Shopping the future | New horizons in ecommerce

SHOPPING THE FUTURE NEW HORIZONS IN ECOMMERCE

POWERED BY BDO

SHOPPING THE FUTURE | BDO LLP

BDO LLP | SHOPPING THE FUTURE

INSIDE

When the internet first entered the mainstream of consumer and business life, retail was of course one of the first spaces where the forces of digitisation broke ground. Indeed, ecommerce is so well established in digital terms that it’s almost possible to look right past it when considering the verticals where tech disruption is most active and interesting today. And yet, ecommerce today is a very different place from that early digital frontier. Where once industry insiders debated online auctions and clicks-and- bricks and contextualised retail, today the talk is of showrooming and recommerce and shoppable TV. However, at the same time, some of the key challenges which have always dogged the sector have yet to be fully resolved: returns, the last-mile issue, and truly seamless omnichannel.

In this ebook, we look at some of the trends and technologies which are currently animating the world of ecommerce, with a focus on market disruption and investment potential. We are very grateful to all those who have shared their time and their insights, and we hope this ebook offers a useful contemporary take on a fascinating and formidable space.

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INTRODUCTION: ECOMMERCE IN THE TIME OF COVID-19 SUBSCRIBING TO SUCCESS TRANSFORMING MOBILE EXPERIENCES THE OMNICHANNEL DREAM PERSONAL EXPERIENCES, CUSTOMISATION AND ADDRESSABLE TV THE DIRECT-TO-CONSUMER REVOLUTION DYNAMIC PRICING VOCAL SUPPORT BACK-END BUSINESS: WAREHOUSING, FULFILMENT AND LOGISTICS MANY HAPPY RETURNS? CREDIT AND LOYALTY SUSTAINABILITY, RECOMMERCE AND CIRCULAR MARKETPLACES CONCLUSION: MONETISING THE HOW

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EYAD HAMOUIEH R&D Partner, BDO

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INTRODUCTION: ECOMMERCE IN THE TIME OF COVID-19

space, whose current investments include poundshop.com, gardening specialist Hedges Direct, tools provider FFX, and equestrian equipment retailer Equus. He sees similar opportunities in what he calls ‘a systemic change in the way people view online shopping’ that has been provoked by the pandemic. ‘What we saw pre-COVID, is that people tended to shy away from ecommerce. It was one of those sectors that people didn’t place masses of value on, and you tended to see higher multiples applied when valuing other sectors,’ he says. ‘But what’s happened during COVID-19 is that people have realised the inherent value of ecommerce and how bad it can be for a retailer if they haven’t optimised that channel. As a result, I think the growth rates this year will be driving people to pursue more ecommerce investment, especially at the smaller venture capital end. And as a consequence, the multiples people apply to value those businesses

and saying, “Oh, that’s something we’ll do over here.” Well, now it’s everything. It is their survival. They have to invest in their ecommerce operation. And that by its very nature has accelerated development.’ Pureplay ecommerce players have the advantage of a mature operation already in place, but there are threats too. ‘For the laggards, it’s about diverting investment into channel development and building a credible ecommerce presence, in order to be able to compete,’ says Hase. ‘But as these players join the programme, the pureplays have to keep innovating, because they no longer have first-mover advantage and the laggards often have advantages of scale and brand equity and customer base. So the pureplays have to double down on differentiation and service in return.’ John Cordrey is a senior investment manager with Foresight, a £7bn significant experience in the ecommerce

While the year 2020 was a tough one for most economies around the world and many business sectors, one area which bucked the trend was ecommerce. Pandemic restrictions kept people at home and out of shops, encouraging many either to shop more than usual online, or to venture to e-tailers for the first time. Retail websites registered almost 22billion visits in June 2020 alone, an extraordinary increase on the 16.07billion global visits for January 2020, reports Statista . Not only did the sector boost revenues, but it increased reach and onboarding significantly. Along with other remote- living lockdown beneficiaries like Zoom, Peloton, and Netflix, the likes of Ocado, Halfords, and B&Q suddenly had access to tranches of once-unreachable shoppers who were now downloading apps, signing up for online accounts and sharing payment details. Suddenly people who barely knew what the

have to up their multi-channel game rapidly, recognising the need to provide shoppers with a ‘COVID-19 secure’ shopping experience in order to survive and thrive in the New Reality. ‘When you look at the numbers, it looks like it’s been a very gradual progression: it took 20 years for ecommerce to become 20% of all retail sales,’ notes Gabrielle Hase, CEO of Soleberry Advisory, an ecommerce consultancy and who sits on the boards of several retail technology businesses. ‘But in the first five months of this year, it’s jumped to 34%. And that is surely because you couldn’t buy in any other way when you had a global lockdown, you could only buy online. But that progression to mass adoption has led to an acceleration in the optimising of functionality and user experience across many aspects of the whole ecommerce journey. And that’s because you had a lot of laggards that were still looking at ecommerce in a silo

