Rundown: FTC vs. Amazon, Target store closures & changes at Peloton

0:06Hello and welcome to the Modern Retail Rundown. I'm your host, senior reporter, Gabby Barco, and this week I'm joined by Modern Retail's managing editor, Anna Hansel. Good morning, Anna. Hi, Gabby. How's it going? It's good. It's been such a whirlwind of a week, so we should get into it. I mean, I think the biggest news of the week is, of course, Amazon. That seems very inevitable, just generally. But this week in particular, there was the FTC lawsuit along with 17 states against Amazon that we will get into. And after that, we will talk about Target planning to close stores, citing theft problems increasing.

0:56And finally, we will check in on Peloton. There's been some changes in the C-suite. And of course, they do have a partnership with Lululemon that will probably fix all their problems. So first up, let's talk about Amazon. Yeah. Do you want to just give us a little bit of an overview of what the antitrust lawsuit entails? Yeah. So one thing that I think is pretty interesting with this lawsuit is that there are a lot of portions that are redacted. So that makes it a little bit tricky to give an opinion on. There are certain portions, for example, where the FTC talks about something called Project Nessie, which apparently feeds into the anti-discounting tactics that Amazon implements.

1:50But there's no details about what this project is or what it entails. So kind of more to come on that front. But I think at the heart of the issue is, again, the idea that Amazon has taken up a number of what the FTC calls anti-discounting tactics, and that ultimately that's resulted in higher prices for customers, which is why they're filing an antitrust lawsuit against Amazon. So according to an FTC press release, Amazon violates the law not because it is big, but because it engages in a course of exclusionary conduct that prevents current competitors from growing and new competitors from emerging.

2:38Um, yeah, so we can get into, uh, some of these specific programs that the FTC takes issue with, but in general, the lawsuit is about this idea that Amazon has a number of programs that make it difficult, um, for sellers to offer different prices elsewhere for competitors to take foot. And that's why they're filing this antitrust lawsuit against Amazon. With that said, we should talk about the third party seller reaction because, you know, this, of course, this is about American consumers. But because sellers are such a big component of Amazon's business model, yeah, they do kind of have a it seems like a mixed reaction to what this could mean.

3:29It is. So we have a story up on Modern Retail. One of our reporters talked to a few sellers to get their reaction. And it was kind of a mixed bag. So there were two things, I mean, more than that, but there were two things that I felt like the FTC especially took AMAT in its lawsuits. And with Amazon, they have so many different programs from sellers. It's kind of hard to keep track of all of them, but I'm going to do my best to explain them. So the first is the buy box. And so the buy box is a button on product detail pages that essentially tells people, hey, this is the preferred seller to buy from.

4:15So if you are an Amazon seller, you really want to get into the buy box. It's very crucial to your business, but, you know, Amazon has kind of a number of stipulations you have to meet in order to get into the buy box. And then there's also some implicit things that they want to see from you as well. So a significant portion of the lawsuit took aim at the buy box. It's mentioned 31 times in the 172 page complaint. And basically, one thing the FTC pointed out is that one way Amazon punishes sellers is by disqualifying a seller's offer from appearing in the buy box if it finds that the seller is offering a lower price on that item in another online store.

5:06and so it's basically a way for Amazon to tell sellers if you want to be in the buy box you need to offer us the lowest price and the FTC wrote in its complaint that for many sellers losing the buy box and even the ability to qualify for the buy box is an existential threat to their business And so a few sellers who spoke with Modern Retail said that, you know, a lot of sellers are really frustrated with the buy box. They wouldn't mind seeing Amazon make changes to it. So I think that that is one of the most interesting aspects of the lawsuit. And a lot of sellers do seem to be hoping that, hey, maybe this will result in Amazon making changes to how it calculates the buy box and make it more fair.

5:58Another portion of the FTC lawsuit took aim at Amazon's fulfillment services. So generally, if merchants want their items to be eligible for Prime, which you do at this point because a significant portion of Amazon shoppers have a Prime membership, you pretty much have to use Amazon's fulfillment services. There are some exceptions, but generally speaking, you will use Amazon's fulfillment service. And the FTC, in their lawsuit, they noted how much the prices and fees for Amazon's fulfillment service has risen over the years, essentially arguing that that is one way, right, that Amazon makes products more expensive for customers is by requiring sellers to use this fulfillment service that is getting more expensive.

