Jay: Richard, thank you so much for coming on our show. It’s such a pleasure to have you here. Can you give us a quick background who you are and where you’re from?
Richard: Well, Jay, thank you so much for having me. It’s a pleasure to be here and great to be talking with you. I’m an investment banker. I’ve been an investment banker for over 40 years. I was a partner and a big firm on Wall Street called Drexel Burnham Lambert. And while I was there, I ran middle market mergers and acquisitions. Coming on 20 years ago, I co-founded our firm Triangle Capital, which focuses on middle market mergers and acquisitions and capital raising in consumer. So, we’ve done a lot in retail and fashion and apparel. We are very active now in beauty and subscription and pet and retail technology.
And I also started writing a blog a few years ago. That blog is now on Forbes, where I try to answer the question, what do we see in the world now that helps us understand what the world will look like in a or two or five? That helps us understand what’s the value of the companies we are representing to an acquirer or investor, and how will they be able to think about what their investment will be worth in five years from now when they’re likelier to want to make an exit or have some liquidity themselves. So, that’s how all of that fits together.
Jay: Awesome. I think this is going to be a really interesting episode for a lot of our audience, because these are, when you’re building a business, you don’t like to think I’m building this business to sell. It’s not. But you want to build it in a way, obviously, that is attractive. And I think investors are smart people. That’s why they do what they do. And they can tell that difference, of course, between a business that’s just being built to sell versus one that has a long term strategy, so I think this is going to be really interesting. One of the things you mentioned, subscription business, which selfishly, there’s kind of two key areas I want to dive into, one of them being subscriptions. And then one of them focusing on retail and some of the things you’re seeing. But why don’t we start on the subscription front, we’re Bold and we have a subscription platform, so it’s something that we’re always interested in.
So from the investment side, subscriptions are a huge trend right now, seems like everyone is trying to figure out how they can add subscription to whatever product or whatever their business model is. What is something you look at to tell some metrics or to tell that this is a healthy subscription, or you could replace the word subscription with membership or, you know, some type of replenishment model? What are some things you look for when you’re looking at a brand that has subscription as a core part of their business?
Richard: Well, Jay, let me just comment on something you said a moment ago about building a business to sell it. You said something that I think was really insightful, something that we advise our clients, because they ask us what kinds of decisions should I make about what I have to do now on a day to day basis and what should I invest in? What should I cut back on? And what we tell them generally speaking is, essentially what you said, which is run your business as though you’re never going to sell it. Because if you do that, the decisions you make will be viewed by buyers who like you said, are smart. And they will say that you’ve made good long-term decisions and that accrues to their value. And so, the things that they wonder about that they can’t see in due diligence, they’ll assume are likewise good decisions.
But to answer your question about subscriptions, so yes, subscriptions are really relevant, much more relevant than we see right now because almost every retailer and brand has a product that’s suitable for subscription. It’s a great way to keep your clients. It’s a great way to attract certain customers/consumers. And it’s a great tool and another channel to add to your quiver of how to reach your consumers, which is the big challenge, broadly speaking for consumer product companies right now.
So what do people look at? Well, what you see in a lot of subscription companies is that, a lot of them are not yet big enough to cover their fixed costs, and so a lot of them are losing money. How do you tell the difference between the ones that are losing money under a good opportunity and the ones that are losing money that are a bad opportunity?
Well, you look at a few different things. One is gross margin. Do you have enough room left after your cost of goods sold to account for what you’ll need to run the business and still have a decent profit? Now, a lot of people will tell you that have low gross margins, well, ‘When we grow, we’ll be able to improve the gross margin.’ Now, that’s not real. You can get some improvement from scaling, but you can get two points, three points of gross margin. Maybe you can get five points, but it’s very unlikely that you’re going to get 10. And if your business can’t support itself when it scales on the gross margin you have right now, then that’s probably something you can’t recover from.
And the other thing is your customer acquisition cost. How much does it cost you to get a customer, to subscribe to your channel, your product service, whatever it is? And after you spend that money, how many months, it’s usually a monthly thing, sometimes it’s quarterly. How many months does it take until you reach breakeven? We find that subscriptions that break even, that is to say they have a contribution to profit after gross margin and customer acquisition after two months, are very strong profit makers with great potential. Three months is normal. Four months is a little too long and there would have to be an unusual circumstance for that to be an attractive business.
