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Q&A With Venture Capital Expert: Are Retailers Trapped By Outdated Performance Metrics? Featured

  • Written by  Adam Blair
Q&A With Venture Capital Expert: Are Retailers Trapped By Outdated Performance Metrics?

Zach Ware VTF CapitalFor most of us, real estate represents a tremendous asset. But real estate also can become a heavy albatross (see The Big Short to refresh your memory about the bursting of the housing bubble in 2008). According to Zach Ware, Managing Partner of the venture capital firm VTF Capital, retailers need to seriously rethink the value of their real estate. They also need to start giving more weight to metrics that reflect the true health of their organizations — not same-store sales but the performance of all channels, and how well the retailer is meeting customers' actual needs.

My Q&A with Ware sheds light on how multiple trends — including Amazon's dominance, democratizing technologies like 3D printing and inexpensive analytics — are destroying traditional barriers to entry in retail and manufacturing. All this could spell trouble for those with heavy investments in brick-and-mortar store locations:

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Retail TouchPoints: Stores are still where the vast majority of sales take place, but you raise a number of questions about their current and future value. What do you see as the primary challenges for brick-and-mortar store retailers?

Zach Ware: Proximity is no longer a value to most people, because Amazon and e-Commerce in general has made it incredibly simple to get products to you, and we're seeing consumers reacting to that fact. Today people go to wherever they can find the product they're looking for, and if you can afford to have just one warehouse, you don't have to deal with real estate costs. Essentially, companies are discovering that they no longer need a network of stores to distribute their products. This is due to the growth of distribution tools that weren't available until recently, which make it much easier to sell directly to consumers. All of these factors raise questions as to the future of retail real estate.

RTP: But certainly there will continue to be a role for stores?

Ware: The role of the store is, first, as a place where a customer can do things he wouldn't be able to do without actually trying a product; or second, where he can ask an expert to help solve a problem. Ace Hardware, for example, has done this well for years. You go in with a plumbing problem and they tell you how to fix it. But stores really won't have a role unless the retailer can solve the experience issue.

We're seeing some retailers take lessons from digital technologies by bringing them into the physical commerce world. I'm talking about things like adaptive upselling, very personalized experiences, and inventory that's designed to be seen and touched, but not necessarily kept in stock.

But the biggest thing is to think about downsizing your stores, because they are no longer places people need to come to just to buy stuff. The store is often the least efficient of all your channels. Some of the continuing focus on the store is about retail companies', and Wall Street's, tracking of same-store sales figures every month or every quarter. Do we really care if the Gap's same-store sales are up or down? We should care more about whether the Gap as a whole is up or down. People are still talking about metrics that don't really matter anymore.

The really smart retailers, rather than just selling something different, are transforming what the store does. A good example is ShopWithMe, which brings about 30 different types of technologies into a single store experience. These are modular, portable stores that different brands can use. If a brand doesn't want to spend a million dollars to build a store because they're not sure the market is right for them, they can move in for a short period of time and let customers experience their products and offerings. It can go up in 24 to 36 hours and can travel to different cities.

RTP: Besides being adaptable to different brands, how are the ShopWithMe stores different from a traditional pop-up store?

Ware: It's more than a pop-up store because of the technologies. It has a "pixel wall" with displays that move related products closer to you when you pick up a specific product, plus displays that show you images of related products that you can order. The store is constantly aware of what you're looking at, what you're touching and feeling, and it makes recommendations to you based on that. Full disclosure, I'm on their advisory board, but that's not the only reason I'm excited about this concept. The overarching belief is that people still want to try a product or experience a brand, but that doesn't mean the bulk of a store location has to be devoted to inventory. A store doesn't need to be just a place with stuff in it. It should complement your online experience in an incredible way.

Democratizing, Disruptive Technologies

RTP: What other companies or technologies do you see as innovative or influential when it comes to the value of the brick-and-mortar store?

Ware: There are a lot of groups doing interesting things in logistics, which is another factor removing the pressure on stores to carry so much inventory. These are companies like Deliv that provide same-day or next-day delivery. Also ice.com, which is tackling the jewelry market online, which no one in e-Commerce has ever quite figured out. They are focusing on all the elements that are hard in e-Commerce — logistics, fulfillment, support — the things that a lot of major manufacturers do poorly, which is why they traditionally sold to retailers. These companies are empowering manufacturers by handling the stuff that they don't need to do.

Another technology is 3D printing, which destroys a lot of the barriers to entry for manufacturing itself. It's not about manufacturing to scale, but seeing quickly whether something is a good idea or not. It's not even a one-month turnaround to make a prototype, it's a day or a few hours. There are also the marketplaces like Kickstarter, Etsy and Shopify that provide exposure to validate ideas — or not. There are so many companies now that support the infrastructure and back end of e-Commerce, and commerce in general. You and I could start a store this afternoon. That's amazing to me.

There are also technologies on the business operations side. I'm talking about the role of SaaS and huge data crunching and analysis, which allows even small organizations to act with the intelligence level of a massive, well-established company. This should scare a lot of retailers — that for $30 a month I can have highly targeted marketing for my half-million-dollar startup. That's pretty incredible.

Don't Stifle Innovation Through Acquisition

RTP: Besides rethinking the role of their real estate, how can retailers move the needle on innovation?

Ware: For one thing, when a retailer looks to buy an innovative startup, they should understand that this company has innovation characteristics that the retailer lacks. Simply buying a company and bolting the brand to your own doesn't work anymore. There's innovation at play at the startup company that you want to allow to thrive, and if you suck them into your existing machines, you'll kill it. That happens a lot, and it's unfortunate. On average, company founders stick around for 12 to 18 months after an acquisition by a bigger company takes place. That should tell you something. Amazon has allowed companies it acquires to stay independent within their "family." Some brick-and-mortar companies have as well, like Nordstrom with Trunk Club.

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