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Technology/Services

How to Win the Disruption Wars

Insights into the battle and the state of the industry’s defenses
Photograph by Francisco Gonzalez

CHICAGO — As Gray Taylor prepared for his presentation at the NACS State of the Industry Summit, he noticed a buzzard—or was it a wild turkey?—sitting outside his hotel room window. He considered it an omen, and not a good one.

It’s not as if the disruptors of the world are circling convenience stores specifically. They’re circling the idea of friction and a lack of convenience for consumers in every market. “Every business is in the convenience business,” said Taylor, executive director of Conexxus, Alexandria, Va.

Disruption comes in two phases, or loops, he said. During the first loop, a disruptor enters a market with lower pricing and a better value proposition, usually driven by digital tech. For instance, Taylor pointed to numbers from MIT Sloan Management Review showing that 85% of GPS manufacturers’ market cap disappeared when Google launched Google Maps.

Then comes the second loop, which Taylor referred to ominously as the “Red Queen.” He cited a section in the novel “Alice in Wonderland” by Lewis Carroll in which the queen forces everyone else to work twice as hard to run at their normal speed. In the context of disruption, once a disruptor establishes market dominance, legacy businesses are forced to scramble to outdo each other to survive. Data from MIT Sloan Management Review shows that these Red Queen disruptors shave 30% from a market’s revenue and profit growth. As an example, Taylor pointed to FedEx and UPS. One introduced real-time package tracking and the other followed shortly thereafter.

“Imitation replaces innovation,” Taylor said. But if that’s the case, why haven’t c-stores been faced with the same impossible standards for success? Why doesn’t everyone get their goods delivered straight from Amazon instead of going to c-stores?

Imagine the convenience industry as a well-defended castle, Taylor said. The armies of disruptors are at the castle gates. They are attacking. The siege has been going on for years, but they have yet to breach the castle walls. “We have immediate consumption and fuel as moats, and they haven’t been able to get around that problem cheaply,” said Taylor, referring specifically to Amazon.

While e-commerce companies such as Amazon and goPuff have become deft at delivering products to customers cheaply and efficiently, last-mile delivery is still difficult for them to conquer, Taylor said. The c-store industry’s defenses make powerful walls, but they are not getting any thicker, and the attacking armies arrive at the castle’s gates every day with more advanced weaponry.

All these weapons are powered by data. “Data is going to grow exponentially, and it’s going to kill you if you don’t learn how to use it, live by it and profit by it,” Taylor said. He pointed to data from Gartner that shows more than 20 billion devices with internet connectivity—also referred to as the internet of things—will be in use worldwide by 2020.

These ubiquitous devices will power the next phases of disruption. Taylor predicted that in one to five years, all of that collected data will spur artificial intelligence (AI) to new heights and lead to innovations such as automated plant management, digital customer relations management systems and AI-powered checkout systems.

The Enemy’s Arsenal

Disruptors worldwide are already making strides toward this data-powered future. Taylor used the Chinese grocery concept Fresh Hippo from Hangzhou, China-based Alibaba Group as an example.

“If you want to see the future of retail, go to China,” said Taylor.

He described Fresh Hippo as Alibaba’s high-tech showroom designed to demonstrate the superiority of online shopping over physical shopping. The physical store is the front for a warehouse with an automated pick-to-pack system to organize deliveries. More than 60% of the store’s sales are online and delivered, though Alibaba wants to push that beyond 80%, Taylor said. The store offers 30-minute delivery within 3 kilometers of each store—about 1.86 miles—at the cost of about $1 per order. And that is only the beginning.

In addition to blending online ordering and physical shopping, Fresh Hippo is a frictionless experience—and not just at the checkout counter, Taylor said. That’s helped by the fact that shopping in China is more mobile-focused than in America. “Try using yuan at a convenience store. They don’t take it,” Taylor said, referring to the Chinese currency. Instead, most businesses accept digital payments from apps such as Alipay or WeChat Pay. To make purchases from Fresh Hippo, Taylor just gave the grocery store access to his payment app, which contained his purchase history and other pertinent data.