...RECOGNISING THE NEED TO PROVIDE SHOPPERS WITH A ‘COVID-19 SECURE’ SHOPPING EXPERIENCE IN ORDER TO SURVIVE AND THRIVE IN THE NEW REALITY .

internet was, let alone how to do online shopping, were searching for voucher codes and setting up payment wallets. This migration to online isn’t just about pureplay online retailers either. More traditional businesses with a legacy of bricks rather than clicks and a rather siloed approach to digital sales now

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SUBSCRIBING TO SUCCESS

investor that their new cohort is actually repeating their purchases to demonstrate their increase is sustainable, rather than a one-off COVID-19 bounce.’ As a mature digital sector enjoying a huge influx of new customers and renewed appetite from investors, ecommerce is on a steadily accelerating trajectory of ongoing innovation and improvement in every area, from product discovery to revenue models to logistics and fulfilment. Here we highlight some of the key trends and technologies, with a focus on market disruption and investment potential.

on are only likely to increase, which is a good thing for the sector.’ The key challenge for ecommerce in the immediate post-Covid era, Cordrey believes, will be to consolidate the gains achieved in lockdown. ‘Many of the commerce businesses we see are faring incredibly well, up over 40% in terms of sales. But the key for those businesses will be retaining those large new cohorts of customers. A lot of ecommerce businesses will have acquired new customers cheaply, or in instances, entirely organically. Their CPAs (cost per acquisition rates) will be going down this year, I would expect, and so their profitability should be going up. But they will have to manage the COVID-19 bump, especially in terms of sales and profit, and not for instance ramp up their cost base too quickly, in case sales fall post- COVID. Anyone undertaking a fundraise or exploring a sale or sale in the near future will need to be able to prove to any

‘The real innovation in ecommerce is often at the fringes,’ says Gabrielle Hase. ‘There are always clever brands doing clever things. But one thing we’ve seen in COVID-19 is the pivoting of business models, where you’ve got businesses completely changing the way they do things, innovating out of necessity and catching up.’ Subscription is a case in point. ‘The subscription model is one way that businesses have really taken off. Take a look at gyms, for example, which have completely gone online, rented out their equipment, and said, in effect, “We’re going to come to you now.” And they’re saving their business model because of that, figuring out ways to make it work.’ Gyms harness what Hase calls the cult of the instructor . ‘The instructor is who you follow, and now you can follow them online. So now I can attend a Zoom class, and that Zoom class has a capacity that’s as big as you want

THE SUBSCRIPTION MODEL IS ONE WAY THAT BUSINESSES HAVE REALLY TAKEN OFF.

For further insight into how consumers are reassessing their shopping habits in light of the COVID-19 pandemic, download our Retail Forecasts Report 2021 .

GABRIELLE HASE FOUNDER AND DIRECTOR SOLEBERRY ADVISORY

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TRANSFORMING MOBILE EXPERIENCES

requirements, from wine to hoover bags to organic veg. Curated subscriptions deliver regular collections of treats, such as wines or beauty boxes. Access subscriptions give you access to exclusive services and content, such as audiobooks or online learning or, indeed, Peloton workouts.

it to be, unlike a physical gym. And that's why businesses like Peloton are brilliantly forward-thinking. They’ve built the entire ecosystem: they've locked in their instructors, they've given you the hardware, and they have the classes in the software. It’s so smart.’ There are plenty of other examples of subscription models in ecommerce, whether that’s regular flowers through the post from Bloom & Wild, healthy snacks from Graze, men’s grooming products from Cornerstone and of course software. By 2022, Gartner estimates that more than 90% of software providers will have migrated to a subscription-based business model. The benefits of subscription include predictable revenue, and the opportunities to upsell to a captive subscriber base. Experts break subscriptions into three types. Replenishment subscriptions enable consumers to top up on regular

In many ways, we live in a post-desktop world; it’s just the tech infrastructure hasn’t quite caught up yet. ‘The growth in mobile has been pretty dramatic,’ notes John Cordrey. ‘In 2016, mobile was 15 per cent, but by the end of the year 73% of ecommerce sales will be on a mobile device. For most people, 60 or 70 percent of their traffic comes through mobile platforms, but the conversion rate on mobile is only 0.5-1% versus 2% for desktop. Because inherently people don't yet trust their mobile phones enough with security to make a large purchase. So quite often people will search a product and even create a basket on their mobile device, but they won’t convert till they get home, after their train journey or whatever, and then they’ll purchase the same basket on desktop. So any technology that improves a mobile shop, say by making payments swifter and easier or making people more confident to transact on their mobile device, will make an exponential difference to

many business’ top lines. Improving the ecommerce experience for mobile customers will be a massive opportunity.’ Optimising the mobile commerce experience is a rich area for disruptive new businesses, and one such example is tru.ID. It’s the brainchild of Paul McGuire and Eric Nadalin, serial entrepreneurs with deep mobile experience, who see ecommerce as one of the key areas that will be transformed by the application of mobile technology. ‘The future of ecommerce is mobile commerce, and it’s already here,’ says Paul McGuire, CEO of this tech scale-up that’s on a mission to ‘transform digital identity’ and create a truly frictionless user experience for mobile users. With tru.ID technology, instead of having to type in a clunky SMS OTP code in order to verify their identity, the customer is verified via the cryptographically secure SIM card in their phone, which happens

