The Evolution of the Retail Store

Reading today about Apple redesigning their store experience got me thinking about the role of the store in the future.  New online companies are exploding into multi-billion dollar vertical categories and growing rapidly.  Does that mean there is no room for the store?  Not in my mind, but it’s fundamental role will evolve consistent with our thesis around the convergence of offline and online models.

For the last few decades, retail companies expanded by driving greater and greater geographic footprint.  Stores were the only point for transacting product and even today represent the preponderance of sales.  “Same store” numbers helped to gauge the productivity of a store but top line most of the time was driven by number of new stores.  Stores had P&Ls they were responsible for, and this system has created an entrenched infrastructure and KPI bias where many retailers measure and optimize around in-store traffic, rather than driving the “most efficient transaction” regardless of where they occur.

I believe this model has to change.  Consumers have a myriad of choices on how and where to transact today.  Online ordering with the very liberal return policies have made it far easier to buy something, try it, and send back than potentially taking a few hours to physically go somewhere.  Buying has bifurcated into two buckets: routine transactions and inspired transactions.  Routine transactions are things that we know we need, don’t require a lot of thinking, get replenished on a regular or reasonably regular basis, etc.  We either know what we want (new jeans) or we’re indifferent across a broad enough range and need to solve a functional task (toothbrush).  Inspired transactions are things that I’m not sure about, that I’d love to learn to fall in love with, that I am trying to discover.  I want a new look instead of just jeans; I want to understand the philosophy of the brand that I am going to wear as I view it as an expression who I am.

I’d argue that the entire domain of routine transactions is designed to go online.  It’s far more efficient and the best use of a consumers time.  Educate me online and let me transact.  Don’t make me spend hours to do a chore.  The second category is where offline shines.  I walk into the Apple store to engage with product.  I’ll go into the Apple store to experience an iPad or the MacBook Air to see if I really care about how thin it is.  I’ll subconsciously feel how “smart” the brand is in servicing me and differentiating.  If I go to the showrooms on 5th Avenue, it’s to feel the luxury and curation of what Cartier or Saks represents.  And it is about entertainment as much as anything else.

Heineken Lounge at an Airport - A Brand Experience

What does this all mean?  Well, I see huge reductions in the number of points of presence for many retailers (not including same-day consumables like coffee or food).  Retailers have to align with consumers, liberate their time and allow them to transact in whatever manner provides the greatest utility.  Retailers should be in the business of selling things wherever that most efficiently occurs.  My partner Larry told me about one innovative retailer that uses their physical store to crowd source and showcase new products only – as soon as something sells in meaningful volume (indicative of a repetitive buyer in a “routine transaction”), it is moved to the online store and that shelf space is freed for a new product to experience.

Over time, I see stores being “owned” by marketing and viewed as a brand expense instead of the revenue bearing, full P&L today.  Should I penalize the store if you came in, had a great experience, and then bought online for convenience?  Or more likely believe that it served its purpose?  Controversial, maybe.  But 10 years from now I think the retailers that survive the transition to digital will look at it more that way than how they do today.  I also wouldn’t be surprised if 10 years from now, we see a flagship Gilt store on 5th Avenue and major cities around the world.  It sounds crazy now, but that might be the most “efficient” way on a blended marketing basis to create mass awareness (like TV today).

The bottom line is that the role of the stores has to change.  It cannot be about the purchase.  Too much of buying is moving online.  It has to be about experience, education, and inspired serendipity!

Lot18, Wine, And Next Gen Retail

It’s been a busy 2011 for FirstMark.  We’ve had some big exits, some great new investments, and seed companies blossoming into market leaders.  On that last theme, I’m excited to congratulate the Lot18 team for closing their $10MM Series B round of capital, led by NEA with substantial participation by FirstMark.

Lot18 is a next generation wine e-commerce company, initially leveraging a membership driven engagement model.  What excited us in October 2010 when we first seeded the company was how Lot18 took an incredibly complicated category, and created a beautiful site where wineries’ products were showcased to consumers.  Though it leverages a membership driven model, this is not about distressed goods or deep discounting as is commonly confused with the space.

