00:00welcome to the a 16z podcast I'm Michael
00:02Copeland and this is the e-commerce
00:04edition I know everyone has shopping on
00:07their minds and no better person to talk
00:09about this then Jeff Jordan General
00:11Partner here at Andreessen Horowitz Jeff
00:13welcome thanks very much Michael
00:15so I want to dig into this and you you
00:17raised this really interesting point and
00:20this this observation it's been coming
00:23for a couple of years now but especially
00:24last holiday shopping season that you
00:27know there's the sort of expectations of
00:29all of us out there and then there's the
00:31realities you know of in the logistics
00:34kind of sense of meeting those
00:35expectations so describe for us a little
00:38bit what you mean and and you just grab
00:40it as a collision between expectation
00:42and reality but so describe that for us
00:43so it's a high quality problem for
00:45e-commerce companies to have but you
00:47know first ecommerce continues to grow
00:50and gain share so there's more volume
00:52being done at at the same time the
00:55Amazon ization of e-commerce is
00:58increased consumer expectations on if I
01:00order today it's here tomorrow right
01:02and the real collision came last year on
01:04the you know right before Christmas
01:06because everyone said okay on the
01:08December 23rd I can place orders and
01:10expect and get them on the 24th and I'm
01:13a hero on Christmas and everyone placed
01:16those orders and it just flat-out
01:18overwhelmed yeah carrier see a UPS a
01:21USPS they just they they couldn't handle
01:25the flow and they and they many cases
01:27you know failed to get the package there
01:29and you know the day after Christmas
01:31stories are you know you know failure
01:33UPS failure e-commerce failure
01:36everything and it was a haiku it was a
01:37problem that that RuPt it out of a high
01:40quality you know issue which is the
01:42share gain is the share tsunami is
01:44getting so big that it overwhelmed the
01:46infrastructure right so from hero to
01:48goat unfortunately I guess so how did we
01:53get there I mean you mentioned Amazon is
01:55that Amazon's kind of you know raising
01:57the bar for everyone or is there
01:59something else in combination with that
02:01yeah I mean I think Amazon is raising
02:03the bar for everyone yeah they keep
02:04improving the service that they that is
02:06just a core expectation you know a free
02:08delivery same day delivery free return
02:11just yeah they just keep making their
02:13customers work better and they have the
02:15scale to be able to invest behind great
02:17customer support so if you're an
02:19e-commerce company and you know you it's
02:22it's better service fast shipping is
02:25getting to be table stakes for more
02:27concepts it was funny Zulily which is a
02:30flash sales business does not do
02:32immediate shipping and they take like
02:34ten days and you know a number of Wall
02:37Street analysts said you know that can't
02:39work because you know the consumer
02:41expects it in his Raley's case they're
02:43offering such a great value and you know
02:46in such a great merchandise selection
02:48that mom is willing to wait and if she
02:50needs it tomorrow she know she shouldn't
02:51buy it on Zulily but it's funny everyone
02:53else is in the free return next day
02:56shipping and all that hot so I mean the
02:59Zulily example makes between that as
03:01long as you are clear about you know
03:02setting expectations on your side and
03:04you and delivering a value prop even if
03:06you're competing directly with Amazon
03:07you know you're selling the same goods
03:08but we ship them a week later and you
03:14need to differentiate a value
03:16proposition so yeah I want to get into
03:17how to compete with Amazon a little bit
03:18but let's remind everyone for starters
03:21both in on the online side but also in
03:24physical retail the holiday shopping
03:27accounts for what and insert ballpark
03:29terms you know in for physical retailers
03:32it's it's close to all their profits I
03:35mean it's called Black Friday because
03:36it's when they the retailer went from
03:39being in the red to being in the black
03:40you know turning a profit so you know
03:42and I was at the Disney Store I think
03:43was over 40 percent of sales happened in
03:46the fourth quarter but you know it's and
03:48but then you know given all the fixed
03:51costs in retail you know that that over
03:54delivery of sales just gushes into
03:56profit so it's it really is the the is
03:58where most retailers particularly anyone
04:01who's involved and proves through
04:03gifting makes all their money right so
04:05let's go back to this sort of collision
04:07idea what are both shippers and and
04:11companies sort of what are you observing
04:14them doing to forestall kind of those
04:16tragedies again this year I mean they're
04:18trying to get out in front of it and so
04:20the there's story in the newspaper a
04:22couple weeks ago about you
04:23PS and USPS proactively going to the
04:26companies and saying how much last day
04:29shipping do you want to basically
04:30reserve and by the way that's all you're
04:32gonna get so you have to and then
04:34they're trying to optimize their system
