Whole Foods – Applied Consumer Psychology

Why do people shop at Whole Foods?

Fresh food, organic food, health food and healthy food, happy employees (that does matter to some shoppers…count me in that group as well), etc.

But as with anything in business or retail, Whole Foods did not automagically get to this combination of things that work together, out of the blue.  

Over time, they learnt how to display food and produce that appeals to shoppers, they worked on employee culture and happiness (part of that comes I am sure from much higher comparative wages and health benefits), they figured out how to offer value (real and intangible) that kept shoppers coming back for more. In other words, product, strategy, culture and understanding their customers.

The last one, “understanding their customers” which really means “applied consumer psychology” gets a great visual treatment on Businessweek in the form of 12 drawings with nuggets such as:

- Colorful produce right at the entrance, in black bins, that promotes the idea of freshness (and “primes customers to spend more”)

- No self-checkout counters because the happy employees at the checkout counter are part of the shopping experience at Whole Foods and its brand (thereby giving it pricing power over shoppers) and it doesn’t want to dilute that

The full slide deck is pretty interesting. 

The News Business – Computers Are Coming To Help

Not all news stories are created equal.

Some are written by master wordsmiths who wield their pens with great skill and ease. Others are written by people who should take the advice given to an aspiring writer who had asked Somerset Maugham if she should put more fire into her stories. Mr Maughm replied, “No, vice versa”.

The latter (the writer) can feel happier and the former (the master wordsmiths) can quiver a bit because in the not too distant future, computers, driven by faster and smarter algorithms may start writing in their place. 

By way of a Wired article, consider this snippet about a baseball game(I think), written by “Quill”, an AI-based writing program from Narrative Science:

Friona fell 10-8 to Boys Ranch in five innings on Monday at Friona despite racking up seven hits and eight runs. Friona was led by a flawless day at the dish by Hunter Sundre, who went 2-2 against Boys Ranch pitching. Sundre singled in the third inning and tripled in the fourth inning … Friona piled up the steals, swiping eight bags in all 

As the article goes on to say, perhaps a Pulitzer Prize is still many years away, but for “routine” stories and reporting, given declining print subscribers and the attendant slump in ad revenue, this may make a lot of sense. 

Say a company reports its quarterly earnings. Could an algorithm look at the results, compare them to the previous quarter and also to the same quarter from a year ago and use a series of simple “if-else” constructs to weave a standard news-wire type report within 60 seconds or so and push it out the door? Human analysis and additional reporting can always follow.

Brave new world? Yes. But is Narrative Science (and similar companies that leverage Artificial or Machine Intelligence will surely crop up, based on NS’s successes) merely responding to ever increasing cost pressures on newspapers and “stock” reporting services?

And who knows, as the algorithms get smarter, one day, Narrative Science may run its own Business Blog as well…

Freeing The Grapes: Amazon’s 3rd Attempt

(Source: www.freethegrapes.org)

As a result of leftover puritanism, some protectionism and potentially sheer official laziness and inertia, the eCommerce revolution which has changed the way consumers in the U.S. buy and pay for almost everything today has more or less bypassed wine.

The result is that “direct to consumer” shipments make up less than 5% of the total wine bought in the US – a surprisingly low number, especially when compared with how online retailing is experiencing double digit growth in other areas. In fact, for Thanksgiving 2012, online sales on Friday exceeded in-store sales for the first time. Or so I hear. 

But the wine market has been a stubborn holdout.

Wine.com, one of the first, and still one of the few players in this market, valiantly sought to lower the barriers to entry (and cut out supermarkets and other players in the supply chain) but it has been a long and painful process, dealing as it had to, with things like this (WSJ article, behind paywall):

The San Francisco-based online wine merchant has been fined by New York state for shipping wine in gift baskets stuffed with food; state law mandates food and alcohol be shipped separately.

As result it is still only a $80 million dollar business after 14 years of existence (and a bankruptcy in between). 

Even someone as tenacious and powerful a Amazon has had to eat humble pie (with no wine to accompany it…). As the WSJ article I linked to above says, both WineShopper.com and its partner New Vine Logistics failed. 

But, like I said, Amazon is tenacious. Not only that, it has deep pockets and can afford to play the very long game.

So its 3rd attempt at creating and capturing value in this market is to create an online market place or virtual storefront where vineyards can display their inventories and sell to consumers. Amazon presumably gets a cut from each transaction.

However all of those buyers are still subject to the same rules and regulations that have prevented eCommerce from disrupting this industry and the best part about this is that Amazon is not responsible for complying with those regulations – the vineyards are!

So at best, in the short term, this is Amazon’s attempt at being a player in this market and capturing some of the dollars currently spent in supermarkets and neighborhood wine stores. But in the medium to long term, as Wine.com, “Free the Grapes.Org” and maybe even Amazon try to pry open America state by state or county by county, Amazon will have gotten a lot of consumers used to the idea of buying wine online via Amazon. 

And at that point, it will do to wine what it has done to books. Or so it must hope.

