Offline retail is apparently not dead.
Sure, venture firms are pouring billions of dollars into ecommerce ventures. But , after all this time, brick-and-mortar still represents about 95% of all retail purchases in the United States, compared to about 5% for ecommerce. Total sales in the U.S. retail market are about $4 trillion, with ecommerce only accounting for only about $190 billion in sales in 2012, according to eMarketer.
(Sidebar: See the bottom of this story for a Q&A with Alexei Agratchev, co-founder and CEO of RetailNext, which just raised a Series C round of $15 Million for technology that helps retailers by tracking in-store shoppers.)
“So much money and so much time and effort have been spent on enabling ecommerce,” says Andrew Braccia, a partner at Accel Partners. “Clearly, there has been a lack of focus and lack of attention on the offline retail world from an innovation point of view.”
Suddenly, that is starting to change. Since the 1990s, many offline retailers have watched as their online counterparts obsessed over every click, every visit, and every customer conversion to ecommerce. Some, such as Toys “R” Us, launched online versions of the physical stores.
But now the physical stories are being more proactive and doing something about it, says Chris Fralic, a partner at First Round Capital who is actively investing in a series of startups geared specifically at offline retailers.
The physical retailers have a reason for acting. It’s called showrooming, a new phenomenon in which shoppers use smartphones at retail locations to price check items and find better deals online. Amazon is by far the biggest beneficiary of showrooming, with much of the company’s approximately $4 billion in mobile commerce sales coming at the expense of other retailers.
But, in fact, mobile phones could offer a new lease on life for physical retailers. In a bid to combat the threat of showrooming, savvy retailers are finally starting to leverage Internet technologies to their advantage.
One of the first startups to lead the way for retailers is Shopkick, backed by Reid Hoffman, a partner at Greylock Partners. Shopkick, which has raised about $20 million in venture funding since 2009, provides a mobile app that encourages consumers to shop in person, rather than online, by rewarding them with specials for stepping foot into such retailers as Target, Old Navy and Macy’s. Shopkick received compensation from retailers every time someone using the app walks through the door. It is now one of the five most used shopping apps in the country, alongside eBay and Amazon, according to Nielsen Co.
The sector has already seen a few encouraging exits. Milo, a site that lists real-time in-store product inventory for retailers across the country, was snapped up for $75 million by eBay. And DemandForce, a software company that helps local retailers and small businesses increase their exposure, was acquired last year by Intuit for $424 Million.
Source: REUTERS/Fred Prouser
“Software will disrupt and eliminate many traditional retailers, yet at the same time enable new innovations for retailers that can adapt to the future.”
Still, there are plenty of investors who are convinced that offline retail is a dead zone. Many of the smartest VCs, such as Marc Andreessen of Andreessen Horowitz, believe that the retail industry is a lumbering dinosaur waiting for the final meteor to strike.
But in a recent blog post, Greylock’s Hoffman, defended the industry, arguing that technology will never replace all offline retail, but instead will be used to transform certain physical retail experiences.
“The important trend to think about is ‘software amplifies retail,’” he says. “Software will disrupt and eliminate many traditional retailers, yet at the same time enable new innovations for retailers that can adapt to the future.”
Some of those innovations are taking shape in the form of two new startups called Nomi and Euclid, which are each bringing the power of big data and Internet analytics to brick-and-mortar stores. The idea behind both these companies is to give offline retailers the same kind of deep insight into customer behavior that online retailers already possess.
Nomi recently landed $3 million led by First Round Capital, and Euclid secured $17.3 million in a Series B led by Benchmark Capital. The startups install small Internet-connected sensors at retail locations. The sensors hone in on smartphone-wielding shoppers and monitor their behavior, such as where they walk in the store, what items they look at the most, and which window displays catch their eye.
“I can’t recall any investment I’ve made that has gotten so much inbound interest from customers,” says First Round’s Fralic of Nomi.
Still, challenges exist when investing in this market. Traditional retailers have done business a certain way for a long time, which means they can be reluctant to adopt new technologies, especially if it means physically installing sensors in their stores, like the ones that Nomi and Euclid require.
Overall, though, retailers “are figuring out that a lot more can be done,” Fralic says.
He points to another First Round investment, called Swipely, which is leveraging the big data trend for small retailers. The company, which raised $7.5 million, began as social shopping service that allowed consumers to share their credit card purchases with friends. When that idea quickly proved to be a loser, Swipely transformed itself into a service that enables local retailers to better analyze their credit card sales and create customer loyalty programs.
With Swipely, merchants can track sales trends in real time and build customer profiles, helping them understand how frequently a particular consumer is coming in and what they are buying. Armed with this data, merchants can theoretically design targeted promotions down to the individual level.
“The big opportunity for retail is to bring the goodness of the Internet, the things we really love about ecommerce, to the physical retail experience. Years from now, we will see a much different retail experience for consumers.”
Another interesting credit-card based technology aimed at physical retailers is CardSpring, which recently closed a $10 million Series A investment led by Accel Partners and Greylock. Retailers are using CardSpring as a way to link coupons and promotions to the customer’s credit card. A coffee shop, for instance, can create a promotion offering $10 off every $50 spend on coffee. Instead of handing out loyalty cards, which consumers typically lose or not readily have available when they need them, merchants can tie the offer directly to the credit card.
Additionally, with CardSpring, consumers can see an online offer, and then register their credit card to opt in for that promotion. When they physically enter the store, the offer is initiated when the credit card is swiped.