04:37to be able to scale and deliver that
04:39which means massive hiring of seasonal
04:41workers and and things along those lines
04:43but but they're trying to you know get
04:46in front of it such that you know that
04:47the ex pay you know if Christmas is over
04:51all is up 12% online or something like
04:53that that last day could be up 25
04:56percent or 50 percent because of the
04:58combination of share shift and
05:00expectation shift and so they're trying
05:02to get out in front of it and work with
05:04their e-commerce companies to say don't
05:06do it I mean when I was at eBay we were
05:08ecstatic if we you know people would
05:10order for Christmas by December 10th
05:12right you know because then our
05:13community you know we kind of say okay
05:14we should stop promoting you know the
05:16fact that you can do Christmas gifts two
05:19weeks out uh-huh and now it's you know
05:21they're the company's on the 23rd we're
05:23saying we can get it to you we can get
05:24it to you yeah a different world and it
05:26and it's interesting that you know in in
05:28some situations you can certainly but
05:31not when everybody on and their mother
05:32is doing the same thing
05:34everyone does all their shopping on one
05:36day you know just you'd but you'd build
05:37your entire supply chain for that
05:39massive peak and that's just not
05:41sustainable so that gets to a question
05:43of forecasting and do you think you know
05:46e-commerce companies and physical
05:47retailers and and sort of the
05:49combination that you have enough
05:50visibility to really make those calls
05:53when UPS comes knocking and says look
05:55this is all you get and and USPS the
05:58same thing is it that fine-tuned yet or
06:01is there something more information that
06:03we could use you know it's they're
06:05unknowns in a couple unknowns is is
06:07gonna be a good holiday season or not
06:09that the calendar changes I used to be
06:11CFO of the Disney Store and we would
06:13have a daily forecast of for the holiday
06:17we had if we also had a pool going who
06:18is gonna be closest down to every day
06:22based on how many days between
06:23Thanksgiving and Christmas you know
06:26prior your weather patterns you're
06:28trying to normalize for blizzards and
06:30things like that so I mean it there's an
06:31enormous amount of effort that goes into
06:33it that said that then there's no
06:35like you know how many consumers will
06:37wait to the last minute this year
06:38because they've been conditioned that
06:39they can write do you I mean I don't
06:42want to put you on the spot but I will
06:43put you on the spot I mean given that
06:44sort of long experience that you have do
06:46you have any sort of spidey sense for
06:48how this shopping season might go
06:51the only spidey sense is the macro
06:53spidey sense is that the e-commerce guys
06:55are going to have it you know joyous you
06:58know Christmas with lots you know
07:00continued share gains and can you growth
07:02and the mall based retailers are are
07:04gonna have another tough sell holiday
07:07season I mean you you look at the macros
07:08and in physical retail and they're just
07:10dismal and gloomy yeah we were talking a
07:13little bit about mall based retailers I
07:14mean what you know what are we actually
07:16starting to see when you walk into a
07:17mall that are you know manifestations of
07:20that macro problem versus a vacancies I
07:24mean you know there's something like a
07:25quarter of malls have over 30% of their
07:28storefronts vacant when you walk into a
07:30mall like that you feel like you've
07:32walked into a ghost town I mean just
07:34it's just it's they're just dying a slow
07:36death I I tweeted the blog done this a
07:39while back but my favorite quote from
07:41the one of the REITs the the real estate
07:43trust that does a retail space was we're
07:46not over built were under demolished and
07:48then frankly those 25% of malls just
07:51need to go away and they were always
07:53soon you know some are being repurposed
07:54and other other other you know areas and
07:59I've seen some photo series where this
08:01guy goes into basically vacant models
08:03and does he's like they're like ghost
08:04towns in malls calm it's eerie and yet
08:09like just fascinating I mean the whole
08:11subculture I mean they they call they
08:13call the storefront that used to have
08:15this the store sign but now the signs
08:17been taken down because it's out of
08:19business I call it label scars that
08:22sounds like more of a Halloween story so
08:25when you look at online versus physical
08:27what are some trends that you're seeing
08:29you know through the through the entire
08:32year is physical retail responding in
08:36some ways that makes sense is there a
08:37hybrid model that seems to be working
08:39you know the the the buzzword right now
08:42is omni-channel you know we're we have
08:46website and we can we have advantages in
08:49within the having both of those because
08:50you can order online return it at the
08:52store can order online pick up in the
08:54store is the saying goes I'm most III
08:57think most of that is hyperbole I think
09:00most of the retailers arming their store