Jay: Interesting. So churn and retention is a key thing when you’re getting under the hood, looking at, it’s not just ARR, MRR, it’s how is that made up? Is that made up of a lot of three month subscriptions versus a lot of eight month subscriptions or 12 months, et etc, because that really gets to the health of the subscription versus, it’s easy to throw out numbers like you value a company at 7x ARR or whatever, but that ARR number is only relevant to how it’s made up. Is that kind of what you’re getting?
Richard: Yes. We look very closely at the cohorts, right? You take the groups of consumers that have signed up for your subscription by month, and you see what happens to them month after month after month; naturally there’s fall off. Every month there are people who don’t renew, and what you’re looking for is consistently performing cohorts. When you have that, then it’s much more reasonable to project a future that has likewise strong cohorts. When you look at revenue, that’s a good way to build a business that gives away a dollar for 99 cents and will never be a profitable business. Let me say one more thing about valuation metrics. You talked about multiples of revenue or multiples of EBITDA, gross profit or whatever. You almost never see a buyer who says, I want to buy a business and pay six times this or 12 times that. What you see is a buyer who says, I want to buy a business that allows me to use my skills to improve that business and doesn’t have some of the issues that I can’t solve.
And so, they look at a business, they do their diligence and they say, based on what I think I can do with this business, this is what it’s worth to me. Now, inevitably, that value is a certain multiple of revenue, a certain multiple of EBITDA, certain multiple of lots of other things. But those numbers are outputs, they’re not inputs. So when you say a business sold for three times revenue, you can’t then say, therefore, this other business should sell for three times revenue because that’s just a handle, if you will, of how to describe a business that has many, many, many attributes, strengths, weaknesses as challenges, cetera. And we express it with one number, but the one number is not really the value. It’s just a conclusion and a shorthand way of expressing what’s this particular company worth.
Jay: Interesting. It’s certainly, we have a ton of brands using our subscription software, and I’ve actually gotten a lot of cold emails and calls from investors saying to the extent of, ‘Hey, any hot and trending subscription brands we should keep an eye on?’ I think we kind of all saw the story of Dollar Shave Club when they were doing a hundred million in Unilever, buying them for a billion and some of these other D2C subscription brands and now thinking that that story is going to replay itself. Like, is that a good strategy for a fast scaling D2C brand, you know, being acquired by one of these large CPG HoldCo brands, like a Unilever, Proctor and Gamble? What are your thoughts on that as someone scales their business, thinking that that’s the potential long term goal?
Richard: One of the things we see that I think is important to mention in financial markets is that when a new form of business is created, people assume it’s going to grow to the moon and they don’t know how to value it. And you create this incredible bubble of value that isn’t necessarily justified by the fundamentals, which are not often understood when a new form of business comes into the market. And so, you see when there’s something new and exciting coming on, someone buys it. Somebody with deep pockets will pay a lot because they think this will change the world. But very few things really do change the world. Eventually, we develop metrics. Now, everything depends on the size of a business.
I was advising a company the other day, that’s a startup that doesn’t have so much that’s proprietary in its market, a subscription business, to get big right away because their only moat against competition is going to be their scale. And if they don’t get to scale, then the low barriers to entry for the other people in the market who have more resources will come and crush them. If you have something proprietary and if you have good gross margins, you don’t need to do that. So, who should raise capital? Who should raise capital is companies that need to scale with a good business model where the margins won’t support the expansion they need to do. But if you look at something like the beauty industry, for example, where margins are high; you see a lot of companies that didn’t raise capital grow very successfully because their margins give them enough resource to build the business on their own. Other businesses are more of a squeeze and they need to raise outside capital. When you raise outside capital, you give up the thing, that’s the most valuable thing, which is the equity. So, the less you have to raise the better off you are.
Should a company be acquired? Well, there’s no right or wrong time to sell a business. It really depends on the risk profile of the owners and the managers of the company. Do they think they have the resources to get to the next stage and are they prepared to take the risks they need to take? Are they prepared to jeopardize what they’ve already built in order to get to the next stage? At some point, a lot of startups that become successful, find that there’s too much risk in it. They’ve built a really valuable asset and they’re tired and worn down by the risk they have to take every day, and that’s a good time for liquidity event. Sometimes that comes when a company’s $5 million in revenue, sometimes comes when they’re five hundred million in revenue and everywhere in between. I don’t know if this is helpful or not, but the transactions we do, which are typically liquidity events for founders most of the time, they tend to cluster around transaction sizes of between 50 and 150 million, so maybe that’s a clue.
Jay: I wanted to ask you, I’ve read a few articles that you’ve written around leveraging AI and recommendations. Do you see that playing into the subscription space much or is there a lot of opportunities still or are you seeing any brands doing that well? Or what are your thoughts around AI and recommendations with subscription?
Richard: I think AI is really important for almost everyone in retail. There are two aspects to it that I think are important. One is consumer facing and one is non-consumer facing. In consumer facing, it’s things like helping consumers to, well, you know, you think back or none of us are old enough. If you think about what it was like to be a merchant a hundred years ago, a consumer came into your store and you knew them. And so, you knew what their taste level was and you could provide them with things that they wouldn’t find themselves and give them an opportunity to have a great purchase and retail experience that they wouldn’t be able to do otherwise. Now you can do that with technology, the technology that understands people in a way that has the same result as that great merchant, because they have insight and they can help the consumer to discover things that they wouldn’t otherwise find that they will like. Most people have had the experience of going into a store, finding something they didn’t expect buying it and being really happy with it. Finding that people when it’s something they wear, for example, that people say, ‘wow, that really looks nice.’ And you say, ‘yeah, I discovered it.’ And you want to have that experience all the time. And AI enables us to have that experience more often than not.
The other way that AI is really important is in things that consumers don’t see. The classic example in retail generally is, the crate that gets delivered to the store and is left in the back of the store and never gets unloaded and put on the shelf or the rack. And when you look at the data from that in a conventional way, you say, well, it looks like demand went down and people don’t want that product anymore, when in fact, they never ever had the chance to buy it. AI with insight and data and cameras can see that the box is still on the floor in the back of the shop, and given it create instructions that say, ‘Hey manager, tell somebody to go in the back and unload the box.’ And that makes retailers more efficient, it increases revenue, it increases profitability, and when your competitor is using that kind of resource, you have to do it too. So, AI is coming. There’s no way around it. It’s going to be very prevalent in retail and consumer, and I think it’s a really important opportunity.
Jay: I read an article, it was around Nordstrom about how they’re using it. And I can’t remember the exact numbers, but their AI tools were able to find a recommended product. And there was a quote you had in there, something like you would never walk into a store, you’re trying on a shirt and the clerks say people who bought that also bought that, it sounds kind of like patronizing to the customer. But the clerk would say, “You know, that looks great. What’s your event. And here’s what would go well with that, given how you’re wearing it and you know, the colors.” And what was it, like their AI was able to find recommendation 80 something percent of the time. And right now as across a lot of other brands, it’s only like we’re in the single digits, isn’t it?
Richard: Yeah. So Nordstrom is making those kind of thoughtful recommendations, as you said, over 80% of the time. And there are recommendations that aren’t, like you said, people who bought that bought this. It’s about, well, that’s an occasion dress that’s suitable for mother of the bride. So, I’m presuming that you have a certain purpose to this garment and therefore I’m going to recommend these shoes or this jewelry or this accessory, or this coat that go along with the purpose of, and the style sensibility of what you’ve put into your cart. And you don’t have to buy it, but it helps consumers to find more things that they’re looking for with a lot less work. You know, online shopping is great when you know what you want.. When you don’t know what you want stores a fantastic tool and online is much harder. So, browsing and discovery is hard online, and AI can help that.
Jay: Yeah, it was an interesting article. I would encourage anyone listening to search it. I just looked up the title of it was “How Nordstrom gets you to buy more online and how they stay ahead.” You’ll probably find it if you search it. I’ll put it in the show notes as well too. But I found it interesting just how there was a software that you mentioned in there that kind of does analytics on AI tools and recommendations. And I was amazed at how low percentage of times most brands actually get a recommendation. Correct.
Richard: Nordstrom built their own tool, and I’m very small investor in a company called Findmine that provides precisely that tool for every other retailer who doesn’t want to spend millions of dollars in many years to create their own artificial intelligence to help consumers find matching things. And it’s just so impressive the way, you know, we each have our own style or non-style and this software can match you up with what makes sense for you, that’s how you want to look and the way you identify yourself in your clothes.
Jay: Yeah, it’s amazing. There’s a couple points I want to touch on still on subscription while I have you, and then I want to jump into a bit of a different train of thought. But one of the things I think a lot about when I look at subscription brands is, it’s almost easy to tell when a company, you know, and this is the way I look at it, that they had a board of directors kind of tell them that, hey, we got to get in the subscription space, and they slap on a subscription and they think they’re going to become either successful or be viewed as kind of lumped more into a subscription brand and maybe see higher value because of it because some of their revenues occurring. Versus some brands that are, I would almost say from the inside out like a membership org, like they think with a membership mindset, they refer to their customers as members, not just customers. They view how you think about accounting and customer acquisition cost, kind of all that changes. Are you seeing, taking a step back, some verticals? I think you had a post you said you’re seeing some, was it, the subscription business is slowing down, but in certain verticals? I’d like to dive into that a little bit because all the data shows that subscriptions are growing, but they’re also slowing down. Let’s dive into that a little bit. What was the findings you found there?
Richard: Well, overall we’re finding that the data that we’ve seen indicates that the subscription business is slowing down generally, but the certain kinds are most popular, like food and drink and personal care and health and fitness. And the rush into fashion and other products, it’s still a sustainable business that’s going to continue, but it’s not going to have the growth in the future that it has had in the past. Now, you know, it’s hard to figure out what’s the chicken and what’s the egg there. Because I said before that I believe subscription is applicable to almost every retailer and brand, but if they’re not in the market with a subscription product, are we really giving consumers all of the choices that they could have by subscription and is the growth not there because there was a burst of new companies that created opportunities, but not a full range of possibilities for what consumers really want in the long run?
I don’t know the answer to that, and we’re going to find out over time. But let me also address something that I think you were touching on about, how do you present yourself in the marketplace as a subscription company, as opposed to something that’s bolted on to a legacy business in the past? We are in a time when consumer product companies are marketing themselves in a completely different way than they ever have in the past. And that is with values. And new, young, nimble companies have the opportunity to lay a foundation that’s based on personal values, and consumers identify with that. And when consumers identify with that, they not only purchase, but they all also do some of the marketing for you because they want to share that identity of themselves that they have in common with the company. And they tell their friends in person and on social media, and that makes customer acquisition cost much lower.
When you’re a legacy company, it’s really hard to graph those values onto an existing system and still be authentic about it because it’s hard to get people to believe that you really care about ethical supply chain or sustainability or any of the things that are popular now, when you never talked about it in the past. And what we see in those companies that have it and those companies that don’t, is the effect of great leadership in a time of change. And when leadership, even in a legacy company says, what do we value as a company? What do we value as a group? What do we value as a board? What’s important to us personally, and how can we bring those values to a company and spread it throughout our organization? Then you have the opportunity for authenticity that resonates with consumers. But when you try and say, well, sustainability is hot, so let’s figure out how to convey to people that what we’re doing is sustainable. Consumers are smart and they know when they’re being snowed and when they’re getting something real. And those young companies that have built values into their foundation have a leg up. Even though in the past, not having capital and scale was a disadvantage, now the nimbleness and the opportunity to reform your business in a way that’s different from what’s in the market is a big opportunity.
Jay: Yeah. And I think even more so for subscription brands like this whole concept of, you know, the customer believing in the brand. And one of the things I think, when I look at SaaS companies and when they have a subscriber and the ability to refer someone, they’ll know, there’s a metric and it’s called your viral coefficient and they’ll know exactly what that is. You know, Facebook can tell you for every person that joins, how many people join because of them. And, you know, Facebook has obviously kind of reached a bit of a critical mass, but when you saw Clubhouse grow virally, they would be able to tell you to the T when one person signed up, you know, 4.3 new people would sign up, there’s a number and it’s a value based off of your churn. If you have certain level of churn, you need a certain number of, this is assuming no new customers through pay channels, but if your growth is through your customers, you need a certain number of customers to refer depending on what your churn is. I know if your churn’s 1.15, you need your customers to refer 1.2.
