By Hiro Rio Maeda, Rickie Koo of DNX Ventures
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 will discuss 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.
0.What is Retail Tech?
First off, what is retail tech? There are many different sub-sectors within retail tech but here is a non-exhaustive list of some examples.
Shelf management tools and solutions include a variety of robots, drones, sensors, and camera visuals process technology that help retailers and brands measure shopping throughput, analyze on-shelf availability, and ensure planogram compliance.
Supply Chain and Fulfillment
Software and hardware solutions designed to help get brands, distributors, and retailers get products from point A to point B in an efficient way.
From the traditional PoS machines to more camera-based automated solutions, checkout technology helps retailer’s process and store shopping transactions and is a crucial layer of any retailer’s technology stack.
Data and Analytics
With so much product, customer, and operations data created in today’s retail environment, data aggregation, and analytics tools can help brands, distributors and retailers make sense of it and drive management decisions.
As modern consumers traverse between online and offline shopping environments, omnichannel marketing tools help brands and retailer deploy their marketing and advertising efforts across the entire shopper journey.
Convenient access to products is now table-stakes, and experiential tools — leveraging media, AR, and VR — help brands and retailers further differentiate themselves from the competition.
1. Why DNX is focusing on Retail Tech
Traditional retail has gone through a tough few decades and many of our beloved retailers — RadioShack, ToysRUs, JC Penny — have either been restructured or filed for bankruptcy. Those who survived were those who were able to out-innovate, either the business model or the technology stack (it was often both). We believe that retailers will continue to invest in technology tools and solutions to stay competitive and to keep their customers happy.
The dust has not settled in the e-commerce space either. Although e-commerce has been around for more than 30 years and Amazon has positioned itself as the front-runner in the space, innovation far from over. While increasing significantly over the past few years, JP Morgan predicts that e-commerce — even with COVID-19 — will likely only penetrate 20% of overall retail sales in 2020. What are the tools and solutions that e-commerce brands and retailers will use to try to close the gap with their brick & mortar competitors? We believe that there will continue to be tremendous opportunities for retail tech companies in the digital space.
We are not the only VC firm interested in retail tech. Venture investments in retail tech companies have been gaining momentum rapidly over the last 10 years with roughly $16 billion invested every year and many notable unicorns emerging. We are encouraged that other venture investors have seen the same market opportunity that we have.
In response to this, DNX is also accelerating its investment in retail tech in Japan and the U.S.
What’s our investment thesis in this space?
Automation and Digitization of the Brick & Mortar Store: Since so much of retail is still conducted in a brick & mortar setting, we believe that retailers will continue to invest in improving the customer experience and operational efficiency of their physical stores. Almost every aspect of a physical store — from the checkout, inventory management, to digital signage — can be further automated and digitized. However, the key to adoption is really understanding the client store’s existing operational workflow and building the retail technology solution around that workflow, rather than forcing the retailer to bend-over-backward to make the solution work for them.
Retail-in-a-Box solutions: The growth of Square and Shopify, for brick & mortar and e-commerce sectors respectively, has shown that there is a huge market for out-of-the-box full-suite retail solutions. With these solutions, a café owner or an aspiring DTC brand CEO can open and run a store in a matter of days. However, there is limited utility in these broad-based solutions, if the retailer is in an industry that necessitates a specific customer experience. As such, we are seeing (and will continue to see) a lot of sector-specific retail-in-a-box companies, each providing a bespoke but comprehensive infrastructure for a retailer to engage in commerce in their domain.
Omnichannel forward and reverse logistics: As more consumers demand same-day delivery, omnichannel retailers will need to reevaluate their existing infrastructure to see where they need to retool or augment, with some of that improvement coming from the investment in technology. Particularly interesting in the age of e-commerce is the growth of “reverse logistics” tools, as retailers need to offer seamless returns and exchanges experience when the consumer can’t touch and feel the product before purchase.
How would COVID-19 impact the retail industry go forward and how should we reorient our investment hypothesis? These are the discussions we — from both sides of the Pacific — the U.S and Japan team, keep having.
2. Impact of COVID-19 on Retail Industry (US)
First, let’s take a look at the data to see how much of an impact it had on the U.S retail industry.
Venue-specific foot traffic
Not surprisingly, foot traffic across most venues dropped after March 15th, with movie theaters, airports, and bars seeing the sharpest decline. Foot traffic to supermarkets and general merchandise stores saw a slight jump, likely because of the panic-buying, and stayed flat with pre-COVID periods.
Brand-specific foot traffic
As people spent more time at home, home improvement stores like Home Depot saw an increase in the number of visitors. On the other hand, traffic to restaurants such as Starbucks and McDonald dropped sharply.
E-commerce penetration in retail sales
While e-commerce still has a long way to go as far as overall retail penetration, COVID-19 has unequivocally increased e-commerce adoption and set a new course of consumer behavior. The same JP Morgan and US Department of Commerce data show what used to be around 16% e-commerce penetration of total retail is now more than 20%, largely having to do with people being unable to go to a physical store. Even though COVID-19 has subsided in certain regions around the world and stores have been slowing and cautiously opening, we fully expect certain COVID-19 era shopping behaviors to stick.
The State of Retail Tech Startups
With such sudden changes in the circumstances surrounding retail, COVID-19 has bifurcated the retail tech landscape between “winners” and “losers.” Instacart and Doordash — marketplace platforms for grocery and food delivery — have seen outsized demand during this period and both have raised significant growth capital to capture this demand. E-commerce infrastructure companies — such as Stripe with payments and Shopify with digital storefronts — have similarly benefited from so much of the commerce having moved online.
On the other hand, retail tech companies that are contingent on brick & mortar retail have suffered. b8ta (pronounced “beta”), which creates mixed retail and presentation centers for consumer electronics and home goods was forced to shut down its stores all at once during the shelter-in-place. Toast, which was growing rapidly with retail POS vendors especially among restaurants, also had to do major layoffs.
3. Impact of COVID-19 on the Retail Industry(Japan and China)
Let’s take a look at the data to see how much of an impact COVID-19 had on the Japanese and Chinese retail industry.
Retail Sales trends in China
Given that China was the first country to be materially affected by the pandemic, as well as, the first to emerge from the crisis, we’ve been watching Chinese data closely to see what we can infer about retail during and after COVID-19. Looking at retail as a whole in the context of February, it was in a pretty grim state, with only food and grocery seeing a jump. Things like apparel and footwear were way down. So Food & Grocery is the winner under COVID-19 in the retail industry.
Chinese Fresh Food Sales via E-Commerce Apps
The overall data shows a shift to e-commerce for the people in China also. Data on sales and other aspects of major grocery e-commerce apps are all showing rapid growth.
Introduction of Delivery Robots in China
Autonomous last-mile delivery robots were considered interesting but difficult to adopt at scale because of high capital expenditure, inconsistent demand and regulatory issues. But during the first few months of pandemic and a massive increase in demand for delivery services, we saw material increase in the number of unmanned last-mile robots and automated delivery vehicles in various parts of China. Many believed that the market would take off, but the news since March has shown that there is a sharp decline in robots deployed. This suggests that it will take some more time to see a true penetration, including the development of ROI and various regulations, into the market. It will be some time to come for a complete penetration of the market.
COVID-19 impact on Japan’s retail
Here is the industry-specific data that came out of Japanese credit card analysis, showing supermarkets doing really well with convenience stores doing fairly well. The rest of the industry was devastated.
Here is the data courtesy of Seven & I Holdings, the largest convenience store chain in Japan, who is one of our LPs. Supermarkets sales grew as people bought more food to eat at home instead of going out to eat. Convenience stores are flat, while department stores and family restaurants are experiencing a big drop in users.
Change in Consumption Trend : Japan
How would consumer trends change, going forward? In Japan, unusual trend values were spotted in such items as face masks and toilet paper. We have seen completely unpredictable consumption behavior that is difficult to analyze solely based on past data. If this era of COVID-19 continues, there is going to be so many variables in things to come.
I think we are in a period in which it is important to take policy measures that include things such as the feel you get in the store, things that cannot be seen through data alone, so-called big data analysis and ordinary AI.
4. Impact of COVID-19 on the Retail Industry (Summary)
We’ve been talking about the impact of COVID-19 in the retail industry. In this last part, we’ll summarize the impact on retail itself and consumers.
The Psychological Impact on Consumers
If you summarize the impact both on the consumers and the retail industry itself, there is a huge psychological impact of instability and uncertainty. It’s not lightweight anxiety; about 20% of people are experiencing incredible stress. With layoffs going on all over the place, the economic uncertainty also hits hard; traumatizing people in many ways, affecting their mental health. The other part of the psychological impact is this sense of expectation toward physical stores, which was not there before; people are very sensitive to things like hygiene and safety now, which, until now, was not something that Americans expected, but now they are looking to interact with as little human contact as possible, and for the store itself to be very clean and sanitary. The strong demand for these new aspects, including contactless payments, has changed consumption itself. Naturally, there has been a quick shift to e-commerce in the U.S., but until a little while ago, people were hesitant about buying vegetables and meats online: how were you going to tell how fresh they were until you saw and touched them! However, since there was no choice, they go online, make the purchase, and find it’s not that bad! and so they keep buying groceries online, which is a big change in consumer behavior.
And when they do, they tend to buy in bulk, taking shipping and other charges into account when making purchases. This then leads to a growing tendency to buy in very large volumes, and consumers begin to seek out retail stores like Costco, which in turn leads manufacturers to create bulky, large packages to accommodate them. However, the data I mentioned earlier showed that purse strings have actually tightened up for spending due in some part to the aforementioned psychological conditions, and Americans are actually putting money aside into savings.
Changes Among the Retailers
The most obvious change on the retail side is the stores closing down and going bankrupt. Even if stores somehow managed to remain open, they had to deal with a lot of new issues, such as how to manage their employees safely, how to work in this environment, how to welcome customers, and how to ensure social distancing.
Since Starbucks had a large number of stores in China, their CEO took a number of measures in China around January, and they were able to respond immediately when COVID-19 came to the U.S., garnering praise from the media for their swift response.
Many offline stores began to function as fulfillment centers.
While store employees were being laid off, essential businesses such as grocery stores needed more and more people, so there was a lot of movement of workers in those months.
Thank you for reading until the end! If you are a founder who’s building a retail tech startup, please contact us from the contact form here. We’d love to hear from you!