09:04base open get incurring the additional
09:07costs of having an online store and
09:09they're still not online presence and
09:11they're still not growing so
09:12omni-channel there means okay I'm going
09:14to take my cost uncompetitive physical
09:17business and layer in additional cost
09:18over it and not change it end up with
09:21more costs in the same amount of sales
09:23and you know that just doesn't end well
09:25there are so you're seeing trends some
09:28retailers are embracing reality I think
09:31you know staples is I'm right now up toe
09:33something like forty percent online and
09:35they're starting to close stores pretty
09:37furiously right because you know they
09:40understand that you know if you you have
09:42your store cost base and your online
09:43cost base you're less competitive than a
09:46pure play office supply store so as
09:50they're successfully hollowing out the
09:52sales in their store through online
09:54purchases they're closing stores and
09:56that that that is a rational behavior
09:58very few retailers are doing it at any
10:01kind of scale to the scale that they
10:02need to do it to truly kind of leverage
10:05their physical presence into a really
10:07strong and profitable online presence
10:10and and online the trends are I mean and
10:12when you step back and actually look at
10:13the overall revenue figures online is
10:15still a relatively small you know
10:17percentage of overall sales and yet it's
10:20growing like men yeah it's growing
10:22really strongly and the I mean I think
10:23the overall average is something like 8
10:25or nine percent of retail in the u.s.
10:28now happens online but you layer below
10:30that things get really interesting
10:31because it you know grocery and personal
10:34care the two largest categories are
10:35included in that and they're largely not
10:37online very much although with instacart
10:40we hope one of them goes online very
10:41quickly but then you get into what I
10:44call especially retail categories
10:46apparel Home Media it's well they they
10:51are growing and are sizable so you know
10:53some of those categories are already
10:5420-25 percent all of them are in the
10:57and so you know the the size of the
11:00total market form in most of those
11:02categories isn't growing that strong to
11:04the US economy isn't growing that
11:05strongly it's about the same now as it
11:07was at before the 2008-2009 financial
11:11statement but this portion of the pie
11:13that's taken by online has exploded
11:15which means the remaining pie available
11:18to the rest of retailers is shrinking
11:20and so you're seeing that to take kids
11:22apparel they're called the three A's
11:23Abercrombie American Eagle I forgot my
11:26third a they're just getting crushed cuz
11:29you know teenagers are ordering online
11:31maniacally and right there the amount
11:33left for them in malls is just is just
11:36shriveling up so is the holiday season
11:39even though it accounts for sort of the
11:40majority of profits is it an anomaly in
11:42terms of like us rushing out and walking
11:45the streets and going to stores or does
11:47that not even happen as much as we think
11:49it does it's just I mean it's it's
11:50happening less you know less and less
11:52you know more and more people are
11:54shopping online and for the holidays um
11:56and you're just seeing you're seeing
11:57tangible manifestation they're talking
11:59about traffic declines where it really
12:00came home to me last Christmas was a
12:02Starbucks in their fourth-quarter
12:04earnings call came in late on the
12:06revenue line and they blame the fact
12:08that there are stores in malls
12:10experienced declining year over year
12:12foot traffic and your people are in
12:15those in the stores there's a shopping
12:16online right so fewer people pounding
12:18the pavement for last-minute gifts or
12:19whatever and guzzling whatever event a
12:22lot is yeah yeah you know you're getting
12:24for second third order effects who would
12:27have thought no and you know Starbucks
12:28is vulnerable to the the surge in
12:31e-commerce let's get to the biggest
12:33player in the e-commerce firmament
12:36Amazon you have written and talked and a
12:39lot about how to compete with Amazon
12:41Amazon always seems to sort of do
12:44something every year to like distance
12:46itself even further I don't know if we
12:48have seen what that is this holiday
12:49season yet but why does Amazon so good
12:52at and then how do you advise you know
12:55some of your companies and and just
12:57retailers in general on how to compete
13:01I mean Amazon is that at a scale that
13:03it's kind of hard to fathom relative to
13:07the rest of the e-commerce world I mean
13:08I've done some back of the envelope
13:11Amazon if you take their first party
13:13business and their third party business
13:14and normalize it for consumer sales they
13:16represent about one in five dollars
13:18spent on the Internet
13:20interesting the eBay also represents
13:23about one in five dollars spent on the
13:25internet they're their sellers in
13:26aggregate that means the entire rest of
13:28the every other e-commerce company and
13:31physical company is fighting for that
13:3260% Amazon's bigger than the next 15