6:54expensive. The problem with that is that, you know, just we've written a lot about this, like supply chain costs generally have risen. Fuel's gotten more expensive, like freight prices have been on and off. And so some of the sellers who spoke with modern retail also said that this isn't really an Amazon thing. Fulfillment prices are rising across the board. And also we like Amazon's fulfillment service better than competitors. So I think it's pretty interesting. Yeah, it's a mixed bag. Sellers see some positives from the FTC lawsuits, but they also are worried about overreach. And like in the case of the fulfillment service, they don't want that to go away.

7:38So it'll be interesting to see how it all shapes up. Yeah. Well, with that said, it seems like, you know the winning side or however you want to refer to it is um it's it's unclear i mean you know this will all hinge on whether uh i guess the states can prove that this is actually going on which like you said is maybe kind of hard to do just because amazon has yeah such a complicated uh ecosystem but with that said um with the monopoly that amazon has uh yeah lawmakers have been vying for some kind of breakdown or regulation for years now. So it's always interesting to see what will actually break the dam or I guess move the needle in this case.

8:27Yeah, I'll be interested to see what happens. I'm a little bit skeptical, honestly, that anything might happen just because these lawsuits take years to drag on. If there's a new administration, If someone new is in charge of the FTC, they might drop the lawsuit. But Amazon did make changes to its buy box in Europe after running into issues with the EU antitrust authorities. So, you know, Amazon could still potentially make changes as kind of a panacea. We'll just have to see what happens. All right. Well, next up, we are going to be talking about, I guess, retail theft, which is a topic that I think you and I have been, I don't know, kind of maybe not so much hesitant to speak about.

9:19But I am kind of cynical of what the retailers say when it comes to, you know, blaming a lot on individual theft in their stores. But this week in particular, Target says it's closing nine stores around the country due to their business being hurt and to, you know, in a quote, protect employee and customer safety. And, you know, this is just the latest example of a retailer that is citing theft as a big contributor to shrink, which is, you know, a problem that's been around for decades. That's not anything new. Right. Yeah. So thoughts? Yeah. So I think it was interesting. The Target had a very long announcement about why they are closing these stores.

10:11And, you know, we took all these steps before deciding to close the stores. But I think what it was short on is specifics on how much it was like, how much these stores were losing from theft, because it's basically this is an issue where retailers say this is a big issue, but they don't give a lot of specifics on like, oh, this is how much we're losing from theft. This is specifically what's happening. So yeah, I think it caused a lot of questions for just like, if you're just an average consumer reading about this in the news, you're like, is this really a problem? Because these stores are located in major areas like New York, San Francisco, Seattle, and Portland.

11:00Obviously, Target has other stores in those cities. So it's like, okay, why are they closing this particular store? Why can't they make it work in this store, but they can make it work in other stores. Like you said, they've pointed to employee safety and customer safety as reasons for the closures, but kind of without concrete numbers, we basically just have to take Target's word for it. Yeah. And then over the past, I guess it's been about two years since this has ramped up. We've seen Home Depot, Rite Aid, Walmart, pretty much any of the big box stores say that this is really contributing to their bottom line or hurting their bottom line, I should say.

11:43And it's become a hundred billion dollar problem, I think was the last figure they mentioned. But this week, just the timing wise, was interesting because NRF came out with a study that says theft hasn't really increased that much over the years. Maybe, I guess, coverage of it has probably been, like I've said before, pretty breathless. And that makes it maybe appear to be a lot higher than previous years. But yeah, I think the data shows that that's not really the case. But again, well, we should break it down. I think because theft is counted as part of overall shrink in retail, it is very hard for a retailer to kind of, or it's hard for us to see the breakdown of that could really mean anything.

12:34I mean, it could be like damaged goods. It could be even employee theft. It could be, yeah, just anything that is not sold. So in that case, I think it is interesting that this is still kind of making headlines. Yeah, absolutely. So like you said, kind of the difficult part of trying to gauge how much customer theft is an issue for retailers is due to the fact that they envelop it into shrink and shrink accounts for a number of different things. So shrink generally is becoming a bigger issue. I mean, Target has said it expects to lose$500 million more this year compared to last year from shrink.

