In the movie Good Will Hunting, Matt Damon, who plays a handsome MIT janitor moonlighting as a math savant (can one say, “Hollywood career vehicle”?), woos a young lady (played by the actress Minnie Driver) by outmaneuvering a few competing, obnoxious cads. When Damon’s character gets the girl's telephone number, he proudly shows it to the other guys and boasts, with his South Boston access, “How 'bout ‘dem apples?” I imagine Tim Cook imitating this film’s scene in front of Jeff Bezos and the Google founders when he reviews Apple Services' revenue. Apple Services, which includes the app store, music, TV, video games, AppleCare, and other subscriptions, reported about $70b in revenue last year. Apple Services may one day generate more money than the hardware division (Source: https://buildd.co/product/apple-services).
A key part of Apple Services is the app store. Just about every company is forced to walk through Apple’s app store ‘door’ and offer an app there. Is Apple a monopoly or is Apple providing a great service? Answer: yes. I’d like to focus on the latter and how it relates to retail. I was thinking about insights I could glean from the recent news that Ace Hardware was closing The Grommet, an online marketplace it acquired in 2017, and Macy’s was downscaling Story, an in-store shopping concept it bought in 2018.
From the start, I didn’t like Macy’s purchase of Story. I’d been to Story's one store in Chelsea, and its ’strategy’ was to decorate the store with a new concept for a few months. For example, February and March were travel themes and the store sold beach bags, sandals, and Weber grills. (Story even contacted me about carrying Air Wear travel t-shirts for that theme. They wanted to sell them on consignment. That’s a horrible model for clothing as clothing gets soiled by people trying it on and would make returns to me a nightmare.) I feel Story was not a winner because:
Story is not digital first. (Many of the most valuable companies are digital first.)
Story had no networking effect. (Many of the most valuable companies have a network effect at play.)
Story customer acquisition costs were the same as Macy’s—aka horrible. Story was just Macy's with a new theme each quarter. (I feel whoever green-lit the Story acquisition should be fired.)
When I’m looking to invest in a company, I look for:
Digital first. Digital should make up a large portion of the business’s offering.
A network effect. The more members that join, the more powerful it becomes. (Also known as economies of scale.)
Customers do the work for the business. Customers invite their friends to join the business (the business doesn’t have to do all the marketing and advertising). I believe each business should have an invite button--or the business modal is broken. Customers load content and can share it. Think of Facebook, Instagram, TikTok, etc.
Scott Galloway, an NYU business professor, has said he invests in companies that offer subscriptions and have moats (aka barriers to entry). Story also failed on these fronts, too. It has no subscription model and no moat.
The Grommet must surely fare better compared to Story I thought. The Grommet, founded in 2008, helped product makers crowd source their inventions online. People would vote for their favorite inventions, place orders, and then get them made. If it sounds a lot like Indiegogo or Kickstarter, you’re right. (Read more: https://www.thegrommet.com/,https://en.wikipedia.org/wiki/The_Grommet, and https://www.hbsdealer.com/distributorsco-ops/ace-hardware-acquires-grommet )
Unlike Story, which started out as a physical storefront, The Grommet was digital first. It should have had these solid investing qualities:
Digital first.
A networking effect.
Customers do the work for the business.
But, when Ace acquired The Grommet, it undermined that first principle. Now the digital marketplace was saddled with the analog world. And Ace’s analog world is unique: Ace is a co-op and each store may be owned by a different person. (Walmart or other larger retailers have a handful of decision makers. The Grommet may have been better suited to teaming up with them). To get the Grommet to scale and be in all the Ace stores was therefore a cumbersome process. Instead of one needing a handful of people saying yes, one needed to get thousands. And, even if the many Ace stores did agree to Grommet, they may not agree to carry all the products that The Grommet offered.
When The Grommet was online, the network effect existed because users could invite other users, collaborate in groups, and encourage others to buy their products. It also kept their costs low. In an Ace store, a customer can’t invite other customers or crowd course ideas easily. Most of the benefits of The Grommet’s community and networking aspects didn’t scale in the analog store.
On top of all of this, there were major supply chain issues in 2020-2022. It’s hard enough to make 10,000 Weber grills and get them shipped on time. The Grommet was known for super new items and maybe only 1,000 were made to test if it was a suitable product. Even if you could offer 500 stores this, this quantity of 1,000 is just too small. Each store gets 2 items? That’s not scalable. One needs big orders going to a few large customers.
Lastly, did I mention the service was called: The Grommet? That is just an ugly, hobbit-like name.
Now, let’s get back to Matt Damon and ‘dem apples.
I’ve recently been debating when Bridge should make an app. When we look at most successful companies, most offer an app. Apps seem to be a hallmark of successful businesses. Here are some household companies, their apps, and their number of reviews:
Microsoft: (3rd most valuable company in the world; Source: https://businessplus.ie/news/most-valuable-companies/)
Outlook: 4.6m
Teams: 2.3m
Word: 1.5m
Xbox: 1m
Excel: 780k
OneNote: 689k
OneDrive: 356k
Powerpoint: 2983k
To-do: 153k
Edge: 80k
LinkedIn: 70k
Meta: (8th most valuable company in the world)
Instagram: 23m
Messenger: 1.3 m
Facebook 1.2m
Now, let’s look at retailer apps:
Amazon: (5th most valuable company in the world)
Amazon Shopping: 7.4m
Prime Video: 2.7m
Macy's:
Macy’s 1.6m
Zola:
Zola 58k
The Knot:
theknot: 115k
The following are some retail industry B2B service providers:
Story has no app. The Grommet, which was a digital marketplace, had no app. Were these clues to how the acquisitions would work out? Maybe Ace and Macy’s should’ve done this: looked to see if the companies had apps. If a business doesn't need an app, it's probably not a good investment. If a business has an app, that doesn't guarantee it's a good investment, but it's likely better than one without one. Macy's has an app, but it’s a digital doorway to a broken business model. It’s a digital door to an analog world. In general, I believe businesses that use apps appear more likely to succeed. One should not just make them for the sake of making them. They magnify a good business and help make it great. In a lackluster business, they will simply go unused. The app space embodies what what it takes to succeed. Apps bring together the peanut butter, banana, and chocolate. An app combines the best suite of investable qualities (digital first, networking effect, and customer content), and then bundles it in a mobile phone in your pocket.
If this were a movie about an MIT janitor, Story and The Grommet were the fellows that didn’t get the phone number. Bridge doesn't have the phone number, er, app yet, but we will. We’ll start by making an app that members and registrants can use. Then, we'll make an app that is a POS system. We're creating digital doorways to our digital world. We want to layer our digital world (the Bridge platform) over a network of important indie stores and promote access via a new digital door (our app). We'll empower these indie stores and help them accomplish something that they could not do alone. We'll avoid the fates of The Grommet and Story and get the upside of digital-first business models like Microsoft, Meta, and Amazon.
Could our app fail? Sure. Yet, as it's a doorway to our digital world, it stands to reason that it should work since our digital world has succeeded.
[South Boston accent:] Bridge Team, your work each week helps plant these app(le) seeds. Thank you.