Quick Thoughts: The Future of Shopping
SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai
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July 11, 2018
Quick Thoughts: The Future of Shopping
- Emerging tech – autonomous vehicles, AI assistants, blockchain, etc. – will have profound implications for retail. Some are obvious, but others are not
- AMZN will be an ever-growing threat – driverless delivery, frictionless (and automatic) ordering, increasingly accurate recommendations, etc. will make e-commerce cheaper, faster and more convenient, disintermediating category after category.
- Partnering with GOOGL and/or FB will be the best options for traditional retailers and brands looking to avoid commoditization in the AMZN marketplace. Both platforms will establish viable e-commerce businesses, with emphasis on exclusive products and brands.
- The rise of robocabs could re-invigorate physical retail, removing obstacles (driving, parking, etc.) for potential shoppers and encouraging shopping as entertainment concepts.
- Successful retailers will personalize shopping, remove friction, integrate their physical and on-line stores, and focus on compelling experiences (e.g. unique merchandise, in-store entertainment, personalized services, etc.).
Investors view Amazon as a grim reaper, methodically mowing down retail categories and leaving behind barren wasteland. Books, electronics, housewares, shoes, apparel, groceries, and now drugs suffer from the relentless pressure of low prices, epic selection, in-home convenience, and ever faster delivery. Beaten down merchants join the Amazon Marketplace collective, an arena where sellers pay a hefty fee to fight to the death with others of their ilk for precious low-margin sales. Even the biggest physical retailers feel the pain – malls are closing; one-time category leaders Circuit City, Borders, Radio Shack, Toys R Us, Sports Authority, Payless Shoes, The Limited, American Apparel, Claire’s and others are bankrupt (Exhibit 1); stalwarts like Sears, JC Penney, Barnes and Noble, Macy’s, GameStop, and others seem to be stumbling toward that white light; while once beloved retailers like Walmart, Walgreens, Target, Kroger’s, and others are getting the side-eye from investors for their dodgy quarterly results and the looming threat of retail apocalypse (Exhibit 2).
It’s hard to argue with that narrative. While traditional retailers struggle to build on-line presence, Amazon keeps raising the bar, and emerging technologies will only accelerate Amazon’s advantages. Amazon has more than 100M Prime Members and more than 20M households using its Alexa AI assistant on Echo speakers. For these users, doing business with Amazon – trusted for providing fair, if not always the lowest, prices – is becoming ever more convenient. Copious data on shopping and buying habits, combined with strong AI development skills, is turning into systems that recommend just the right product at just the right time. You are reminded to buy household goods before you run out and told of pending sales for products
Exh 2: 2 Year Stock Performance for 10 Major Retailers Relative to S&P500
of interest to you. With time and more data, the systems are getting better and the order process getting easier – just say yes to Alexa and the package is on its way.
Delivery will get faster and cheaper. Driverless vehicles, maybe someday drones but more likely specialized vans, will bring commonly ordered goods in less than the time that it would take to drive to a store and back. Less frequently ordered products will also come faster – ever greater scale will bring more fulfillment center diversity, while AI-powered inventory stocking will better predict what is needed where. This infrastructure will also reduce Amazon’s already low overhead costs, enabling it to be cheaper if it wants to be. Despite their own massive investment in building a digital presence and delivery infrastructure, companies like Walmart and Target are losing ground to the Amazon onslaught.
It is easy to believe a bleak narrative for the future of retail in this context, but it is also hard to think that online stores will completely displace physical shopping. Indeed, Amazon itself sees a place for bricks-and-mortar. Whole Foods was a synergistic pick up that virtue signals quality for its move into groceries, but it also gives the company a footprint in affluent geographies that it can use to stage its other businesses. The tightly curated Amazon bookshops and the Amazon and the experimental Amazon Go convenience concept suggest retail showcases for the company’s technology will be an important leg of the strategy and ratchet up the pressure on traditional rivals. Existing competitors need to consider how they can differentiate themselves, not right now but in a future rife with AI assistants and self-driving robocabs. We have some thoughts on this.
