Isegoria

Best Buy should be dead, but it’s thriving in the Age of Amazon:

There is, of course, one thing Best Buy has that Amazon doesn’t: more than 1,000 big-box stores. Joly saw the benefit of using them as showrooms — a word so fraught in retail that the company calls them showcases — for the big tech brands, Amazon included. Best Buy was among the first chains to feature Apple boutiques. In April 2013, Joly said there would be Samsung mini-shops in its 1,400 U.S. locations by June. That same month, Best Buy began adding 600 Microsoft stores-within-stores. Sony arrived in 2014. Last year, Best Buy turned over more space to Amazon and Google to better display their smart home technologies. The two are bitter rivals: Amazon doesn’t sell Google Home and offers a limited selection of Google’s Nest products. Best Buy is neutral ground.

The brands essentially pay rent to Best Buy (it’s cheaper than building stores) and either send in their own salespeople or train the blue shirts. No one at Best Buy would offer details about these partnerships. But even analyst Michael Pachter of Wedbush Securities Inc., who in almost 10 years has never recommended buying Best Buy’s stock, describes the partnerships as a phenomenal success because they ease the financial burden of operating stores while enhancing profit margins. “Best Buy is like an arms dealer,” he says. “They’re indifferent to what brand you buy as long as you buy it from them.”

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In August 2013, the company recruited Rob Bass from Target Corp. to make it more efficient and to save a couple hundred million dollars to help cover the costs of Joly’s price-matching strategy. Bass discovered quickly why customers were frustrated: Best Buy’s distribution centers typically weren’t open on weekends or holidays, and its warehouse management software was at least two decades old. The software has been updated, the supply operations extended, and two-day free delivery is standard on orders of $35 or more. In April 2016, Best Buy announced it would offer same-day delivery in a few cities for a fee. Right after that, Amazon expanded same-day delivery to some Prime customers for free. Best Buy then lowered its price, which had been as high as $20, to $5.99. This past holiday season, Best Buy expanded its same-day service to 40 cities.

Bass also turned back to the stores. He started a system that allowed them to fulfill orders via delivery and pickup. Best Buy says 70 percent of Americans live within 15 miles of one of its locations, so it’s been encouraging customers to come collect their orders. Forty percent of the time they do, which “helps my budget a lot,” Bass says. To make those pickups faster, the company is testing an “On My Way” function on its app to ensure customers don’t arrive before their TVs are retrieved from the back of the store. Since 2012 the proportion of its online revenue has more than doubled, from 7 percent of all U.S. sales to 16 percent, well above those at other big-box retailers.

As individual pieces of technology become simpler to use, connecting them gets more complicated and important for their utility. To Joly, this was a missed opportunity. “The vision I had from the beginning is for us to be to the consumer what a company like Accenture is for a business,” he says.

To one longtime employee, this was an enticing idea: an elite group of salespeople who could offer more than the Geek Squad did. Corie Barry had tried to start an advisory program in 2010 when she was a senior director without a budget. Now she’s chief financial officer.

Amazon’s Kindle Unlimited is a boon for some authors:

Industrywide, self-publishing is gaining readers as traditional publishers are losing them, according to Author Earnings, a site produced by an anonymous marketing analytics expert who calls himself Data Guy. The self-published share of paid US e-book units increased to 46.4 percent from 44.7 percent between the second quarters of 2017 and 2018, Data Guy told me in an email, while the traditionally published share of paid e-book units decreased to 43.2 percent from 45.5 percent. (His data takes into account self-published and Amazon imprint-published books, which many traditional data sources do not.)

Central to Amazon’s gambit — and authors’ pay — is Kindle Unlimited. Launched in 2014, the feature was a response to other companies that were trying to create a Netflix for books, such as Oyster, which shut down in 2015, and Scribd, which is slowly gaining acceptance from the Big Five publishing houses. Authors can choose to participate in KDP Select, which automatically puts a book into Kindle Unlimited, and which can be highly lucrative. Amazon sets aside a pot of money every month that it divvies up among KDP Select authors, based on how many of their pages have been read each month by Kindle Unlimited subscribers and readers from the Kindle Owners’ Lending Library, which allows Prime members to borrow one book a month for free. The payment ends up being a little less than half a penny per page, authors told me, but those who are read the most can also get monthly bonuses as high as $25,000. Last year, Amazon paid out more than $220 million to authors, the company told me. Regardless of participation in KDP Select, authors who self-publish on Amazon through KDP also earn a 70 percent royalty on books priced between $2.99 and $9.99, and a 35 percent royalty on books that cost more or less than that.

Kindle Unlimited works in the same way as Amazon’s other big subscription service, Prime: Just as Prime users often think of shipping as free, even though they’re paying a monthly or annual fee for it, Kindle Unlimited readers may begin to think of books as free, even though they’re paying a monthly fee, because each additional book they read in Kindle Unlimited doesn’t cost them anything extra. This can be a boon for new authors: Readers who might not be willing to pay outright for books by unknown writers will read those books on Kindle Unlimited, where they feel “free.”