“In the next five years, technology will continue to empower the fickle consumers.”

“I don’t have any friction in becoming a close customer with Fresh Hippo,” he said. The Fresh Hippo concept is growing quickly, jumping from one store to 100 in only three years.

Taylor also pointed to encroaching disruption from Amazon, but not only from Amazon Go, the e-retailer’s frictionless c-store concept.

Amazon Go’s frictionless checkout has undoubtedly pushed retailers in America to innovate, and the technology powering the store is powerful. Even so, Taylor said the concept is “not ready for prime time.”

Instead of using barcodes to recognize items, Amazon Go stores use cameras and sensors in the ceiling and shelves with built-in weights to recognize each item and its location in relation to customers. However, there is a team of real human beings “behind the curtain” who are observing shoppers and which items they pick to send them the correct receipt once they have exited the store.

Taylor is more worried about Amazon’s rumored grocery concept first reported by The Wall Street Journal, which he believes will function similarly to Fresh Hippo in China.

Beyond Alibaba and Amazon, another potential disruptor is Santa Clara, Calif.-based AiFi, which has a functioning pop-up store demonstrating its frictionless checkout technology. Unlike Amazon Go, which includes countless cameras and sensors, AiFi has fewer cameras and lets AI do the heavy lifting. The system relies on preloaded 3D pictures to identify products and works through an app similar to Amazon Go to enable the experience. Taylor said the AiFi system costs approximately $20,000 for the technology, in  addition to a subscription fee to use the company’s software.

But behind these disruptors lurks a more dangerous foe: autonomous vehicles. “They will deliver pizzas before people,” Taylor said. He used Amazon’s test of a small sidewalk-bound delivery robot and the self-driving Nuro delivery vehicles from Kroger as examples of this rising trend. Automated vehicles designed to deliver goods bypass the requirement to pay a human driver, making it easier to conquer the ever-challenging last mile of delivery. They are also simpler to implement. “They’re regulated on the same level as bicycles,” said Taylor.

Launching a Counterattack

To combat the disruptors, convenience retail must become more like them, Taylor said. However, more tech is not a guarantee of success, especially if a company’s humans do not work well together. “Technology is easy,” he said. “Culture is really difficult.”

Retailers should get their leadership teams to think 10 years into the future, then work backward, when coming up with solutions to keep the business viable in the long term, Taylor said. He also cautioned that this attitude cannot simply be installed into a business through new hires. It must come naturally from within the organization. For instance, he suggested retailers send their smartest, most capable employees to learn about burgeoning trends in technology instead of hiring a computer scientist for $250,000 a year.

Retailers should not only collect as much data as possible, but also be able to effectively use that data. “Why did I sell more Snapple three days ago? You need to answer that question,” he said.

25 billion

Number of internet-of-things devices projected to be in use worldwide by 2020, according to Gartner

One relatively easy first step toward innovation is robotic process automation (RPA), Taylor said. RPA does not involve a physical robot; instead, software observes how human employees perform repetitive tasks. It then creates programs that consistently perform those tasks on a computer.

The typical RPA time to market is within a few weeks; it uses existing applications and does not impose changes on existing infrastructure. At its core, RPA can allow employees to spend less time doing menial work in the back office and more time with customers in the store.

Taylor said that retailers need to meet the changing wants and needs of consumers. He used the typical 27-year-old American as an example. “It’s all about convenience for them. They don’t care about your location,” he said. In fact, younger consumers don’t typically value brand loyalty, he said. If their retailer of choice isn’t meeting their needs, they know how to find others who will. “In the next five years, technology will continue to empower the fickle consumers.”

Herein lies the opportunity for legacy retailers. Today, convenience retail is battling through its long siege. The moat defending the castle of the industry is drying up as the gas, Cokes and smokes model becomes less viable. The walls are thinning as they are chipped away by disruptors large and small. But with the right culture and forward-looking goals—and some technological help—retailers can launch a counterattack.

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