Betting on Startups to Reinvent Retailing

CB Insights in partnership with Mastercard Start Path

As traditional retailers face headwinds, the stalwarts of the high street are facing change. Since January, in North America major retailers like Gymboree and Payless ShoeSource have announced plans to close nearly 3,000 stores.

Nevertheless, the recent news is not a sign of a “retail apocalypse,” but rather a “transformation” — one where retailers must fundamentally change how they interact with consumers to survive, largely via new technology and operational strategies.

To help brick-and-mortar retailers bridge this gap, dozens of startups around the world have developed services including in-store augmented and virtual reality technology, new experiential store formats, shelf-scanning robotics, cashier-less checkout technology and more.

In 2018, in-store retail tech startups witnessed a record level of global dollar funding from investors, totaling close to $2 billion. The pace of early 2019 funding to the space suggests the total may reach close to $3 billion by year-end. Analyzing deals involving in-store retail tech startups by investment stage, we see that seed and angel deal share is declining, down to only 20 percent of deals in early 2019. This reduction points to a maturing in-store retail tech startup ecosystem.

Series A, B, and C deals, on the other hand, have seen a significant rise in deal share. One of the largest Series C deals of 2019 to-date was an $82 million investment in Paris-based startup Wynd, which helps retailers digitize their point-of-sale systems. Beyond in-store retail, e-commerce is also evolving. Startups are offering services that are reimagining the online consumer experience — including new forms of social commerce, autonomous last-mile delivery and beyond.

As we look toward the future of retail, we will examine four trends, largely driven by startups, that are reshaping the consumer experience both online and offline.

TREND 1: THE RISE OF SOCIAL COMMERCE In the U.S., technology giants and retailers have not entirely been able to crack the code on social commerce. The most active venture capital investors in the space to unique in-store retail tech startups American consumers have traditionally treated since 2014 by number of investments are Plug e-commerce and social media as distinct activities. and Play Ventures, Commerce Ventures, Intel Someone might go on Facebook to chat with a Capital, SV Angel, MaRS Investment Accelerator friend and then go on Amazon to buy shoes, but Fund and Salesforce Ventures. she wouldn’t buy shoes on Facebook or chat with friends on Amazon. Some of these investors have focused on retail tech startups around the globe. Salesforce Historical attempts at social commerce by Ventures’ portfolio, for example, includes startups companies like Twitter with its “buy button,” from France, Japan, Switzerland, Canada and have flopped. However, we are seeing a resurgence more. in social commerce activity, particularly among non-U.S. startups. 2015, took only two years to reach over 100 U.S.-based Goodworld is the only billion RMB in annual revenue. Moreover, in social fundraising platform with June 2018 the company reached 195 million hashtag-to-donate technology, monthly active users. In July 2018, the transforming #donate from a static company raised $1.6 billion through a U.S. IPO. phrase to a tool for making easy, frictionless charitable payments.

As part of its mission to bring payments infrastructure to Africa, U.S.-headquartered Flutterwave launched Rave Social in 2018. This feature helps merchants who Source: GGV Capital run their businesses through Pinduoduo’s fast rise in the world of Chinese Instagram track inventory, orders e-commerce is bolstered by its unique and payments seamlessly on the approach to social commerce. Through its social channel. e-commerce platform, users can invite friends and contacts to join “shopping teams” to

START PATH SNAPSHOT win discounts of up to 90 percent on certain items. Pinduoduo also integrates with social network WeChat, which has over 1 billion monthly active users.

Meesho’s success is indicative of greater social commerce traction in Asia.

Singapore-based Visenze is using AI and the demand for a visual online shopping experience to enhance online engagement and Some of these startups are gaining investor conversion rates for merchants. traction. For example, Bangalore-based Harnessing its image-recognition startup Meesho raised a $50 million Series technology, Visenze simplifies online C round of funding in November 2018 from retail platforms with features like DST Global, Sequoia Capital India and Y search-by-image and suggestions Combinator, among others. for visually similar products. Another company benefitting from this traction is China-based Pinduoduo. The social START PATH SNAPSHOT commerce company, which launched in just The dynamic and interactive nature of have developed vehicles that are specifically Pinduoduo stands in contrast to attempts at designed for last-mile delivery. social commerce in the U.S. While there is no Robotics startup Nuro made recent headlines widely-used equivalent of WeChat in the U.S., for raising a $940 million investment from it begs the question: could a similar model be Japan-based Softbank Group in February 2019. successful among American consumers?

That remains to be seen as U.S.-based social media giants continue to push to capitalize While still in its infancy, retailers and other on social commerce. brick-and-mortar businesses are leveraging autonomous last-mile delivery startups to Most recently, Facebook acquired startup reduce costs and improve efficiency. Grokstyle in February 2019. Grokstyle offers a visual search platform for e-commerce and could be used to enhance social selling capabilities on platforms like Instagram going forward.