Don’t Give Up on E-Commerce – Going head to head with Amazon with store branded apps or capitulating to the Amazon Marketplace are not the only two options for retailers. Google, with its billions of search and maps users, is pushing to use its reach and engagement to convert e-commerce sales for retail partners. Google Assistant can execute voice orders for products from both Walmart and Target, with other partners like Costco and Home Depot soon to be added. The Google Express shopping service integrates merchant loyalty programs, enables one-click reorders, maintains active shopping carts, and supports local delivery in many markets. With Waymo’s robotaxi service rolling out in Phoenix this year, autonomous delivery options may also be forthcoming. Target reports that the average size of its Google Express shopping baskets is almost 20% larger than on its own site, while Google suggests that the average retail partner experiences an even larger 30% boost.
Another option is Facebook’s Instagram. Last year, Instagram rolled out “Shoppable Posts”, allowing users to tap on products shown in a post to get product info and prices, with another click bringing you to the poster’s website to complete a purchase. With the overwhelming popularity of Instagram with younger demographics, these Shoppable Posts are a key advertising tool for smaller fashion brands and retailers, retaining the connection to the merchant. With time, we suspect Facebook will look to complete sales directly, without transferring the consumer to a 3rdparty, but expect the format to continue to emphasize brand and differentiation. Excellent retailers of the future will utilize Google, Facebook and other high-engagement platforms (e.g. Twitter, Snap, etc.) to reach consumers outside of the Amazon Marketplace.
Integrate Digital and Physical Stores – When consumers shop online, they are accustomed to familiarity. The store knows what they’ve bought before and what they’re looking for now. It knows their sizes and other product preferences. It knows their shipping addresses and their payment details. It presents recommendations tailored to them. It lets them keep a shopping cart, a saved for later list, and wish lists for gifts. It makes checking out a one-click breeze.
This familiarity can, and should, apply to physical stores as well, with on-the-spot recommendations and easy navigation to find items that had been viewed online. The store could issue a snap coupon for that visit for items viewed online to spur immediate sales. Checkout should be as easy as possible for loyal customers. Merchandise returns for online orders should be a snap at the store, which could also act as a showroom for products not held in local inventory. Store personnel should understand a customer’s interests and act from knowledge, anticipating needs. Delivery should be a simple option – to the home, to the store, for products seen online or in the store. Again, Google with its user data, maps and delivery potential could be a substantial partner. All of this could help narrow the convenience gap with digital shopping.
Establish the Store as an Experience – Humans are social animals and, even in an Amazon world, consumers will leave their homes. The best stores will give shoppers unique reasons to visit – exclusive products, special service, in-store entertainment, social events, etc. This “shopping as theater” is not new per se, but emerging technology will allow stores to move beyond tasting stations, book signings and trunk shows, while also raising the importance of factors beyond price and selection in bringing in sales.
Cheap self-driving robocab services may greatly reduce the friction for future customers – no driving, no looking for parking, no worries – so destination shopping may become a much bigger thing as autonomous TaaS rolls out market by market. Without having to drive home, shoppers may grab their favorite beverage at the door and count on local delivery to drop off purchases later. The mall might once again become the favored teen hangout with activities intermixed with shopping without the hassle of finding a friend with a car and a license. Stores might play host to bigger events – concerts, e-sports, live celebrity appearances, etc – featuring merchandise tailored to the crowd. In store technology will play a big role here as well – VR changing rooms, personalized information kiosks, sales associates with AR glasses to find answers while maintaining eye-contact, and other retail-tech will make shopping easier and more fun (Exhibit 3).
Exh 3: Key Elements of Next Generation Physical Retail
Location, Location, Location – The suburban retail model of big stores set off busy roads with giant parking lots will not likely translate well to the future. Stores will cluster in interesting locations with foot traffic – places where people work or where communities gather. They may be much smaller – relying on delivery from cheap warehouses rather than instore inventory. They will focus on product categories where seeing the product before buying is valuable or where having it immediately is important. It will take a decade or more to figure out the real winners, but retailers would be foolish not to start preparing now.