Wine has a complex distribution chain of wholesalers and distributors before getting to the retail store.  Lot18 allows wineries to bypass that distribution, while protecting their brand and introducing them to a much broader audience.  Value gets passed directly to the end customer, enabling outstanding prices on great wines.  Frankly, as a “non-wine” person, I find the discovery and education that Lot18 offers to be far superior to any in store retail experience.  I can buy a great wine at a great price (because it’s direct) and know that it’s a wonderful product to bring out while having guests over, give as a housewarming gift, or enjoy on a special occasion.  For people who love wine, you’ll find product that has never been released from cellars, or offers from wineries that have 3 year long wait lists, and benefit from their Select service, which calls our top buyers with offers that could make anything in their cellars blush.

The company has grown more rapidly than anything we could have predicted.  It helps that it is led by serial entrepreneurs Kevin Fortuna and Philip James, who have built some very large businesses in their past (and have a few unique experiences to boot).  They have executed extremely well.

We’ve had a long standing thesis in E-commerce, from Stubhub to Shopify to Lot18 to AHAlife and many more.  Retail is changing faster than we can imagine.  We’re delighted to invest behind this team, and look forward to working with our new partners in NEA.

If you’d like to become a member of Lot18, simply click here to get an invitation.

Offline to Online: The Internet Inside

I recently tweeted about the acquisition of HauteLook by Nordstrom.  I think this is one example of many we will see in the coming years of large scale, “offline” incumbents buying their way into the future.

I believe every business today is going to be rewritten for the web, or “Internet optimized” as I call it.  This is not about putting up a website or selling online.  This is much more fundamental.  The Internet affects literally every part of a business system and makes it much more cost efficient than their legacy comparable.  Let’s take a few examples:

  • Marketing – Paid, organic, display, affiliate and other channels are far more precise and cost effective to pin point your audiences than any blunt mass-market tool of the past.  You are connected to all your customers, it’s just a matter of finding them (and vice versa).
  • Product – In an Internet optimized business, the product is instrumented to see real metrics on how people are logging into your application, which functions people are accessing, what breaks and doesn’t, etc.  Each of those tell you in real time what features to focus on or not, develop or discard, etc.  Customers participate in the product development process.
  • Development – Multi-tenancy, single instancing, and SaaS makes development easier and faster than the complex install matrix of the past. Cloud services like AWS, Rackspace, Engine Yard and others are fully variable infrastructure available to build upon.  AGILE and other development methodologies create output on regular basis.

Any “new” company is doing things efficiently across virtually all departments from the ground up (and includes areas not mentioned like sales, hiring, finance, and more).  At scale, they will have a fundamentally better cost model than any legacy player possibly could.  The legacy company still has those very expensive relationship based sales reps, or the high touch TV-driven ad model, or the “divine from above”/ “decide by committees” product model.  These are all points of friction that makes them hard to change, slow to adopt new business models, and not innovative.  It also leaves them at a fundamental economic disadvantage.

If you think about it, this concept is true for almost all businesses.  We see retail in the Nordstrom/Hautelook example.  The same is true in traditional advertising versus ad networks; console based gaming versus virtual goods businesses; large media publishers versus blog aggregators/publishing platforms; stock fit retail brands versus custom manufacturers; etc.  The Web is as deflationary across the internals of a business as anything else!  This wholesale rewiring is happening now, creating a unique moment in time and a littany of new companies looking to lead the pack.

The most likely way for offline players to evolve is to buy these Internet optimized businesses, incent those organizations to grow as rapidly as they can, retain the talent for as long as it possibly can, in the hopes they can eventually re-make their overall business by being led by example.  Those that do nothing will not survive, and there will be many;  those that think aggressively have a shot, and I think we’ll see much more of these partnerships with traditional brands and Internet optimized companies going forward.

[Update 4/08 - Random House leads round of financing at Flat World Knowledge]

[Update: 4/25 - The Travel Channel announces $7.5MM investment in Oyster.com]

New Investment: Shopify

One of the key trends we have been following at FirstMark is next generation retailing and e-commerce.  We’ve seen rapid adoption of consumers buying online across categories, and it’s no longer controversial that people are willing to buy even complex items physical sight unseen.  We’ve seen new business models like flash sales, Netflix-style rentals, and direct producer to consumer relationships blossom.  The Internet allows for sourcing, curation, and selling on a level unparalleled.  All in all, we are in a golden period for retailing online. 

