Retail is not dead, it’s simply evolving. I predict that over the next five years, consumers will experience completely new retail models that effectively use physical locations combined with world class Internet and mobile sites to offer truly unique and delightful shopping experiences for their guests. The retailers that deliver this experience intelligently, will thrive.
These companies will transition to “lower-cost” and smaller retail footprints. They will utilize these spaces as a major asset to improve the costs and friction associated with shipping and returns; to offer new and innovative ways to promote product discovery; and to offer levels of service and entertainment that will be difficult to match by algorithms and machines on the Web.
But at some level, from the standpoint of technology entrepreneurs, this debate is irrelevant. What is clear and irrefutable is that e-Commerce overall is an enormous and growing industry. And whether the composition of the industry is dominated by pure-play or multichannel, we know that all the players will need massive amounts of technology in order to be successful. This is why we believe that commerce technology is the single most attractive technology space for B2B entrepreneurs in 2013.
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Global e-Commerce is the only trillion-dollar industry growing in double digits.
According to a recent eMarketer report, global e-Commerce sales in 2012 topped a trillion dollars in annual sales ($1.2 trillion). In 2013, global sales are estimated to grow by 18%, and by 2016, 15%. If these estimates are accurate, in the next five years, e-Commerce is estimated to grow by another $1.2 trillion, doubling in overall market size. And today, global e-Commerce represents only 6.5% of the overall retail vertical.
As compared to other large trillion dollar industries, e-Commerce is only the sector expected to grow at a double-digit growth rate. Even historically fast growth industries like oil & gas and pharma are only growing by 7.5% and 4.0% respectively, while other large trillion dollar categories are growing by 1% to 2%.
E-Commerce R&D technology is key: look at Amazon’s success.
Amazon accounts for roughly 25% to 35% of all online commerce. Their success over the past decade is directly attributed to their technology advantage. As a result of their technology and infrastructure investments, Amazon has the most advanced capabilities of any player in the areas of website personalization, customer targeting, price optimization, frictionless checkout, low-cost and fast shipping, and product selection.
According to a report by management consulting firm Bain & Company, Amazon spends roughly 3.3% of total revenue on information systems investments, which equated to $1.6 billion in 2011 and $2.0 billion in 2012. As Amazon grows to $100 billion in revenue in the next few years, assuming they continue to invest at the same rates, this investment in information systems will grow to $3.3 billion a year. If every e-Commerce player invests in information systems at the same rate as Amazon, this would equate to a staggering $82 billion in annual technology spend globally by 2016.
This is only the beginning.
In the last three years, we have seen the first wave of commerce technologies reach maturity.
Pioneering entrepreneurs over the last decade have started technology companies to help both pure-play e-Commerce companies and multi-channel retailers effectively compete in the e-Commerce world. Many of these companies started at a time when it was not necessarily obvious that e-Commerce technology would be a big enough space for large venture-backed exits. However, these companies have enjoyed strong growth rates due to the market tailwind of e-Commerce growth, and many have resulted in exciting exits: GSI Commerce, Demandware, Endeca, Kiva Systems, BazaarVoice, Omniture.
We are only scratching the surface.
If you look at the entire value chain of e-Commerce, the companies listed above have solved only some of the core aspects. In addition, many private companies have launched in the last five years to tackle additional areas. However, there are three things worth noting that lead us to the conclusion that we are still in the early days of innovation in this space:
1. There are significant portions of the e-Commerce technology value chain that are still unsolved by startups or legacy vendors.
We talk to hundreds of CMOs a year and they outline for us the set of challenges and opportunities for which they would love to find an innovative technology vendor. The list is long, but some of the examples they have shared with us include:
- Optimization of multichannel supply and fulfillment chains;
- Streamlining of shipping and returns;
- Better demand forecasting accounting for networks of regional distribution centers;
- Reduction in the cost of product data and images; and
- Management of international sites, international demand generation, and personalization across countries.
In many of these areas, Amazon is investing heavily and has consistently been the market leader. Everyone else needs to catch up.
2. The space is still extremely dynamic and is growing at extraordinary rates.
As mentioned before, the space is growing at 15% a year. But the market is also experiencing tremendous shifts in consumer behavior leading to exciting new opportunities:
- The growth of mobile as a discovery and commerce channel;
- The intersection of offline and online and how multichannel players can effectively leverage the strengths of both;
- The rise of social as a consumer behavior that has yet to be harnessed by e-Commerce players in a scalable/high-ROI way;
- The changing nature of payments and loyalty programs with new providers and mechanisms emerging; and
- The pressure of same-day delivery and the need to achieve lower cost ways to fulfill from using lockers to leveraging stores as distribution centers.
There has never been a more dynamic time in this space.
3. Over time, the definition of e-Commerce is getting broader. Every business is an e-Commerce business.
When many people hear the word, e-Commerce they naturally think retail. However, every business leverages e-Commerce/Internet technologies for at least a portion of their value chain. Whether it’s a bank offering credit cards, or an auto dealership booking service appointments, or a software company soliciting leads and prospects, or a restaurant displaying its menu, or a hair salon selling beauty products, or dentist booking appointments — they all need to leverage the web and mobile to attract, find, communicate, and service their customers. Whether the actual “commerce” transaction occurs on a digital device or with a sales rep or in a physical location is secondary and immaterial. What is material is that every business on the planet will need to invest in commerce-enablement technology to stay competitive.
This I think the CMO will spend more than the CIO on technology five years from now; why I believe someone will build a $10 billion marketing technology company; why I don’t think retail will die; and why I think this is the single most exciting opportunity for technology entrepreneurs in 2013.
Ajay Agarwal is a Managing Director for Bain Capital Ventures, leading the west coast office where he focuses on early-stage software, mobile, and internet investing. Prior to Bain Capital Ventures, Agarwal spent more than seven years as a senior executive at Trilogy Software, a privately-held enterprise software company based in Austin, Texas. As head of sales and marketing, Agarwal grew Trilogy’s annual revenues to $300 million and led Trilogy’s product expansion into new areas such as enterprise pricing and enterprise incentive management. Prior to Trilogy, Agarwal was a consultant with the Los Angeles office of McKinsey & Company.