This is something I think a lot like when we were talking earlier about the health of subscription brands, and when I kind of look under the hood of a company, first of all, most brands don’t even know that number off the top of their head. They can tell you LTV, they can tell you churn, they can tell you customer acquisition cost, they can tell you a lot of these numbers, but if I said, you know, what is your average customer referral rate or subscriber referral rate? They wouldn’t have that metric. But if that’s a healthy number, you can almost instantly tell if that brand is going to be healthy or not because then to your point; raising money, every customer you bring in just multiplies. And that goes back to - so when you have a brand that has aligned values with the customer, it’s like magnified with subscription customers, versus one-time customers, because they have so much more ability to affect the growth of your brand. Versus, if I refer someone and they buy once, it’s kind of the end of it. But if they become a subscriber and then they refer and then they become a subscriber… I’m just going to throw that out there for someone listening. I don’t know. I’d like to hear your thoughts on that too. Do you ever look at those metrics when you’re looking at subscriptions?
Richard: We do. And we look at it in a somewhat different form. What I would add to that is, you also have to have a great gross margin, because if you are giving your product away, you can’t make money and it may be that people are buying your product because it’s such a great value. And you never really want to compete on price unless you’re the low cost producer, which almost no one is. So, you have to have a good gross margin. A good gross margin and a high referral rate is the holy grail of a subscription business.
Jay: Awesome. Okay. With that, I want to move on to a little bit of, I guess, like retail and maybe this might be a little bit more forward looking, but I know you spend a lot of time thinking about this and talking about it. And when you’re looking at brands, this is probably something you’re trying to get into the hood a bit. It’s funny - I can’t remember where I heard you speak about this. I think it might have been another podcast, but I’d love to hear your thoughts on, the market uses the word “omnichannel”. It might be a buzzword, it might be take it for what it is; you have some interesting thoughts on it that I thought were really interesting and refreshing. And I think a lot of people could benefit from hearing the way you think about it. How should brands think about their, I’m going to use quotes, “omnichannel strategy” in the next few years?
Richard: I’m not sure what you’re referring to about my earlier comments, but when I hear the word omnichannel, I react badly. And I react badly because omnichannel implies that there are channels, and I don’t think there are. And what I mean is, you know, just like when there were only stores, you said, well, I don’t care if they buy it in my Chicago store or my Houston store, as long as they buy it. Now, you don’t care if they buy it in your Chicago store, your Houston store or on their mobile device or on their mobile device standing in your Houston store. It doesn’t matter. And so the idea that we treat different channels differently is not the future. And there are no channels.
There is only the consumer and we need to be wherever they are. So, you know, there are consumers who walk by stores every day and never go in. But when they think of a product that’s sold in the store, they think about the brand because it’s top of mind and they sit on their couch in their robe at 11 o’clock at night and they get on their mobile device and they buy the product. Well, the store played a really important role in that. And that brings me to another topic, which is how do you measure the success of a store?
Before online, you measured a success of the store by sales per square foot. A store had a certain size so it had to do a certain revenue, but stores have many different purposes. I was in Paris over Thanksgiving and I went to Gallery Lafayette, and I saw a shop and shop, actually a lease department for a brand, and I liked their sweater and they didn’t have my size. So I got on my mobile device, standing in the store. I went to the US website of the brand and I ordered the sweater and it was in my apartment when I came back to New York three days later. What they can’t measure is the fact that the store in Paris simulated the sale on the website or the online business in the United States. And we need more effective ways to measure in different metrics. People generally succeed only at the things that we measure, and when we don’t measure the right thing, we don’t succeed. And in retail, that can lead to closing or opening the wrong stores. So, no one’s really invented a way of measuring the effect of stores in stimulating sales in a broader way than we used to in the past.