In 2018, Facebook partnered with Mastercard While still in its infancy, retailers and other to provide a QR payment bot via Facebook brick-and-mortar businesses are leveraging Messenger to facilitate digital transactions autonomous last-mile delivery startups to for small businesses in Africa and Asia, reduce costs and improve efficiency. starting in Nigeria. Facebook Messenger’s growth to over 1.3 billion users in 2018 may act as continued motivation for businesses to sell on the social networking platform.

TREND 2: AUTONOMOUS LAST-MILE E-COMMERCE DELIVERY Last-mile delivery cost businesses more than $86 billion globally in 2017 according to McKinsey, and can make up 28 percent of a good’s total transportation cost. The high costs associated with last-mile logistics have For example, in June 2018 Kroger, one of the an outsized impact on thin-margin businesses largest brick-and-mortar grocers in the U.S., like grocery retail, among others. As a result, partnered with Nuro with plans to leverage the opportunity for disruption is substantial. the startup’s fully-electric autonomous Over the past year, a slew of startups focused delivery vehicle, the R1, to transport groceries on the intersection of autonomous vehicles to consumers. and last-mile delivery has gained investor More recently, Alibaba employed startup attention. These startups, such as Nuro, Savioke’s indoor delivery robot, Relay, at its Starship Technologies, Savioke and Udelv, new unmanned hotel, Flyzoo, in Hangzhou, reducing or eliminating the cost of human China. The Relay robots help deliver room delivery people. service orders to customers’ hotel rooms, While experimentation is increasing, sans human employees. autonomous ground delivery vehicles still face regulatory hurdles. Many of these Nigeria-based MAX is offering vehicles and robots, for example, are confined on-demand, last-mile delivery for to designated areas on specific roads within Nigerian businesses and retailers. cities. With the option to integrate with Nevertheless, autonomous ground delivery is a merchant’s website or app, MAX catching the attention of certain corporates. connects businesses with “Delivery In January 2019, Amazon unveiled an Champions” that allow for quick autonomous delivery robot named Scout. moto-taxi delivery and a smoother The following month, FedEx unveiled its own delivery process for local businesses. ground delivery robot. Both robots move at a walking pace and are intended for travel on NetPlusDotCom partnered sidewalks.

with Mastercard to encourage While autonomous ground delivery is still Nigerians to go cashless and take in early stages, successful trials could lead their retail experiences online. to direct investments or acquisitions of This partnership blends no-risk autonomous ground delivery startups by purchases with last-mile delivery: retailers going forward. only when consumers are satisfied TREND 3: EXPERIENTIAL AND with delivered products are DESTINATION RETAIL pre-authorized transactions Retailers are quickly learning that in-store approved and completed; if experiences need to be about much more a consumer is dissatisfied, the than just “purchasing” – something that preauthorization is voided and customers can easily do online. immediately in effect. Clicks-to-bricks startups like Casper and Harry’s have been arbiters of this trend, START PATH SNAPSHOT opening physicals stores that essentially act as marketing tools for their online brands. Currently, retailers are constrained by the Walk into a Casper store and you can feel its cost of paying humans to deliver goods, which sheets, touch the material inside its pillows often causes the price of delivery (especially and even take a nap on a mattress inside a for groceries) to become prohibitively “bedroom.” The company plans to expand to expensive for many consumers. Autonomous 200 locations in 2019. ground delivery vehicles can encourage greater consumer adoption by ultimately The rise of startups like Casper in physical retail has prompted a frenzy of interest in expand to other locations in the next two experiential stores. years, including New York City.

In its wake, a new class of startups enabling other retailers to explore experiential shopping has gained traction among industry players and investors.

Some startups, such as U.K.-based Appear Here and Canada-based Uppercase enable digital brands to move into physical retail.

Mercaux’s retail mobile platform Some startups, like Spacious and Re:Store, are bringing coworking to physical retail, enables digital in-store shopping giving stores new life as alternative work experiences so they are integrated spaces. Another startup – WeWork – has – and unified – across all channels. partnered with Mastercard to enable contactless payments for everyday items like START PATH SNAPSHOT snacks and beverages in office spaces, an initiative that may help further drive adoption of contactless technology.

Other startups, like Texas-based Neighborhood While some retail incumbents like Apple Goods, attempt to infuse experiential retail have pioneered the idea of experiential into the department store. The company, retail for decades via community which opened its first 14,000-square-foot center-styled stores, product showrooms location in Texas late last year, offers shoppers and in-store classes, others are now a rotating lineup of products from various leveraging startups to compete in this area. online brands. In addition, the store attempts to build a community around shopping by Specifically, as mall vacancy rates have providing a restaurant and bar, events, social reached 9.1 percent in the U.S. (a seven-year spaces and more. high), mall owners are focusing on non-retail experiences and activities (i.e. fitness centers Neighborhood Goods, which raised additional and movie theaters) to turn their shopping seed funding in February 2019, is looking to centers into multipurpose destinations. Their newest strategy? Partnering with TREND 4: AUGMENTED AND coworking startups at the mall. VIRTUAL REALITY IN RETAIL Augmented reality (AR) and virtual reality (VR) are finding some acceptance across retail as they provide tools in such areas as online ordering, customer satisfaction and store planning.