13:21But yeah, shrink encompasses a number of different things. So the NRF surveys retailers annually about shrink. And one thing that is important to note is according to the NRF survey, the average rate of shrink represents about 1.6 % of sales. So yeah, I mean, to your point, Gabby, theft is increasing or losses from theft is increasing, but it's still a very small percentage of sales. So I think that kind of feeds into the fear mongering a little bit when people are like, here, oh my gosh, Target's going to lose$500 million more this year due to shrink. That's an insane number. It is a very big number, but Target also does billions of dollars in sales each year.

14:07So relatively speaking, you know, that's still a small percentage of their sales. And then the other tricky thing is that there are three things that encompass shrink. So one is theft from customers. The other is theft from employees. And then the other 27 % is just generally due to errors. So basically, the retailer lost or misplaced the merchandise. And so NRF surveyed retailers and they said about 36 % of shrink comes from customer theft. Another 29 % comes from employee theft. And then the other 27%, again, just generally comes from errors. So yeah, if shrink is increasing, it could be due to a number of factors.

14:59Retailers like Target say shrink is increasing specifically due to customer theft. But again, we just kind of have to take their word for it. We should mention, I thought this was interesting, but there's been some kind of take backs about complaints. I thought this quote was really interesting from earlier this year. Walgreens, which was, I believe, one of the earlier examples of a retailer kind of complaining about it and wanting law enforcement to step in. So earlier this year, their CFO said that maybe we cry too much and they overstated the problem. And so I think their shrink stabilized back to about 2.5 percent from 3.5 percent.

15:45So, you know, over the years. So maybe, again, that could have been really due to a lot of things, including theft. But it's, again, for us, it's hard to tell. I kind of want to ask you a little bit about this, just because it's a topic I find really fascinating. some of the solutions, I guess we should say that some of the retailers have taken, you know, the glass cases, the locked products has become kind of a prominent symbol of all of this, I guess. And so, you know, if it's such a, I don't know, I mean, if that's not helping, then it's like, well, what is the solution, you know, if they can't protect their own merchandise.

16:31Right. Yeah. Like you said, especially in New York, it's if you go into a Walgreens, a CVS, a Target, so much merchandise now is locked up behind glass cases. And so, yeah, it's interesting. Like if you look at Target's press release, they've said, you know, We've used a number of theft deterrent tactics, and basically that means locking up products behind these glass cases. And the issue with that is just that I feel like it also discourages people from buying stuff. I've done this many times. I've seen people on social media say they do this. If I go into a Target and I need to buy five things and all five of them are locked behind different cases and I have to get a different employee each time to unlock it, I'm probably not going to buy all of those five things.

17:30I might just be like, okay, these are the two biggest things I need and the rest of the stuff I'm going to order on Amazon. So I think it's going to continue to be a huge issue for retailers. They have to figure out a better way to do this. I think people are going to continue to be skeptical of how big of a problem is this if they don't give some more concrete numbers behind why this is how big of an issue this is. And if they don't find better ways to deal with this besides, I mean, essentially, they're just making they're dealing with it by making it harder for the customer. And that's not going to be good in the long run.

18:05Right. And I guess continuing to close stores doesn't seem like a feasible one either. So I think we'll probably see some kind of turning point pretty soon with this. So next up, let's talk about Peloton. There's been a lot going on, I think specifically in the last few months. Peloton, as many probably know, was one of the biggest winners during lockdowns. They did really well. It was sort of like a lifeline that was thrown to them after they went public in 2019. But this past few months, they've had a lot of shakeups due to, well, tied to, I guess you could say, declining revenue, subscribers and whatnot.

18:53So most recently, their co-founder and chief product officer, Tom Cortese, is stepping down in November. This is not the first executive shakeup last year. They also had their CEO leave. So yeah, what do you make of all of this, Ana? Yeah, I mean, to me, it means Peloton is still in trouble. That's the takeaway. Interestingly, the chief product officer will be replaced by this guy called Nick Caldwell, whose previous experience includes Google and Reddit. So I find it interesting, at least his most recent experience isn't in hardware. And I wonder if that means it's a signal that Peloton is going to focus more on content.

