Betting on Startups to Reinvent Retailing · START PATH SNAPSHOT Other startups, like Texas-based Neighborhood Goods, attempt to infuse experiential retail into the department store.

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.

Betting on Startups to Reinvent RetailingCB Insights in partnership with Mastercard Start Path

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.

The most active venture capital investors in the space to unique in-store retail tech startups since 2014 by number of investments are Plug and Play Ventures, Commerce Ventures, Intel Capital, SV Angel, MaRS Investment Accelerator Fund and Salesforce Ventures.

Some of these investors have focused on retail tech startups around the globe. Salesforce Ventures’ portfolio, for example, includes startups from France, Japan, Switzerland, Canada and more.

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 COMMERCEIn the U.S., technology giants and retailers have not entirely been able to crack the code on social commerce.

American consumers have traditionally treated e-commerce and social media as distinct activities. Someone might go on Facebook to chat with a friend and then go on Amazon to buy shoes, but she wouldn’t buy shoes on Facebook or chat with friends on Amazon.

Historical attempts at social commerce by companies like Twitter with its “buy button,” have flopped. However, we are seeing a resurgence in social commerce activity, particularly among non-U.S. startups.

U.S.-based Goodworld is the only social fundraising platform with hashtag-to-donate technology,

transforming #donate from a static 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

run their businesses through Instagram track inventory, orders and payments seamlessly on the

social channel.

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Some of these startups are gaining investor traction. For example, Bangalore-based startup Meesho raised a $50 million Series C round of funding in November 2018 from DST Global, Sequoia Capital India and Y Combinator, among others.

Another company benefitting from this traction is China-based Pinduoduo. The social commerce company, which launched in just

2015, took only two years to reach over 100 billion RMB in annual revenue. Moreover, in June 2018 the company reached 195 million monthly active users. In July 2018, the company raised $1.6 billion through a U.S. IPO.

Source: GGV Capital

Pinduoduo’s fast rise in the world of Chinese e-commerce is bolstered by its unique approach to social commerce. Through its e-commerce platform, users can invite friends and contacts to join “shopping teams” to 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

conversion rates for merchants. Harnessing its image-recognition

technology, Visenze simplifies online retail platforms with features like search-by-image and suggestions

for visually similar products.

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The dynamic and interactive nature of Pinduoduo stands in contrast to attempts at social commerce in the U.S. While there is no widely-used equivalent of WeChat in the U.S., it begs the question: could a similar model be successful among American consumers?

That remains to be seen as U.S.-based social media giants continue to push to capitalize on social commerce.

Most recently, Facebook acquired startup 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 to provide a QR payment bot via Facebook Messenger to facilitate digital transactions for small businesses in Africa and Asia, 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 DELIVERYLast-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 an outsized impact on thin-margin businesses like grocery retail, among others. As a result, the opportunity for disruption is substantial.

Over the past year, a slew of startups focused on the intersection of autonomous vehicles and last-mile delivery has gained investor attention. These startups, such as Nuro, Starship Technologies, Savioke and Udelv,

have developed vehicles that are specifically designed for last-mile delivery.

Robotics startup Nuro made recent headlines for raising a $940 million investment from Japan-based Softbank Group in February 2019.

While still in its infancy, retailers and other brick-and-mortar businesses are leveraging autonomous last-mile delivery startups to reduce costs and improve efficiency.

While still in its infancy, retailers and other brick-and-mortar businesses are leveraging autonomous last-mile delivery startups to reduce costs and improve efficiency.

For example, in June 2018 Kroger, one of the largest brick-and-mortar grocers in the U.S., partnered with Nuro with plans to leverage the startup’s fully-electric autonomous delivery vehicle, the R1, to transport groceries to consumers.

More recently, Alibaba employed startup Savioke’s indoor delivery robot, Relay, at its

new unmanned hotel, Flyzoo, in Hangzhou, China. The Relay robots help deliver room service orders to customers’ hotel rooms, sans human employees.

Nigeria-based MAX is offering on-demand, last-mile delivery for Nigerian businesses and retailers. With the option to integrate with a merchant’s website or app, MAX connects businesses with “Delivery

Champions” that allow for quick moto-taxi delivery and a smoother delivery process for local businesses.

NetPlusDotCom partnered with Mastercard to encourage

Nigerians to go cashless and take their retail experiences online. This partnership blends no-risk

purchases with last-mile delivery: only when consumers are satisfied

with delivered products are pre-authorized transactions approved and completed; if

a consumer is dissatisfied, the preauthorization is voided and

immediately in effect.

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Currently, retailers are constrained by the cost of paying humans to deliver goods, which often causes the price of delivery (especially for groceries) to become prohibitively expensive for many consumers. Autonomous ground delivery vehicles can encourage greater consumer adoption by ultimately

reducing or eliminating the cost of human delivery people.

While experimentation is increasing, autonomous ground delivery vehicles still face regulatory hurdles. Many of these vehicles and robots, for example, are confined to designated areas on specific roads within cities.

Nevertheless, autonomous ground delivery is catching the attention of certain corporates. In January 2019, Amazon unveiled an autonomous delivery robot named Scout. The following month, FedEx unveiled its own ground delivery robot. Both robots move at a walking pace and are intended for travel on sidewalks.

While autonomous ground delivery is still in early stages, successful trials could lead to direct investments or acquisitions of autonomous ground delivery startups by retailers going forward.

TREND 3: EXPERIENTIAL AND DESTINATION RETAILRetailers are quickly learning that in-store experiences need to be about much more than just “purchasing” – something that customers can easily do online.