FOR MOST PEOPLE, 60 OR 70 PERCENT OF THEIR TRAFFIC COMES THROUGH MOBILE PLATFORMS ... JOHN CORDREY SENIOR INVESTMENT MANAGER FORESIGHT

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But checkout and payment is only one part of the friction, says McGuire. The other big challenge for users is identifying themselves online, often using email + password and then SMS PIN code – effectively another ‘12-foot high wall’ put in their way. And on mobile it’s much worse. ‘At the moment, people like Amazon are innovating by taking friction out, but the only way they can do that is by taking on the risk,’ says McGuire. ‘You can’t have low friction unless you have high risk. Right now, Amazon is being brave and taking all the hits on the risk side. They’ll let the bad guys through. They’ll pay, but they’re making it great for the good guys. But what we’re saying is actually there’s a third way, which is you can have your cake and eat it. You can have low friction and low risk if you use the mobile phone.’ Not having to face a challenge about your identity could be one the most fundamental changes in reducing friction

with barbed wire on top, just in order to log in and make a purchase. ‘Consequently, a lot of ecommerce innovations in the last 20 years have been all about skipping over the payment step -- one-click buy, storing your payment method or a default address, try before you buy and we’ll charge you 30 days later. These are powerful innovations. What’s the most amazing thing about Uber? It’s actually not getting the taxi; it’s getting out at the other end without having to pay the driver. That whole problem of finding the money, the embarrassment of should I tip or not, it’s all gone. That’s because they’ve taken away a part of the process that everyone thought was fundamental, and actually isn’t. Online should be much more like that: you should be able to go in, do your shopping, and walk out again, because no one wants to pay. Paying is always the pain.’

invisibly in the background. ‘This has the potential to transform the user experience without increasing the risk of fraud,’ says McGuire. ‘More than 55% of online transactions in Europe already take place on mobile, and it’s over 80% in parts of the world like China . But at the same time, over 70% of fraud transactions start on mobile , because hackers have figured out that mobile is not well-protected. Shoppers are increasingly moving to mobile, so there’s been this dilemma, until now -- businesses and app developers have had to make an uneasy trade-off between UX (user experience) and security. ‘In the past, most merchants have chosen security, and payment industry regulators have recently increased that focus with the introduction of Strong Customer Authentication requirements. As a result, we have all become accustomed to a user experience that is the equivalent of being asked to climb a 12-foot high fence

THE FUTURE OF ECOMMERCE IS MOBILE COMMERCE , AND IT’S ALREADY HERE .

PAUL MCGUIRE CO-FOUNDER AND CEO tru.ID

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THE OMNICHANNEL DREAM

online. Ultimately, tru.ID aims to enable everyone to use their mobile phone to create a ‘trust framework’ with a secure, private, digital identity, so enabling them to streamline all their online interactions and avoid the need to type passwords and long credit card numbers or wait for an SMS PIN code. ‘You can’t transact without trust, and I think ecommerce can be radically transformed if you build a seamless trust framework,’ says McGuire. ‘Both authentication and checkout rely on trust. If you can have a seamless way of being a trusted person who’s transacting, then you can have a personalised experience going in, and you don’t have to go through the payment process, because the merchant knows it’s you and you’re good for the money. That’s how it should be. There are elements of that around, but there is no seamless experience yet.’ Essentially, in the tru.ID model, your phone itself becomes your identity.

cheaper). So the interactional influence of different channels lies behind many of our shopping decisions, but on another level, however, complete intra- channel seamlessness as a technical achievement remains elusive for many e-tailers. The challenge for brands is to provide a familiar and usable experience that integrates the user’s world of past and possible interactions, assimilating their history in real time and delivering a consistent experience across a growing array of devices where purchases can be made: mobile, desktop, tablet, Apple Watch, voice assistant, gaming device, TV, and more, not to mention physical locations. ‘We haven’t achieved that level of total seamlessness in omnichannel yet,’ says Gabrielle Hase. ‘With legacy retailers, that’s often because you get this silo mentality. The retailers had done their offline thing for so long, and now online’s come along and they’ve just bolted it on

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