Brick and Mortar Merchants Desperately Need A Chief Innovation Officer

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Within minutes of the announcement of Amazon’s purchase of Whole Foods, share prices at competitive grocers tanked between 5% and 15%.

Before we dig into why, here’s a quote from Jose Alvarez, a senior lecturer of business administration at HBS and former CEO of Stop & Shop/Giant-Landover, that is downright hilarious if you know what to look for:

[Amazon] can help Whole Foods buy high-quality products more cost effectively and thus improve gross margins while keeping customers satisfied. It can also use its process and technology expertise to take enormous costs out of the supply chain and store operations while improving the in-store experience.

These two points are one and the same.

Retail (and really any brick and mortar operation) is run so shoddily that news of an entrant with a little sophistication put the retail market into a panic.

Jose’s quote might be more diplomatic, but he’s saying exactly the same thing:

  1. Amazon will leverage data to optimize supplier relationships and purchase the right amounts of the right perishable inventory
  2. Amazon will leverage data with an adherence to fiduciary responsibility and improve shareholder returns
  3. Amazon will leverage data to measure and intelligently manage supply chain, labor and other large expenditure
  4. Amazon will leverage data to focus on the customer experience

Someone needs to tell us how you can run a $13.7B operation (Whole Foods) with executives making hundreds of thousands of dollars a year and you fail to hire a handful of capable data scientists to fix these problems.

This is not a budget problem. What we have here is a sophistication issue. And it’s not specific to Whole Foods: it persists at retailers and restaurants everywhere.

Can you think of any legitimate reason why retailers don’t hire people to fix these problems that are obvious to anyone at Amazon? We can.

Retail and restaurant management are making great money under the status quo. Capable people, aside from clashing with the incestuous retail culture, would make it abundantly clear that current leadership is making this money for doing, well, nothing spectacular.

Would you be motivated to make changes if the changes meant you were out of a job?

This is the same reason why restaurant and retail executives are amazingly unresponsive. Here are some statistics from our archives, but you could run a test yourself: email some hedge funds, then email some retail/restaurant management. We all know the latter businesses are struggling yet we bet you won’t get one reply from them.

We’re going to quote ourselves from that article to really put a different spin on this disastrous behavior.

Restauranteurs and retailers, who run far more customer-oriented businesses than those in finance, should be aware that every inbound email is a direct reflection of their brand. If someone has a bad experience in the initial stages of communication, they’re going to associate that feeling with your whole organization. And it’s not as if there are a limited number of choices when choosing where to spend dollars either.

This observed behavior emits a pungent odor of self-preservation and costs retail/restaurant shareholders tens of billions of dollars annually. Anyone with a little sophistication would acknowledge brick and mortar has huge problems, yet these executives cannot be bothered to return a call.

The fix? Enter the Chief Innovation Officer. Since boards have proven themselves incapable of firing their executives, the board should instead hire someone to usher in innovation (because these boards love to spend money). This position should report to the board – not the CEO – and thereby skirt the politics of decision making that have preserved shit business practices in retail. All “innovation” inquiries should be forwarded to this person so they can sort out legitimate opportunities from old-hat practices.

This person should be technical in nature with high business acumen. Recommended changes should go to the board, not the CEO, so the board is on the record for votes that may have decreased shareholder returns. Any adopted resolutions would then be tasked to the appropriate department for execution, with supervision of the Chief Innovation Officer to ensure objectives get completed by agreed-to timelines.

It’s our view that the Chief Innovation Officer should also maintain relationships with activist investors, acting as an intermediary to alert shareholders when their board is neglecting fiduciary responsibility as well as protect the company from financial-engineering, activist investors by assuring that the company is operating responsibly if that is truly the case.

But maybe we’re being too optimistic. Maybe these executives and their boards don’t even know they have problems. If that’s to be believed then we’re back to Dunning-Kruger and what should undeniably be the most studied subject matter for anyone thinking about approaching brick and mortar. If only Arthur Wheeler had decided to join the ranks of retail he wouldn’t have had to rob banks for an undeserved payday.

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