Sound and softwareTech giants will probably dominate speakers and headphones

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Smartspeakers and wireless ear buds are sending the audio industry “horizontal”

MUSIC lovers do not typically go to the opera to buy a speaker. But at the Palais Garnier in Paris they now can: Devialet, a local maker of high-end speakers, on November 29th opened a store in the 19th-century music venue to sell its most sophisticated product, called Phantom. Looking like a dinosaur egg, this supercomputer for sound (priced at $3,000) is considered one of the best wireless speakers available. It also comes with a dedicated streaming service for live performances, including some at the Palais Garnier.

This Phantom at the opera is the latest example of how digital technology is transforming speakers, headsets and other audio devices. Once mostly tethered to hi-fi systems, they are now wireless, increasingly intelligent and capable of supporting other services. As a result, the industry’s economics are changing.

Only a few years ago the audio industry was highly fragmented, says Simon Bryant of Futuresource, a market-research firm. Hundreds of brands offered their wares, both premium and basic, often with identical components. As with other device businesses, the industry was a “vertical” one: if speakers used any software at all, it was specific to the product.

All this started to change with the advent of smartphones, which made music more portable by connecting music-streaming services such as Spotify with wireless speakers. Smartphones have also given a boost to headphones, which are becoming ever more versatile, with features now ranging from cancelling out ambient noise to real-time translation.

These new possibilities have proved hugely popular: the global market for audio devices has rocketed in recent years (see chart). According to Futuresource, only about 200,000 wireless speakers were sold in 2009; this year the number is expected to be 70m. Headphones have been on a similar tear.

Smartspeakers, which were pioneered in 2015 by Amazon with the Echo, will be even more disruptive. Nearly 24m of these devices, essentially voice-controlled remote controls for everything from music to lights, will be sold worldwide in 2017, estimates Strategy Analytics, another market researcher—a number it expects to quadruple by 2022. Once households have one, they buy more to spread them throughout their homes (apparently nearly a tenth now live in bathrooms).

Smartspeakers are pushing the audio-device industry to become “horizontal”. The voice that emanates from Amazon’s Echo or Google’s Home is not just a digital assistant, but a “platform” for all kinds of services, of which most are developed by other firms. Alexa, as Amazon’s version is called, already boasts more than 25,000 “skills”, as the firm calls such services. These range from ordering goods and finding a mobile phone to turning up the heating and (early next year) asking The Economistfor the latest on any given topic. Similarly, wireless ear buds, such as Apple’s AirPods and The Dash by Bragi, a startup, may become so clever that more and more people will leave them in all day, for instance to monitor their health or for constant access to a digital assistant.

Conventional speaker firms are trying to catch up. In September at IFA, a trade show in Berlin, booths of various makers were adorned with logos of Amazon or Google, signalling that they already have or will integrate a digital assistant in their products. But if the history of the smartphone is any guide, such platforms will turn the hardware into a commodity, with most of the profits going to the providers of software and services. Having sold 75% of all smartspeakers (at low prices that are thought to be close to the cost of making them), Amazon is now the world’s biggest speaker brand. Incumbents will also have to contend with Apple, despite the delay of its smartspeaker until early next year.

The dominance of a few platforms is not a forgone conclusion, says Mr Bryant of Futuresource. More specialised ones are likely to thrive, too—like Microsoft’s Cortana, which is good at understanding business jargon. But some audio firms feel the need to branch out. Sonos, which pioneered wireless speakers a decade ago, now wants to become an über-platform, integrating all voice assistants and streaming services, so consumers who like Sonos speakers have a choice. Harman, which in March was bought by Samsung Electronics, has similar plans for entertainment systems in cars.

And then there are companies which do not build their own speakers, but offer technology to enhance other products. Dolby and DTS, for instance, are busy creating software for what is called “immersive audio”. Combining several speakers, Dolby’s Atmos technology—first introduced in cinemas, but now available for home use—already “places” sounds in space. The next step is separate personal sound zones for each listener in a room, in effect creating invisible speakers.

So why does Devialet, which last year got €100m ($106m) in fresh capital, think it can succeed by selling expensive high-end speakers? The answer is that it wants to be a platform, too. The speakers are mostly meant to demonstrate its technology, in the hope that other companies will integrate it into their products. The first example, launched last month, is a soundbar (a slim loudspeaker) it has developed together with Sky, a broadcaster. “If you see yourself just as an audio company,” says Quentin Sannié, Devialet’s chief executive, “your days are numbered.”

The Future Of Retail In The Age Of Amazon

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In Fast Company by Austin Carr.

As Jeff Bezos’s juggernaut continues to grow, forward-thinking competitors are finding creative ways to succeed—and be what Amazon can never be.

The Future Of Retail In The Age Of Amazon
[Illustration: Zohar Lazar]

The Mall of America’s terrazzo floors, glazed white like doughnut frosting, ribbon out in every direction, creating a vast mirror maze of consumerism with 520 glassy storefronts. Shoppers, who have escaped an endlessly gray Bloomington, Minnesota, sky on a Monday morning in October, drift through the largest mall in the United States like tourists at an Atlantic City buffet. A couple holding hands strolls into a Zales while buttery perfumes emanate from an Auntie Anne’s next door. Kids and some willing parents fling around on the SpongeBob SquarePants Rock Bottom Plunge roller coaster, one of 27 rides at the Nickelodeon-branded amusement park on-site. Distant echoes of saxophone Muzak clash with both elevator whirs and bubbly pop songs. Somewhere in this otherworldly commercial expanse are five Lids stores and four Sunglass Huts.

When the mall opened, in 1992, it represented the pinnacle of retail convenience and a mecca for young people to gather and spend. But the $650 million megamall was always “vaguely unreal . . . exuding the ambience of a monstrous hallucination,” as novelist David Guterson described it in a 1993 Harper’s article, calling it “monolithic and imposing.” Two years later, Jeff Bezos launched his online book marketplace, which quickly grew into a new type of Everything Store, one that fundamentally redefined the shopping experience and led some to argue that commercial centers like the Mall of America would become gaudy relics of an antiquated era.

Now, Wall Street analysts say, the retail apocalypse is upon us. Amazon dominates e-commerce and has gobbled up 5% of total U.S. retail sales. Some expect that the company will own half the online market within the next five years, a period during which, Credit Suisse predicts, a quarter of all malls will close. By the end of this year, more than 8,600 stores will have shuttered in 2017, the worst year on record.

But here’s the thing about the Mall of America: It’s fighting back. “I hear all this doom and gloom in the industry,” says the mall’s SVP of business development, Jill Renslow, with an upbeat, Midwestern delivery. “I’m like, ‘Folks! Keep your chin up! There’s so much opportunity!’ ” The mall completed a $325 million expansion in 2015, says Renslow, who started working there as an intern in the mid-1990s and has seen it endure recessions and upheaval before. A new 342-room JW Marriott has opened upstairs, and retailers like Zara and Anthropologie are being lured to the space. The mall is experimenting with new leasing models to attract pop-ups and younger players like Untuckit and Toms Shoes. Renslow, who is eager for people coming to Minneapolis for the 2018 Super Bowl this February to visit the mall and be surprised, doesn’t view Amazon as a competitor but as a partner; she recently worked with Amazon to install a set of pickup lockers at the mall. She believes retailers in general can “bring online shoppers to brick-and-mortar.” I ask her directly: Is physical retail dying? “Not at all!” she says.

Renslow isn’t feigning enthusiasm. Despite Wall Street’s pessimism, industry leaders sound downright bullish on the future of traditional retail. Why else, they argue, would Amazon spend $13.4 billion to buy Whole Foods? Sure, the competition is fiercer than ever, and icons such as Sears and JCPenney are dying. But they believe that the narrative has been oversimplified. “Amazon alone isn’t holding the knife,” says NYU Stern professor of marketing Scott Galloway, who studies the retail industry. Cultural tastes have changed. Malls grew too quickly, at twice the rate of the population, from 1970 to 2015. Many retailers succumbed to quarterly earnings pressures, invested in share buybacks rather than their stores, became saddled with private-equity debt, or failed to keep pace with digital trends. What we’re seeing now, industry executives say, is a rational, albeit painful, course correction. One study from retail-research firm IHL Group found that a mere 16 chains, including Radio­Shack and Payless, account for nearly half of all store closings, and that there will be a net increase of more than 4,000 stores in 2017 and 5,500-plus in 2018.

“Retail is under huge pressure, but the death of stores is greatly exaggerated,” says Galloway, who believes that while Amazon will continue to disrupt the market, an increasing number of competitors will discover new ways to respond. “In the age of Amazon, retailers must leverage assets that [Bezos] doesn’t have: When Amazon zigs, retailers must zag.”

This fall, Fast Company embarked on a journey to learn from those retailers that are flourishing in the age of Amazon. After all, more than 90% of retail sales still happen in the real world, and as relentless as Bezos is, it’s not likely he’ll swallow up all of brick-and-mortar on his own. The truth is that the bigger Amazon gets, the more opportunity it creates for fresh, local alternatives. The more Amazon pushes robot-powered efficiency, the more space there is for warm and individualized service. The more that people interact with Amazon through its AI-based assistant Alexa, the more they will crave the insight and personal connection of fellow humans.