With this renaissance in e-tailing, we noticed most of the e-commerce platforms out there were significantly dated.  Many had not changed for over a decade, offered very little flexibility, and did not take advantage of the incredible advances in software we have seen in that period of time.  But we found one – Shopify – which we are extremely excited to announce as our latest investment

Shopify is a unique retail platform company that allows merchants to have an online store up and running in 20 minutes, but with a unique app store model that allows it to also service the highest end commerce providers.  There are some interesting applications on the platform today, but the goal is to rapidly build out the ecosystem so a retailer can find everything they need to run their business – online marketing, billing, inventory, logistics, supply chain, mobile, etc.  With this approach, we should satisfy any retailer from small to large with a consistent platform and a best of breed set of options.

Shopify was founded by Tobi Lutke several years ago as he and his friends wanted to launch their own snowboarding store.  They found most of the alternatives out there very kludgy.  Fortunately for the rest of us, they are renowned Ruby On Rails core contributors and developers, and so they decided to build their own store.  They opened the platform for others in 2006, and have surpassed $100MM in Gross Merchandise Value with over 10,000 active stores on the platform a few years later.  It’s a real business that is poised to power the next generation of retail.

We are excited to partner with Tobi, the Shopify team, Bessemer and Felicis on this investment.

The Group Buying “Craze”?

Been listening to a lot of the chatter about the group buying bonanza that is going on these days.  The latest news is a rumored large round for Groupon at a reported $1.2B valuation, close on the heels of a $25MM round announced by LivingSocial, which was shortly after Buywithme.com completed their $5.5MM round.  The count is now more than 70+ group buying companies that have launched, with more coming each day.  In addition, many content publishers are now beginning to think about entering the space.  Is this insanity?

My simple answer:  No. 

I think the dynamics of group buying are very different than people think.  In fact, I don’t like to call it group buying.  I also think it has very little to do with retail merchandising.  Instead, I put it in the category of perfected local performance advertising.

People have talked for many years that the local market is the holy grail for the next stage of online ad spend.  The problem is how to convince the corner pizza shop or spa to value a “click” and spend money on this thing called “Google”.  These merchants are way too busy in their day to day and have none of the time we have to study TechCrunch or Read/Write/Web to follow all the twisted ways we have come up with to advertise online.  The companies that have become successful in local advertising have had to solve that problem in some form or fashion.  ReachLocal kicked this off by creating a large overlay sales force to go in, talk to these local merchants, and deliver “in person” translation.  Companies like Yext have skyrocketed by translating online advertising into the currency of the local merchant.  “Have a gym?  We’ll book you appointments.”  Monetization at Yelp and OpenTable are related to things restaurants have done for decades – reviews & reservations.  One clear takeaway – make something simple and transaction oriented, and local merchants will pay attention.

Coming back to “group buying”.  What is group buying?  Well, it’s a way for a merchant to give up some margin (aka, advertising dollars) to secure a purchase and hopefully build some incidental brand goodwill.  In this case, activation by sufficient buyers and selling out are simply the game mechanic.  If you’ve used any one of these sites, the offer almost always gets activated and many times sells out.  The group buying craze is really a merchant paying some money for the best possible performance advertising you can have – A CLOSED SALE!  (Not to mention some “in person CPM” thrown in for side benefit).

And now back to Groupon, et al?  Well, their model is optimized around a tight, high volume operation versus a costly field sales approach.  Over time, Groupon is building a database of every local merchant out there, and also a database of who has bought what in a local area.  They’ve proven their ability to execute in 30+ markets and now will just manufacture the same city widgets 100 times over.  As they are more successful, they can automate greater pieces of the system.  Word of mouth begins to kick in.  Data synergies such as re-marketing and recommendations become possible.  Is that worth $1.2B today?  I have no idea.  But I do know local is big.  Hundreds of billions of dollars big.