In the e-commerce arena, startups and retail- ers are using AR and VR to enhance the online shopping experience – giving consumers a better understanding of the types of prod- For example, Macerich partnered with ucts they may want to buy before making an Industrious in August 2018 to add flexible actual purchase. office space in its malls. The first space occupies 32,000 square feet of Scottsdale Fashion Square in Arizona and is set to open in early 2019.

Beyond transforming physical stores, experiential retail is also moving online.

Mastercard partnered with Next Retail Concepts and luxury brand Fred Segal to design an immersive e-commerce experience Most recently, AR startup Wannaby for online customers in late 2018. Through the launched a beta version of its app that allows partnership, online customers can virtually customers to virtually try on new pairs of navigate a three-dimensional store, where shoes. Customers who download the app can they can interact with brands and content. choose from a variety of 3D-rendered shoes, dubbed “Wanna Kicks,” whereby they point their cameras at their feet to instantly gauge how the new shoes will look on them.

Backed by Bulba Ventures and Haxus, the startup intends to market its technology to retailers and brands.

Beyond e-commerce, AR and VR are finding Going forward, retailers and brands will have uses in brick-and-mortar retail. Several to reimagine ways to draw in customers. retailers have partnered with AR and VR Experiential retail concepts will help differentiate startups to improve the in-store experience. competitors, while also acting as tools for marketing and branding. On the corporate side, large incumbents have also developed similar technology for retail.

Alibaba partnered with Starbucks to construct a 30,000-square-foot mega-store in Shanghai, China, which opened in December 2017. The store integrates AR technology into the coffee-buying process, educating customers about coffee-making and available products through an Alibaba-powered AR app. For example, Macy’s has partnered with VR startup Marxent Labs to reduce return rates Smart mirrors have also become a popular in in its furniture department. AR-based tool to enhance the in-store shopping experience. Marxent’s in-store VR showroom service and platform help retailers market their For example, Mastercard has rolled out smart products through in-store VR headsets that dressing room mirrors in the U.K. that provide let customers visualize what furniture an interactive experience for retail shoppers. would look like in their homes. As part of The mirrors, which leverage RFID technology, the expanded partnership, Marxent will can identify which items are brought into the operate at Macy’s in 70 stores nationwide, dressing room. The mirror also gives product with plans to spread to 20 more locations in recommendations and controls lighting, early 2019. After pilot tests at three stores, among other features. At the end of this Macy’s claimed returns decreased to under experience, customers can purchase their items 2 percent for VR-influenced furniture sales. through the screen to save time on checkout.

AR and VR go beyond enhancing customer AND WHAT ABOUT PAYMENTS? satisfaction. Startup InContext Solutions Traditional lending products are becoming helps retailers plan out their stores by less popular among younger consumers. creating virtual simulations that track shopper In response, startups are reinventing lending preferences and actions; they even predict at the point-of-sale. POS lenders are part- eye movement to optimize store layout and nering with merchants to provide shoppers — organization. The startup has worked with both in-store and online — access to capital. retailers including Walgreens, Walmart and Home Depot. For consumers, POS lending offers transparent, fixed-payment loans as a simpler alternative to credit cards. For merchants, offering POS financing can help boost sales, increase conversion rates and streamline cash flows.

While POS installments is not a new business, the combination of consumers’ aversion to traditional lending products and more effective underwriting algorithms have If POS lending startups are able to effectively created fresh momentum in the market. measure their subprime risk, these startups will continue to thrive. Two major startups distrupting this space are Affirm and Klarna. CONCLUDING THOUGHTS: In 2017, U.S.-based Affirm raised a $200 Retail isn’t dead. But it is rapidly transforming. million Series E at a $1.8 billion valuation The retail landscape as we have known it from investors including GIC, Founders Fund, is under massive pressure from e-commerce, Lightspeed Venture Partners and Ribbit macro-economic changes and shifts in Capital. In 2019, Affirm partnered with consumer trends. To survive, traditional retailers Walmart to provide its services at over will have to continue to integrate disruptive 4,000 Walmart supercenters in the U.S. technology into their brick-and-mortar Sweden-based Klarna works with 100,000 operations, ultimately creating a seamless merchants to power payments for 60 million blend between digital and physical commerce customers across 14 countries. In late 2018, for consumers. fashion retailer H&M invested a $20 million Startups innovating in the areas of social stake in Klarna, setting the foundation commerce, autonomous delivery, experiential for a partnership in which Klarna will retail and consumer-focused AR and VR will integrate its payments technology into H&M’s have important roles to play in bridging the brick-and-mortar and online businesses. online-offline gap for retailers.

It is rumored that Klarna has plans to go While many of these trends have experienced public in 2019. various levels of adoption across Asia, Europe and North America, we will continue to see investments in startups across these spaces Banks are expanding into POS from retailers, technology giants, institutional lending by building their own investors and beyond - and the results will solutions and partnering with play a major role in determining retailer white label startup partners like winners – and losers – in the coming years. Divido. Divido is building the world’s largest platform for point-of-sale finance, working with 1,000 merchants, banks and partners to allow them to offer instant customer financing.

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