“I truly believe that people would not read as many of my books were I not on Kindle Unlimited,” Samantha Christy, who decided to try writing romance novels in 2014, told me. Christy’s Amazon writing career has been so successful that it supports her four children and husband, who quit his job two years ago to manage her IT, taxes, and publishing business. Christy, who typically writes three books a year, talked to me from Hawaii, where she was vacationing with her family before they were headed to Comic-Con International in San Diego to speak on a panel about self-publishing.

Kindle Unlimited has its downsides. Amazon demands exclusivity from its KDP Select authors, meaning they can only sell their books on the Kindle Store, and not on any other digital bookstores, or even on their own websites. The payment structure means that authors who produce a lot of pages, even if they’re not particularly good pages, earn more money than authors who write succinctly. Almost since the launch of Kindle Unlimited, Amazon has been battling “book stuffers,” authors who publish hundreds of pages of content in Kindle Unlimited, some of which is gibberish, some of which tricks readers into flipping to the last page of the book, so the book will count as read and they’ll get paid. Self-publishing on Amazon’s platforms benefits authors in some genres — including romance and mystery, where readers tear through books and writing them might not take a long time — over those who spend years writing novels, or who do deeply researched nonfiction books, Mary Rasenberger, the executive director of the Author’s Guild, told me.

And authors on Kindle Unlimited have to work hard to promote themselves and attract new readers in a crowded marketplace; one, I.T. Lucas, told me she works 12-hour days, seven days a week. Part of that is writing — she has published 21 full-length novels in three years — and part is marketing. “You have to be willing to run a business at the same time,” Rasenberger said. Christy tries to answer every message she receives on Facebook, does a lot of free giveaways, and frequently holds Q&As and other events. Many authors buy ads on Amazon, effectively paying their employer to get more customers.

The structure of Kindle Unlimited also means writers need to churn out a lot of content. Since 2014, Lea Robinson and Melissa King have published more than 100 romance novels and novellas on Amazon under the pen name Alexa Riley. They told me by phone that they make the bulk of their money from payments from KDP Select as people read their backlist of titles on Kindle Unlimited. This motivates them to keep producing; the more pages they have on Kindle Unlimited, the higher the chance they’ll be a most-read author, which will win them tens of thousands of bonus dollars from Amazon. Each woman tries to write 3,000 words a day, and Alexa Riley generally publishes three books a month.

Even so, King and Robinson said that writing for Amazon doesn’t necessarily feel like more of a churn than any other job would. Each writes from about nine to five each day, and never on the weekends.They both recently left their full-time jobs (Robinson in banking, King as a CFO) to write Alexa Riley books. They have a formula — sexy men, headstrong women, a happy ending — that they and their readers both enjoy. “It is a production with us,” King said. “We don’t deviate from how we write, and we know there are key points we have to hit, and we don’t change our formula.” This formula helps them, since once people discover one book, they tend to pore over the Alexa Riley backlist on Kindle Unlimited for more of the same, which brings in more income for King and Robinson. If they publish a new book and make $10,000 a month, they estimate, just $3,000 of that income comes from sales of the new book on Amazon; the rest comes from Kindle Unlimited payments.

What Megan McArdle and her neighbors love about Trader Joe’s is not a particular product, or even the store’s subtle hippie aesthetic, but its business model:

That business model can be summed up in two things: “private label” and “low SKUs.” Private label is self-explanatory; Trader Joe’s house-brands most of its products, which means they’re cheaper (no need to pay for all those national advertising campaigns).

But maybe you already realized that. It’s the low SKUs that really offer a hidden benefit to millions of unwary shoppers. SKU is an industry acronym for a “stock-keeping unit,” a.k.a. “one product.” The average grocer carries nearly 50,000 SKUs. Trader Joe’s, by contrast, carries only about 4,000. That’s an immense difference — though you’ll only realize how immense when you think through the implications.

Real estate, for instance. The new Trader Joe’s near my house is, by the standards of a Trader Joe’s, quite roomy, with wide aisles and lovely high ceilings. But compared to the local grocery stores, it’s still compact. In a dense, urban area like Washington, that’s a big savings on rent — which can be passed on to you in lower prices.

The advantages hardly stop there. When you only have a few SKUs, all of which have to earn their place on the shelf by selling briskly, you end up with less spoilage than a normal grocery store. Given the razor-thin margins typical of the industry, spoilage can be the difference between turning a profit and running into the red. Minimizing your SKUs gives you even more room to cut the prices on the products you do sell.