“The idea that everybody needs to be terrified of Amazon is completely wrong,” says Brian Spaly, who cofounded two e-commerce-centric startups, Bonobos (menswear) and Trunk Club (a wardrobe-in-a-box service), which sold to Walmart and Nordstrom, respectively, for nine-figure sums. “Everybody needs to figure out what makes them special and use those weapons to compete.”

The faster Amazon delivers, the more cash it burns. Shipping losses soared to $7.2 billion in 2016 from $5 billion in 2015. [Illustration: Zohar Lazar]

SUCCESSFUL RETAILERS WILL FEATURE PRODUCTS THAT CUSTOMERS CAN’T GET ELSEWHERE

A 15-minute drive north from the Mall of America are the downtown Minneapolis headquarters of Target. The company’s $7 billion bet on its future is coming to life in a series of spacious rooms littered across several floors and filled with mannequins, racks of colorful apparel, and fashion magazines. It’s here that Target is designing its own goods, refocusing on the aesthetic sensibility that fueled its success in the early 2000s. “While others are shrinking their footprints, reducing head count, or trying to save their way to the next quarter, we think there’s opportunity for us to take more market share,” says CEO Brian Cornell, who launched the initiative last February.

On the fourth floor, at the studio for Cat & Jack, Target’s new children’s clothing line—which blew up in its first 12 months to become a $2.1 billion brand—mood boards display photos of smiling tots at a July Fourth block party and a family movie night. Julie Guggemos, Target’s SVP of product development, describes the spirit behind the design as “positivity, happiness, saving the world,” citing the adventurous tweens in Netflix’s Stranger Things as an inspiration for the team. “We listen to Mom and Dad, but we have these kids in mind when we’re designing,” says Guggemos, a 27-year Target veteran.

Guggemos and her team of 400-plus designers will be rolling out more than a dozen high-quality, affordable, Target-exclusive brands by the end of 2018. They have already introduced a boutiquey children’s decor line called Pillowfort, a modern furniture collection called Project 62, an athleisure apparel line for the post-yoga brunch crowd called JoyLab, and a dapper menswear brand called Goodfellow & Co, which even Esquire described as “elevated.” Guggemos has just come from a product review for a new line, slated to launch next year. “We’re designing everything from the bottom up, 100% original,” she says.

When consumers can get seemingly anything and everything online, what can Target offer that Amazon can’t? That question was top of mind for chief merchandising officer Mark Tritton when he joined the company from Nord­strom in 2016. Target had fallen into a trap of licensing outside brands like Cherokee, which makes children’s apparel; even its in-house kids’ label, Circo, felt dated. “I thought, Wow, this stuff isn’t right,” recalls Tritton. “It feels tired and disconnected.”

In other words, Target had strayed from what made it “Tar-zhay.” Two decades ago, the company had distinguished itself from other big-box retailers by teaming up with celebrated architect and designer Michael Graves to craft a collection of mass-market housewares, partnering with high-end fashion designers like Isaac Mizrahi for custom fashion lines, and nurturing emerging brands such as Method through forward-thinking curation. “There would be no retail if it weren’t for merchandising, so why isn’t anyone talking about it anymore?” wonders Rachel Shechtman, founder of Story, the novel Manhattan concept store, which reinvents itself regularly (and collaborated with Target in 2014). “Merch assortments designed by spreadsheets and algorithms” is what’s killing department stores, she says.

When I meet Target COO John Mulligan at Target’s flagship, which sits just a block away from the Cat & Jack studio, he’s eager to compare the store’s $10 million renovation with printed-out photos of the old layout, which hadn’t changed much since the flagship was built in 2001. “It was gondola hell, right?” Mulligan says, referring to the basic shelving units you see in stores. “Just rows and rows of stuff. No sight lines.” Mulligan shakes his head as he points to a depressing image of the in-store Pizza Hut that used to greet customers.

The layout has been reorganized around Target’s new brands, and the presentation is crisp and contemporary. (Inexplicably, the company didn’t have a visual merchandising department until just two years ago; Cornell has since poached talent from J.Crew and the Limited.) As Mulligan ushers me through the store, he beams at the displays, each of which will now be refreshed monthly, which is double the previous rate: There’s an autumn-themed collection from Cat & Jack; sporty JoyLab leggings designed in partnership with Clique, whose Who What Wear line has been a hit at Target since it launched in 2016; and modern dining chairs and walnut tables from Project 62. “Before, it was a dead zone back here,” he says of the home-essentials area. Other parts of the store feature bright new arrangements of exclusive products from e-commerce upstarts such as Harry’s and Casper, and even the fitting room looks more like what you’d find in a Club Monaco. As for the Hut? It’s been replaced by fresh groceries and a liquor and craft beer shop. Target will remodel an additional 1,000 stores in a similar fashion by 2020, while also rolling out more localized stores with smaller footprints.

The redesigned “Tar-zhays”—there are around 110 of them so far—have delivered up to a 4% jump in sales at each location, but the more promising return from this investment has come from the house brands themselves. Cat & Jack customers, for example, spend 50% more in surrounding kids’ retail areas, Mulligan says, adding that their total basket size is 23% higher than other customers’. Most significantly, Target’s consumer research has shown that its brands have become a “trip driver”: People come to the store for Cat & Jack as much as they do for essentials like laundry detergent or bread or milk. “Target has always won with a spirit of design that their competitors didn’t have. I don’t see any other move for them: They’re not going to beat Amazon on e-commerce,” says a high-level retail expert who has advised the company on strategy.

Indeed, Target’s digital efforts continue to lag. When Mulligan takes me to the back to show off the redesigned storeroom, I don’t see any floor-roaming robots or automated conveyer belts, despite the fact that Target has stated that it plans to use its more than 1,800 stores as fulfillment centers (80% of the U.S. population lives within 10 miles of a Target). Instead, I find just one store clerk manually taping cardboard boxes for in-store pickup. Later, when I arrive to retrieve a $14.99 Goodfellow Henley shirt I purchased via Target’s app, the cashier asks for my ID because the flagship store’s smartphone scanner is broken. When I test Target’s new curbside-pickup service to buy paper towels, it fails at three consecutive outlets within the Minneapolis area. Ultimately, I give up.

The company needs to improve e-commerce and store pickup, but its future success does not depend only on these services. “Target is going to have to win on stuff that nobody else has,” the high-level expert says. “And that’s great retail, right?”

SUCCESSFUL RETAILERS WILL DELIVER A SATISFYING EXPERIENCE

A time zone away, in the sixth-floor showroom of Warby Parker’s SoHo offices in New York, cofounders Neil Blumenthal and Dave Gilboa are squinting at a backless shelving unit displaying their designer glasses. Customers mill about just steps from the co-CEOs’ desks, a dynamic that helps them relentlessly monitor and surgically adapt Warby Parker’s high-touch experience. Blumenthal is eyeing a wood shelf, which is missing a centimeter-tall lip, so that if a customer slides a pair of $95 Chamberlains too far back, they’ll slip onto the floor. “This does not make me happy,” he grumbles. Addressing these tiny details has proven crucial to the eyewear brand’s success. If they’re not fixed, “we’ll hear about it, like, ‘Fucking shit is falling off [the shelf]!’ ” Blumenthal says, with an effervescent laugh. “I don’t know if it’s right for policing, but broken-window theory definitely applies to retail.”

The 37-year-olds, who on this sunny Friday morning are both wearing slim-fitting button-downs, black sneakers, and patterned glasses—imagine the Black Keys as merchant princes—visit a Warby Parker store each day, hunting “for anything that needs to be refreshed, anything that’s out of place,” Gilboa says. This could be off-kilter frames or neglected customers. As much as the two consider themselves disrupters of competitors like Luxottica (Warby Parker’s $10.5 billion rival, which owns everything from LensCrafters to Ray-Ban), they’re students of retail history and find inspiration in such leaders as hospitality guru Danny Meyer, Apple Store legend Ron Johnson, and Mickey Drexler, the merchandising titan famous for reviving Gap in the 1990s and J.Crew in the 2000s.

Drexler, an early Warby Parker investor and board member, taught them that good experiential design is about solving customer problems. Gilboa describes how Drexler would walk into stores, zoom by Warby’s managers, and head straight to associates to interrogate them for unvarnished feedback. “He’ll isolate them, ask each of them the same questions, and then triangulate: Is he hearing consistent or conflicting answers? Then he really digs in, surfacing nuggets of wisdom hidden even by stores with great numbers,” Gilboa remembers.