And it’s being tinkered with now, and most people think of it as, I think of each of our stores as having a catchment area. And that’ll be different in Chicago than in LA, than in Kansas city or Manhattan, New York, and each one needs to be identified. And that’s a good first step. And it’s not clear what the next steps are to measure the effectiveness of stores. That’s a long answer to your question about omnichannel. I’m sorry, all my answers are long, but there’s so much to talk about here and you’re asking really good questions.
Jay: We’re a checkout experience company, and this is something we think about all the time and tying, creating checkout, anywhere moments for brands. One of the things that comes up a lot, it kind of doesn’t completely solve this but it aids it, is the QR code. And when I’m shopping, I sometimes don’t even want to wait five minutes for a salesperson to come by. If I don’t see the size there, like I know what I want, or I know the model, maybe it’s not clothing, it’s something I have to try on. I would like to just scan a QR code and check out and have it delivered to my house. That could tie it, but beyond actually purchasing it, that experience that I have with the brand and now my future purchases, there isn’t a great way to tie that together. I thought something was really interesting that I would love you to give this example to our audience, your Vegas versus Disneyland example. Do you know what I’m referring to?
Richard: I do, because what that speaks to is what should a store do? And I think of Las Vegas and as great examples of what retail venues should do. No one goes to any of those places, or almost no one goes to any of those places to shop. But when you go there and you have the experience that you do, you wind up shopping. And the shopping is appropriate to the venue. And the shopping relates to the experience. You don’t find people going to Las Vegas and buying mouse hats with big black ears. And you’re unlikely to see a person going to Orlando and buying a Fendi bag. But if the experience and the retail relate to each other in an effective way, you come for the experience and you shop because you feel good about it, it relates to it, it relates to you. I want to say something else about checkout.
Amazon Go and Self Checkout are more important than we generally recognize because once consumers experience that, they come to expect it. And so when you leave an Amazon Go store, having just walked out rather than stood in a line to pay, the next time you’re in a line you say to yourself, “Why am I here? Why do I come to this store? Why doesn’t this store have faster checkout?” And the idea of waiting in line to give money to a retailer is a crazy idea, and yet people are accustomed to it. Once they realize that doesn’t have to be, things have to change.
Jay: Yeah. Even think about how much friction we’ve noticed that’s been removed because of the pandemic. I think it seems sometimes archaic to even now go into a store. Versus, just ordering it and let alone having it delivered the same day, but getting it delivered in my parking spot or there’s so many things that are being, we didn’t realize that it was friction. Well, I guess… so we’re looking at brands right now and some are adopting well and some aren’t, and then we’re looking at other brands that are consider splitting their retail and their online or shutting down, and then some are doubling down on it. What’s holding back some of like the biggest retailers today from really embracing this new technology and not seeing it the way that you just said it?
Richard: Culture. It’s very hard to run an organization of good people who’ve performed over a long time, but who can’t adapt to the way the world is now and tell them goodbye. So, who wants to do that? No one wants to do that. It’s mean and horrible. But I talked earlier about leadership; when you have great leadership, you can adapt and it’s harder when you don’t. And not everybody who has a great leader can follow that leader. And that kind of change is very upheaving and hard and not everybody makes it through the change. And that’s what we see in legacy organizations. The way we sell, the message we sell, where we sell, all of that has changed. We’ve never seen as much change in retail as we have in the last several years, and not everybody is accustomed to that.
Doing mergers and acquisitions; what we really traffic in is change, and so we are at the crossroads of change in organizations and we see it and live with it every day. And as a result, people come to us when they seek opportunities, including executives who’ve been in jobs for a long time and they want to find their next opportunity. And we’re not head hunters, but people do come to us and say, you know, we’re looking for this, or we’re looking for that. Or you find a particular fit and you call them.. And it’s always a great experience to help somebody find a new job. In the last several years, people contact us, and what they’re looking for is a new job that’s exactly like their old job, but their old job is never going to come around again because organizations change and they haven’t adapted. There’s a lot of people like that. And it’s sad, but I don’t have opportunities for people like that because the jobs don’t exist, and we all have to adapt. And lifetime learning is really important and being open to change is really important and not everyone is.