13:36players or some number like that I put
13:38it in a blog a little while ago so they
13:40have such scale and they're just
13:42ruthless at leveraging that scale in to
13:44lower and lower costs that they
13:46translate into better and better
13:47customer experience in terms of lower
13:49costs as well as you know higher quality
13:52service that I have you know free
13:54shipping overnight shipping that you
13:56know they're just brutal to compete with
13:58so I mean in that sense that we talked
13:59about this collision as Amazon immune to
14:02that at some level just because their
14:04own infrastructure is so resilient and
14:06massive for that matter I think they
14:08would like to make themselves more
14:09immune to it I've got a thesis that they
14:12will soon be I think they are already
14:14entering the shipping market
14:16cherry-picking the best the the the the
14:20low the lowest cost shipments they are
14:22start trying to do themselves
14:24increasingly and just leave ups with the
14:27higher cost shipments which is a very
14:29rational thing to do there's a cherry
14:31pick off but um their Amazon trucks
14:33running around Amazon fresh now is you
14:36know those trucks are constantly in the
14:38city I don't think it's a far reach to
14:40expect to see you know non grocery Goods
14:43starting to run around on the Amazon
14:45truck but you so you talk about this is
14:46interesting you talk about high cost
14:48sort of shipping addresses versus lower
14:51cost and Amazon is keeping the lower
14:53cost are the easier ones for itself
14:54what's the difference I thought an
14:56address was an address yeah you know
14:58it's a it's all does a density play so
15:01if you know when you're in a city a
15:03truck can go and within you know X
15:05blocks it can you know deliver and it's
15:08and credit you know they're just you
15:09know the delivery guys literally walking
15:10from door to door to door you know you
15:12see him in our office complex he's right
15:14he's got the rolling cart with the pile
15:16of boxes half of which are Amazon boxes
15:18now you go out into into the suburbs or
15:21up in the hills or take it to quarks in
15:24get you know to deliver you know the the
15:27dairy farmers in wisconsin rural
15:29Wisconsin's package you're not going to
15:31be anywhere near as efficient and what's
15:33happening the overall mix at UPS is it's
15:36because of the growth in e-commerce it's
15:38going more and what's being skewed more
15:41and more towards those more expensive
15:42residential deliveries relative to
15:44business deliveries right and you know
15:46that they've got a they've got concerted
15:48efforts to reduce their costs materially
15:52to in order to maintain their
15:54competitiveness in costs as well as
15:56their profit margins and so in this
15:58trend toward you know same day same hour
16:01delivery that's just gonna get harder
16:04and harder to do yeah did you know and
16:06it they're scale advantages to that - I
16:08mean I blind UPS is USPS is you know
16:11been having annoying up and running a
16:13massive loss for many many many years I
16:16mean for me the best outcome is either
16:18one of two people buys it and basically
16:20privatizes it UPS or Amazon so it's
16:23yelling because I think Amazon you know
16:25if you're one in five retail dollar
16:27already and you're gaining share you
16:30know you you know you you can
16:32efficiently start thinking about
16:33shipping options right and you also will
16:35need to help at someone yeah at some
16:37point you overwhelm everyone else yeah
16:39if you have the ability to do it you
16:40don't you're gonna differentiate
16:41yourself and they have the scale to have
16:43the ability weight but I thought all of
16:45this was gonna happen by drones yeah
16:48don't get me there so we're not gonna
16:52see drones delivering holiday gifts not
16:54this year I mean it's it's actually it's
16:56a serious effort and you know there were
16:58companies well before Amazon's
17:00announcement on 60 minutes you know
17:02running around with the business plan
17:04raising money for that very use case
17:06right I mean it's an intriguing use case
17:08in the right things so I mean it for me
17:12it's not absurd at all okay so let's get
17:14back to competing with Amazon you know
17:16Amazon's got all this scale we know what
17:17they sort of are up against and the
17:19advantage they have given that what do
17:22you tell companies or and when you think
17:24about it what are ways to to go after
17:27you you just have to you you would have
17:30avoid doing what it was selling the same
17:33merchandise that they sell in some form
17:35so there are a lot of strategies to be
17:37you know a Zulily and and fab aggregated
17:40a long tail of designers who national
17:43distribution most of the goods they sell
17:45are not on amazon and if they are on
17:48amazon they're not there they're
17:49typically more impulse purchases they're
17:52not the kind of things you search for
17:53right for me Amazon's a search engine
17:55you can build your own product you know
17:57we have a couple investments julep and
18:00Walker & Co in beauty and personal care
18:03for people of color respectively where