When Warby launched its first store, in SoHo in 2013, the mission was to eliminate everything annoying about buying glasses. Blumenthal hated the “little shit vanity mirrors” at optometry shops, while Gilboa couldn’t stand the merchandise locked away in glass cases and the awkward interactions with often-pretentious store associates. They wanted approachable store greeters, an ask-us-anything reference desk, and a warm aesthetic, which they modeled after Sweden’s Stockholm Public Library, complete with its dark-wood shelving. Anthony Sperduti, cofounder of design studio Partners & Spade, who helped Warby Parker conceive its early stores, says they needed to feel like an authentic extension of the e-commerce brand. The high-quality materials of its eyewear products, he says, are reflected in “the brass details, marble counters—this incredible weight, this classicism.” To transform an intimidating experience into a fun and social activity, Warby Parker added photo booths and full-length mirrors so groups can check themselves out together. “If you’re born online, you better have a really good reason to do brick-and-mortar,” Sperduti says. “You better come out swinging.”

Warby now operates more than 60 stores, and on this particular day, it’s opening three new locations simultaneously—in Milwaukee; Fort Worth, Texas; and Harvard Square. Analysts estimate that the company will generate around $250 million in 2017 revenue. As the operation grows, it only gets harder for Blumenthal and Gilboa to keep this experience fresh. Before committing to risky new territories, the company often tests low-cost pop-up shops, rather than get stuck in the kind of expensive, long-term leases that have suffocated many traditional retailers and led them to try to save costs by building out one-size-fits-all stores. The Warby Parker team has developed modular components so that each store shares an identity but there’s room for local flourishes. Vernors ginger ale, a Michigan favorite, is on tap at the Detroit store, honoring the 151-year-old soda maker that once operated a pharmacy at the same location. The Miami store, which opened in 2015, features floors painted to look like swimming lanes, so that photos taken from the ceiling-affixed cameras make customers in sunglasses look like they’re floating in a pool—images that shoppers can then share on social media.

Big retailers and digital-native consumer brands alike cite Warby Parker as an inspiration and seek to mimic, even reverse engineer, what they believe is the core of its hip but inviting store experience. But refashioning stores with a certain wood finish or outfitting employees in a distinctive smock doesn’t make you Warby Parker any more than painting your store white makes you Apple. Piling on frivolous attractions in an attempt at authenticity, as Brooks Brothers did by opening a Stumptown at one of its Manhattan locations, drives the Warby Parker team bonkers. “The way people are defining experience today is way off,” Blumenthal says. “The idea of adding coffee shops to every store is ridiculous,” because it’s driven not by solving a customer problem or introducing a novel experience tied in some way to a brand, but by a hackneyed attempt to boost foot traffic. Equally jarring to them is Amazon’s new Go store in Seattle, which Gilboa recently explored, in which an array of sensors and computer-vision technology enable the ultimate in grab-and-go shopping. “Play that [concept] forward and you can imagine this dystopian experience where you have no human interaction at all,” he says.

Warby Parker is just as maniacally focused on efficiency as Amazon: Its next big initiative is a $15 million optical lab, in upstate New York, which enables greater quality control and faster product delivery. But the company knows that its true value lies in its elevated and personal experience, and Blumenthal and Gilboa never want to stray too far from what Drexler taught them. “We want to reinvent, but we sure as shit don’t want to reinvent the wheel,” Blumenthal says. “Startups sometimes take it too far, like, ‘Oh, we’re an innovator! We’ll just ignore what [traditional] retailers have done!’ Ignore best practices, get crushed.”

The best retailers are embracing what makes them special to counteract Amazon’s quest to dominate commerce. [Illustration: Zohar Lazar]

SUCCESSFUL RETAILERS WILL CHALLENGE THE FUNDAMENTAL ASSUMPTIONS OF COMMERCE

What does the store of tomorrow look like? Amazon Go is certainly one experiment, and seemingly every big brand, from Mastercard to Sephora, is dreaming up its own vision of the future inside whiz-bang concept labs. Ask around the retail industry and you’ll hear endless, breathless predictions about the potential of in-store augmented reality, drone delivery, or bitcoin payments.

So far, these technologies have amounted to little more than gimmicky distractions. “Customers don’t want stupid disco balls with lasers and holograms,” says Healey Cypher, founder of Oak Labs, which, yes, makes an interactive “smart mirror,” but is more focused on customizing the dressing-room experience. Target, too, seems to have come to this realization. Earlier this year, the company shuttered its much-ballyhooed “store of the future” project built on glitzy tech. “Ultimately, we didn’t want to build a Jetsons-like store just because we can,” COO John Mulligan says.

Vibhu Norby and Phillip Raub, cofounders of B8ta, a San Francisco–based consumer-electronics retailer that has raised $19.5 million to reimagine brick-and-mortar, are thinking different. Rather than depend on a cut of sales from products, like Best Buy does, their company charges brands for the privilege of being featured in B8ta’s 10 stores. By selling only a limited selection of trendy gadgets, B8ta’s store associates act as ambassadors for the products—the true stars—educating consumers on their features and offering white-glove service.

Norby and Raub believe that all physical retailers—Amazon included—need to rethink the business entirely. Norby, B8ta’s CEO, argues that historic metrics for success are completely irrelevant today. Who cares about sales per square foot when products reach customers via Uber and Prime Now? Why do year-over-year same-store sales comps matter when 56% of customers test products in-store but buy online? “Designing stores for throughput is how we ended up with 10-by-10 walls of Tide at Safeway,” Norby says. Perhaps most radical is the new idea that retail can be unbundled from transaction. Bonobos’s “guideshops,” for example, offer fittings and fashion advice, with the assumption that customers will order their apparel online afterward. Decide to buy in-store? Bonobos will ship it for free. “I’m starting to see it more, where retailers are not expecting you to walk out with a bag of their stuff,” says Partners & Spade’s Sperduti.

Some of these ideas might strike industry veterans as heresy, but B8ta’s cofounders view it merely as a shift in thinking about how physical space can be monetized. On a recent Saturday afternoon at B8ta’s downtown Palo Alto location, store associates demonstrate Boosted electric skateboards out front on the sidewalk. Inside, the store has a relaxed vibe, with homey carpets and armchairs occupied by gadget-shoppers’ patient loved ones, though it takes obvious inspiration from Apple’s minimalist stores. Customers sipping bubble tea toy with unboxed gadgets set up on long tables—Oculus Rift VR headsets, August door locks, Onyx walkie-talkies—while B8ta staff politely chats them up. These associates are not pushy at all, because they’re not pressured to sell units. They’re happy to answer questions and are knowledgeable about everything from the Nebia ionizing shower (“It turns your droplets into even smaller droplets,” an employee explains) to the finer points of four different Bluetooth trackers. B8ta’s market advantage is its well-trained staff. The cofounders, who met at the smart-thermostat company Nest, know firsthand how difficult it is to get customers interested in, let alone grasp, the benefits of new hardware products.

For electronics brands, B8ta stores are an excellent (and relatively inexpensive) marketing portal, and an even better data tool. “The real magic happens behind the scenes,” says Raub, the company’s chief business officer, who previously worked at Gap and Nintendo. Every product featured in the store is wired to track how customers play with it. Store associates, called “B8ta testers,” also gather qualitative feedback on why a shopper did or didn’t buy a product. “Why did they look at it? What didn’t they like?” says Raub, listing off a couple of common data points, which he compares to how e-commerce players monitor checkout cart abandonment. “Now brands can know that customers may have liked a product, but gave up once, say, they found out it wasn’t compatible with Android.” In a world where consumer products often end up languishing on shelves at Best Buy or forgotten amid Amazon’s catalog of an estimated 350 million–plus items, this data is more valuable than the sale itself. Traditional retailers now want what B8ta can offer: In late October, the startup announced that 70 Lowe’s locations will add a smart-home-focused B8ta, and Macy’s will soon feature B8ta outposts in its flagship stores.

SUCCESSFUL RETAILERS WILL RESURRECT THE ART OF SELLING

During my reporting, I quizzed each person I spoke with about which stores get retail right. People picked one place more than any other: MartinPatrick3.

An extravagant, 17,000-square-foot cathedral of high-fashion menswear in Minneapolis, MartinPatrick3 looks like what would have happened if Willy Wonka had gone to Parsons School of Design. At once boundless and intimate, the store’s colorful rooms naturally transition to the next, each its own pristinely wrapped Christmas present. In one, a collection of hand-stitched bow ties lie near $5,500 Brunello Cucinelli suits, a shiny black Vespa, and a modern steel cocktail table by a local designer. Down the hall, a white-accented men’s grooming shop stocked with shaving creams and bottled fragrances practically glows. There’s an in-store tailor, a barber, a full-time jewelry designer, and sharply dressed store associates, all with bouquet-like pocket squares blooming from their blazers.

Eleven years ago, Greg Walsh, an upscale interior designer who also sold home furnishings from his studio in the city’s hip North Loop neighborhood, began showcasing men’s accessories he’d collected during his travels: cuff links, watches, wallets. Customers loved them. Walsh brought on his better half, Dana Swindler (they’re “partner partners,” as Swindler puts it, smiling), to build out a stand-alone store in 2008. “The rule was that nothing could have sizes,” Walsh says. “That totally went out the window,” he laughs, explaining that the scope quickly grew to include apparel and much more.