What happens to all the other companies out there? The big venture outcome game is probably over with the leaders already staking out their position.  Other large local content players will get into the mix.  But local has a few dynamics other segments don’t have.  First, scale is less relevant than in other industries – a merchant can only service so many of the offers, and the offers are inherently relevant to the people in a neighborhood.  Particularly since most offers are services like a massage or spa.  Second, to create good ‘rotation’, the Groupons of the world limit how many times a merchant can run a deal and the number of deals shown.  If this perfected local performance advertising works for a merchant, they will gladly go to the next guy and see if it works on LivingSocial‘s members, and after them, to the next person, and so on.  Most scale businesses invite more of an activity, not restrict it.  Third, relationships can matter.  Small players can get to their local merchants and use charm to rope them in.  So while many are highly skeptical, I believe there will be a slew of companies that exist in this market and can grow profitably for the next few years.  Many should never take venture capital.  But there is a long way to go to activate this market!

[Update:  Space is really moving.  BuyWithMe Inc. announced that Cheryl Rosner, former president and chief executive of Ticketmaster company TicketsNow, is its new CEO.]

Zappos & Amazon – Happy News For All

I had been asked a few times over the last week about my thoughts on the Zappos transaction.  I think this is a great story for innovation and startups.  Zappos started in a space many believed you could not transact online: selling shoes without people trying them on… Of course, as the world has grown increasingly comfortable transacting on the Web, that changed pretty quickly and Zappos took off.   With their focus on customer service and company culture (can watch a video by Tony Hsieh on that here), they were able to build sustaining brand advantage.

Ultimately, I think Zappos could have gone public, but Amazon stepped in and paid over 20x+ reported EBITDA of Zappos.  That’s a serious multiple, healthier than the public markets now.  And of course, in an online business at this scale there are significant capex cost, so I’m sure if you looked at cash flow, you get an even bigger premium.  Zappos built a dominant brand in a category, and Amazon stepped up and paid a premium to get the company.  To me, that’s a textbook entrepreneurial story.  I think you will continue to find next generation e-retailing companies thrive, but with an innovative new spin.  Gilt just raised money at a reported $400MM valuation, and had multiple bidders competing to get in.  There are a whole generation of companies pushing the ‘mass customization’ or ‘personalization’ theme, and doing well.  It’s all about finding a novel approach, attacking it quickly, and building scale at a brand level before someone can catch up.

Black Friday Shopping

I just read an initial report out of ComScore indicating this year’s Friday retail e-commerce numbers were up slightly over last year.  Online, nontravel e-tailer sales grew 1% for the day to $534MM from $531MM last year.  For the month of November, retail e-commerce sales were down 4% from last year’s numbers.  The National Retail Federation, on the other hand, is forecasting an increase of 2.2% for the full Thanksgiving weekend (with only Sunday being an estimate), on total spend of $41 billion and average customer spend up 7% from $372.57 to $347.55. 

All in all, I’d consider the data to be encouraging (relatively speaking).  It seems to me all retailers were very concerned about spend and pushed heavy discounts to the forefront to ensure the holiday season got off to a good start.  It may not bode well for retailer margins, or for the overall health of the industry for that matter, but at least a strategy of heavy discounting did create elasticity and spend with consumers.  It would have been far worse to heavily discount and feel like one was simply pushing on a rope.  People could have easily refused to put any money out this holiday season, and frankly I would have guessed we would see declines in spend.  I’m still not sure I believe the increase in average purchase size.

Walking around, things seemed to be pretty busy.  I put a couple of pictures from Macy’s and the Apple Store in NYC this weekend below.  They were jammed.

Apple Store NYC

Macy's

The next step is to see whether people have “forward bought” and all retailers have done is rob from tomorrow to get paid today.  I noticed several retailers offering discounts for future period purchases.  For example, at Banana Republic, upon completing a purchase, they offered a card for 20% off any item between December 2 and 22nd.  The goal is clearly to get me back into the shop.  It will be interesting to hear the data come in over the next month.  If anyone has other good anecdotal data, would certainly love to hear it!