Jay: I just had this thought of this kind of concept that I go back to all the time. And even at Bold is this jobs to be done framework. And if you’re selling a hammer, if someone is putting a nail on the wall and you’re talking about your hammer and how good your hammer is and how fast it can nail something in or whatever; you care about this hammer, you try to make the world’s best hammer, but the customer, do they actually even care about the hammer or do they just want the nail in the wall? And then do they just want the nail in the wall or do they care about the shelf that they’re trying to hang? And do they even really just care about the shelf or do they just want a place to put their books? And when we really understand the job to be done, what we’re actually selling is a place for of them to put their books, but we get too hung up on our product. And I think that is the detriment of a lot of brands is they’re not focused on the job they’re actually doing is to get groceries in their customer’s fridge as fast and seamlessly as possible. It might not even be in your store. It might not be the fanciest aisles. It might not be the best instore experience, it’s to get groceries in your customer’s fridge as seamlessly as possible. But we take our eyes off of that, and as soon as our eyes are off of what it actually is, I think that’s almost the beginning of the end, you know, like with blockbuster case and point, you know?
Richard: Yeah. That’s a real insight, Jay, and it’s so interesting, you keep coming back to grocery. I think grocery is the place where there is more change and more opportunity in retail than almost any other sector right now. And one of the interesting things about grocery is, why isn’t Amazon number one? They’re number one online in so many categories, why are they not succeeding in grocery? They put $13 billion into buying Whole Foods. They see how stores work. They know how online work works, why aren’t they number one. And first of all, grocery’s really hard. And you know, it’s the place where consumers have the most interaction with, because everybody eats three times a day, and almost every household interacts with a grocery store once a week or more, and it’s harder than it looks. So, it’s just so interesting to me that they aren’t more successful when they are so successful in selling almost every other thing online.
Jay: They’ll probably eventually figure it out.
Richard: Well, you know, Walmart’s not a pushover and Walmart’s number one in grocery and Kroger is number one in grocery only, and they’re not just laying down and waiting for Amazon to take over. They are really learning and experimenting about how to serve their customer and it’s fits and starts, but they’re doing a good job.
Jay: I’m so curious. What are your thoughts on Walmart? I thought three years ago, or five years ago, I thought they were in the perfect position to not take out Amazon, but they had retail locations, thousands of them, tens of thousands all across the US. They had the ability to get products to customers the same day. They could do things where, you know, if you order on the Walmart website, they could sell a TV for $200 less than Amazon, but you have to go pick it up at a Walmart store where you might also buy other things like Amazon couldn’t do that, that all these tools, I would’ve bet so much that they would’ve been in a slightly different place than they are now. I’m not saying they’re in the bad spot by any means, but what do you see as the future for Walmart?
Richard: I have a TV on my wall. It’s 55 inches. I paid $150 for it at Walmart. I can’t believe these people. I think Walmart is amazing, and what’s amazing about them is the way in which they are fearless. And that is so important right now, because no one knows the future of their biggest, which is grocery. It takes experimentation and a willingness to fail in order to find the right answer. Very few companies are willing to do that on the scale that Walmart and Amazon will do. And so, yeah, you’re right, maybe Walmart should have been farther along and they’ve certainly spent a lot of money on acquisitions that you can’t measure the success of, but they’ve learned a lot. They’ve tried a lot of things. And when we talk about leadership, we talk about being willing to allow people to try things and fail in order to find success.
I think a weaker company with a weaker culture would have been further decimated by the onslaught of Amazon that has unlimited capital and a willingness to absorb losses that Walmart can’t or won’t sustain, their shareholders won’t let them sustain. Amazon shareholders supported them through losses for decades. So being able to compete and still being the number one retailer, I think that’s pretty impressive. I wrote article that nobody agrees with, which is that I think Walmart should buy Walgreens, and the reason they should buy Walgreens because Walgreens has almost 10,000 stores. And even though Walmart has 4,500 stores in the United States, approximately, and are within 10 miles of 90% of consumers in the United States, Walgreens is even closer. And I believe that short shopping trips to supplement online grocery delivery and pickup are going to become more important in the future. And having those staging areas that are closer to consumers will be more important because Less Mile is so expensive and Walgreens is in the health business that Walmart knows it has to be in and is trying to be in. And I think that Walmart could make the core area of Walgreen stores more efficient and effective.