Local Heroes: Five independent retailers who get it right, through curation, service, and offering something you’ll never get at Amazon

 

 Avenue, Tucson, Arizona “Avenue is led by this incredible woman [Alexis Mosij] whose sense of design and taste is just unreal. You look at her store and you just want to live that life.” Healey Cypher, CEO, Oak Labs, a retail technology startup
1/5 Avenue, Tucson, Arizona “Avenue is led by this incredible woman [Alexis Mosij] whose sense of design and taste is just unreal. You look at her store and you just want to live that life.” Healey Cypher, CEO, Oak Labs, a retail technology startup

Walsh and Swindler approach retail drastically differently from any merchant I encountered. Each display in MartinPatrick3, no matter how exquisite, is designed to be ephemeral. “We’re constantly reinventing. We can completely remodel a room within 24 hours,” Walsh says. They pride themselves on always paying vendors within 30 days—uncommon in the industry—and rushing new products into store collections often within days. (“This would take nine months at Nordstrom,” Walsh remembers one vendor telling him.) Whereas the traditional rules of brick-and-mortar dictate that sales matter above all else, store associates at MartinPatrick3 are encouraged to dole out sincere fashion advice, and if it means counseling a guest away from a higher-priced item or directing him to competitors’ shops, so be it. The payback comes in the lasting relationships such honesty builds. The company hosts events for free—even weddings—which it sees as a natural arm of its service, particularly if it has helped outfit the groomsmen. (There are shelves stocked with prosecco in a cozy VIP lounge.) In April, Walsh and Swindler even took down their e-commerce site. “It’s been funny. People in the industry keep saying, ‘You did what?!’ ” Walsh says. “But we decided we’re all about brick-and-mortar—that’s what we do really well—so let’s focus all our energy there.”

The self-financed retailer is growing fast. Walsh and Swindler guide me through back doors into 4,000 additional square feet of empty, brick-walled warehouse space adjacent to the store. This unfinished part of the 131-year-old building they moved to in 2010 is what Walsh is targeting as the company’s fifth addition. Down the hall, in their design studio, where MartinPatrick3’s “board of directors”—Cole and Ella, finely groomed poodles—lounge about on a green-mohair dining settee, Swindler cracks open a thick three-ring binder full of store statistics. (Swindler, who previously ran an engineering firm, is as meticulous about data as Walsh is about design.) Revenue has jumped an average of 40% annually since the company’s founding, with some years reaching triple-digit growth. “We work our asses off,” Swindler says proudly.

The pair can’t quite articulate their secret, but they know other retailers don’t have it. Others move too slowly, they feel, and simply aren’t creative enough. “We started in the recession. We’re used to hustling,” Swindler says. “The retailers we meet, they don’t do anything all day! Their give-a-shit factor is way down; they’re not on the floor every day like we are. Now that they’re making less [money], what do they do? The same thing as before, over and over and over again.”

MartinPatrick3 (the name comes from the ones Walsh’s father almost bequeathed him) offers sophisticated taste, expert curation, and a concierge-like, almost old-fashioned level of service that’s increasingly hard to find. Yes, it’s a store mostly for the 1%, but there is much here that Amazon can’t copy, time-honored lessons of merchandising and customer attention.

Retailers don’t need to chase a futuristic version of themselves that they might never attain; they first need to remember what made them special in the first place. The answers are all here. The talent, too. If Wall Street is right and the industry continues to decline, then this will be what we lose: the art of selling. MartinPatrick3’s store manager once worked at Nordstrom. The self-described concierge, who welcomed me to the store, made helpful recommendations, and even offered to assist with dinner reservations while I was in town, is an expat of Neiman Marcus, another shrinking department store trying to find its footing in the age of Amazon. You don’t need to sell mid-four-figure Cucinelli suits to offer this level of hospitality—Warby Parker does it with $95 frames—you just have to care enough to treat customers with the consideration and cordiality they deserve.

I roam through MartinPatrick3 by myself for a while, and eventually end up at Marty’s, the in-store barbershop with a classic candy-cane pole out front. Christopher Hernandez, my stylist, is dressed in a black vest and a gray flat cap like a 1920s newsboy. He previously worked at the barbershop inside the downtown Minneapolis Macy’s. Last March, Macy’s shuttered the location. “Most of us have a background in some big department store that’s closed,” he says as he snips away. “We’re all orphans here.”

What To Do With Dead Malls?

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Just when you think you have a handle on the brick-and-mortar retail crisis, the prognosis gets worse. More than 8,600 stores will close their doors in 2017, according to Credit Suisse analysts—a number that exceeds store closures during 2008, when America was in recession. One quarter of all shopping malls are expected to shutter in the next five years, according to the same report.

This downward spiral has severe economic implications, although some are less apocalyptic than they seem at first. In fact, there’s some evidence that automation and e-commerce actually create more—and better-paying—jobs than they destroy.

But there’s one issue that no one has figured out how to solve: what to do with all those vacant stores. And America has more of them than anyone. Retail square feet per capita in the U.S. is more than six times that of Europe or Japan. As our physical stores continue to lose market share to e-commerce, more than one billion square feet of commercial real estate could be gathering dust by 2022. Because blight begets blight, that number could climb even higher.

If these predictions hold, America’s retail landscape could look a lot like the residential landscape of Detroit.

To find a solution, retailers need to face the failings that landed them here. Blaming Jeff Bezos doesn’t change the fact that many companies have spent years with their heads in the sand. Sales have been migrating online for almost two decades, and millennials prefer to splurge on experiences—tasting menus, concert tickets, trips to Iceland—rather than flat-screen TVs. Faced with a crisis, traditional retailers responded by iterating an outdated model. Chains like Sears and Kmart used loyalty programs as Band-Aid solutions. Guess and Payless played a discount game but couldn’t keep up with their online competition.

The industry as a whole needs to accept that the in-store sales of the past aren’t coming back. Consumers no longer spend their Saturday afternoons going shopping, and no promotions or window displays are going to change that. Consumers are looking for places to be—not things to buy—when they leave the house. What’s needed is a radical new approach to sales—one that may not include selling goods in store at all. Smart retailers arerepurposing physical stores to do what e-commerce can’t: offer a memorable, meaningful and multisensory experience. A reimagining of what retail can be is already under way. Only one thing is certain: That old retail mantra—“stack ’em high and let ’em fly”—now applies only to online order-fulfillment centers.

Three Disruptive Approaches to Physical Retail
Nothing to buy but plenty to see: Samsung 837.
Nothing to buy but plenty to see: Samsung 837. PHOTO: SAMSUNG
The Nothing-to-Buy-Here Approach

Samsung 837

New York City

You’ll find plenty of Samsung products at the company’s 55,000-square-foot space in New York City’s Meatpacking District. But the phones, tablets and TVs on display aren’t for sale. Instead of a store, 837 is a “full brand immersion” designed to push customer engagement rather than on-site purchases. In this paradigm, the store becomes a kind of 3-D billboard. “It’s about creating an authentic connection and moments where our technology meaningfully enhances the experience,” says Zach Overton, vice president of customer experience at Samsung and general manager of Samsung 837. In addition to product samples, you’ll find displays that flex the tech giant’s prowess, like an immersive image tunnel that pulls content from your Instagram account as you pass through.

The only thing available for purchase is food curated by Smorgasburg, Brooklyn’s locavore open-air market. For non-Samsung users—who represent the majority of visitors to 837—the message is simple: We’re cooler than Apple.

‘Palm Beach Parade,’ a mural by renowned artist Michael Craig-Martin, will transform the facade of an abandoned Macy’s at CityPlace.
‘Palm Beach Parade,’ a mural by renowned artist Michael Craig-Martin, will transform the facade of an abandoned Macy’s at CityPlace. ILLUSTRATION: RELATED COMPANIES
Culture is the New Anchor Tenant

CityPlace

West Palm Beach, Fla.

There was a time when anchor stores—Sears, Nordstrom, Toys “R” Us—were the beating hearts and financial engines of large shopping malls. But as the big chains have foundered, their sprawling, underperforming outposts havebecome anchors in a more literal sense. At the axis of a once-thriving shopping center in West Palm Beach sits a 110,000-square-foot former Macy’s location, abandoned by the struggling retailer earlier this year. An immersive arts experience is taking over the space in December. World-renowned visual artist Michael Craig Martin will transform the exterior of the entire building with his largest mural to date, and famed sound designer Stephen Vitiello is creating a sound installation that will live in and around the detritus left behind by brands that once called the space home. This experiment by the landlord, real-estate giant Related Cos., aims to transform the struggling shopping center by putting culture front and center—and relegating retail to a supporting act. “It’s all about driving different kinds of traffic to a project,” says Ken Himmel, the president and CEO of Related Urban. “Mixed-use retail developments centered on cultural offerings are outperforming every other type of retail offering by a long shot.”

