The first phase of retail commerce disruption 1995 – 2009
For the last 15 years you can go online and purchase a book. The book is boxed by the online retailer, shipped via UPS to your home and arrives a couple of days later.
Over the last years these models have evolved, offline retailers have joined and today Walmart, Target & other national retailers rather than being squeezed out of the commerce transaction have build multi channel, well integrated commerce funnels to serve the consumer where they are, online or in the store.
These years have been phenomenal and the per cent of total retail sales for ecommerce has steadily grown to 5.8% in 2010 according to the US Department of Commerce and according to Forrester will grow further to over 8% by 2014.
Amazon is the leader in Ecommerce with a 36% growth rate in 2010 and is outperforming any traditional retailer.
2010: The first year of the next wave of retail commerce disruption.
During 2010, more than $451 billion in consumer incentives were delivered via FSI coupons, up 17.1 per cent from 2009. With the increased availability of smart phones and mobile applications and continued growing internet access to now nearly 80% of the US population, you would have expected a drop in printed FSI coupons.
It is amazing that FSI’s have still grown considering the technology trends, but digital coupons are by far the fastest growing coupon segment and the distribution has exploded in the last 12 month. Not only an explosive growths of 100% over the past year, but according to a study from Coupons.com the average household income seems to be as well more affluent with $ 105,000/ year, which is 26% higher than the average.
We have experienced another new phenomenon sweeping the world with Groupon in 2010 and 2011, completely bypassing the established infrastructure for coupon distribution. In under 3 years Groupon grew to over 1 billion dollar in revenue.
What was the technical innovation that allowed this? None!
Groupon simply moved the point of payment from a traditional post paid coupon transaction to a prepaid online transaction. Groupon does not carry any inventory, they simply changed the commerce payment flow and moved the payment to the place where intent for a purchase was initiated.
Groupon went further to make their model work, they created an artificial scarcity, time limitation and social dynamics to push the purchase intent to a fast close online.
As Groupon and Co. lack innovation you will not find any economies of scale in their model or technological advancements that would benefit the merchant and allow them to part ways with products and services at half price, plus the insertion of a new middle man, charging another 50% of the already discounted sales price.
Though we see Groupon as a true disruptor, there is no economical foundation to justify the insertion of a middle man at this level and we expect this phenomenon to gravitate over time to consumer categories where merchants fill excess capacity without any additional per seat costs. This would mean as well a much smaller market share for Groupon style offers, compared to the overall market size for online to offline commerce.
What is interesting is that Groupon chose a retail category that was not organised with an established incentive system, but was rather fragmented with local focus and single locations.
Comparing Groupon’s sales numbers now to the total incentives circulated that are organised by large manufacturers, CPG companies and retailers, Groupon still seems small in comparison to the overall incentive market.
When you compare historically disruptive developments, you can see often early entrants creating awareness with a simpler model, while the true disruption comes from deeper technological innovation and more complex replacements of an existing structure.
Groupon was the early catalyst that is enabling deeper innovative developments on all levels of the retail commerce chain in the coming years thanks to the new awareness.
2010 – 2020: The decade of retail commerce disruption (Online & Offline Convergence)
I believe there will be two main drivers for future disruption in retail commerce and both of them are closely tied to more mobile adoption:
a) the payments process and
b) capturing data of the consumer at the time of the purchase intent.
We have seen with Groupon that by simply moving to a prepayment of discounted goods and services, the power shifts from the retailer to the “advertising” agent. The “agent” now controls consumer data and the payment to the retailer or merchant. The concern we have with this model is that the “agent” may contribute initial value to the consumer, but is not adding similar value to every retailer or merchant. Quite to the contrary they marginalize the merchant and shield off the valuable consumer data and keep it for themselves to present the next discount from another merchant or retailer to the same consumers.
Google, PayPal, Square, First Data, Visa and many other online and payment companies have rolled out a first version of digital wallet applications for mobile devices. Groupon has changed the dynamics by moving the payment from the merchant to themselves, we do see wallets having a similar impact and potentially disrupt traditional retail. For established card networks we expect that their wallet offerings become simply a smarter extension to the plastic card without a change in the established business model and without true disruption.
The disruption is more likely to come from fairly new entrants like Google or PayPal, and not the traditional card networks Visa or MasterCard. MasterCard is currently fast tracking Google wallet enabling them to utilise the Paypass infrastructure. The Google wallet product is build on top of the Firstdata infrastructure that today already handles 50% of US credit card payments.
Players like Google and PayPal have a distinct advantage, they control the consumer (if they choose) and can influence them at the time of purchase intent. The only other traditional card network that has this distinct advantage as it has direct relationships with consumers is American Express. Visa, MasterCard and Discover utilise a bank issuing partner system and have not direct agreements for the most part with consumers.