19:43That's just me speculating here. I don't have any hard proof about that. But of course, the biggest issue that Peloton has run into is they saw a huge level of demand during the pandemic when nobody could go to gyms. Peloton thought, this is great. This is going to last forever, or maybe not forever, but they thought it would last longer than it actually did. They responded by hiring a bunch, by producing a lot more inventory, by buying a manufacturer. And then demand really started to slow. And so Peloton has basically been trying to right size its business since then. They offloaded this manufacturing business they bought.

20:32They tried to cut manufacturing contracts because they were left with too many products, essentially. executives have left. There's been multiple rounds of layoffs. And yeah, so I don't know. I don't think necessarily things have stabilized for Peloton, but I don't know if things are still moving in the right direction. I mean, during the most recent quarter, subscriber numbers still fell. So it'll be interesting to see what happened. You know, with executive changes, it kind of takes time for the new person to come in and implement their vision. So I think it'll be still kind of a few quarters before we see like how their new chief product officer, what direction he decides to take the company in.

21:22Yep. And I think your hunch about focusing more on digital and less on hardware is probably true because around May they did rebrand into, I guess, like this sort of more than a bike company. They're really honing in and promoting their digital fitness, their app to kind of, you know, target more than just the product bike treadmill owners at home to kind of expand that customer base. So that's probably going to continue in that direction, which I guess makes sense if you're hiring software execs. And then with that, actually, this week was another step in that direction. They announced a partnership with Lululemon for the next five years.

22:13And this one is particularly interesting for those of us. We covered this space pretty heavily in 2020, where Lululemon was all in on Mirror. They paid, was it$500 million? Yes. I think, yeah, for that company. And it looks like they're, I guess, switching teams this year. Yeah. What's that about? So it feels like Peloton and Lululemon are looking to each other to help solve their problems. So with Peloton, like you said, they are trying to position themselves as more than just a bike company. And so with that, they are trying to, they also sell apparel. Um, they have, again, you can just get a subscription to their fitness app where you get access to a greater variety of workout classes beyond just the cycling class.

23:07Um, so with that, I mean, I know they've just continued to strike more deals with more types of companies. I know recently they've actually said they're going to try to target colleges more, um, and offer students access to things like discounts on their app or on apparel. And then on the flip side, it feels like Lululemon is trying to get out of that area. So they acquired Mirror in 2020 at the height of everyone buying fitness devices instead of going to the gym. And yeah, that acquisition has seemingly not worked out so great for Lululemon. They tried a few different things to get more people to buy Mirror.

23:52I know that there was a time where they displayed Mirror in certain stores. They slashed the price of the device at some point. But it seems like this is kind of an admittance from Lululemon that, yeah, this hasn't worked out. So Lululemon has said it will discontinue sales of Mirror by the end of the year. At one point, they were considering, there was a report from CNBC in April that Lululemon was trying to sell Mirror, including to other connected fitness startups like Hydro, but it appears that that didn't pan out. And I also think what's interesting is that Lululemon even is, you know, for a while they were trying to create their own workout classes too for the mirror device.

24:44And this is just a sign that they're like, it's not even worth it for us to get into online workout classes. We're just going to outsource this to Peloton. It seems like they are trying to, yeah, just kind of get rid of this line of business as quickly as possible. And yeah, that I think Lululemon will also sell some Peloton apparel, which I think is pretty interesting. Again, it's just a concession that they wanted to get out of this business as quickly as possible, that they were willing to sell apparel from another company, too, as part of a deal to offer their digital content. Yeah, I'm interested to see what kind of content Peloton will create for Lululemon.

25:32They make sense together as a brand, so it'll be interesting to see how much overlap there is with those customers. Yes, we'll see what happens. I'm sure there will be more shakeups in the digital fitness space. Yep. Well, that is our show for this week. Please rate and review us on Apple Podcasts, Spotify, or anywhere else you're listening. Also, don't forget to subscribe to the Modern Retail Podcast to hear interviews with industry leaders every Thursday. And of course, come back on Saturdays for the Modern Retail Rundown. Thank you for listening. Thank you.