Now let's unpack this a bit more starting first with customers. Now you might say," Well that was then, but this is now it's a whole new world." Everyone's online and the percentage of purchases made online are going through the roof. But is it? As we said earlier, more than 90 percent of all retail purchases are still made in the store. Less than 10 percent are online, although yes, that number is increasing. Another thing about customer behavior is that frankly, many people like and enjoy stores for the social interaction that it offers. My grandmother used to walk to a local grocery store every morning where she would meet other senior citizens out for a walk. Publics, gave them free coffee and they were thrilled, and sure many would buy groceries while they were there. But for customers like my grandmother, going to publics gave her exercise, social interaction, and the opportunity to source whatever grocery she needed for the cooking that she would do that day. While browsing and shopping may not be the most popular activities in my classrooms full of busy students and executives, it is a very fun and meaningful form of entertainment for many, many consumers. Now let's consider issues from the retailers' perspective. By the way, you should be aware that retailers have debated offering online grocery shopping and delivery for decades, and few to none have successfully accomplished this. I was on the faculty at MIT during the Internet boom years, which was the mid-1990s, and everyone talked about the spec then. Companies like Peapod and Webvan and other firms tried to do exactly what this grocer considered and they failed. Today, grocery ordering and delivery is still not worked out even with the COVID pandemic forcing the issue. Yes, you can order groceries online, but you may wait for days or a week before delivery happens. This is because these necessary activities and processes, or what we will refer to as channel functions in later sessions, are not skills that are in most retailers will houses. This is why we see Walmart acquiring online retailers like jet.com just so they can learn how to do this function better and catch up with the competition like Target. Bear in mind that retailers, particularly grocers, have very slim margins on their goods. They might make pennies on a can. Their profits come from the rapid turnover of large volumes of low-priced products. They don't have a lot of money to invest and they certainly don't have the time to wait around for those investments to pay off. Now, today we have a retailer with very deep pockets, Amazon, and we will see whether they can make a go of this. While the pandemic has made delivery issues front-and-center for customers, we see that even Amazon has struggled to get it right. Amazon has tried to account for all of the factors listed here by buying out whole foods, which provides a food quality assurance as part of the whole foods brand, convenient locations to deliver from, and a target market with a high willingness to pay. But one aspect that Amazon did not have was a native understanding of the delivery function. They try to work with delivery firms like UPS and FedEx and even the United States Postal Service. But ultimately they have had to vertically integrate this activity and do it themselves in order to make sure it gets done right. Vertical integration is a very, very expensive move and we will see how it works out for Amazon. If it does, it may mean that only retailers with very deep pockets will be able to catch up. If you watch the retail space you will see that Walmart is very determined to become a meaningful competitor to Amazon, and it remains to be seen if they can. Finally, it's worth remembering that being the first mover in the grocery delivery space does not always imply an advantage. Setting up an online channel is not only expensive for retailer, but it requires competencies that they don't have. If this grocer had entered the online channel space, it would have had to wait for customers to feel comfortable enough to use it in mass. It would have been the only retailer to have made these investments while the competition was investing in their stores, offering fresher foods, and convenient locations, improving their product merchandising, and investing in their in-store experiences. Importantly, the path to this conclusion was from assessing which channel benefits customers desired. This saved the company 10s of millions of dollars. Now, let's take a step back and think about what we should take away from today's session. A channel benefit analysis is clearly important for informing what our customers want in terms of how they wish to buy and ultimately can assist in guiding our resource allocation decisions and channel strategy design. However, it is a decision support tool, it's not a formula or algorithm that spits out an answer. As you and I both know, most models spit out answers based on the quality of the data you feed in. They also can be spectacularly wrong as well. However, it is the case that you will make much better decisions if you apply these ideas than if you don't. As Donald Rumsfeld once famously observed, often, "You don't know what you don't know." The goal of a channel benefit analysis is to point you in the right direction and help you figure out what you need to learn more about, and this in and of itself is enormously helpful. In many industries, companies, and situations, the baseline data are often incomplete and it is almost never perfect. But this is not an excuse to avoid using the framework or associated tools or ideas. In the real world, you do what you can with the data you have and these are tools and ideas to organize your data in the best way possible. Like most data, it will always be incomplete. But as is the case with most market research usage, our goal is not "truth" or "perfection. " But if it can help us minimize errors or support even a directional decision, then it will have been worthwhile. If you do a thoughtful analysis using these tools, you will be the competition, because it's a pretty good bet that they are not considering value creation from this perspective. In fact, I see this to be the case in many business-to-business market situations. This ability to be more informed and analytic compared to the competition will absolutely give you a leg-up on them. Don't miss an important implication of what we've said so far. That is that parody or average and even commoditized products can win over consumers given the right product and channel benefit bundle. How are consumers want to buy will often trump the product itself. This is just one more way in which firms can gain both loyalty and high margins. There's a tendency to focus on fast-moving competition like Amazon or to overreact to the latest trends in the marketplace, like show-rooming or disintermediation, big data, or even machine learning, think channel benefits instead. A channel benefit analysis can help guide your decisions about targeting customers in the appropriate channel structure. It can also help identify which channel activities and processes are needed to produce a channel benefits your customers desire. Finally, a channel benefit analysis can help you identify which channel partners to work with. Together, all of this suggests that channel benefits are concepts that can be quantified and ultimately monetized. But we need a framework for how to do that and that is exactly what we will do next. Stay tuned.
