The WalMart Earnings Miss is a Cannon Shot for the Retail / CPG Industry

Like many other investors, I was glued to CNBC yesterday as WalMart announced an earnings miss, a renewed commitment to ecommerce (to the tune of $1B+), and a $20 billion share buyback. I don’t personally own shares in WalMart, nor does my firm, so why the interest?

It publicly validated what many of us in Silicon Valley have been betting on for several years now: technology is quietly eviscerating slow moving retail/CPG incumbents from below. It’s not just Amazon. In the U.S., it’s Instacart, Boxed Wholesale, Wish, Blue Apron, Plated, Postmates, Jet, Dollar Shave Club, MiniBar and many others. In China, it’s companies like TMall Chaoshi, Womai and Xiaohongshu. In India, we may see the entire grocery category dominated by an online/mobile-only model (the largest existing player is less than $1 billion in annual sales). As First Round Capital’s Josh Kopelman said to me when we were discussing an investment in the space last year:

“We believe the mobile guys are going to figure out retail before the retail guys figure out mobile.”

Public investors commenting on WalMart’s miss seemed to be completely unaware of this industry shift (though kudos to Jim Cramer, who nailed it on CNBC) and were more focused on wage increases and Amazon than anything else. So what’s really going on under the surface? Three key trends:

CPG is a $750 billion industry, and less than 2% of it is online

Wait, what? How is that possible? Well, for starters, the incumbent players haven’t really wanted it to go online. Their existing stores and supply chain infrastructure are complicated, complex and expensive, and took decades and billions of dollars to build. It’s not easy to cannibalize your own competitive advantage. However, the supply side is anxious: I’ve spoken with top execs from the largest food brands in the world over the past few weeks, and every one of them is painfully aware the market is shifting — and they need to get going. They can’t wait around for the incumbents to get their act together.

Venky Balakrishnan, Global VP of Digital at $70 billion wine and spirits leader Diageo, told me recently “We get it. Our next generation consumer is on mobile. We are aggressively focusing on Silicon Valley and innovation elsewhere.”

Though emphasizing ecommerce as a key focus for the future, WalMart did just $10 billion in ecommerce sales in 2014, and is projecting $13 billion or so for 2015. Impressive growth, but to put it in perspective, that’s less than two weeks of sales across Alibaba’s platforms (which did $100 billion in ecommerce sales in Q2 alone). WalMart needs to take a page from the playbooks of Starbucks and Nordstrom — two legacy retailers who are nailing it on ecommerce and mobile.

Today’s shopper is a Mobile Mom

If Amazon was Marines storming the beach of traditional retail, this is the Army coming in from all sides. Women direct 85% of all consumer purchases, and control the majority of household goods (CPG) spending. Retailers and CPG companies know this, and have marketed to moms through in-store promotions, endcaps, samples and mailers for years. But — here’s the catch — when mom doesn’t come into the store, those don’t work.

Today’s mom wants the flexibily to shop while on the subway home from work, at a kids soccer game, or anywhere else for that matter. I know it sounds crazy, but she really doesn’t want to spend 2 hours of her day inside a big, boxy store when she could be going for a run or playing with her kids.

The threat posed by the shift to the Mobile Mom also presents an enormous opportunity for CPG companies. The mobile app becomes the virtual endcap, and every shopper gets a different look (an endcap is the display at the end of a store aisle — highly valued space inside the store), highly customized to her interests, preferences and shopping behavior.

The mobile app as “virtual endcap” via the Boxed Wholesale app.

CPG companies have an opportunity like never before to reach consumers with the right products at the right time — right at the point of purchase. It’s a marketer’s dream scenario — unless they are still lamenting the fact that shoppers are no longer coming into the store.

The opportunity is global

This is the biggest shift over the longer term, and certainly the big one public investors should be paying attention to. Apple, P&G, Mercedes and many other brands have stated that China is their most important and fastest growing market (Apple sales rose 112% in China last quarter, vs. 33% overall). But China is just the beginning.

Today there are 2 billion smartphone users globally, a number that will grow to more than 4 billion in the next 5 years:

For comparison, when Amazon went public in 1997, there were less than 100 million people on the Internet. Almost all of these 2 billion new users will be outside of the U.S. and Europe, and most will have never been on the Internet on a PC. That’s right, more than 90% of the addressable market will be outside the U.S. The income levels, purchasing behavior and social norms of these consumers are wildly different than your typical “middle class” U.S. consumer. The management teams going after these markets must be diverse, well-traveled, and as comfortable doing business in Shanghai as they are Seattle.

So who wins?

The top companies in technology/retail/CPG are on top of these trends and will win over the next 5–10 years. What does “win” mean? Well, let’s take a hypothetical investment in “new retail” players Amazon and PayPal 10 years ago (PayPal was acquired by eBay, but we’ll use market cap when it was acquired vs market cap today) versus a similar investment in “incumbent retail” players WalMart and Verifone. Ten thousand dollars invested in Amazon and PayPal would now be worth approximately $200,000. That same $10,000 invested in WalMart and Verifone would be worth about $13,000 (not including dividends). Pretty stark.

Yesterday’s announcements from WalMart confirmed what many in Silicon Valley have been betting on for years — the market is shifting, fast. Tomorrow’s retail/CPG consumer is mobile and global. It will be interesting to see how things play out from here.

Our money is on the entrepreneurs.

Jeff Richards is a Managing Partner at GGV Capital, a $2.6 billion venture capital fund focused on the U.S. and China. Follow him on Twitter @jrichlive.

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