Reinventing the Retail Experience — Ron Johnson, CEO Enjoy

The Industrialist’s Dilemma — January 14, 2016

The first week of class culminated in Patrick Collison’s interesting discussion of the role Stripe could play in expanding the market for digital payments; something that is good for many of the biggest players in the industry. In the second session, the contrast could not have been more stark.

We were privileged to be joined by Ron Johnson, the CEO of Enjoy, architect of Apple’s rise to retail success, and former CEO of JC Penney. In retail, Ron is a legend. But more importantly for the students in the class, Ron has a rare combination of someone versed in operations within the world of fast growth disruptors (Enjoy and Apple) as well as incumbent organizations (JC Penney and Target).

Enjoy, his new venture, is taking advantage of his vast understanding of the retail and consumer electronics landscape to deliver the experiences that customers want without the costs that are a byproduct of the Industrial era of retail.

The conversation with Ron spanned everything from Enjoy to the challenges facing existing retail chains. While it would be impossible to boil it down completely, these were some of the most important observations…

The Burden of Fixed Assets

If you are not familiar with Enjoy, Ron probably wouldn’t blame you. The company is less than 2-years old and currently operating only in San Francisco and New York. But the promise of Enjoy is very real. As Ron would describe it, his team is re-imagining the shopping experience for a digital age. In an era where setting up a smart home device, training someone to fly a drone, or configuring your iPhone can be the difference between a returned product and a happy customer, retailers need to be more service and solution oriented towards their customers. Enjoy does just that — and only that — by sending someone to your home to both deliver and configure a purchased product. The cost they save by not having stores allows them to offer this service for free to their customers and has helped them create a set of wonderful buying experiences for thousands of customers.

This idea of adding a service layer to the retail business is not new. With its genius bar Apple did this for technical support, with personal shoppers Nordstrom did this for purchasing, and with their unlimited service offerings, high-end jewelers have done this as well. It’s an attempt to de-commoditize a commodity product.

However, Ron is convinced that existing companies won’t be able to make this switch. Why? Because they’re trying to squeeze incremental profitability out of their fixed assets. While Geek Squad is a valuable service, the attempt to bundle Geek Squad with Best Buy retail saddles the service with an existing and sub-optimized cost structure. And it is not easy for the executives at Best Buy to separate the two — especially when Best Buy retail has such enormous fixed costs.

It is not intrinsic to the incumbents’ positions that they succumb to this behavior. They could launch competitive services to Enjoy. But this is highly unlikely because they are much more focused on investing to drive marginal profitability from their existing assets, not creating value from the ground up. Just maintaining inventory tracking systems, renovating decade old stores, and ensuring they can keep taking payments at the counter requires billions of dollars and takes capital away from new potential customer solutions. When most executives get down the list of potential investments to the innovative projects that might cannibalize (as opposed to support their existing operations), most leaders in incumbent organizations balk at moving forward.

This is the big advantage disruptors have in this market. And it’s also indicative of the mindset change that CEOs of large industrial organizations need to have in order to stay competitive in the 21st century.

Our Fireside Chat with Ron

The Middleman Tax

The second big takeaway from Ron’s discussion was about the “Middleman Tax.” In today’s age, great brands can go direct to customers. This is particularly true in markets like Enjoy’s (high-end, connected consumer electronics), where the role and value of the retailer is actually somewhat unclear. A user typically knows that he/she would like a Sonos speaker before going to a store to make a purchase. People often experience great brands through friends and colleagues who already own these products. Customers do their research online ahead of time. And the retail sale typically boils down to a simple transaction. In these types of markets, the margin that retailers extract, in essence, becomes a tax of distribution. For the brands that command enough mind-share with consumers to go direct (brands such as Sonos, DJI, and Apple) it makes sense to cut these middlemen out of the chain and offer a superior buying experience to customers where possible.

That’s where Enjoy comes into the picture.

But as Ron explained the concept, it reminded us of something Patrick had mentioned in our first session. Namely, that in the era of the internet, there were a group of independent sales organizations in the payments market that had become obsolete. Like retail from a bygone era, these ISOs were charged with just getting products or services to customers. You needed a lot of people to distribute, manage operations, and educate the entire value chain to deliver a complete solution. When the internet emerged, getting information and sending an order became incredibly easy. With it, the companies that were built with the value proposition of simply distributing things were often obsoleted. Unless a CEO turns her business into the one supply chain to rule them all, it is unlikely that only being a distribution channel will be anything more than a tax on consumers. Which means that, over time, margins will decay and price competition will become the most important variable impacting business.

We’re fairly certain this will be a recurring theme in the course.

Stop Emulating and Start Differentiating

In 1979, Michael Porter started writing about competitive strategy. The best firms, as he claimed, were the ones that could deliver a complementary set of activities that reinforced a value proposition to customers. For example, Southwest Airlines could deliver low cost and convenient tickets, in part, because they had chosen to eliminate classes of cabins — making it much simpler to re-ticket people quickly on other flights. For Ron, the strategy question should be top of mind for any retailer from the industrial age — it wasn’t just enough to emulate what eCommerce vendors were doing, they needed to be thinking about the complementary set of activities that would leverage the stores and the brands to differentiate.

Ron pointed out that most of today’s large retailers are investing in massive online channels that try to deliver enormous selection, low prices, and speedy delivery; Amazon’s bread and butter. The problem is that when people want to get something random delivered within two days, the brand that comes to mind is Amazon. And through years of performance with Amazon Prime, that’s who people naturally think of using.

Conversely, when consumers think of Target, they think of its 1,805 stores. Each of those stores was chosen thoughtfully to deliver a mixture of convenience to customers, capacity for products, and quality in the shopping experience. Too many industrial era retailers are forgetting that they own an asset base that’s fundamentally different — and advantaged — for certain jobs that arise in a consumer’s life. You might love convenience from Amazon, but when you’re dashing to the store to pick up toothpaste, two days might not be fast enough.

This point definitely resonated with us as Clayton Christensen and I wrote an article in 2012 on the subject.