Market Commentary

 

Clicks and Bricks

Stores are not going away – it’s how we use them that is changing. Catamount is a firm believer that the future is digital. We think names like Amazon, which enables a digital marketplace, and Visa, which enables digital payments, will be big winners in the future.

We have previously written about cord cutting and talked about Amazon’s move to create a digital store for almost anything. In this environment, many on Wall Street and in Silicon Valley now believe Macys’ and JCPenny’s days are numbered. The beginning of this century has been the story of the internet and the move from the physical to the digital world. Then, why have so many online retailers started opening physical storefronts?

Digital retailers open physical storefronts

Famously, Amazon bought Whole Foods in 2017. Many of those Whole Foods locations now have Amazon lockers in them where customers can come to physically pick up items they ordered online. This week, after significant hype, a fully automated Amazon convenience store “Amazon Go” has launched.

Bonobos, a menswear retailer founded in 2007, radically redefined its online-only strategy when it opened about 50 physical stores from 2012 through 2017. This strategy worked so well that Walmart bought the company for $310mm in June 2017. You now see Everlane, another clothing company known for being online only, opening its first store in NYC this year.

Warby Parker, an eyewear maker founded in 2010, became famous as an acclaimed success story when many initially thought no one would want to buy prescription eyeglasses online. Almost overnight, 65 physical Warby Parker stores now exist with many of them offering in-store eye exams. Warby Parker’s most recent investment round valued it at $1.2bn.

Casper, founded in 2013, started out as an online-only mattress company. The company would ship you a mattress, allow you to use it for 40 days, then return it if you were not satisfied. In late 2017, Casper announced that it would open at least 18 storefronts between the end of 2017 and beginning of 2018. Around the same time, Casper received a major $170mm investment led by big box retailer Target.

Many, many other smaller online companies have moved from the only digital to the physical world by opening up storefronts in major US cities, including: M.Gemi, Allbirds, Away, ModCloth, Glossier, and Madison Reed.

And big brand retailers push dollars into online stores

Many retailers that were previously purely physical have seen the competition coming. Walmart, Target, Costco, BestBuy, and others have invested heavily in building out their own online store capabilities, as well as acquiring and investing in smaller companies to build out brand and prowess.

Walmart has shined brightly here. Through online channels like walmart.com and samsclub.com the company has a significant online presence. In 2016, Walmart also bought Jet.com, billed as a direct Amazon competitor. In Q3 of 2017, Walmart announced that online sales were up a whopping 50% from the year prior. While this figure is partially inflated due to the Jet.com acquisition, it is impressive nonetheless. Walmart launched ecommerce operations in both Canada and Mexico. The retail behemoth also announced that it was going to double its online grocery store pickup location number by adding more than 1,100 new pickup locations. As mentioned earlier, the company also bought Bonobos in 2017.

Target is another company focused on its digital transformation. It recently opened several smaller format stores and plans to open 75 more by the end of 2019. Target also committed to remodel 600 stores to better display product and integrate with an online experience. Target’s digital sales figures grew 24% over last year’s figures. As mentioned earlier, Target also invested in Casper. In December 2017, Target bought Shipt for $550mm. Shipt is Target’s second acquisition focused on enabling better same day deliveries and shows the company’s push to compete with Amazon in the digital space.

So, who wins?

Online companies that approached the challenge later will have an advantage of being agile and not having to worry about upkeep costs at existing stores. The incumbent competitors here are being forced to invest heavily in online retail and revamping those existing stores. The new, nimble entrants will have a better view of what physical stores and associated costs make sense vs a bigger online spend. You can see the success of the newcomers’ strategy in the investment by Walmart and Target in young startups. Target’s move to reform its old spaces to fit a more online-focused sales strategy shows that this is where the industry is headed. Will all the old school brick and mortar retailers fail? Probably not. Will the more nimble and well-funded startups succeed? Not necessarily.

The store of the future has both an online and a physical presence. We at Catamount think that online retailers that have more mobility, like Amazon, will have an advantage going forward as they are setting the pace and not playing catch-up. We also think that companies focused on digital payments, like Visa, will be set up to succeed in a world where people are using more credit cards and less cash.