Alice.com, a shopping website supported by makers of packaged goods, came into being in beta a few days ago. The idea is that you order brand-name consumer staples–from pet food to soap to cosmetics to batteries, pay Wal-Mart-like prices and your purchases are sent directly to you. Shipping is free.
Alice can track your product usage, remind you when she thinks you may be running out, offer you coupons, introduce you to new offerings, gain your trust by encouraging shopping-related networking. The one thing you won’t see from Alice is house brands. From the consumer staples’ manufacturers’ point of view, the whole point of Alice is to leapfrog over the supermarket/discount store and deal directly with the product user. That way, the shopper may never enter the staples part of the store, and thus may never see the signs, the displays and the other forms of in-store advertising that steer the consumer away from the name brands to the cheaper store brands.
In a lot of ways, this is the ideal time for something like Alice to start.
Certainly the national package delivery services have lots of excess capacity. The packaged goods makers are suffering severely from consumers’ trading down to store brands (see my post on trading down). And since Alice is supposed to be self-supporting, that is, to not require any outlays by the packaged goods makers, they don’t see that they have anything to lose.
You might think that the staples manufacturers risk angering the supermarkets by doing this. That’s probably true. But supermarkets are the ones who are putting store brands on the shelves right next to the national brands and highlighting both the product similarities and the price differences. And they’re the ones who have announced that they want to take the opportunity recession presents to increase the percentage of store brands they sell–which is relatively low by world standards. So what have they got to lose? In addition, there’s another big issue looming over the manufacturers that they think will squeeze their profits further.
Remember RFID tags? They’re still on the way, although perhaps delayed a bit by the recession. The idea, articulated some years ago by Wal-Mart, is that eventually every item on the grocery shelves will have a small, paper-thin Radio Frequency ID tag on it. The tag would not only act as a theft deterrent but also provide lots of inventory information about the product that would be recorded at checkout.
At this point, RFID tags are only put on crates or pallets of merchandise. But they’re already providing valuable information that is saving money by tightening up the flow of goods through Wal-Mart’s distribution system and reducing out-of-stock merchandise issues.
Eventually, the idea is to have RFID tags not just on boxes or pallets but on each item of merchandise. One benefit would be further inventory control. Wal-Mart or the supermarket could just pilot a recording device down each aisle and get an accurate account of everything that’s on all the shelves. This information could make further supply chain and out-of-stock savings. Of course, somewhat similar information is now available from bar code scanning at checkout. So, why would manufacturers be worried? Two reasons:
1. RFID tags allow tracking of each individual item from the manufacturer’s warehouse to the supermarket distribution center, to an individual store, and to the point where a consumer puts it in a shopping cart and presents it at checkout. So they are potentially an important means of identifying and stopping losses from shoplifting or employee theft.
They will also permit the store to analyze in detail shelf by shelf and display by display, what merchandise sales are. This would allow stores to fine-tune the fees stores charge suppliers for placing their merchandise in favorable locations on the shelves or in end-cap or other displays. In a 2003 study, the Federal Trade Commission investigating supermarket “slotting” fees paid to get new products on the shelves found that supermarket chains were unable to provide records of how much these fees were. To me, this implies that the amounts retailers charge staples manufacturers to in effect “rent” shelf space are much higher than the retailers care to admit. With better data on the profits from in-store locations, I can’t imagine that these charges will go down.
2. Retailers have talked about RFID enabling a “zero inventory” balance sheet for them. That is to say, because the tags allow each item to be tracked to the checkout counter, retailers will argue that they should only accept legal ownership of the merchandise at the point of sale. This is, of itself, an accounting issue, not an economic one. But manufacturers fear the retailers will try to shift the cost of financing inventories back to them.
A related issue is shrinkage, the difference between what the manufacturer delivers to the retailer and what the retailer sells + what’s left in inventory. Shrinkage includes spoilage of perishables and lost or broken merchandise, but is mainly loss through shoplifting and employee theft. Manufacturers also worry that if they agree to own the merchandise until checkout–and what choice do they have?–they will find themselves responsible for more of the costs of shrinkage.
Will Alice work?
It’s way too soon to tell. But it deserves watching carefully.
Alice.com is being run by two successful veteran internet executives. The site itself appears to me to be well thought out, deftly constructed and to have considerable depth.
The staples manufacturers have reasons to really want this to work. At the very worst, it gives them a negotiating tool to use in speaking with retailers.
Americans are now accustomed to ordering all sorts of merchandise over the internet, including groceries.
The target market is probably not the Wal-Mart customer, but the supermarket customer, who may value the convenience of home delivery + a brand name at a lower price as a better bargain than picking up a house brand at a supermarket.
Effect on consumer staples companies
My preliminary guess is that the companies in the aggregate will have higher revenues at somewhat lower margins than they would otherwise, if Alice is successful. That’s a lot better than the alternative or losing unit volume, and therefore revenues, with the possibility of eroding margins as well.