What came back to me is Walmart doesn’t believe in the opportunity of the core part of the stores and they don’t know what they would do with it. And in my view, I understand that and I respect it. I think there’s a big opportunity for grocery-related products in the core of that store, that Walmart and deliver from as well as offer a closer way to get to a store for consumers, but begins to get into what’s your philosophy about what the future of grocery will look like. So, I still think there’s a big opportunity there.
Jay: That’s interesting. I don’t disagree. Somebody’s got to fill the gaps from your weekly order, with all the perishables and the smaller items.
Richard: One way or other, I think we’re going to see more small grocery stores that perform that function. And I think we’re also going to see an unpackaging of the pricing. So for example, if you had an app on your phone and it said, you can buy these paper towels, there are three bucks, or if you’re willing to wait 14 days, because I can deliver it more efficiently from a giant Ocado warehouse than I have 60 miles from your house, it’s two bucks. And there are some things you’re going to say, “Okay, I’ll wait a week. I’ll wait two weeks. Doesn’t matter. I know I’m going to need these things on a normal cadence.” But if you are making a recipe and you don’t have the strawberries or eggs that you think you’re going to need right then and you need it in 10 minutes, you’ll pay almost anything for that. So we all tend to think about shopping for groceries the way our moms did; you go to the supermarket once a week, you go around every aisle with your wagon, and it’s a whole different paradigm, and there’s a lot of adaptation that still has to happen.
Jay: Yeah, it’s interesting. Well, before we run out of time here, selfishly I would love to get any of your thoughts on just going back a little bit to you called it, no channel, Omniretail? Sorry, no channel?
Richard: I just think the word “channel” is kind of yesterday’s way of thinking about it.
Jay: Right, yes. How do you see - we are a checkout experience. How do you see checkout and its importance in these different purchasing experiences? How do you see its role? What opportunities, any brands doing it really well? I think there’s a huge opportunity, but just curious your thoughts around the actual checkout experience itself in this kind of new way of shopping.
Richard: The more invisible checkout is the better it is for consumers. So if I don’t have to do anything to check out, that’s the greatest checkout there could be. How do you do that? That’s really hard. It takes a lot of technology. It takes a lot of change and it takes a lot of organizing your business in a different way. I said earlier that I think people walk out of Amazon, go and wonder why are they doing all this other stuff? I think in the online interpretation of that, it’s, why am I putting my data in again? Why don’t they already know my name? They track me to market to me, why can’t they have my information? Sometimes they do, and it’s really easy. And sometimes you just scratch your head saying, why do they keep asking me this again? So, the more invisible… I’ve made the decision, I’m ready to give my money. Don’t make it hard for a consumer to give you. And so, the harder you make it, the less likely they’re going to be to check out. And you have a pleasant experience when check out is easy, simple, and fast, and you want to come back. And it’s one of the things that draws consumers back because time is valuable.
Jay: And it’s that last impression you have with the brand as well too.
Richard: And it shows you care about your consumer and you want them to feel that you do care about their convenience. Convenience is such an important value for consumers. So if it’s all great and then you have to spend forever checking out, who needs it?
Jay: Couldn’t agree more. Well, this has been awesome. Richard, thank you so much for the time and your insights. I know there’s a lot in here. We could talk for hours. Got to draw a line somewhere. If people want to learn more about you, I know you write a lot for Forbes, where would you like to direct people to read or learn more about you?
Richard: Best way to find me is on my firm’s website. My firm is Triangle Capital, and our website is trianglecapitalllc.com. You’ll find my bio, you’ll find my email, you can also Google my name, Richard Kestenbaum, but it’s easy to spell my name wrong. And when you do that, it leads you first to Forbes and various articles, and the speaking engagements that I’ve and also to our website. So trianglecapitalllc.com is probably the best place to find me. Jay, thank you so much for having me. You’re a great question asker, and love to continue the conversation any time.
Jay: Awesome. Well, thank you so much for coming on Richard. It’s been a pleasure and I’ll have all those links in our show notes as well for everyone listening.
Richard: Thanks so much.
Jay: Thank you.