Drinking before shopping at the Restoration Hardware Lifestyle Store in Chicago.
Drinking before shopping at the Restoration Hardware Lifestyle Store in Chicago. PHOTO: RESTORATION HARDWARE
Everything Under One Roof

Restoration Hardware Lifestyle Store

West Palm Beach, Fla. (coming in Nov.), Denver, Chicago and more

While most retailers are shrinking their physical footprints, Gary Friedman, the chairman and CEO of Restoration Hardware, is thinking big. In 2015, the brand took over the 70,000-square-foot Three Arts Club in Chicago—10 times the size of a normal Restoration Hardware. The space allows for expanded showrooms but also an expansive vision of the brand, including design ateliers, a wine-tasting room and a music venue. “The key to unlocking the value of our assortment has been to transform our retail stores into huge design galleries,” Friedman says.

“Our new galleries generate two to three times higher retail sales than the legacy galleries they replaced.” In November, Restoration Hardware will open a 74,000-square-foot gallery in West Palm Beach, which is turning into a hotbed of experimental retail. An RH-branded hotel concept is also in the works.

Your Next Home Could Run on Batteries

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A combination of solar power and the rise of residential energy storage paves the way for a new kind of cable cutting

A customer inspects a Tesla Motors Inc. Powerwall unit inside a home in Monkton, Vt., in May 2016. Vermont's largest electric utility, Green Mountain Power, in partnership with Tesla Energy, is offering 2,000 customers the chance to have a Powerwall in their home for $15 a month.
A customer inspects a Tesla Motors Inc. Powerwall unit inside a home in Monkton, Vt., in May 2016. Vermont’s largest electric utility, Green Mountain Power, in partnership with Tesla Energy, is offering 2,000 customers the chance to have a Powerwall in their home for $15 a month. PHOTO: IAN THOMAS JANSEN-LONNQUIST/BLOOMBERG NEWS

In the near future, your home could be battery operated.

This is especially true if you live in New York, California, Massachusetts, Hawaii, Vermont, Arizona or a growing roster of other states and municipalities experimenting with revamping their electrical grids for the 21st century.

You might not even know your lights are being kept on by the same chemical process that powers your smartphone, since the batteries could be tucked into what looks like a neighborhood junction box, or behind a fence in a substation. But now, thanks to efforts by startups and the utility companies they sell to (and sometimes battle), you might get one right inside your home.

The rise of these home batteries isn’t just a product of our collective obsession with new tech. Their adoption is being driven by a powerful need, says Ravi Manghani, of GTM Research: renewable energy.

Without batteries and other means of energy storage, the ability of utility companies to deliver power could eventually be threatened.

Solar power, especially, tends to generate electricity only at certain times—and it’s rarely in sync with a home’s needs. In some states, such as California and Arizona, there’s an overabundance of solar power in the middle of the day during cool times of the year, then a sudden crash in the evenings, when people get home and energy use spikes.

For utilities, it’s a headache. The price of electricity on interstate markets can go negative at certain times, forcing them to dump excess electricity or pay others to take it.

“This is not a long-term theoretical issue that might happen—this is now,” says Marc Romito, director of customer technology at Arizona Public Service, the state’s largest electric utility.

There’s something ruggedly individualistic and inherently American about having batteries in your home. They’re good for keeping power going in a disaster, as customers of the two biggest firms by sales volume in this field, Sonnen and Tesla, demonstrated in the aftermath of Hurricane Irma. And in combination with rooftop solar panels, they free people from total dependence on the grid—a kind of energy cable-cutting that wonks call “grid defection.”

Solar power tends to generate electricity only at certain times and is rarely in sync with homes’ needs. Here, a portion of the Stafford Hill solar power project in Rutland, Vt., developed by Green Mountain Power, in September 2015
Solar power tends to generate electricity only at certain times and is rarely in sync with homes’ needs. Here, a portion of the Stafford Hill solar power project in Rutland, Vt., developed by Green Mountain Power, in September 2015 PHOTO: WILSON RING/ASSOCIATED PRESS

The very real possibility of grid defection is changing the power dynamics between utilities and their customers.

Last week, real-estate developer Mandalay Homes announced a plan to build up to 4,000 ultra energy-efficient homes—including 2,900 in Prescott, Arizona—that will feature 8 kilowatt-hour batteries from German maker Sonnen. It could eventually be the biggest home energy-storage project in the U.S., says Blake Richetta, senior vice president at Sonnen.

The homes, which will come with the Sonnen battery preinstalled, will be part of a Sonnen-managed “virtual power plant for demand response” that could allow the houses to stabilize the grid, lower its carbon footprint and decrease peak load, says Mr. Richetta.

An exterior shot of the Mandalay Homes development in Prescott, Ariz. The real-estate developer announced plans to build up to 4,000 ultra energy-efficient homes.
An exterior shot of the Mandalay Homes development in Prescott, Ariz. The real-estate developer announced plans to build up to 4,000 ultra energy-efficient homes. PHOTO: MANDALAY HOMES

While the Mandalay Homes project is still in the blueprint stage, with only one test home built so far, this kind of radical, battery-enabled rethink of the grid is already happening in Vermont.

In partnership with Tesla Energy, Green Mountain Power is offering 2,000 of its customers the opportunity to have a Tesla Powerwall in their home for $15 a month. The 13.5 kilowatt-hour batteries retail for $5,500, but the utility can afford to put them in homes because they help the company save on other grid infrastructure, says Mary Powell, GMP’s chief executive and president. “Peaker plants,” for instance, are fired up only when the grid is strained to maximum capacity, saving the utility from using one of its most expensive forms of electricity.

GMP also uses batteries from Sonnen, SimpliPhi and Sunverge. Ms. Powell says the larger battle for home battery storage will be over how each of these companies—and dozens of others—differentiates itself, selling different size batteries adapted for different uses in homes, businesses and utilities.

Arizona Public Service’s Mr. Romito says not all of these batteries are created equal—though he wouldn’t name names.

The biggest challenge to home battery storage remains economics. Utilities’ current rate structures don’t charge most homeowners for using excess power, nor do they change the price based on time of day. For the overwhelming majority of homeowners, the payback on a solar power system with battery storage could take decades.

Batteries aren’t the only way to reduce the need for short-order energy, or so-called “demand response,” says Mr. Romito. Smart thermostats, managed by the utility company, can precool homes when solar power is at peak production, reducing load on the grid in the evening.

The Mandalay homes will come with 8 kilowatt-hour batteries from German maker Sonnen. From left, Sonnen CEO Christoph Ostermann and Mandalay Homes CEO Dave Everson pose beside a Sonnen battery.
The Mandalay homes will come with 8 kilowatt-hour batteries from German maker Sonnen. From left, Sonnen CEO Christoph Ostermann and Mandalay Homes CEO Dave Everson pose beside a Sonnen battery. PHOTO:MANDALAY HOMES

This cannot only be as useful as batteries in certain cases, it can be more cost effective. Other possibilities include remotely determining when electric vehicles charge and even shifting large industrial loads to different times of year.

In states where electricity is more affordable, it’s still early days for batteries in homes. But Mr. Romito says users and utilities will continue to move toward them with the inexorable addition of more and more renewables to the grid.

Mr. Manghani of GTM Research agrees. His battery storage adoption forecasts track closely with states and regions where renewable energy is being generated.

Falling prices also help. Battery pack prices have decreased, on average, 24% a year since 2010. Cheaper batteries shorten the resulting payback period, which in turn makes renewable energy more attractive to home owners. In 2016, solar grew faster than any other energy source, according to the International Energy Agency.

At the intersection of these and other trends is a simple fact: For the first time since the discovery of fire, the way humans get energy is set to fundamentally change.

Boeing Deal Targets Flying Taxis

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Proposed acquisition of Aurora Flight Sciences could pave way for fleets of pilotless flying taxis

Uber selected the Aurora eVTOL to explore potential flying taxis, with 50 due to be delivered by 2020.
Uber selected the Aurora eVTOL to explore potential flying taxis, with 50 due to be delivered by 2020. PHOTO: AURORA FLIGHT SCIENCES

Boeing Co. BA 0.98% on Thursday said it plans to acquire Aurora Flight Sciences Corp., a maker of aerial drones and pilotless flying systems in a move the company said could pave the way for fleets of small flying taxis.

Virginia-based Aurora is a specialist in autonomous systems that allow military and commercial aircraft to be flown remotely, including technology that automates many functions, and has been working with Uber Technologies Inc. on a new vehicle that would take off and land like a helicopter.

Flying taxi-style concepts have attracted interest and funding from technology and aerospace companies, though face big hurdles including regulations that would allow fleets to operate alongside commercial airliners and other air traffic, as well as batteries to keep them aloft for several hours.

The purchase of Aurora would also expand Boeing’s reach in the new field of electric-powered aircraft.

Flying car concepts and designs have been around for awhile. But some firms are looking to transform the idea and provide a point-to-point passenger vehicle service–or a flying taxi. Graphic Simulation: Volocopter (Originally published June 20, 2017)

Boeing’s venture capital arm also this year invested in Zunum Aero, a Washington state-based startup that on Thursday unveiled its plan for an electric-hybrid regional passenger jet.

