03 May 2022
Retailers are the new tech companies
Brands and retailers are making plans to double down on digital approaches as stores reopen.
Brands and retailers are making plans to double down on digital approaches as stores reopen.
As ecommerce rose over two decades, it was often painted as an antidote to in-person retail.
The internet brought a reinvented shopping experience. Ecommerce platforms offered a wide range of goods available at low prices, ordered and delivered without leaving the house. Simultaneously, direct-to-consumer (DTC) brands brought fresh approaches in particular verticals that didn't change in years, and simultaneously setting the tone with style. They even made packaging fun. As with so many web-based businesses, they were characterized as disruptors setting out to replace the established incumbents.
Two years of acceleration during the COVID-19 pandemic made shoppers more comfortable with this mode. Ecommerce boomed. Not only were more shoppers turning to digital channels for purchases. Brands and retailers born in the analog era were now growing online businesses, too. With more exposure, the tactics of digitally native brands offered lessons for their larger counterparts. The era of disruption gave way to one of wide adoption.
Now, as pandemic restrictions pull back, ecommerce is returning to its pre-pandemic growth trajectory – steadily gaining share of retail spend year by year, but no longer gaining a decade's worth of growth in a single quarter. Yet, as shoppers are heading back out to stores, they are taking the expectations and habits of online shopping with them.
As UPS CEO Carol Tomé put it on the company's recent earnings call:
Retailers are more attuned to this than ever, and they are making adjustments in kind. Digitally native brands, facing increased competition with the growth of ecommerce, are interested in exploring the in-person route, offering an additional channel to meet shoppers.
What's next is not simply a return to in-person, but a combination of physical and digital shopping.
DTC brands are becoming more prominent at ubiquitous stores and growing their retail own networks, while brands that were already brick-and-mortar mainstays are opting for DTC strategies. Stores are fulfillment centers. Groceries are ordered via app, then picked up at the store. Ads are getting served in the aisles. Malls are getting built in Roblox.
Before, the store came to the internet. Now, the internet is coming to the store.
The era of blanding is giving way to one of blending.
This puts the more established brands and retailers in a unique position. They already have scale, and sizable store footprints that can be adapted. Yet, given the nature of the internet, they must also constantly innovate in response to what customers want. This means they will need to keep adding technology capabilities. They will do so by growing teams from within, and looking beyond their own walls. This is evident in the hiring and investment plans being laid by several consumer companies.
Lego plans to triple its tech team in three years.
Brands and retailers are scaling tech teams quickly.
With an increasingly digital business that combines its stores and an online marketplace with a growing number of third-party sellers, Walmart has a foundation for blended retail in place. Now, it is hiring more than 5,000 technologists this fiscal year, and setting up hubs in Toronto and Atlanta.
“We have a world class organization including technology, product and operations teams that we believe, combined with our retail strength and scale, will allow us to build a mutually beneficial flywheel that unlocks new revenue for Walmart while improving the customer experience for everyone,” Anshu Bhardwaj, Walmart SVP of Strategy and Tech Commercialization, told The Current.
Nike, which doubled down on a DTC and digital strategy that has brought growth, is set to join the company as a tech talent magnet in the Georgia metropolis next year. The athletic brand is planning to open a technology center that’s set to focus on supply chain and logistics, AI that improves shopper experience and cybersecurity.
Lego, long a primary proponent of building with one’s hands, is set to nearly triple the size of its tech team to 1,800 employees over three years. In the first building block to get there, it recently opened a new office with room for up to 400 team members in Copenhagen, and is planning three more.
“Our digital transformation is one of the single largest investments the LEGO Group will make in a generation,” said Atul Bhardwaj, Chief Digital and Technology Officer at LEGO, in a statement. “We’ve been blending physical and digital experiences for many years and are excited by our progress, but we have big ambitions so are accelerating our investment and expanding our digital team.
In tech, small companies with big ideas and focus have huge advantages. Collaboration is a must in order to grow. Retailers must also be mindful of the startups bringing new products, and seek opportunities for partnerships that will yield mutual benefits. For particularly promising companies, there will be chances to support them, as well. There may be more room for retailers to play a bigger role in the startup ecosystem as venture investment among institutional firms cools off.
The Home Depot appears to recognize this. On Tuesday, the home improvement retailer announced the creation of Home Depot Ventures, a $150 million venture capital fund that’s designed to support technology that will “advance The Home Depot's ability to provide a seamless interconnected shopping experience, develop new and differentiated capabilities, and extend its low-cost provider position,” according to a news release. In particular, it is interested in backing technologies that can support homeowners, home improvement businesses, Home Depot associates and drive “operational excellence.”
The fund builds on The Home Depot’s past investment in startups such as freight technology company Loadsmart and same-day delivery platform Roadie, the latter of which was acquired by UPS in 2021. It comes amid signs that tech is being elevated at the company. It recently promoted Matt Carey to the newly-created role of EVP of customer experience and Fahim Siddiqui as CIO.
"With Home Depot Ventures, we're lending our support and expertise to enable rapid scale of innovation," said Richard McPhail, executive vice president and chief financial officer of The Home Depot. "This is an exciting opportunity to find and scale the next big ideas in technology and retail."