Clicks-to-bricks startups like Casper and Harry’s have been arbiters of this trend, opening physicals stores that essentially act as marketing tools for their online brands.

Walk into a Casper store and you can feel its sheets, touch the material inside its pillows and even take a nap on a mattress inside a “bedroom.” The company plans to expand to 200 locations in 2019.

The rise of startups like Casper in physical

retail has prompted a frenzy of interest in experiential stores.

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 enables digital in-store shopping

experiences so they are integrated – and unified – across all channels.

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Other startups, like Texas-based Neighborhood Goods, attempt to infuse experiential retail into the department store. The company, which opened its first 14,000-square-foot location in Texas late last year, offers shoppers a rotating lineup of products from various online brands. In addition, the store attempts to build a community around shopping by providing a restaurant and bar, events, social spaces and more.

Neighborhood Goods, which raised additional seed funding in February 2019, is looking to

expand to other locations in the next two years, including New York City.

Some startups, like Spacious and Re:Store, are bringing coworking to physical retail, giving stores new life as alternative work spaces. Another startup – WeWork – has partnered with Mastercard to enable contactless payments for everyday items like snacks and beverages in office spaces, an initiative that may help further drive adoption of contactless technology.

While some retail incumbents like Apple have pioneered the idea of experiential retail for decades via community center-styled stores, product showrooms and in-store classes, others are now leveraging startups to compete in this area.

Specifically, as mall vacancy rates have reached 9.1 percent in the U.S. (a seven-year high), mall owners are focusing on non-retail experiences and activities (i.e. fitness centers and movie theaters) to turn their shopping centers into multipurpose destinations.

Their newest strategy? Partnering with coworking startups at the mall.

For example, Macerich partnered with Industrious in August 2018 to add flexible 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 for online customers in late 2018. Through the partnership, online customers can virtually navigate a three-dimensional store, where they can interact with brands and content.

Going forward, retailers and brands will have to reimagine ways to draw in customers. Experiential retail concepts will help differentiate competitors, while also acting as tools for marketing and branding.

TREND 4: AUGMENTED AND VIRTUAL REALITY IN RETAILAugmented 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-ucts they may want to buy before making an actual purchase.

Most recently, AR startup Wannaby launched a beta version of its app that allows customers to virtually try on new pairs of shoes. Customers who download the app can 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 uses in brick-and-mortar retail. Several retailers have partnered with AR and VR startups to improve the in-store experience.

For example, Macy’s has partnered with VR startup Marxent Labs to reduce return rates in in its furniture department.

Marxent’s in-store VR showroom service and platform help retailers market their products through in-store VR headsets that let customers visualize what furniture would look like in their homes. As part of the expanded partnership, Marxent will operate at Macy’s in 70 stores nationwide, with plans to spread to 20 more locations in early 2019. After pilot tests at three stores, Macy’s claimed returns decreased to under 2 percent for VR-influenced furniture sales.

AR and VR go beyond enhancing customer satisfaction. Startup InContext Solutions helps retailers plan out their stores by creating virtual simulations that track shopper preferences and actions; they even predict eye movement to optimize store layout and organization. The startup has worked with retailers including Walgreens, Walmart and Home Depot.

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.

Smart mirrors have also become a popular AR-based tool to enhance the in-store shopping experience.

For example, Mastercard has rolled out smart dressing room mirrors in the U.K. that provide an interactive experience for retail shoppers. The mirrors, which leverage RFID technology, can identify which items are brought into the dressing room. The mirror also gives product recommendations and controls lighting, among other features. At the end of this experience, customers can purchase their items through the screen to save time on checkout.

AND WHAT ABOUT PAYMENTS?Traditional lending products are becoming less popular among younger consumers.

In response, startups are reinventing lending at the point-of-sale. POS lenders are part-nering with merchants to provide shoppers — both in-store and online — access to capital.

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 created fresh momentum in the market.

Two major startups distrupting this space are Affirm and Klarna.

In 2017, U.S.-based Affirm raised a $200 million Series E at a $1.8 billion valuation from investors including GIC, Founders Fund, Lightspeed Venture Partners and Ribbit Capital. In 2019, Affirm partnered with Walmart to provide its services at over 4,000 Walmart supercenters in the U.S.

Sweden-based Klarna works with 100,000 merchants to power payments for 60 million customers across 14 countries. In late 2018, fashion retailer H&M invested a $20 million stake in Klarna, setting the foundation for a partnership in which Klarna will integrate its payments technology into H&M’s brick-and-mortar and online businesses.

It is rumored that Klarna has plans to go public in 2019.

Banks are expanding into POS lending by building their own

solutions and partnering with white label startup partners like

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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If POS lending startups are able to effectively measure their subprime risk, these startups will continue to thrive.

CONCLUDING THOUGHTS:Retail isn’t dead. But it is rapidly transforming.

The retail landscape as we have known it is under massive pressure from e-commerce, macro-economic changes and shifts in consumer trends. To survive, traditional retailers will have to continue to integrate disruptive technology into their brick-and-mortar operations, ultimately creating a seamless blend between digital and physical commerce for consumers.

Startups innovating in the areas of social commerce, autonomous delivery, experiential retail and consumer-focused AR and VR will have important roles to play in bridging the online-offline gap for retailers.

While many of these trends have experienced various levels of adoption across Asia, Europe and North America, we will continue to see investments in startups across these spaces from retailers, technology giants, institutional investors and beyond - and the results will play a major role in determining retailer winners – and losers – in the coming years.