“The idea behind CardSpring was, how to help offline retailers connect with consumers online, and lead them to make offline purchases?” says Accel’s Braccia. “CardSpring realized the easiest way to do that is to view the credit card as a mechanism to tether the online world to the offline world, and so they built a platform to enable that.”
Fralic agrees that this notion of connecting the online and offline worlds is the biggest trend in retail today.
“Last year nobody was doing this and now a bunch of companies are going down this path,” he says. “Retailers want to synchronize what they are doing online and offline.”
That’s where a startup called Retailigence comes in. The company, which recently raised $6.3 million from Draper Fisher Jurvetson and Motorola Solutions Venture Capital, helps retailers manage their online-to-offline marketing. Retailigence pulls inventory data from such retailers as Nordstrom, North Face and RadioShack and then distributes that product information to mobile applications, such as ShopSavvy and ShopAdvisor. When consumers check their mobile shopping apps, they can see what is in stock and where, thus driving foot traffic to local stores.
“Mobile is impacting physical retailers,” says Reese Schroeder, managing director of Motorola Solutions Venture Capital. “Ten years ago when I went into a retail store, I wasn’t scanning barcodes. Today the average consumer is armed with a ton of information through that device. So it’s a challenge, but it’s also a real opportunity in terms of better connecting retailers to the consumer.”
Another company helping traditional retailers enter the digital age is LightSpeed, which last year raised a $30 million Series A from Accel Partners. The company helps retailers create a more exciting in-store experience which is intended to make consumers more eager to shop in-store, instead of purchasing online. With LightSpeed, sales associates can cruise the floor armed with iPads and iPhones loaded with product information and payment capabilities. The customer can see additional options that are not on the showroom floor and can purchase items directly from the sales associate, rather than having to stand in line at the checkout counter.
“The big opportunity for retail is to bring the goodness of the Internet, the things we really love about ecommerce, to the physical retail experience,” Braccia says. “Years from now, we will see a much different retail experience for consumers.”
Tom Stein is a Palo Alto, Calif.-based contributor. He can be reached at firstname.lastname@example.org.
SIDEBAR: Q&A with Alexei Agratchev, co-founder and CEO, RetailNext
By Connie Loizos, Senior Editor, VCJ
You might not realize it, but that smartphone in your pocket is letting a growing number of retailers know when you return to a store. Retailers’ in-store cameras are telling them how long you linger in front of certain displays; Wi-Fi devices are allowing them to distinguish between customers and sales associates; and point-of-sales systems are reporting what you ultimately purchase. Retailers outfitted with off-the-shelf sensors may even know what the weather is like outside when you shop with them.
One company that’s combing through these various data streams so that retailers can make better staffing, layout and promotion-related decisions is RetailNext. In fact, the 6-year-old, San Jose-based outfit now counts 70 retailers as customers, including American Apparel andBrookstone. And its revenue is growing quickly enough — it rose 235 percent last year and looks to triple again this year, says the company — that investors have just given it $15 million to expand. The Series C round, from StarVest Partners, Nokia Growth Partners andCommerce Ventures, along with previous investors that include August Capital, brings RetailNext’s total funding to $29 million.
To find out more about the company, its business model, and its plans going forward, peHUB caught up with RetailNext’s co-founder and CEO, Alexei Agratchev. Our chat has been edited for length and clarity.
Q: How many people does RetailNext employ and where are they based?
A: We have 83 employees, including about 50 in San Jose. We also have a small group in Russia doing support, a few people in New York, Chicago, and Columbus, and we have a few employees in Europe and in Asia Pacific.
Q: You’ve told me that until now, you’ve been backed by private investors, including one your old bosses at Cisco, and August Capital, which invested $6.5 million as part of an $8 million round closed in 2011. How did you connect with StarVest in New York?
A: Through one of our board members, Bob Rosenblatt, who was most recently [Group President] and COO of Tommy Hilfiger and a former executive of Home Shopping Network, who StarVest had recruited to be interim CEO of one of their companies. They really like retail and they’re very plugged into retail, and we’re pretty plugged into the venture community here, so we’re pretty excited to be getting a different perspective from the East Coast.
Q: How does your tech work, in the simplest terms?
A: Our focus is on taking analytics happening online and providing it to physical retailers: how many people walk in, what they buy, where they stop, how many people lingered in front of a display, male vs. female demographics. We also track point-of-sale data, so how much spent, what discounts were applied. We track time and attendance, so we know how many people are working. And, we pull in promotional calendars and weather data. It’s all key to figuring out how to compensate better, stock better, and make better layout decisions, and so forth. And as the tech improves and retailers put in more digital infrastructure, we’re getting even more data.
Q: Who are your most direct competitors?
A: In the last few years, a whole bunch of startups have cropped up with the same mission and goals as [we have], including Euclid Analytics. But most are much smaller. No one is bringing analytics together the way that we do. (Euclid raised $17.3 million in Series B funding in February led by Benchmark Capital –Ed.)
Q: What’s your business model? Simple subscription basis?
A: We have a mixed SaaS model; customers can pay for different layers of analytics, but there are also upfront costs for every store, and we’re expanding into 400 new stores each month.
Q: You’re obviously relying on a mix of hardware and software. Do you produce any hardware?
A: None. It’s all off-the-shelf. All of our IP is in our software.
Q: What’s next? How will you use your new funding?
A: We’re focused on two main things. We’re investing more in R&D and working on new predictive analytics and some new data sources. We’re also focused on international expansion. We’re in 25 different countries today, but mostly through U.S. retailers that have stores abroad. So we’re putting people in key geographies and establishing retail partners there. We expect that by year-end, 30 percent of our business will be coming from international-based retailers.