There are other partnerships on it’s way, one example is the white label solution for a mobile wallet product introduced with a recent announcement between Corfire and Incomm to market the Corfire mobile wallet platform to Incomm’s retailers. The question is here how consumers may adopt multiple wallets and I simply cannot see consumers manage their finances in a variety of wallets where each unique wallet is linked to one particular retailer.
Understanding the revenue force Groupon has become in just 36 months, we should be prepared to see even larger revenue shifts as payments are moved into the mobile wallet, especially from providers that somehow control the online presentation of content served to consumers.
In our opinion the main disruption during the next years is coming by providing information to the consumer when he needs it at the point in time when the consumer is formulating a purchase intent. Our worldwide population is 7 billion, the number of mobile phones worldwide is 5 billion. 50% of new phones are smart phones (general purpose computing devices), this trend will bring the power of mobile discovery of your offline surroundings to every person on the planet.
Google claims that already today 50% of offline retail sales are influenced online. Forrester has similar predictions and numbers.
The companies that will influence the purchase intent are many, not just one. Reviews, search results and other information available on any device at any time will influence the purchase intent of the consumer. Application developers will have a unique opportunity to serve relevant content that allows the consumer to discover their offline surroundings and while doing this, applications will have the ability to insert themselves into the commerce transaction. There will be a new symbiotic relationship between Internet companies that serve content or applications that help to manage consumers’ lives and retailers.
Our offline lives are complicated and diverse; the same will remain true in the future when Internet technology will help to organise our offline lives. Today we already see a flood of new applications and tools for consumers that will make local offline information more accessible online, with new monetization options these will only increase in numbers.
To put the move of purchase intent online into perspective and if the Google numbers of 50% of offline retail is touched online are correct, here an interesting number that reflects the enormous market size of this opportunity:
25,000 restaurant visits per second are touched online in the US alone!
Google, PayPal or other potential mobile wallet leaders may become a proxy in that process to harmonize analogue and fragmented data points and turn them into a digital consumable feed to provide to app developers, enabling them to present and match consumer intent with offline venues.
While the back end infrastructure still needs to be build and the current innovative cycle connecting online and offline is truly helpful, the future I see in this development will create ultimately participation of app developers, payment providers and other technology partners in the local offline GDP.
The US GDP was $ 14.7 trillion in 2010, nearly $ 3 trillion, about 20% are retail sales. How does this impact the already projected increase to 8% of retail sales in ecommerce? I believe that we will see an unexpected acceleration and larger numbers with the connectivity that is currently build enabling online to offline commerce.
We could see potentially hundreds of billions of dollars in retail commerce be accounted for via an online to offline connection, we will propably need to define a new category “online to offline commerce” aside from ecommerce. This will be commerce where the consumer will identify a product or service online and will either prepay or will be provided with a unique redemption code that will be stored in the consumers mobile wallet for redemption (pick up) at the retail location.
For these transactions we anticipate that up to a 5% tax will be charged by “connectors” (compare this to the current misaligned and unsustainable merchant tax of 30% – 50% from Groupon). The charge may be inserted into a wallet payment product or will be charged as standalone marketing/ advertising costs.
We will see companies flourish that move the payment transaction into their books, these will be the new Groupon comparable “success” stories and I would not be surprised to see shortly another company cracking the nut and move billions of dollars into their books within just 24 months in business. Some of them will work with similar accounting principles like the adjusted consolidated segment operating income, similar to what Groupon tried in their S1 filing, but with or without those accounting procedures, ultimately we will see billions move to online to offline “connectors”. The difference to Groupon will be the alignment of those companies with the retailers needs. Therefore the financial transaction in the books of the online partner will equate more to a settlement role similar to traditional card networks and processors and should see similar valuations.
Other applications will leverage mobile wallets and established payment methods or will simply leave the payment transaction to the retailer, but will have accountability for online to offline transactions with point of sales SKU level integration. The “connector” will now hold the consumer data and in exchange for driving business will command a tax, varied by the margins supported by the retailer served.
There is a quite race for connectivity shaping up right now from major players like Google and PayPal. Traditional payment companies do see changes coming, but have a hard time establishing disruptive movements as they disrupt their traditional business. From time to time we can read about acquisitions. Some larger like the Google acquisition of Motorola, some smaller like the Google acquisition of Zave Networks or Paypal’s acquisition of where.com.
Major disruption is coming with the move of our offline retail purchases to the point of thought and intent online. Considering the shift in control of the consumers’ wallet this is a trillion dollar opportunity and may deliver the next Google or Facebook in the process.
Today we are just in the early beginnings, Groupon compares in this coming evolution to maybe Infoseek, Altavista or Lycos in the search category in 1996. At the core is the merchant and the business will flow towards an aligned and sustainable model, between purchasing consumers and merchants providing the products and services.
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