We are witnessing an incredible transformation of the world economy, with China predicted to overtake USA by 2030. Billions of people are coming out of poverty, populations around the world are moving from the countryside to cities and a new generation of consumers are growing up entirely digital. By 2020, 27% of Europe’s consumers will have been born after 1980.
McKinsey and Co describes these trends in the four global forces breaking all the rules.
Arguably, no industry is feeling the effect of these changes as profoundly as retail. Digital technologies create connectivities that fundamentally change and disrupt commerce, blurring the distinctions between the physical and digital worlds, between buyers and sellers and between brands and retailers.
The world as we know it is being remade to cater for an on-demand and empowered generation, high on expectation and low on patience, expecting a personalised yet convenient service, often with more knowledge of the product they are buying than the person doing the selling.
New business models and global players such as Amazon, eBay and Alibaba have emerged to service demand that traditional retailers failed to recognise. Talking about multi-channel or omni-channel challenges entirely misses the point; what we are seeing is a wholesale transformation of an outdated industry.
Retail won’t die, but it must change. Retailers will adapt and the strong will survive; and entirely new models and business will emerge. And that is why we think retail tech is one of the most exciting areas for investors in 2015.
Retail enablers versus retail disrupters
We see retail innovation and investment opportunities falling into two broad categories – enablement and disruption. Enabling technologies help existing retailers to adapt to change, while the disrupters are challenging the existing preconceptions of what it means to be a retailer.
Retailers as a whole have been under investing in technology and are now racing to adapt to demanding, price sensitive shoppers, armed with a mobile phone and a ceaseless array of choice.
Many are on ‘burning platforms’, silo’d legacy products that undermine their fundamental ability to manage inventory with 100% item-level accuracy at one end and a fully integrated buying experience at the other. Furthermore these legacy products stifle the very ability to foster cultures of innovation critical to success – failing fast and often.
A new wave of open, cloud-based retail enablement platforms (or apps) will provide the operational backbone for ambitious retailers. These apps will sit on top of “retail as a service”, unifying frameworks within which each – and future technologies – can exist, enabling the agility to adapt and innovate at speed.
This is by no means an exhaustive list, rather outlining some of the key areas of innovation and investment that we are tracking:
- Inventory management – the digitisation and interconnectivity of inventory to optimise stock levels and sales across all channels will be a major area of focus. Anatwine is interconnecting the inventory systems of brands and online retailers to create a seamless experience while Detego is connecting physical inventory across an entire retail operation to deliver real-time, item level transparency.
- Product management – rich product data is critical to all aspects of personalisation and performance marketing and remains a major retail headache. This is a sector dominated by the major players such as Hybris (an SAP company), with a few well positioned challengers such as Sweden’s inRiver.
- Commerce platforms – providing fundamentals of transactional capability online and mobile, we expect to continue to see disruption in this space. The market is again dominated by the big players, IBM, Hybris, Demandware – but there are many retailers still to replace legacy waterfall technologies and we expect to see a number of new agile platforms emerge such as London-based Aurora Commerce.
- Logistics – streamlining supply chain management, delivery and returns remains an area of significant cost and focus. Numerous players in this space are challenging MetaPack, including Scurri and Veeqo. As well as specialists in returns such as Clear Returns.
- Payment services – new methods and models of payment that enhance user experience across all channels and devices. A major battleground for innovation in disruption with major players such as Klarna through to early stage businesses such as Trurating disrupting payment to capture POS ratings and reviews. With of course many companies innovating in and around mobile.
- Social enablement / collaboration – reaching out into social networks to enable discovery, purchase and sharing, for example BuyaPowa or Shopa.
- Marketplace management – maintaining integrity of multiple channels will only increase as brands and retailers look to reach new international markets, putting companies such as Volo Commerce in an exciting position.
- Data management, analytics and intelligence – the ability to enhance customer understanding to improve experience. RetailNext has just secured major funding and numerous big data solutions capturing online and offline data abound. Ometria continues to evolve and innovate in this space.
- Visual / Video commerce – using video to enhance online sales such as Vee24 with video co-selling on mobile with embedded sharing, tracking and transactional ability from companies such as Olapic, capturing and curating images from social networks.
- Personalisation – combining insight and behavioural data to deliver unique and engaging experiences across all channels to maximise conversion and repeat purchase. For example Qubit, optimising onsite conversion.
- Performance marketing – targeted, payment by results client acquisition – an incredibly diverse and competitive market from companies such as Intelligent Reach and StitcherAds.
New models of retail are rapidly emerging building on new methods of production, interconnected places and objects as well as broader social and economic change. Arguably these areas of disruption far oustrip the enablers in terms of risk and reward.
In a recent Forces article Barbara Houe describes the impact changing consumer behaviour is having on retail. http://www.forbes.com/sites/barbarathau/2015/02/10/a-look-at-the-retail-model-of-the-future/
In a recent article Kyle Fugere at Dunn Humby Ventures nails three new retail models, emerging from the lessons learned in flash sales – subscription commerce, consumer to consumer and on-demand – combining the loyalty and multi-vertical disruption that the early flash sales lacked.
Again nowhere near comprehensive, but below are a few of the disruptive retail models currently emerging we are tracking on behalf of retailers and investors.
- Vertically integrated micro-retail: new models of production, combined with technology, plus creative, building global niche markets. A good example of this would be a company such as Knyttan offering digital knitwear made to order or yrstore, offering unique t-shirts and accessories.
- Connected retail: Shoppers will experience new retail models combining physical locations and connected devices to offer truly unique experiences. Not a perfect example, but Farfetch offers a transformational opportunity to fashion boutiques around the world to connect to new audiences and recently raised an additional $86m at a market value of $1bn. While mobile apps that offer an in-store mode are gaining significant traction in South Korea.
- Collaborative consumption – new economic models that shift consumers from ownership to shared access across communities. Naked Wines customers, called Angels, fund independent wine-makers in advance in return for wholesale prices.
- Circular economy – new economic and retail models that shift the notion of purchase “take, make, waste” to one where materials can be reused instead. Michelin Tyres has long been an exponent of the circular economy and surely it won’t be long before we see tyre purchase be a thing of the past.
- Mass customisation – the ability to produce personalised product at scale is not new, but the potential to align flexible computer-aided manufacturing systems with custom output remains for many the future of retail. Similar to the vertical integration model above, but offering broader opportunities within, for example 3D printing market places or hubs such as Shapeways or 3dhubs.
- Marketplaces – this area is still ripe for innovation with the advent of vertical, horizontal, local to local or local to global marketplaces, creating unique experiences between offline products and online audiences, wherever they may be. Streethub is connecting local boutiques with online audiences, while Shopa connects retail brands with consumers through social networks, recommendations and curated collections. Lyst, the London based fashion destination has also recently raised almost $50m.
- Subscription commerce – applying the SaaS philosophy of purchase and ownership to regularly purchased retail products is taking hold, start-ups such as Graze have created a new category of consumption.
- Consumer-to-consumer commerce may not be new, but we do expect to see a resurgence, as highly connected shoppers use the power of their networks to create new forms of value.
- On-demand retail, with the advent of the connected home, we will see an increasing ability for brands and retailers to deliver products as and when they are needed.
Each of these areas has the potential to create entire new categories of retailers, as well as to inform future strategies for existing retailers as they seek to re-invent.
Over the coming weeks we will be digging further into retail enablement and disruption, looking at the biggest fund raises in each category from the last 12 months, the leaders setting the pace in each sector and the ones to watch.
Blog produced in partnership with Stephen Millard and Matt James at Eccomplished.