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The thing about having 50,000 SKUs (or 100,000, as is typical of a Walmart) is that no employee can be familiar with more than a small fraction of them. It is not possible, in such a place, to deliver the kind of service that Trader Joe’s does. For example, the new outlet’s store captain, Rebekah Eagle, told me that the store regularly holds employee tastings to familiarize the staff with what they’re selling. A great idea, with a limited stock selection; not feasible in a conventional grocery. And since it is actually impossible for front-line workers at conventional stores to deliver Trader Joe’s-level service, it doesn’t necessarily make business sense to invest in the kind of training and retention policies that Trader Joe’s does.

The private-label branding allows Trader Joe’s to attract loyal customers with cheap prices. And the low number of SKUs allows it to generate extremely high revenue per square foot, enabling it to pay the rents even in expensively dense urban areas and to lower prices even further. It’s a pretty neat trick, if you can manage it.

Will Felps, who studies organizational behavior at the University of South Wales in Australia, secretly brought grad student Nick into his experiment, where groups were asked to construct a marketing plan for a start-up, and had him portray three negative archetypes — the Jerk (an aggressive, defiant deviant), the Slacker (a withholder of effort), and the Downer (a depressive Eeyore type):

In almost every group, his behavior reduces the quality of the group’s performance by 30 to 40 percent. The drop-off is consistent whether he plays the Jerk, the Slacker, or the Downer.

“When Nick is the Downer, everybody comes into the meeting really energized. He acts quiet and tired and at some point puts his head down on his desk,” Felps says. “And then as the time goes by, they all start to behave that way, tired and quiet and low energy. By the end, there are three others with their heads down on their desks like him, all with their arms folded.”

When Nick plays the Slacker, a similar pattern occurs. “The group quickly picks up on his vibe,” Felps says. “They get done with the project very quickly, and they do a half-assed job. What’s interesting, though, is that when you ask them about it afterward, they’re very positive on the surface. They say, ‘We did a good job, we enjoyed it.’ But it isn’t true. They’d picked up on the attitude that this project really didn’t matter, that it wasn’t worth their time or energy. I’d gone in expecting that someone in the group would get upset with the Slacker or the Downer. But nobody did. They were like, ‘Okay, if that’s how it is, then we’ll be Slackers and Downers too.’”

Peter Skillman’s design contest challenged each group to build the tallest possible structure using uncooked spaghetti, tape, string, and one marshmallow — to go on top:

The fascinating part of the experiment, however, had less to do with the task than with the participants. Some of the teams consisted of business school students. The others consisted of kindergartners.

The business students got right to work. They began talking and thinking strategically. They examined the materials. They tossed ideas back and forth and asked thoughtful, savvy questions. They generated several options, then honed the most promising ideas. It was professional, rational, and intelligent. The process resulted in a decision to pursue one particular strategy. Then they divided up the tasks and started building.

The kindergartners took a different approach. They did not strategize. They did not analyze or share experiences. They did not ask questions, propose options, or hone ideas. In fact, they barely talked at all. They stood very close to one another. Their interactions were not smooth or organized. They abruptly grabbed materials from one another and started building, following no plan or strategy. When they spoke, they spoke in short bursts: “Here! No, here!” Their entire technique might be described as trying a bunch of stuff together.

If you had to bet which of the teams would win, it would not be a difficult choice. You would bet on the business school students, because they possess the intelligence, skills, and experience to do a superior job. This is the way we normally think about group performance. We presume skilled individuals will combine to produce skilled performance in the same way we presume two plus two will combine to produce four. Your bet would be wrong. In dozens of trials, kindergartners built structures that averaged twenty-six inches tall, while business school students built structures that averaged less than ten inches.

The result is hard to absorb because it feels like an illusion. We see smart, experienced business school students, and we find it difficult to imagine that they would combine to produce a poor performance. We see unsophisticated, inexperienced kindergartners, and we find it difficult to imagine that they would combine to produce a successful performance. But this illusion, like every illusion, happens because our instincts have led us to focus on the wrong details. We focus on what we can see — individual skills. But individual skills are not what matters. What matters is the interaction.

The business school students appear to be collaborating, but in fact they are engaged in a process psychologists call status management. They are figuring out where they fit into the larger picture: Who is in charge? Is it okay to criticize someone’s idea? What are the rules here? Their interactions appear smooth, but their underlying behavior is riddled with inefficiency, hesitation, and subtle competition. Instead of focusing on the task, they are navigating their uncertainty about one another. They spend so much time managing status that they fail to grasp the essence of the problem (the marshmallow is relatively heavy, and the spaghetti is hard to secure). As a result, their first efforts often collapse, and they run out of time.

The actions of the kindergartners appear disorganized on the surface. But when you view them as a single entity, their behavior is efficient and effective. They are not competing for status. They stand shoulder to shoulder and work energetically together. They move quickly, spotting problems and offering help. They experiment, take risks, and notice outcomes, which guides them toward effective solutions.