Future of Shopping Is All About Tech, but Not All Online
By J.J. Colao
Back in 2012, I wrote a piece titled, "Five Trends Driving Traditional Retail Towards Extinction." Looking back, I'm generally happy to see that the trends I examined are still valid, though "extinction" might be a little strong.
Living in New York provides a firsthand view into the petri dish that many of these companies use to experiment. So almost two years later, I've revisited the space to focus on three more trends that are changing the way we shop. (I'm leaving out an exploration of mobile for the moment, since it's probably worth its own post.)
The Macro View
First, a brief look at the bigger picture. Last month marked Amazon's (AMZN) 20th anniversary, which is kind of amazing to think about since e-commerce seems both very new and indispensable at the same time. Either way, the world has had plenty of time to digest the trend.
It makes some sense then that the pace of e-commerce growth appears to be decelerating in both the developed and developing worlds. I should note that a deceleration in the developing world means going from say, 94 percent year-over-year growth in China in 2012, to 64 percent in 2014. Those are still monster numbers, and there's still plenty of land to grab, but the peak growth rates appear to be in the rearview.
In the U.S., the pace of growth is a more stately 14 percent. The sector attracts a healthy sum of sum of venture money -- nearly $1 billion in Q1 of 2014, according the National Venture Capital Association. But all of that strength doesn't mean that the future of shopping is as simple as buying everything online. Consider our first trend:
Location-Based Technology for Stores
For online retailers, it's always been relatively easy to gather data about customers. If you run a Web company you can track all kinds of information about shoppers who visit your site -- where they're located, how they reached your page, what they look at and where they get held up during the shopping process. This helps e-commerce companies adjust tactics quickly to maximize sales.
For brick-and-mortar stores, that kind of granular data has been harder to come by. Location-based technologies promise to bridge that data gap. Apple (AAPL) recently introduced iBeacon, a set of small sensors that can be placed around stores to track and communicate with customers' iPhones. Startups like Estimote, Nomi and inMarket sell similar technology to retailers.
What does this look like? Let's say these beacons track a spike in foot traffic near a rack of bathing suits in a high-end department store. But that foot traffic isn't prompting a comparable increase in sales. Are customers intrigued by the style, but put off by the price tag? If that's the hypothesis, the store can ping each shopper who approaches the section with a 10 percent discount on the bathing suits. If the hypothesis was correct, customers now buy more bathing suits and the company can subsequently reduce the bathing suits' price to increase sales.
This kind of technology helps brick-and-mortar retailers to optimize their store layouts, pricing, and improve ad campaigns. It also figures heavily into the next trend.
Since e-commerce first started gaining traction in the late '90s, nearly every brick-and-mortar brand in the country has developed an online sales strategy. But traditionally, it hasn't worked in reverse. Amazon, eBay (EBAY), Blue Nile and other online pioneers never opened up physical shops for customers to browse items.
That's starting to change as more and more e-commerce companies warm to the benefits of brick-and-mortar. Warby Parker, a sunglasses brand that started out online in 2010, has set up six stores since opening its first in Manhattan's SoHo neighborhood last year.
Customers buy way more stuff if they can see, feel and try on items. Andy Dunn of Bonobos, a men's clothing brand that started out as an e-commerce company in 2007, told Bloomberg that only 5 percent of visitors to the company's website make a purchase. In its 10 stores, that number is 83 percent.
Other online companies like Etsy, Everlane, Birchbox and Harry's have also dabbled in setting up physical stores, often experimenting with temporary locations or popup shops.
Meanwhile, traditional brick-and-mortar brands are getting smarter about integrating online efforts with their physical outlets. Nordstrom (JWN) sets the pace among department stores. It bought HauteLook, a flash sales site, for $180 million in 2011 and invested $16 million in Bonobos. Web sales at the company grew 33 percent last quarter, and it's using brick-and-mortar locations as distribution centers for fast shipping.
Other retailers are following, at the least integrating online and store inventories. The latest crop of tablet-ready POS systems -- like Lightspeed, Revel and Tulip Retail -- help streamline the process.
Top Brands Now Start Online
For years, one name has struck fear into hearts of young e-commerce entrepreneurs: Amazon. The online retail giant has a reputation for ruthlessly competing against upstarts, undercutting them on price and diverting millions of marketing dollars to drive them out of business.
So how do you build an Amazon-proof online retail business? In short, make your own stuff. (Bessemer's Jeremy Levine pointed this out in an interview last year.) More and more, online brands emerge that control every aspect of their businesses, from design and manufacturing to technology and distribution.
So instead of taking clothes from, say, Calvin Klein and selling them over the Web, companies are now making their own clothes and creating their own brands. This control allows them to match traditional competitors on quality while undercutting them on price. There's Warby Parker for sunglasses, Chloe & Isabel for jewelry, Chubbies for shorts, even MeUndies for underwear and Tuft and Needle for beds. The biggest retail brands of the next decade are being built online, right now.