Retail, really? Isn’t it dead?
In 2018, we invested in 2 Retail-tech companies: Trigo Vision, a developer of a video-based retail automation platform, and another company which is still in stealth. Often the comments we have heard were along the lines of this title, so we decided to share this brief post with our early, high level thoughts about this space and observations from working with these companies, as well as with our fast-growing eCommerce-Tech portfolio companies - YotPo and Dynamic Yield.
Retail is a $28tn industry (Trillions, not Billions), growing at 4–5% YoY. The eCommerce segment is clearly growing much faster (~20% YoY), but it is just around 10% of the overall retail industry and expected to reach 15% in the coming years with decelerating growth rates. So we can say for sure that offline retail as an industry is not going anywhere, at least not in the foreseeable future.
However, the retail industry is going through dramatic changes that will completely transform every aspect of it in the coming years. The rise of eCommerce and the dominance of Amazon in almost every segment in that market are driving big department stores and consumer electronics chains out of business and putting grocery players under pressure. Digital native brands emerge with direct to consumer (DTC) online strategy that is enhanced with offline stores, and more traditional brands are trying to catch up, investing heavily in their direct online and offline channels. Apple showed the world how Experiential Shopping is done right, with exceptional impact on brand and sales, and we have also seen new business models, like subscription, become mainstream. And then, of course, we have Amazon Go, the revolutionary no-line, no-checkout stores.
We can only imagine what is being discussed these days in board and senior management meetings at Retail companies, but it is probably safe to say they spend much of their time thinking about their strategy in the new world, and one of the first things they are doing is turning to technology. Over the years we have seen little change in how stores operate, with only limited impact by technology. Even technologies like RFID, that, when done right, can improve operations and margins, are still not mainstream within stores. But our belief is that 2018 was the inflection point. Over the past few months, we have seen, on a weekly basis, news about new partnerships between retailers and tech companies, both startups and tech giants. Retailers are much more engaged with the tech ecosystem, with budgeted programs, senior management sponsorship and C-level visits to tech hubs. One of our portfolio companies was even invited to show case its tech to and share its vision with the board of a multi billion retailer.
So a multi trillion dollar industry is being disrupted with many of the incumbents likely to disappear, while new winners emerge, and with technology playing a key role going forward. Sounds like Disneyland for entrepreneurs and investors. What’s the catch?
The catch is that we are early in the innovation cycle, and these are still retail companies: big, slow and often led by internal politics rather than strategy. This is not going to go away easily and quickly (and for some maybe never). In addition, we need to remember that most players are yet to have real strategy and are often just reacting to what we all read in the news, with frequent shifts in priorities. Lastly, the change is not a cosmetic one but rather a deep one that would most likely require the restructuring of the organizations and their internal processes, the hiring of talent currently not existing in these companies, as well as the implementation of complex set of technologies, with a mix of hardware and software, which will take time and likely to be costly.
So assuming we are now on square one, where do we start? At this stage of the innovation cycle, we prefer to focus on deep technology companies that would allow retailers to fundamentally change how they run their business and in-store customer experience. One example is companies that help close the logistics gap with Amazon, allowing to compete on both price and time of delivery (e.g., CommonSense Robotics, Bringg). Another example is companies that help retailers compete in the era of Amazon Go (e.g., our Trigo Vision). The technical challenge here is that most retailers don’t have the luxury of building new stores or completely retool existing ones with expensive, sensor heavy, technology, so they need a much cheaper and leaner approach (e.g., Video only), which also allows gradual adoption — start with in-store analytics and security capabilities before moving to fully automated stores. Clearly many other opportunities would emerge, but just like the case with other markets, we expect a quick shift from under to over investment in the space, leading to highly noisy and competitive market for startups, and this is one of the reasons we opted to invest in a few of the early movers that may be well positioned to rise above the noise.
To summarize, we see a lot of similarities to what we have seen in the automotive space over the past 3–4 years. Highly disruptive trends driving innovation in both technology and business models, and incumbents having to invest heavily and collaborate with startups to remain competitive. However, there are also couple fundamental differences between the automotive and retail markets, mainly around the fact it is unlikely anyone will get injured by an autonomous shop, at least not physically, and, except perhaps for privacy issues, regulators are unlikely to interfere. Also, while autonomous cars are said to be 5–10 years away, Amazon-Go is here and quickly expanding. So, we expect to see the change takes place much faster in retail, with potentially better ability for startups to build and scale a business in the space.
