By Tanaka Chikosi, Summer Associate at DNX Ventures
The field of retail technology, which encompasses a broad array of tools that help retailers manage their operations, is growing quickly. While billions of dollars are already being spent on expanding digital capabilities, we expect the industry will shift somewhat toward a focus on changing consumer behavior to more readily adopt these tech solutions. Here, we’ll discuss the major trends that are driving retail technology spending, as well as key areas of development that retail tech companies should focus on.
Retail Tech Overview & Market
What Is Retail Technology?
“Retail Technology” is a term for solutions that enable retailers (brick-and-mortar, e-commerce, D2C, etc.) to manage and optimize operations. These technology tools help retailers increase revenues, drive down costs, and/or advance a combination of other key metrics: improving customer satisfaction/experience, decreasing returns, or increasing retail conversion rates, for example.
Retail Technology Market Size
Globally, spending in retail sector technology is predicted to grow by 3.6% to reach almost $203.6 billion in 2019, with similar growth rates for the next several years (according to Gartner). Retail tech spending has typically lagged behind other industries, but customer expectations and competition are forcing retailers to spend big on tech as retail now surpasses the majority of other industries in IT spending.
Specifically, the global smart retail market size was estimated at USD 10.74 billion in 2017, with a CAGR of 23.9% from 2018 to 2025. This segment of tech spending includes technologies such as AR/VR, AI, and IoT to improve store operations, facilitate accurate inventory management, and enhance consumers’ shopping experiences.
Despite the uptick in retail tech spending, many of the retail technologies being deployed are still far from mature. I believe the next stage in the evolution of retail tech will focus less on new and more installations, and instead on changing business processes and consumer behavior to actually embrace and utilize many of these technologies.
Major Retail Trends Driving Retail Tech Spending
There are eight major trends/themes in the retail industry that are driving the rise in tech spending, which I’ll elaborate on below:
1. Brick-and-Mortar Is Not Dying
There is a misconception that brick-and-mortar stores are dying and will soon cease to exist — but data show this is not true. For instance, the majority of major retailers are investing equally in both e-commerce and in-store technology. A larger portion of companies, such as Amazon and Warby Parker, are now pursuing omnichannel approaches both online and in-store.
While e-commerce provides convenience, brick-and-mortar stores provide an experience. A physical presence helps fortify brand perception, serves as a marketing tool, and conveys confidence and financial stability.
2. Personalization Is Driving Retail Success and Loyalty
The average consumer now enjoys and expects a personalized retail experience when shopping both online and offline. This is due to both the rise of millennial spending power (now greater than the Baby Boomers) in a generation that is more used to personalization, and the fact that all consumers have become accustomed to personalized/tailored digital experiences via platforms like Netflix, Spotify, and Amazon.
Increasingly, consumers are seeking a retail experience that has been tailored to suit their own personal shopping preferences. Studies show that 75% of consumers are more likely to buy from a retailer that recognizes them by name and recommends options based on past their purchase history. To compete, brick-and-mortar retailers are striving to cater to the individual preferences of shoppers through methods such as targeted advertising and reward programs.
3. Innovation in Brick-and-Mortar Space Utilization
Stores are no longer simply a location for handling and exchanging goods; consumers go to stores for an experience. Brick-and-mortar stores need to get creative when thinking about ways to engage with and provide pleasant experiences for shoppers.
Though retailers vacated a record 145 million square feet of space in 2018, brick-and-mortar stores are creating new, inventive ways to use their space to entertain and provide a pleasing environment for shoppers. For example, Staples partnered with Workbar (a coworking company) to launch workspace memberships at their retail locations for $130 per month. Fashion brands that previously existed only online (like Cuyana, M.M.LaFleur, and Rent the Runway) are opening physical stores to supplement their branding. And though business is booming for Peloton online, their growing number of retail outlets provide a showcase for the equipment and accessories.
