten,' a documentary about the life of the founder of The Clash, there is a great line uttered by Bono talking about the vibe in England and Dublin in the 70s. Bono says, "I was frightened...I was excited." That sentiment is applicable to our present time. Many, many industries in a deeply screwed mode. A completely unhealthy, ineffectual political system. Oh, and institutionalized conflicts of interests between Big Business and the government apparatus (I am intentionally distiguishing between Policy Creation and Policy Adminstration). Yet, something HAS to give. The patient will not simply get better with time. You can look at this pessimistically, and with cynicism. Or, you can be a little scared, but also be excited. Because we are at the end of a cycle, and approaching the beginning of a new one. It's post-global, post-digital, and post-commoditization. The new cycle is about making the inefficient more efficient, and creating differentiation where commodization exists. This is the 'stop the film and discuss' portion of the program. It stands to reason that some companies will figure this one out, providing the essential case studies for many others to get to the higher ground of re-invention. Be scared. But also be excited.

Pattern Recognition: Microsoft's Lost Decade; Differentiate or Die; Building the Whole Enchilada

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Microsoft's Lost Decade: Once upon a time, Microsoft dominated the computing industry like no other. They were absolutely terrifying if they viewed you as the competition, as Borland, WordPerfect, Netscape, Lotus, Apple and many others can attest. Yet, Microsoft under Steve Ballmer has become a decidedly different company; one that has repeatedly gotten outflanked by Apple and Google. In fact, just ONE Apple product, the iPhone, now generates more revenue than the entirety of Microsoft's offerings. How did this happen, and why did I suggest back in 2007 that a decay was coming. Read this engaging Vanity Fair article to find out.
2. Differentiate or Die: We see it in the PC space, a market so commoditized that the only hardware OEM that is making any money is Apple. And of course, we are seeing how totally Apple is killing it in the post-PC market with a completely integrated and differentiated set of offerings that the competition can't touch. As John Gruber of Daring Fireball notes, "It’s a testimony to just how remarkable Apple’s last few years have been that 23 percent year-over-year growth (this past quarter) looks so bad on a chart." Meanwhile, this week we saw it in the grocery space, where Whole Foods (aka 'Whole Paycheck'), who StockTwits founder Howard Lindzon calls a 'platform business for new unique food brands,' is crushing it. Meanwhile, it's undifferentiated competitor, Safeway, is majorly struggling. I have a general thesis on this one. The conventional wisdom the past 20 years has been dominated by the loosely-coupled, 'horizontal' model that made Microsoft a lethal killer (upon the release of Windows 3.1 in 1992). That model was so effective that it made Bill Gates the richest man in the world, and industry after industry embraced horizontal as the 'one right way.' With the advent of the Internet, however, the downside of horizontal - a vicious cycle of commoditization - played out. Now, we are at the end-game, a point where few companies can make money under this model, unless they are the core supplier of the secret sauce. Thus, I believe that the next 20 years will look less like Microsoft and more like Apple; namely, tightly integrated, and vertically focused businesses where bricks to clicks are logistically worked out in a more than the sum of the parts fashion. Bet on the companies that figure this one out.
3. Building the Whole Enchilada: Speaking of the vertically integrated trend, BuzzFeed is a social news organization founded by Jonah Peretti, co-founder of Huffington Post, and they are killing it. This letter from Peretti to his BuzzFeed cohorts provides a great window into how a startup (in publishing, no less) is embracing a vertically integrated product strategy to breakout success. Here is an excerpt: "Most publishers build their site by stapling together products made by other companies. They get their CMS from one company, their analytics package from another, their ad tech from another, their related content widgets are powered by another, sometimes even their writers are contractors who don’t work for the company. This is why so many publisher sites look the same and also why they can be so amazingly complex and hard to navigate.  They are Frankenstein products bolted together by a tech team that integrates other people’s products instead of building their own. At BuzzFeed we take the exact opposite approach." Read the whole piece HERE.