“These types of technology are helping pilots today and are a steppingstone to pilotless aircraft,” said John Langford, Aurora’s founder and chief executive, in a live-streamed interview.

Greg Hyslop, Boeing’s chief technology officer, said the work on autonomous systems also had potential benefits for a host of other industries looking to leverage the potential of so-called machine learning, where computers improve from experience.

The proposed Aurora deal marks Boeing’s second acquisition in less than a year involving autonomous systems following last December’s purchase of Liquid Robotics Inc., a maker of ships and undersea vehicles, and adds to a portfolio that includes aerial drone maker Insitu.

Terms for the proposed purchase of Aurora weren’t disclosed. The firm has more than 550 staff and will be run as an independent unit in Boeing’s engineering and technology business.

Aurora also produces composite parts for aircraft and other vehicles. Boeing is looking to produce more of its own parts as part of an insourcing strategy to reduce costs and potential disruption in its supply chain.

Boeing has been considering further acquisitions as part of the push to expand sales at its newly formed services arm to $50 billion over the next several years from around $14 billion at present.

Giving the Dry-Erase Whiteboard a High-Tech Makeover

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Your videoconferences are going to become far more productive.

MIT Technology Review by Elizabeth Woyk
September 11, 2017

As far as unproductive meetings go, it doesn’t get much worse than being on a videoconference when someone in a conference room 3,000 miles away starts scribbling on a dry-erase whiteboard you can’t see.

Organizations are increasingly hiring employees around the globe, and they need tools that help people collaborate across distances. But using a regular webcam to live-stream a whiteboard usually produces a mirror image in which the letters are displayed in reverse. Even when all participants can see the board correctly, shadows and reflections can make words and drawings frustratingly difficult to decipher.

Cyclops, a startup based in Cambridge, Massachusetts, is developing a new approach: an online videoconferencing service that uses computer-vision algorithms to clarify writing on whiteboards and flips their orientation so both the meeting host and remote viewers can read them easily. The technology, which took about two years to develop, reduces the “noise,” or visual distortions, produced by consumer-grade laptop cameras and webcams. Cyclops’s algorithms also scan whiteboards for marks that look like text or lines and enhances them to give viewers a more vibrant, higher-contrast image.

In recent years, Cisco, Google, and Microsoft have introduced large, Internet-connected touch-screen monitors that people can write on using a stylus. A crop of startups, including Altia Systems and Kaptivo, sell cameras that use Web-based software to make regular whiteboards interactive. But these cameras typically cost hundreds of dollars and require annual subscriptions to software packages, while digital whiteboards like Google’s Jamboard and Microsoft’s Surface Hub are as much as $9,000. Both types of products also necessitate software configuration, hardware mounting, or both.

Cyclops says its tool is easier to use and more affordable. With a webcam and a Slack account, remote colleagues can be connected to a shared whiteboard with just a few clicks. Toggles located within the app let them customize the computer-vision algorithms and adjust the image’s contrast, sharpness, and texture. An augmented-reality feature allows them to draw and type comments on top of the whiteboard image. They can also take screenshots of the board and upload the picture directly to Slack or e-mail it.

For now, the tool is entirely free. Cyclops cofounder and CEO Waikit Lau says the startup might charge a small monthly subscription fee in the future.

Cyclops still has some kinks to work out. Currently, only eight people can log in to a videoconference at the same time. The platform’s whiteboard-enhancing algorithms also result in blurriness when trying to capture fast motions, such as people gesturing or walking past the camera. Lau says Cyclops hopes to solve that problem by refining its technology so it will be able to augment just the lines on the board rather than the entire video feed.

Early users say Cyclops’s video streams stutter at times and look grainier than those produced by other videoconferencing services. But they also think its whiteboard feature and convenience set it apart from competitors, such as Appear.inGoogle HangoutsGoToMeetingSkypeWebEx, and Zoom. Before discovering Cyclops, Boston-area technology entrepreneur Paul Morville used Google’s Slides program to create online presentations that groups of people could view and edit together. He says Cyclops is a faster, simpler way to brainstorm: “You can be on a phone call and say, ‘I want to show you something on my whiteboard,’ and within 15 seconds, you’re projecting that whiteboard to the other party—and it’s clear and easy for them to read.”

Another satisfied user is Brett Terespolsky, the chief technology officer of Switch Innovation in Johannesburg, South Africa. He used to end meetings by e-mailing a photo of his marked-up whiteboard to remote colleagues. Now he opts for Cyclops, so his entire team can review and plan projects around a single whiteboard in real time.

How 3-D Printing Is Changing Health Care

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Recent advances have made the technology more useful for planning surgery and creating drugs

The Mayo Clinic printed a model of a patient’s pelvis to plan surgery to remove a rare tumor that had spread to the base of the spine.
The Mayo Clinic printed a model of a patient’s pelvis to plan surgery to remove a rare tumor that had spread to the base of the spine. PHOTO: MAYO CLINIC

A year ago, an 11-year-old girl named London Secor had surgery at the Mayo Clinic to remove a rare tumor located in her pelvis. In the past, surgeons would have considered amputating one of Ms. Secor’s legs, given that the tumor had spread to the bone and nerves of her sacrum and was encroaching on her hip socket.

That didn’t happen this time, however, due largely to advances in 3-D printing.

Before the surgery, Mayo printed a 3-D model of the girl’s pelvis, scaled to size and showing her bladder, veins, blood vessels, ureters and the tumor. Members of the medical team were able to hold the model in their hands, examine it and plot a surgical approach that would allow them to remove the entire tumor without taking her leg.

“There is nothing like holding a 3-D model to understand a complicated anatomical procedure,” says Peter Rose, the surgeon who performed the operation on Ms. Secor, an avid swimmer and basketball player from Charlotte, N.C. “The model helped us understand the anatomy that was altered by the tumor and helped us orient ourselves for our cuts around it.”

The pelvis model was one of about 500 3-D-printed objects created at the Mayo Clinic last year. It’s part of a web of organizations racing to find ways to use 3-D printing to improve health care.

Some research institutions, including the Mayo Clinic, have set up on-site printing labs in partnership with such makers of 3-D printers as Stratasys , 3D Systems and Formlabs. General Electric Co. and Johnson & Johnson are diving in, too, with GE focused on 3-D printers and translating images from various sources into 3-D objects, and J&J focused on developing a range of materials that can be used as “ink” to print customized objects.

Using data from MRIs, CT scans and ultrasounds, as well as three-dimensional pictures, 3-D printers create objects, layer by layer, using materials ranging from plastics to metal to human tissue. Beyond organ models, the printers are being used in health care to create dental and medical implants, hearing aids, prosthetics, drugs and even human skin.

Research firm Gartner predicts that by 2019, 10% of people in the developed world will be living with 3-D-printed items on or in their bodies, and 3-D printing will be a central tool in more than one-third of surgical procedures involving prosthetics and implanted devices. According to research firm IndustryARC, the overall market for medical 3-D printing is expected to grow to $1.21 billion by 2020 from about $660 million in 2016.

Though the industry is young, Anurag Gupta, a Gartner vice president of research, says 3-D printing in health care “could have the transformative impact of the internet or cloud computing a few years ago.”

The technology of 3-D printing has been around since the 1980s, but recent advances in software and hardware have made it faster, more cost-efficient and of higher quality. Five years ago, the 3-D printers made by Stratasys could print in one or two materials and one or two colors. Now they can print six materials simultaneously and create more than 360,000 combinations of textures and colors to better mimic materials ranging from soft tissue to bone, paving the way for wider adoption.

The rise of customized medicine, in which care and medicine is tailored to individual patients, also has helped fuel growth of 3-D printing in health care, as more patients and doctors seek out customized medical devices, surgical tools and drugs.

One of the areas in which the technology may hold particular promise, experts say, is in the manufacturing of drugs in the dose and shape best suited to certain groups of patients. Aprecia Pharmaceuticals recently launched a 3-D printed epilepsy drug called Spritam, a high-dosage pill that dissolves quickly with a small amount of water and in a shape that is easy to swallow.

Printing whole organs, such as livers and kidneys, remains the Holy Grail, but that is more than a decade away, says Gartner’s Mr. Gupta. Printing smaller pieces of human material, however, has already begun.

Researchers at the University Carlos III of Madrid, along with the Spanish biotech company BioDan, have printed human skin to eventually help burn victims and others suffering from skin injuries and diseases. The process involves a 3-D printer that deposits bioinks containing cells from an individual as well as other biological molecules to create a patch of skin. Like the real thing, this printed skin consists of an external layer, the epidermis, and the thicker, deeper layer, the dermis.

Organovo Holdings Inc. of San Diego prints pieces of liver and kidney tissue to test new therapies and the toxicology of early-stage drugs. Johnson & Johnson is working with Aspect Biosystems Ltd. to develop bioprinted knee meniscus tissue. And 3D Systems is developing 3-D-printed lung tissue with United Therapeutics Corp.

