Betting on Startups to Reinvent Retailing - Mastercard ...
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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
e-commerce platform, users can invite friends
social channel.
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,
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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.
Some startups, like Spacious and Re:Store,
Mercaux’s retail mobile platform
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
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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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