4. The Rise of Automated Delivery Strategies Is Converting Stores Into Warehouses
Automation is a huge trend in many industries, including retail. Many stores are now offering “click-and-collect” services, which allow customers to place an order online and pick up their purchases at a designated location. For example, Target’s “Drive Up” service allows customers to make a purchase through the app, receive a notification when the order is ready, drive to the store, park, and have their cars loaded by target employees.
There has also been a rise in the use of vending machine applications to efficiently utilize retail store space in a self-service manner. And progress on autonomous vehicles has retailers excited about the potential of using this technology to deliver goods from stores to customers without human labor.
5. Checkout Counters Are Becoming Obsolete
In line with the overall trend of automation and self-service, consumers want a fast, frictionless, and efficient end-to-end process when shopping. Retailers are attempting to address this by investing in cashier-less options, such as self-checkout machines, kiosks, and even tech to enable fully checkout-less stores.
An early player in this space, Amazon Go stores have achieved approximately $2,700 of sales per square foot, surpassing most retailers (except for Apple and a few others).
6. Packaging and Delivery Strategies Are Differentiators in the Retail Process
In the increasingly competitive retail landscape, retailers need to utilize any levers they can to differentiate themselves and win market share. Two such levers are packaging and delivery strategies. Packaging plays a critical role in the delivery process. Ideally, packaging delivers a great brand experience while ensuring the product arrives in perfect condition. But it can go further: sustainable and smart packaging can enable replenishment or re-orders, for example.
These auto-replenishment delivery models provide the opportunity to convert physical sales to future e-commerce purchases, allowing recurring revenue. For a customer, great packaging and delivery experiences can be a differentiator and drive brand loyalty.
7. Using Beacons for Proximity Marketing and Analytics
In an effort to replicate the digital shopping experience customers are now accustomed to, brick-and-mortar stores are using beacon technology to send targeted sales, advertisements, and promotional information via their apps once a customer enters the store.
Retailers can supply the in-store customer with information on promotions and new products that might interest them based on their profile and/or shopping history. In addition, they can track traffic flow throughout the store and pinpoint the busiest areas, helping plot the placement of promotional items to high-traffic areas or create more space to accommodate shoppers.
8. Major Growth for Voice Assistants
With the rapid increase in smart device adoption, interacting with voice assistants to manage day-to-day tasks/activities is becoming the new normal. Retail is no exception to this trend.
From an estimated 25 million in 2018, forecasts anticipate a jump to 275 million U.S. household voice assistants by 2023. Retailers are working with third parties like Alexa, Google Home, and Siri to stay in the game. For example, Walmart partnered with Google to offer hundreds of thousands of items through voice shopping by using Google Assistant.
Key Areas for Retail Technology Companies to Focus On
Given the aforementioned trends, below are six key areas where retail tech companies should be building solutions, and where the retail industry should be investing in new and innovative technologies. Early investment in and adoption of such technologies will be critical to a retailer’s ability to thrive in an increasingly competitive industry.
1. AR/VR in Retail
What Is It?: Retailers are utilizing augmented and virtual reality technology to help customers interact with their products remotely and thus make more informed purchases. Integrating this technology into a consumer-focused strategy can help increase customer experience and growth while reducing churn and returns.
Why Is It Important for Retailers?: Currently, ~10% of all merchandise and ~30% of clothing items bought online are returned. Fully 50% of these returns are due to an item not looking/fitting as expected. AR/VR tech solutions can help mitigate this significant and costly problem.
2. Retail Return Processing
What Is It?: Technology-enabled solutions can help streamline, optimize, and reduce the cost of returns for retailers and/or customers.
Why Is It Important for Retailers?: Retailers are overwhelmed by returns: 11%-13% of all merchandise is being returned, representing a value of $400B in 2018 (and projected $550B by 2020). The process of returning and exchanging items continues to be a major pain point for both consumers and retailers, and returns plague the growing e-commerce market even more than brick-and-mortar.
This is because returned products must be inspected, handled, and prepared for resale. In addition, customers are often unclear on how to return e-commerce items, or face long lines to return items in brick-and-mortar stores. Many do not have a physical copy of their receipt necessary to return items. Additionally, approximately 5 billion pounds of returned apparel end up in landfills annually, accounting for 1.6 billion gallons of diesel fuel and 15 million metric tons of CO2.
3. Cashier-Less Stores
What Is It?: A mix of cameras, machine vision, IoT, and RFID tech can track shoppers throughout the store and charge them automatically for items they pick up, eliminating the need for cashiers and checkout counters.
Why Is It Important for Retailers?: Cashier-less stores will improve the customer experience, since they will no longer have to wait in checkout lines. By reducing the need for manual labor in stores, this tech can reduce overhead costs as well. In addition, data on shopper behavior and movement within a store let the retailer make decisions that can better align their offerings with this behavior.
4. Shelf Monitoring
What Is It?: These technology solutions help retailers and brands monitor the presentation of merchandise on store shelves, and can track the results of in-store promotions and visual displays. Some rely on in-store cameras and artificial intelligence features, while others leverage crowdsourced intelligence from shoppers and store associates.
Why Is It Important for Retailers?: Shelf monitoring technology enables retailers to spend the minimum amount to keep adequate stock for customer orders. For employees, their time is freed up to focus on customer engagement.
5. Inventory Management
What Is It?: Generally using cloud-based software, this technology helps stores track inventory and optimize supply chain operations. It also includes the use of artificial intelligence to provide predictive merchandising analytics.
Why Is It Important for Retailers?: The benefit here is two-sided: retailers save on costs from overstocking, and consumers are more satisfied without experiencing shortages of popular goods.
6. In-Store Analytics & Marketing
What Is It?: These hardware and software tools help stores track and target visitors. Many focus on data collection for internal analytics, such as merchandise tracking, adjusting staffing levels, monitoring promotions, etc.
Why Is It Important for Retailers?: Using this data, brick-and-mortar retailers can provide shoppers the same customized experience they would get online when shopping at e-commerce stores. Retailers can also make data-driven decisions to increase revenue, e.g., choosing to move higher-price or higher-margin items to regions of the store where more customers tend to gather. Ideally, this would increase purchases of those items relative to cheaper and lower-margin items.
Profiles of Interesting Startups in the Retail Tech Space
Within these aforementioned retail tech sub-categories, there are a range of startups emerging that are building innovative products and services. Below are a few examples of such companies across the six sub-categories:
- AR/VR in Retail: ZeroLight, Blippar, Strivr, Marxent, HyperFair, InContext
- Retail Return Processing: Return Runners, ZigZag, NewMine, Returnly, SupplyAI, Freeing Returns, Happy Returns
- Cashier/Checkout-Less Store: Standard Cognition, Trigo Vision, AiFi, Accel Robotics, Zippin, Vaak, Bingobox
- Shelf Monitoring: Cosy Robo, Eversight, Repsly, Shelfbucks, GoSpotCheck,
- Inventory Management: Pensa Systems, Nextail, Skupos, Relex
- In-Store Analytics & Marketing: Perch, RetailNext, Teemo, Scanalytics, Aislelabs, PlaceIQ
Tanaka Chikosi is a Summer Associate at DNX Ventures focusing on investments in Retail Tech. He is currently pursuing an MBA at the Wharton School of Business, University of Pennsylvania. Prior to Wharton, Tanaka spent 6 years in the private sector with escalating roles in Management Consulting (Accenture), Corporate Strategy (CVS & Lenovo), and Technology Operations (Zenefits; high-growth Silicon Valley startup). Tanaka is currently the Co-Founder & COO of Binte, a food-tech startup that is revolutionizing how diners and restaurants interact before, during, and after the dining experience.