While entry-level 3-D printers used by hobbyists can cost a few hundred dollars, industrial 3-D printers used by hospitals can range from $10,000 to $400,000 for those that print plastics and polymers.

Another hurdle for hospitals is the “hidden cost” of operating 3-D printers, says Jimmie Beacham who leads GE Healthcare’s 3-D printing strategy. Engineers are required to transform dense digital images from MRI, CT and ultrasound scans into information that can be printed into a 3-D model. What’s more, printing a 3-D object doesn’t yet happen with the click of a button. It took 60 hours for Mayo Clinic to print Ms. Secor’s pelvis and tumor, for example.

Still, 3-D printing can lead to cost savings in other areas, say experts such as Jonathan Morris, a Mayo radiologist. Allowing surgeons to practice on 3-D models of a specific patient’s organs before surgery can significantly reduce time in the operating room. Printing implants and prosthetics on demand and on location means fewer middlemen in the supply chain and less waste. And given the better fit of customized implants from 3-D printers, patients may not have to replace them as often.

The Mayo Clinic and a half dozen other cutting-edge research hospitals have blazed the path in terms of creating 3-D printing labs on site. Now some larger city network hospitals are beginning to purchase their own 3-D printers, while smaller hospitals and doctors can order 3-D models for complicated surgeries on a case-by-case basis from 3-D printing companies.

A Survey of 3,000 Executives Reveals How Businesses Succeed with AI

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AUGUST 28, 2017

The buzz over artificial intelligence (AI) has grown loud enough to penetrate the C-suites of organizations around the world, and for good reason. Investment in AI is growing and is increasingly coming from organizations outside the tech space. And AI success stories are becoming more numerous and diverse, from Amazon reaping operational efficiencies using its AI-powered Kiva warehouse robots, to GE keeping its industrial equipment running by leveraging AI for predictive maintenance.

While it’s clear that CEOs need to consider AI’s business implications, the technology’s nascence in business settings makes it less clear how to profitably employ it. Through a study of AI that included a survey of 3,073 executives and 160 case studies across 14 sectors and 10 countries, and through a separate digital research program, we have identified 10 key insights CEOs need to know to embark on a successful AI journey.

Don’t believe the hype: Not every business is using AI… yet. While investment in AI is heating up, corporate adoption of AI technologies is still lagging. Total investment (internal and external) in AI reached somewhere in the range of $26 billion to $39 billion in 2016, with external investment tripling since 2013. Despite this level of investment, however, AI adoption is in its infancy, with just 20% of our survey respondents using one or more AI technologies at scale or in a core part of their business, and only half of those using three or more. (Our results are weighted to reflect the relative economic importance of firms of different sizes. We include five categories of AI technology systems: robotics and autonomous vehicles, computer vision, language, virtual agents, and machine learning.)

For the moment, this is good news for those companies still experimenting or piloting AI (41%). Our results suggest there’s still time to climb the learning curve and compete using AI.

However, we are likely at a key inflection point of AI adoption. AI technologies like neural-based machine learning and natural language processing are beginning to mature and prove their value, quickly becoming centerpieces of AI technology suites among adopters. And we expect at least a portion of current AI piloters to fully integrate AI in the near term. Finally, adoption appears poised to spread, albeit at different rates, across sectors and domains. Telecom and financial services are poised to lead the way, with respondents in these sectors planning to increase their AI tech spend by more than 15% a year — seven percentage points higher than the cross-industry average — in the next three years.

Believe the hype that AI can potentially boost your top and bottom line. Thirty percent of early AI adopters in our survey — those using AI at scale or in core processes — say they’ve achieved revenue increases, leveraging AI in efforts to gain market share or expand their products and services. Furthermore, early AI adopters are 3.5 times more likely than others to say they expect to grow their profit margin by up to five points more than industry peers. While the question of correlation versus causation can be legitimately raised, a separate analysis uncovered some evidence that AI is already directly improving profits, with ROI on AI investment in the same range as associated digital technologies such as big data and advanced analytics.

Without support from leadership, your AI transformation might not succeed. Successful AI adopters have strong executive leadership support for the new technology. Survey respondents from firms that have successfully deployed an AI technology at scale tend to rate C-suite support as being nearly twice as high as those companies that have not adopted any AI technology. They add that strong support comes not only from the CEO and IT executives but also from all other C-level officers and the board of directors.

You don’t have to go it alone on AI — partner for capability and capacity. With the AI field recently picking up its pace of innovation after the decades-long “AI winter,” technical expertise and capabilities are in short supply. Even large digital natives such as Amazon and Google have turned to companies and talent outside their confines to beef up their AI skills. Consider, for example, Google’s acquisition of DeepMind, which is using its machine learning chops to help the tech giant improve even core businesses like search optimization. Our survey, in fact, showed that early AI adopters have primarily bought the right fit-for-purpose technology solutions, with only a minority of respondents both developing and implementing all AI solutions in-house.

Resist the temptation to put technology teams solely in charge of AI initiatives. Compartmentalizing accountability for AI with functional leaders in IT, digital, or innovation can result in a hammer-in-search-of-a-nail outcome: technologies being launched without compelling use cases. To ensure a focus on the most valuable use cases, AI initiatives should be assessed and co-led by both business and technical leaders, an approach that has proved successful in the adoption of other digital technologies.

Take a portfolio approach to accelerate your AI journey. AI tools today vary along a spectrum ranging from tools that have been proven to solve business problems (for example, pattern detection for predictive maintenance) to those with low awareness and currently-limited-but-high-potential utility (for example, application of AI to developing competitive strategy). This distribution suggests that organizations could consider a portfolio-based approach to AI adoption across three time horizons:

Short-term: Focus on use cases where there are proven technology solutions today, and scale them across the organization to drive meaningful bottom-line value.

Medium-term: Experiment with technology that’s emerging but still relatively immature (deep learning video recognition) to prove their value in key business use cases before scaling.

Long-term: Work with academia or a third party to solve a high-impact use case (augmented human decision making in a key knowledge worker role, for example) with bleeding-edge AI technology to potentially capture a sizable first-mover advantage.

Machine learning is a powerful tool, but it’s not right for everything. Machine learning and its most prominent subfield, deep learning, have attracted a lot of media attention and received a significant share of the financing that has been pouring into the AI universe, garnering nearly 60% of all investments from outside the industry in 2016.

But while machine learning has many applications, it is just one of many AI-related technologies capable of solving business problems. There’s no one-size-fits-all AI solution. For example, the AI techniques implemented to improve customer call center performance could be very different from the technology used to identify credit card payments fraud. It’s critical to look for the right tool to solve each value-creating business problem at a particular stage in an organization’s digital and AI journey.

Digital capabilities come before AI. We found that industries leading in AI adoption — such as high-tech, telecom, and automotive — are also the ones that are the most digitized. Likewise, within any industry the companies that are early adopters of AI have already invested in digital capabilities, including cloud infrastructure and big data. In fact, it appears that companies can’t easily leapfrog to AI without digital transformation experience. Using a battery of statistics, we found that the odds of generating profit from using AI are 50% higher for companies that have strong experience in digitization.

Be bold. In a separate study on digital disruption, we found that adopting an offensive digital strategy was the most important factor in enabling incumbent companies to reverse the curse of digital disruption. An organization with an offensive strategy radically adapts its portfolio of businesses, developing new business models to build a growth path that is more robust than before digitization. So far, the same seems to hold true for AI: Early AI adopters with a very proactive, strictly offensive strategy report a much better profit outlook than those without one.

The biggest challenges are people and processes. In many cases, the change-management challenges of incorporating AI into employee processes and decision making far outweigh technical AI implementation challenges. As leaders determine the tasks machines should handle, versus those that humans perform, both new and traditional, it will be critical to implement programs that allow for constant reskilling of the workforce. And as AI continues to converge with advanced visualization, collaboration, and design thinking, businesses will need to shift from a primary focus on process efficiency to a focus on decision management effectiveness, which will further require leaders to create a culture of continuous improvement and learning.

Make no mistake: The next digital frontier is here, and it’s AI. While some firms are still reeling from previous digital disruptions, a new one is taking shape. But it’s early days. There’s still time to make AI a competitive advantage.


Jacques Bughin is a director of the McKinsey Global Institute based in Brussels.

Brian McCarthy is a partner in McKinsey’s Atlanta office.

Michael Chui is a McKinsey Global Institute partner based in San Francisco, and leads MGI’s work on the impact of technological change.

Technology Speeds Up Timeline on Quarterly Close

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Companies are taking four-and-half days to collect the quarterly snapshot of their financial position, down from six days in 2009

Duke Energy reduced its quarterly closing timeline by 30% to 40% to just a handful of days by 2010.
Duke Energy reduced its quarterly closing timeline by 30% to 40% to just a handful of days by 2010. PHOTO: MONICA HERNDON/ZUMA PRESS

As accounting becomes more reliant on technology, finance chiefs across a range of sectors are reaping substantial benefits from closing their books faster.

