Alexa, how do you spell “competition”? H y p e r -M a r k e t

Michael Buffer is the boxing ring announcer who coined his trademarked catchphrase, “Let’s get ready to rumble!” I could hear Buffer’s distinct announcing style as I read about Amazon’s repositioning pricing at Whole Foods and Wal-Mart which has teamed up with Google. Can you hear him today saying; “This is a special tag- team match between Amazon & Whole Foods in the red tights, fighting Wal-Mart & Google in the blue tights……. Let’s get ready to Rumble!”

What does the paring of these four behemoths’ mean to the rest of the retail market? When these two finish fighting, will there be anything left? Or are these announcements related to something else? In this blog, I’ll explain how these announcements are related to your business and what you need to compete in this new “Hypermarket”

Amazon.com, Inc. & Alphabet Inc (GOOGLE) are two of the world’s biggest tech companies. Their partnership with traditional “Brick and Mortar” (Wal-Mart and Whole Foods) combined with the introduction of smart speakers represents a new, more aggressive, type of competition. What makes these two partnerships so dangerous is that they link world-class, leading-edge technology with major product distribution channels. If Google can get Home right, Wal-Mart’s store based distribution means I put my money on the blue tights.

The Hypermarket links the consumer to their shopping in a subliminal way by simplifying the process, and the processes, between need, order, payment and delivery. The objective is to provide a seamless, consistent shopping experience…and kill your competition. The smart speaker is an early form of Artificial Intelligence (A.I) in the home. Either “Amazon Echo” or “Google Home” links consumers to the retailer in a new way, surpassing Smart Phone apps, TV’s, Tablets’ or PC’s. The scale of these partnerships are immense! As an example, 55% of U.S. adults start their online shopping trips on Amazon and they expect to ship 10 million Amazon Echo speakers in 2017. As for Wal-Mart and Google; well, they are Wal-Mart and Google! Apple will soon announce I-Home and we don’t know yet how it will be marketed. If retailers plan on keeping or growing their market share, competing in the Hypermarket will require new tools and offer new reasons for consumers to visit their store.

To compete, retailers will need to look to new aggressive strategies, innovative solutions and technology. Stephen Covey wrote about “Sharpening the Saw”. Sharpening the Saw is to preserve and enhance your greatest assets. Partnering with others, as these four industry leaders have done, adds speed and expertise. Competing in the Hypermarket will require each retailer to identify its own unique market position and focus on building similar partner and consumer relationships, both with operations and marketing.

Surcharging for credit versus discounts for cash; why it makes a difference and how the consumer will react.

In the struggle between the Credit Card Associations and Retailers this week’s court decision reminds me of the old western film when two guys are fighting and the guy with the rifle runs out of ammo as the other guy’s gun is a few yards away. There is that brief moment when they both realize that the game has changed and now the race to the finale is upon them.  This week MasterCard Inc. and Visa Inc. along with some large banks settled what had become known as the Brooklyn case, setting the stage for retailers to pick up the gun and shoot first.

 The weapon that the Brooklyn decision has given the retailer is the ability to surcharge the consumer for the use of a credit card.  Surcharging is a tremendously powerful tool that has the ability to dramatically shift consumer behavior. Surcharging is fundamentally different than Discounts; understanding why, is the key for retailers wishing to leverage this decision. How powerful is surcharging?  Alphawise (Morgan Stanley Research) reports that “43% of consumers would be “very-likely” to switch from credit/charge cards to debit, cash or check if asked to pay a 1-2% surcharge by a merchant”. Further, “on average, those who said they would be “very likely” to stop using a credit card would shift about 67% of their credit purchases to other forms of payments”.

Retailers have some experience with offering discounts for cash or alternative payment discounts.  In the Convenience Store Industry, the per gallon discount for cash or merchant issued debit has been moderately successful. Some merchants like Savannah’s Parker Stores, are offering up to 10 cents off per gallon for consumers using their PumpPal card. These programs are reported to have captured between 5% and 25% of their consumer’s transactions.  But if Alphawise is correct, and Parker posts a price of $3.50 with PumpPal, and then ROLLS-UP the price of gas by 10 cents per gallon for the use of credit, then according to Alphawise’s survey results,  upwards of 50% of consumers appear ready to walk away from credit cards

The reason Surcharging is more powerful than Discounts is because of “Network Effects”. Network Effects are an economic term that describes the attraction of two groups of end-users across a “platform”. The reason the card associations have never allowed surcharging is because the economic principles driving a platform (two-sided market) state that only one side of the platform can be weighted with fees to the end-user.  An example of network effects is the Adobe PDF Reader. Almost all of us have the PDF reader on our computers, and it is free. The PDF writer on the other hand is expensive. The reason the writer is expensive is because so many people have the reader. If Adobe had charged for the reader it’s likely no one would have purchased it and as a result, the writer would be valueless. The same is true for credit cards, show the consumer the real cost of using their credit card and they are likely to find another way to pay.

The question is; will the Retailers react? Like our gun fighters, there is risk going for your gun.  Mike Schumann, owner of Traditions Classic Home Furnishing in Minneapolis was quoted in the WSJ saying that he is “hoping that surcharging will become commonplace, but that small firms will not lead the charge” adding that he might charge 2.5% to 3% if his competitors adopt the practice. During a call with a national home furnishings chain, the CIO wondered aloud how consumers would react to seeing an $80.00 upcharge for a major purchase. It’s a good question. But what does seem clear, is that in areas of every day spend, like gasoline and groceries, retailers have a new tool. We’ll have to see if they choose to use it.