Pattern Recognition: The JCP Story; App-Enabled Hardware; Thesis-Driven Investing

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. To make sense of J.C. Penney, look to Apple: What's the moral of the story at JCP, where same store sales are down 18.9%, the stock is off 26.5% year-to-date, and CEO Ron Johnson, who built Apple's massively successful retail stores, is suddenly no longer looking like a savior? I think that the moral is less mysterious than it may seem. It's that change is hard, mega-transformations take time and only those with the intestinal fortitude (and board support) to focus and see it through to the end, succeed. After all, JCP is trying to fix a broken brand that's been poorly packaged in a tired segment where a shocking 99.8% of all sales occur at below regular price. Moving to "Fair and Square" pricing may be the right approach, and it's certainly sensible enough to succeed (think: "Low Prices Everyday"), but success won't happen overnight. After all, it took Apple six years to reach the tipping point from which they'd never look back. Macs were dead. Apple's brand was tarnished. The iPod was hardly an overnight success and Apple stores to a while to find their footing. In fact, few remember that while Apple was a ~$5.50 stock when Steve Jobs became interim CEO in September, 1997, it nonetheless hit $6.56 in April, 2003. Now, don't get me wrong. I am not saying that Ron Johnson is Steve Jobs. Just that he's no shlub that has no idea what he's gotten himself into, nor a simpleton who doesn't understand the requisite details needed to come together for his company to succeed. Know this, though. Mega transformations take time, and he'll need it to reinvent JCP. I thought about this reading Herb Greenberg's quasi-defensive position on twitter. Two related takes: HERE and HERE.
2. iOS Inside - App-Enabled Hardware Accessories: As a long time network hardware guy (I've built it, sold it, and created platforms to extend it), and one of the earliest 'bandwagon jumpers' on iOS as a platform play, I have been more than a little disappointed in the lack of hardware accessory businesses to grow out of the enormous success of iOS. After all, from 1994 to the crash of the dotcom bubble, there was a tremendous amount of network device innovation, the so-called Internet of things. Money flowed in, and cool products came out. But as the past 30 years teaches us, the marriage of software and hardware is a coupling that is incredibly hard to pull off. Software guys hate hardware guys, and vice-versa, and that's when they even talk the same language. That's one fundamental reason that there's Apple, and everyone else. Making software, simple web services and apps is a whole lot easier, and takes a lot less capital, so that's where the dollars and decisions flow. But, the ability to create entirely new categories of devices that are "app aware" and can take advantage of an iPhone or iPad as a proxy is a BIG idea - think watches, scales, fitness devices, home monitoring systems, thermostats, etc. That's why I was particularly excited to see Incident's gTar, a new fangled electric guitar that uses an iPhone as its brain, get honorable mention at the latest TechCrunch Disrupt. Subsequent to this, I was thrilled to see that Apple has created a category in their online store for such devices called App-Enabled Accessories. Between this, Apple's decision to resell the Nest Learning Thermostat, and the tremendous story of the Pebble smart watch project at Kickstarter, which raised over $10M and generated tens of thousands of orders, I am optimistic that a boom in hardware accessories that are "native to the post-pc era" are just around the corner.
3. Thesis-Driven Investing ("Large Networks of engaged users.."): I will never forget the conversation that I had with a VC a few years back. In response to my assertions about the value of thesis-driven investing, the VC retorted, "Well, we pride ourselves in NOT being thesis-driven." That the fund is defunct, and the particular VC was never heard from again, is unsurprising, something that I thought about in reading Union Square Ventures' investment thesis in a post this week. USV is the fund led by Fred Wilson, who in addition to being in most of the smartest deals, is transparent about his approach (via his blog), engages his faithful community (myself included) in a conversation on same, and has enough battle scars from the dot-com bust to not take himself too seriously. No hubris here. Hence, I was more than a little piqued to read and digest their investment thesis, which is focused on: "Large networks of engaged users, differentiated through user experience, and defensible through network effects." Read the whole piece, as it's well articulated, but even better, think about codifying your own thesis. 

 

Pattern Recognition: The Integrator's Dilemma; iTV Disconnects; Buy a House

I read a ton, and while much of what I read captivates me in the moment, very little gets under my skin, and into my bone's by week's end. These three narratives are the ones that kept percolating to the top:

1. The Integrator's Dilemma: There was an interesting article written by Horace Dediu on the topic of 'What retail is hired to do: Apple vs. IKEA.' It basically looks at IKEA's global success, its dearth of competitors, durability, and relativity to the Apple Store model. As a devotee of Strategyn's 'Jobs, Outcomes and Constraints' model, which is one of the primary inspirations for Clayton Christensen's excellent book, 'The Innovator's Solution,' I am a firm believer in the precept of hiring products and services for specific jobs. In parallel, I have have been ruminating alot on how the Internet is changing the job that retail can viably perform from an economic perspective (see 'Retail Needs a Reboot to Survive' at GigaOM), so the topic is near and dear to me. When I net it all out, I am left with a narrative that goes like this. Once upon a time, the premise was that businesses should be horizontal and focused on solving just one piece of the product or service equation, and outsource the rest. The rise of the PC and the growth of Big Box category killers (Comp USA, Best Buy, Barnes and Noble) all seemed to affirm this approach. As the Internet took hold, the idea that this model was universal became conventional wisdom, as Google was all about being open and loosely coupled; and Amazon become the biggest online retailer by (seemingly) building very little, but selling everything. But now, this wisdom is getting turned on its head, as undifferentiated retail is dying, commodity PC makers are dying, commodity mobile and tablet device makers are dying, and the winners are folks like Apple and Amazon and Nike that are the antithesis of loosely coupled. In other words, conventional wisdom is dead. Not only are these companies integrated across their value chains, but they have built into their DNA truly differentiated positions. To me, this is The Integrator's Dilemma. It's not enough to assemble a bag of components. You have to do it in a way that is truly differentiated, which often means, a hybrid of hardware, software and service, which is hard to execute. In retail, I look at someone like Gap as an example of a company that confused brand and hit-making with clear vision, agility and differentiation, and once they stumbled, they never came back. The irony here is that most individuals would get fired for not taking a holistic (integrated) approach to getting their jobs done, yet paradoxically, few companies embrace this ethos, preferring the path of comfort, entropy and obsolescence to the path of discomfort and reinvention. And we wonder why there are so few catalysts for job creation in our economy.
2. iTV Disconnects: Ever since Apple analyst Gene Munster starting asserting that Apple was going to build a full-fledged TV set, I have struggled to get my head around the concept (see my analysis HERE). TVs, after all, are low margin, bulky to deal with from an inventory perspective, and infrequent buys. Plus, the actual TV viewing experience is essentially "good enough." By contrast, Apple's last three game changing devices -- iPod, iPhone and iPad -- are the kind of devices that several members of the family might buy, and those same members would likely replace and upgrade every 2-3 years. Moreover, those devices created entirely new experiences to fix fundamentally broken models or to define new ones. In the big picture, the TV set is closest to, but doesn't even look as good as, the Mac model, where you buy 1-2 Macs for the household every 4-5 years. It just doesn't fit that Apple would build a device that looks more like the relatively low unit Mac model when their universe is all about high unit sales and high device refresh frequency. And the only scenario where content is a compelling, high margin business for them as rationale for such a device, is where Apple is partnering with the cable and satellite providers for a slice of the monthly subscribers' bill. But, that's a set-top box play, more so than a TV play, in my opinion. The only other scenario I can theoretically see is where the so-called iTV is really an iWall; a widget device that is flat like an iPad, but made to perform the task of the smartest, most interactive wall frame ever. Yet, the rumors persist. (See also: 'Your iPad Could be Your TV' in MIT Technology Review.) 
3. Let's Go Buy a House: Felix Salmon did some interesting analysis looking at the correlation between rental rates and mortgages in America, on the premise that when you can get a mortgage (if you can qualify) for equal or less to what it would cost you to rent in the same market, housing values are, or should be, compelling. This truth is even more so when you weigh the fact that the historical market data shows that rents go up pretty predictability over time. In other words, the value of your house today, if nothing changes, should only get relatively less expensive than renting over time. You can even rent it out. So, let's go buy a house! 

 

 

ANALYSIS: Retail needs a 'reboot' to survive (My latest @GigaOM)

“Customers will not pay literally a penny more than the true value of the product” — Ron Johnson, former senior vice president, Apple Retail, and J. C. Penney’s new CEO

Profit margins of Wal-Mart, Amazon, Best Buy, Target, Home Depot and Apple over the past decade.

While some may view the wholesale destruction of numerous brick-and-mortar segments as inevitable, we all have a vested interest in seeing the retail industry reboot itself for the modern age. Because as Main Street goes, so does America.

This is no mere platitude when you consider that 13.3 percent of all jobs in the U.S. are in retail (that’s 14.7 million jobs in all, according to the Bureau of Labor Statistics), and retail is deeply tied to consumer spending, the same spending bracket that accounts for two-thirds of the U.S. economy. This doesn’t even factor in the natural synergy between our domestic manufacturing base and Main Street retail as a sales channel for that base.

Read the full piece at GigaOM, and let me know what you think.

UPDATE: There's a nice write up in the San Francisco Chronicle on The Candy Store, one of the mini in-store boutiques that Target is featuring as part of their store-within-a-store strategy. I really like these guys. Great products, and nice operators.

Related:

1. Assessing the Internet: Great Creator or Better Destroyer? (GigaOM)
2. The Great Reset: Why Tomorrow May Not be Better than Today (O'Reilly)
3. Pattern Recognition: Makers, Marketplaces and the Library of the Commons
4. Apple's Segmentation Strategy, and the Folly of Conventional Wisdom (O'Reilly)