Companies including Red Hat Inc., RHT -1.07% Duke Energy Corp. DUK -0.51% and Dun & Bradstreet Corp. DNB -0.51% have sped up their quarterly close to gain quicker access to their results.

It takes most companies four-and-half days to capture a quarterly snapshot of their financial position in 2017, down from six days in 2009, according to PricewaterhouseCoopers LLP benchmarking studies. The consulting and accounting firm examined the practices of roughly 500 companies around the world with a median revenue of $2.5 billion.

Companies that have accelerated their quarterly close say having results in hand earlier makes decision-making easier and helps the organization become more nimble. The extra time allows the finance team to perform a deeper analysis, catch errors and invest more time in planning for the next quarter.

Dash to CloseCompanies are reducing the number ofdays spent on closing their books eachquarter.THE WALL STREET JOURNALSource: PricewaterhouseCoopers LLP
.daysTop quartileMedianLower quartile200920170.02.55.07.510.0

A faster quarterly close was the priority for Eric Shander when he joined open-source software solutions company Red Hat as chief accounting officer in 2015. Mr. Shander and his team spent 14 months streamlining and accelerating the process.

Tasks such as account reconciliation were previously left to the end of the reporting period, contributing to the last-minute rush. Now, accounts are reconciled every few weeks. Mr. Shander also redistributed book-closing responsibilities across the finance team to ensure a more equitable workload.

Red Hat now closes its books comfortably in two days, down from five days previously, said Mr. Shander, who was named chief financial officer in April.

The finance team has been more productive as a result of the extra time, Mr. Shander said. They have caught and fixed errors, dug deeper into the data before announcing results and pivots to identifying priorities for the next quarter earlier, he said.

“We’re actually considering moving up some of our earnings announcements as a result of it,” he said. “It’s been a huge success.”

Advances in technologies are helping companies accelerate their book-closing process. More companies are automating their close to reduce the amount of manual activities, such as journal entries, said William Marchionni, senior business adviser at consulting firm Hackett Group HCKT -1.31% Inc.’s Finance Operations Advisory Program.

“Some top performers are getting management reporting data on revenue, shipments, cost for goods sold, and other key metrics on a daily basis from their information systems,” Mr. Marchionni said.

For Dun & Bradstreet CFO Rich Veldran, the lure of cost savings has prompted investments in robotics and automation technology that accelerate the quarterly reporting process. The data and analytics company closes its books in four days, despite operating across more than 200 countries, which adds to the complexity of its financial reporting process.

“There’s a real opportunity for us to do things in a much more automated, faster way, within finance,” Mr. Veldran said, adding that his team is already testing several potential applications for robotic process automation in the finance function.

Steven Young, CFO of Duke Energy.
Steven Young, CFO of Duke Energy. PHOTO:DUKE ENERGY

A new software system was key to helping Duke Energy streamline its quarterly close, said CFO Steven Young. The electric utility in 2007 launched a three-year revamp of its financial infrastructure, after a series of acquisitions burdened the company with a patchwork of financial systems and processes, Mr. Young said. Duke reduced its closing timeline by 30% to 40% to just a handful of days by 2010, Mr. Young said, though he declined to state the exact number of days. The company has continued to improve its quarterly close through new technologies.

“The advantage is that you get data disseminated through the organization quicker, you can then communicate trends, patterns and that can result in quicker decisions to take tactical actions in response to the data,” Mr. Young said.

Companies that operate across multiple geographies and sell different types of products and services often require more time to close their books than a single-product, single-geography business, said Beth Paul, a partner at PwC.

CFOs in a particular sector, such as airlines, autos or retail, often aim to close their books and report results around the same time to keep in line with industry norms.

“There’s a view that they need to be consistent with their peers because if you’re lagging, it could lead people to wonder why,” Ms. Paul said, adding that straggling behind the pack could raise doubts about management’s competency.

She also noted that certain sectors, such as banks and financial services, tend to close their books faster due to greater investments in technology.

Still, for many CFOs accelerating the quarterly close process remains a low priority. Instead, these companies have focused on meeting increasing regulatory demands and deployed resources to operational projects such as entering new markets or launching new product lines.

“Account-to-report has historically been the last place where companies invest. It isn’t client facing, and they have ended up doing things on a shoestring,” said Hackett Group’s Mr. Marchionni.

Next Leap for Robots: Picking Out and Boxing Your Online Order

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Developers close in on systems to move products off shelves and into boxes, as retailers aim to automate labor-intensive process

Your Next Online Order Could Be Picked Out by a Robot
Facing more pressure to speed orders more quickly to customers, a rising number of companies are using high-tech robots in their manufacturing process. But could it render humans obsolete? The WSJ takes a look inside.

Robot developers say they are close to a breakthrough—getting a machine to pick up a toy and put it in a box.

It is a simple task for a child, but for retailers it has been a big hurdle to automating one of the most labor-intensive aspects of e-commerce: grabbing items off shelves and packing them for shipping.

Several companies, including Saks Fifth Avenue owner Hudson’s Bay Co. HBC -0.27% and Chinese online-retail giant JD.com Inc., JD 1.07% have recently begun testing robotic “pickers” in their distribution centers. Some robotics companies say their machines can move gadgets, toys and consumer products 50% faster than human workers.

Retailers and logistics companies are counting on the new advances to help them keep pace with explosive growth in online sales and pressure to ship faster. U.S. e-commerce revenues hit $390 billion last year, nearly twice as much as in 2011, according to the U.S. Census Bureau. Sales are rising even faster in China, India and other developing countries.

That is propelling a global hiring spree to find people to process those orders. U.S. warehouses added 262,000 jobs over the past five years, with nearly 950,000 people working in the sector, according to the Labor Department. Labor shortages are becoming more common, particularly during the holiday rush, and wages are climbing.

Mechanical engineer Parker Heyl adjusts a robotic arm at RightHand Robotics’ test facility in Somerville, Mass.
Mechanical engineer Parker Heyl adjusts a robotic arm at RightHand Robotics’ test facility in Somerville, Mass.PHOTO: SIMON SIMARD FOR THE WALL STREET JOURNAL

Picking is the biggest labor cost in most e-commerce distribution centers, and among the least automated. Swapping in robots could cut the labor cost of fulfilling online orders by a fifth, said Marc Wulfraat, president of consulting firm MWPVL International Inc.

“When you’re talking about hundreds of millions of units, those numbers can be very significant,” he said. “It’s going to be a significant edge for whoever gets there first.”

Until recently, robots had to be trained to identify and grab each item, which is impractical in a distribution center that might stock an ever-changing array of millions of products.

Automation companies such as Kuka AG KU2 -0.45% , Dematic Corp. and Honeywell International Inc. unit Intelligrated, as well as startups like RightHand Robotics Inc. and IAM Robotics LLC are working on automating picking.

In RightHand Robotics’ Somerville, Mass., test facility, mechanical arms hunt around the clock through bins containing packages of baby wipes, jars of peanut butter and other products. Each attempt—successful or not—feeds into a database. The bigger that data set, the faster and more reliably the machines can pick, said Yaro Tenzer, the startup’s co-founder.

Hudson’s Bay is testing RightHand’s robots in a distribution center in Scarborough, Ontario.

“This thing could run 24 hours a day,” said Erik Caldwell, the retailer’s senior vice president of supply chain and digital operations, at a conference in May. “They don’t get sick; they don’t smoke.”

JD.com is developing its own picking robots, which it started testing in a Shanghai distribution center in April. The company hopes to open a fully automated warehouse there by the end of next year, said Hui Cheng, head of JD.com’s robotics-research center in Silicon Valley.

Swisslog, a subsidiary of Kuka, sells picking robots that can be integrated into the company’s other warehouse automation systems or purchased separately. The company sold its first unit in the U.S., to a large retailer, earlier this year, said A.K. Schultz, Swisslog’s vice president for retail and e-commerce. Mr. Schultz declined to name the retailer.

Previous waves of warehouse automation didn’t lead to sudden mass layoffs, partly because order volumes have been growing so fast. And automated picking is still at least a year away from commercial use, robotics experts say. The main challenge lies in creating the enormous databases of 3D-rendered objects that robots need to determine the best way to grip new objects.

RightHand Robotics co-founders Leif Jentoft, left, and Yaro Tenzer
RightHand Robotics co-founders Leif Jentoft, left, and Yaro Tenzer PHOTO: FOR THE WALL STREET JOURNAL

Some companies hope to speed development by making some research public.Amazon.com Inc. will hold its third annual automated picking competition at a robotics conference in Japan later this month. For the first time, entrants won’t know in advance all the items the robots will need to pick.

At the University of California, Berkeley, a team is simulating millions of attempts to pick 10,000 objects. Funded by Amazon, Siemens AG and others, the project is meant to build an open-source database for use in any automation system, said Ken Goldberg, the professor leading the project.

“With 10,000 objects, I’m surprised how well it did,” he said. “I would love to show it 100,000 examples and see how well it performs after that.”