18:06they're building products that they
18:07elect not to sell to Amazon because they
18:09control the distribution of their own
18:11product that avoids head-to-head price
18:13comparison I'm you can go in categories
18:15where Amazon isn't particularly strong
18:16they in spite of a lot of efforts
18:18they're not that they're good they're
18:19really strong in hard goods and and you
18:22know mass mass marketed UPC code type
18:25things they're not that good in soft
18:27goods and that's a whole big slice of
18:29retail and then you can do alternative
18:32distribution methods you know things you
18:34know monthly subscriptions boxes you
18:37know the personalized you know offerings
18:41to people you know like like stitch fix
18:44or trunk club do right so you get a
18:47monthly or weekly or whatever selection
18:49of curated things yeah so that you're
18:51playing convenience you're playing
18:52duration you know there's a number of
18:54ways you're doing but again you're
18:56desperately avoiding you know the you
18:58know the huge elephant feet that come
19:00down if you sell what Amazon so right
19:02let's shift gears a little bit to
19:04payment we're all waiting to see how now
19:06the iPhone six out there how Apple pay
19:11who does that help from your perspective
19:13and how how much of a change is it going
19:15to be in the retail landscape I mean I
19:17the person it helps is I mean it helps a
19:19lot of people helped Apple clearly think
19:21so anything that doesn't help yeah yeah
19:23they're good for that it helps the
19:25credit card industry
19:27I mean basically for me the this whole
19:29innovation is just another form factor
19:31for credit cards at this point um you
19:33know at one point the credit card
19:34companies we're trying to get you to do
19:36these little teeny credit cards that you
19:38put on your keychain and then you know
19:39they're all different form factors but
19:41this this is still a overlay leveraging
19:44the entire credit card transactional you
19:46know the rails they're called as a
19:48result essentially it's a small
19:50on top of what's already a huge tax on
19:53payment so I mean so a credit card
19:54payment you'll run something like two
19:57and a half to three percent of the cost
20:00of credit cards run to two and a half
20:01three percent of sales for different
20:03merchants this will just raise that
20:05number because apples now gonna take a
20:07big on top of what the credit cards
20:09already take right you know and a lot of
20:10people thinks the merchants pay that I
20:12believe that consumer pays that yeah
20:14just because the merchants pass on the
20:16cause you know those costs you know for
20:18their profit margin so I think it helps
20:20them but I don't see it as a huge
20:22payment innovation it's a it's a it's a
20:25new form factor on top of credit cards
20:27and but give an apple scaler we have to
20:29see actually people using it yeah then
20:31that's the interesting thing it's
20:33probably not a huge technology
20:35innovation it's a pretty good exhibit of
20:38their business power and the power of
20:40the network where banks look at this and
20:42goes we you know apples doing it it
20:45could explode we need to support it so
20:47they lined up to support it really quick
20:49plus it reinforces and supports their
20:51credit card business so at this point
20:53it's not a threat at all and then you
20:55know a lot of retailers looked at it and
20:56go oh my god if they're all these
20:58iPhones and we don't accept it we might
20:59lose share so the the respect and almost
21:03fear of Apple led everyone to say we
21:06can't ignore it we have to support it
21:08unless they are working to support a
21:11competing standards yeah you know in my
21:14mind it seems to me one of those things
21:16it's for physical retail right like you
21:17whip out your phone and like pay with it
21:19so it may help physical retail is more
21:21than online but it doesn't sound to me
21:23like you think it's a big game changer I
21:25mean it could work all its gonna do is
21:27you know continue the move towards
21:30electronic payments with you both credit
21:32and debit gaining share as a percent of
21:34total payments and I agree with that
21:35statement I think it's much more of a in
21:37physical retail innovation than an
21:39online right innovation that said I will
21:42tell you I think the credit card is a
21:45pretty good customer experience you know
21:47at physical retail you take it out of
21:48your wallet you swipe it and you sign
21:50something and ID you get credit you get
21:52points you get you know all these other
21:53things taking your phone out needing to
21:56you know do your security thing you know
21:58just if it's not that much better of an
22:01experience from my purse
22:03but yeah that's so well but the ultimate
22:05test isn't with the consumer well Jeff I
22:09want to thank you so much I you know it
22:12sounds like we shouldn't wait till the
22:1323rd to do our shopping and UPS would be
22:15headed 22nd through the top early this
22:19year shop on the 22nd yeah well you
22:22heard it then and that's that's a wrap
22:25for us thanks Jeff thanks Michael much
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