So what will supermarket chains and neighborhood wine stores and distributors do to stop this juggernaut? Can they do anything?

China, Comparative Advantage and Moving Up The Value Chain

“Comparative Advantage”, which helped China become the world’s manufacturing hub, may now be starting to work against China, based on a growing body of evidence. But before we delve into this further, what does it (Comparative Advantage) mean?

In simple terms, it means that each country or region should produce, manufacture or create what it can do most “efficiently” (= using the least amount of raw materials or inputs).

In more rigorous economic terms, from an MIT article,

David Ricardo’s concept of “comparative advantage” is one of the most famous and venerable ideas in economics. Dating to 1817, Ricardo’s proposal is that countries will specialize in making the goods they can produce most efficiently — their areas of comparative advantage — and trade for goods they make less well, rather than making all kinds of products for themselves.

As a thought example, Ricardo proposed, consider cloth and wine production in England and Portugal. If English manufacturers are relatively better at making cloth than wine, and Portugal can produce wine more cheaply than England can, the two countries will specialize: England will concentrate on making cloth, Portugal will focus on making wine, and they will trade for the products they do not produce domestically. 

For the last couple of decades, as many erstwhile manufacturing hubs in the US realized, China was a prime illustration of this principle (in addition to companies’ greed, as some would argue) in action. Because labor in China was cheap, substantially more so (anywhere from 60 to 90% cheaper than in the U.S.), many low skilled jobs and some moderately skilled ones too, migrated to China. Entire factories sprung up to make everything from toys to phones to American flags.

But now there is growing evidence that parts of China are beginning to see the other side of this economic principle in action.

China’s reliance on cheap labor has powered the country’s economy to unprecedented heights. But China’s manufacturing sector is running into problems these days: squeezed from one end by places with even lower labor costs, such as Laos and Vietnam, and yet struggling to move to higher ground making more advanced products because of competition from developed nations such as Germany and the United States.

What this means is that just like their American and Western European counterparts, Chinese companies and workers must now move up the “value chain” and begin to produce products that require high degrees of skills and are not easily transferable to lower wage countries.

The alternative is a future where other lower wage Asian countries become the world’s next generation of foundries and factories.

Yet another alternative, which should cause substantial cheer in the American heartland, if fully realized, is a slow and eventual return of at least some manufacturing and related jobs back to the US, as an article in The Economist noted, back in March:

Joerg Wuttke, a veteran industrialist with the EU Chamber of Commerce in China, predicts that the cost to manufacture in China could soar twofold or even threefold by 2020. AlixPartners, a consultancy, offers this intriguing extrapolation: if China’s currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there… In reality, the convergence will probably be slower. But the trend is clear.

That article goes on to argue that what may prevent both alternatives from becoming reality in the near future or even for another 15-20 years, is that China provides not just cheap labor but amazingly efficient supply chain logistics as well as ecosystems of suppliers. While supply chain logistics are no doubt key, the supplier ecosystems are more key – because having other companies near by that can supply all the parts that you need does wonders to inventory management, costs and efficiencies. This is something that is difficult to reproduce elsewhere easily.

Still, these are early warning signs. Or signs of hope. It depends on who you are and where you are.

Predicting How Good A Recipe Is

One of the takeaways from the 2012 election was how good algorithms that use statistical models to predict results can be.

In fact, Big Data’s promise (and its less glamorous cousin, analytics’ promise) is exactly that – that it can forecast and determine a wide variety of things: how likely is a customer to buy product X, how well will an employee fit in and work out or how Facebook or Twitter chatter can mean a drop or a boost in sales.

To illustrate the promise of forecasting, an interesting article on NPR talks about algorithms applied to recipes

…an algorithm to guess how successful a recipe will turn out. And the math works surprisingly well. It predicts with nearly 80 percent accuracy how many stars your mother’s cranberry recipe will receive on allrecipes.com. Plus, it can recommend ingredient replacements to make your pie crust and potatoes more healthful.

She and her team took nearly 50,000 recipes and 2 million reviews from allrecipes.com and then hacked up an algorithm to extract out all the ingredients, cooking methods and nutritional profiles. With just these items, her algorithm could predict the recipe’s rating with an accuracy of about 70 percent.

For a slightly different “Good of Humanity meets Business meets Algorithms” story, we also turn towards the rise of crop insurance and companies offering crop insurance, via The Economist:

The Climate Corporation, a start-up based in Silicon Valley, wants to reverse the trend and reduce farmers’ financial risks—by crossing agriculture with the IT industry’s latest trend: big data. The firm is collecting all kinds of information—including on weather patterns, climate trends and soil characteristics—and analyses the data down to an individual field. These insights are then used to offer farmers tailored insurance policies against the damage from extreme weather events.

For now it is focusing on the U.S., but based on its success here, it is looking to go global. The millions of farmers across the world who badly need something like this (instead of depending on government handouts which are subject to the whims and vagaries of corrupt bureaucrats) should rejoice.