In the food sphere, Chipotle recently launched a $50 million venture fund to invest in restaurant technology. Known as Cultivate Next, the fund is set to back technologies that can assist in running restaurants, improving its food offerings and expanding access and convenience for consumers. In the first two signs of investment, the company is testing an AI-powered robot called Chippy to cook tortilla chips, and experimenting with RFID to track ingreidents.
"We are exploring investments in emerging innovation that will enhance our employee and guest experience, and quite possibly revolutionize the restaurant industry," said Chiptole CTO Curt Garner in a statement. "Investing in forward-thinking ventures that are looking to drive meaningful change at scale will help accelerate Chipotle's aggressive growth plans."
Ever mindful of staying ahead, Amazon has its own plans to invest in new robots as it seeks to back fulfillment technology that pushes logistics forward. With the new $1 billion Industrial Innovation Fund, the ecommerce giant has already backed five startups. With a massive fulfillment network built out (excessively, it turns out, at least for now) to keep up with demand, more investment is coming.
Going forward, it will be less and less surprising that strategies taken by the top ecommerce retailer and a chain known for its massive brick-and-mortar stores are sounding some similar notes. After all, they’ll be looking to reach many of the same shoppers, wherever they prefer to be.
The figure underscores the importance of the marketplace to Amazon's business.
When it comes to selling physical goods through online channels, the Amazon model is dominant.
The company’s commerce business has four distinct components: A marketplace with a constantly expanding assortment of goods driven by third-party sellers, an advertising network that helps sellers stand out, a fulfillment network that delivers items quickly and conveniently, and a membership program that builds loyalty, while connecting shoppers to the other parts of Amazon’s consumer ecosystem.
Each of these elements are mutually-reinforcing. At this point, it would be difficult to grow one without another. A third-party seller on the marketplace likely buys advertising to stand out in a sea of brands, and uses Fulfillment by Amazon to store and ship inventory in part because it’s the most convenient way to access Prime customers.
Yet these parts also exist as their own lines of business that have helped Amazon unlock new avenues for growth beyond the rote sale of goods. Services provided to third-party sellers, Amazon Ads, FBA and Prime all generate their own revenue, and most of these are growing rapidly.
Just how important are they to Amazon?
The company offered some details on one of these areas in a new report this week: Third-party sellers. These independent sellers that list, manage and ship their own products are distinct from first-party sellers, which effectively sell items to Amazon and leave the ecommerce company responsible for the sale to the consumer. As Amazon points out, most third-party sellers are small and medium-sized businesses. First-party sellers tend to be the larger name brands.
As it turns out, third party sellers are very important to Amazon. Key stats from the report:
Independent sellers account for 60% of sales in Amazon’s store.
U.S. sellers sold more than 4.1 billion products—an average of 7,800 every minute. These sellers averaged more than $230,000 in sales in Amazon’s store.
Brand owners in the U.S. grew sales over 20% year over year in Amazon’s store.
Amazon sellers are based in all 50 states.
Over 260 million products were exported globally by U.S.-based sellers.
The results in part underscore how much energy Amazon has put toward growing the marketplace, and the uptake in sellers that has arrived as a result.
“Amazon invests billions of dollars annually to provide entrepreneurs with a constantly improving set of valuable tools and resources to help them gain access to capital, quickly launch in our store, build their brands, and rapidly scale and reach more customers,” said Dharmesh Mehta, vice president of Worldwide Selling Partner Services at Amazon, in a statement. “Amazon is committed to the success of small businesses, and we are excited to continue innovating on their behalf and help them grow into thriving success stories.”
Make no mistake: There is also a massive benefit to Amazon’s business. In the first quarter of 2023, third-party seller services generated $30 billion, and grew 20%. Compare that to AWS, which is typically seen as Amazon’s big profit driver, and you’ll find that the cloud division generated about $21 billion while realizing 16% growth.
While third-party seller services aren’t always running ahead of AWS, the fact that they are growing in areas close to each other is a sign of how much opportunity lies in the marketplace for Amazon. Factor in that Amazon’s $9.5 billion (Q1) advertising business is also tied in part to the marketplace, and it’s clear that the impact extends beyond a single budget line.
Amazon’s success with third-party sellers is a big part of the reason why the marketplace model is being widely applied across commerce. Walmart is doubling down on growing third-party sellers on its marketplace as it follows an ecommerce playbook that has similar components of Amazon, and Macy’s opened its ecommerce business to third-party sellers last year. Shein recently brought its own marketplace to the U.S., and the fast fashion platform is using it as a means to expand the number of categories.
While Amazon will likely to continue to couch its communications about third-party sellers in the language of support for small businesses, it is a major reason that the company has been able to grow to the giant it has become, and remain there. With the growth of ecommerce and the rise of retail media, plenty of others in commerce will continue to apply the model, as well.
For a bit more info on Amazon, the company also shared the below rankings in the report on third-party sellers:
The most-shopped categories from third-party sellers:
The five states with the most third-party sellers: