Retail Tech Trends under COVID-19（Part 2）
Over the past few years, we at DNX have been focused on deepening our understanding of the retail sector and building out our investment thesis on the future of retail tech startups. More recently, COVID-19 has irrevocably changed the overall outlook of the sector and we would like to share some of our research on the structural shifts that we’ve witnessed. This post is an extension of a retail tech industry overview presentation that we did for our LPs.
In Part I, we discussed why DNX is focusing on the retail tech space and the impact of COVID-19 on the retail tech space in Japan, China, and the U.S.
In Part II, we provide a framework of the retail tech value chain, the solutions used most frequently within each of those value stages, and which solutions will likely rise in importance in a COVID-19 retail landscape. We then dive deep into certain solutions that we as DNX find particularly interesting.
1. The Retail Tech Value Chain
There are arguably many different ways to split up the retail tech value chain, but we segmented it based on what retailers and brands are doing at each stage of the customer journey: pre-purchase, purchase, and post-purchase.
Pre-purchase tools are generally those that help brands and retailers develop products, assort merchandise, and outreach to their targeted customers. Purchase tools are those that help brands and retailers sell more effectively on the store “floor” whether that be in a brick-and-mortar store or an e-commerce store. Post-purchase tools are those that help brands and retailers manage all of the logistics of ensuring a customer properly receives a purchased item, as well as, customer engagement tools that can be used to extend the customer lifetime value.
Which solutions will likely rise in relative importance in a COVID-19 retail landscape? The starting point to answer that question is to first think about how consumer sentiment changed before and after the pandemic. Before COVID-19, the US and Japan both were experiencing relatively robust economic growth and that translated to high consumer willingness to spend on non-essential discretionary goods, with relatively stable demand for essential goods (i.e., groceries, toiletries). Now with COVID-19 and the resulting economic downturn, discretionary consumer spending has dropped, with a massive, if not, volatile increase in demand for essential goods. Before COVID-19 e-commerce was unequivocally growing (as discussed in the previous post), but brick-and-mortar retail still made up a majority of retail purchases. Consumers in a pre-COVID era sought out not just the convenience of being able to take home an item immediately after a purchase, but also the memorable shopping experiences. Now with COVID-19, consumers are demanding to be able to shop online and have the purchased products either shipped to their home or available for pickup at a nearby retail location (i.e., Buy Online Pickup In-Store or “BOPIS”). For consumers willing to enter a brick and mortar store, they care deeply that the retailer has invested in rigorous sanitation measures to ensure that the store is safe.
Knowing how consumer sentiment changed over the course of the pandemic informs which retail technology, across the value chain, will increase in relative importance. Among pre-purchase tools, brands and retailers will likely scrutinize their existing inventory management and demand forecasting tools to ensure that they can properly respond to potentially volatile consumer demand. Among purchase tools, solutions that help retailers reduce physical touchpoints without ruining the shopping experience will likely rise in importance, with a particular focus on robotics for measuring on-shelf availability, contactless payments, and socially distant shopping. Among post-purchase tools, brands and retailers will likely look into how they can bolster their e-commerce distribution channels, especially using micro-fulfillment centers, last-mile delivery solutions, and returns and exchanges management software.
We now will dive into a few specific COVID-19 era solutions that we as DNX have found to be particularly exciting.
2. Deep dive: Demand Forecasting and Planning
The first is Demand Forecasting and Planning, which are tools that use data to develop an estimate of consumer demand. For businesses, demand forecasting provides an insight into the amount of goods and services that customers will likely purchase and therefore how much the retailer should prepare in inventory. However, simple demand signals, like past orders will no longer be enough of an indicator to keep retailers ahead in a new COVID-19 world. Retailers will need new platforms that can provide and ingest more complex datasets — such as foot traffic, weather, and health indicators — to help retailers plan for highly variable demand. Demand Forecasting and Planning tools have existed long before COVID-19, but the following slide shows a few companies that we saw a lot of potentials.
3. Deep dive: Next-Gen PoS and Contactless Payments
The second deep-dive is Next-Gen PoS and Contactless Payments, which are tools that enable retailers to accept a multitude of payment methods — from cash to NFC to facial recognition — and provide retailers with value-added services and analytics based on those transactions. With COVID-19, there has been highlighted sensitivity towards hygiene and safety and the demand for a seamless and contactless payment solution is likely to become a priority at retail stores.
4. Deep dive: Social Commerce
The third deep dive is Social Commerce. Social Commerce refers to the ability to shop online on a social media and video distribution or streaming platform. Social Commerce has existed for some time now — this segment is growing especially in China — but we reasonably expect more similar products to emerge and grow in the US and in Japan. A big catalyst for this is undoubtedly COVID-19; as the pandemic forced brick-and-mortar stores to close their doors, consumers and brands now have no choice but to transact online. However, rather than offer their products on a static and unengaging shopping platform, live streaming functionality of social commerce solutions can be used to guide participating customers through the personalized merchandise selection to the payment process, making the experience all the more personal and engaging. While social commerce as an extension of existing social media platforms (e.g., Facebook, Instagram, and Pinterest) will likely be how most people initially engage with this new form of shopping, we are particularly excited about the emergence of native platforms like PopShop and ShopShop that are creating platforms specifically around social shopping.
5. Deep dive: Last-Mile Delivery
The fourth deep dive is Last-Mile Delivery, which are companies focused on helping brands and retailers move goods from a transportation hub to a final destination. Last-mile delivery solutions have grown at a steady rate for a number of years, but the pandemic has served as a catalyst for explosive demand for these services especially among brands and retailers that don’t already have their own end-customer distribution channels. Most businesses today lean heavily on third-party gig companies, but we are particularly excited about technological progress in robotics and autonomous vehicles, as a means to serve this delivery demand.
6. Deep dive: Micro Fulfillment
Micro-fulfillment involves a store building out a robot-driven system in the back of the house to help automate the assembly of online grocery orders. Because of the COVID-19 pandemic, there is a demand for robotic fulfillment facilities that will support the online food delivery industry as these facilities can pick and handle grocery orders faster and more accurately.
7. Deep dive: Retail-in-a-box
The final deep-dive is “Retail-in-a-box” solutions, which are end-to-end retail software packages that allow brands and retailers to stand up a shop (either e-commerce or brick motor) in a fraction of the time that it used to even a few years ago. These solutions often include white-labeled payments, marketing, fulfillment, and customer engagement tools. The most notable of“Retail-in-a-box” solutions are, of course, Shopify, BigCommerce, and Magento, but we expect there to be an emergence of many more “Retail-in-a-box” solutions that cater to the end-to-end needs of a specific retailer category (e.g., home improvement, pharmacy/medicine, or sports equipment). In a COVID-19 environment, brands need agile and lightweight selling tools to thrive and survive. Especially for physical-only brands and retailers, they need a quick e-commerce solution to maintain sales.