Take the Data, Leave the Cannoli
November 5, 2013
Technology has transformed consumers' lives—smartphones, tablets, streaming video, social media, near-ubiquitous wireless connectivity, MMOGs (massively multi-player online games), to name a few. Even on an airplane flying at 35,000 feet, we can shop online, post news of our purchase to our social media accounts, enjoy the support and approval of our friends regarding said erstwhile purchase, and then return to Words with Friends. Many of these online experiences, or even the words to describe them, didn’t exist 10 years ago.
For all of technology’s influence on our lives as consumers of "stuff" (both material goods and media—music, movies, etc.), the impact of technology on the companies selling us the stuff is as great, if not greater. The use of mobile devices for shopping and buying is one example. According to one study, 31% of web traffic today originates from a mobile device. If you’re a retailer, you have a lot less screen real estate to convert your traffic into a sale, compared with a laptop or desktop. Traffic is good, but retailers only get "paid" on the conversion when they ring the (sometimes virtual) register.
And that traffic can also be heavily influenced by the lightning speed of technological change. Recently, a major email service provider changed how solicitous emails were handled. Messages from retailers started being automatically delivered to a previously non-existent inbox—an inbox most people weren’t aware of. More than a few retailers mentioned a drop-off in their web traffic and possibly even their store traffic. After all, if you don’t get the message about a big sale from your favorite retailer, you’re not going to make a special trip to the store or visit the website.
The impact of technology on retailers extends beyond the customer-facing side of things. There are seismic shifts occurring throughout the retail business that customers don’t see or feel. Of course, many readers are aware of the increasing automation in the distribution centers that fulfill online orders, but it doesn’t end there. Retailers are able to optimize their offerings, prices, and availability of products and services to consumers by the time of day, customer browser type, or zip code. While largely invisible to us, it’s game changing for companies. Companies are able to use radio-frequency identification (those stiff little tags you cut out when you take your products home) to better manage and move inventory and control “shrink” (that’s theft, to you and me). Companies can also “geo-fence” at a more granular level (for example, to track when a mobile device—and its attached consumer—enters a mall).
We’ve come a long way since the days of the five-and-dime store, and it’s impossible to know what technologies we’ll be writing about in 2023 or even what words will have entered the consumer’s lexicon by then (omni-channel, anyone?). What I am sure of is that technology will continue to change consumer industries and consumer behavior. Mostly for the best, I believe.
So, what are the implications for finding investment opportunities in the consumer sector? It’s our job as investors to stay on top of changes and understand which companies are likely to win and which are likely lose. There are many well-known winners in the retail technology arms race, but what’s really exciting for us as investors is finding the less obvious companies with businesses that are ready to inflect because of the way they are using technology to enhance the consumer experience. Here are some things we look for:
Companies that go fast … but not too fast
We want companies that are proactively adapting to change. In the early days of the internet, many companies thought of their websites as virtual billboards. Those that went a step further and were earlier adopters of transactional websites gained a leg up on those that didn’t.
While we like early adopters, we don’t want companies that move so fast that they upset the apple cart with a single-step shift in their business models. Successful companies don’t lose sight of risks when they implement new technologies. For example, one early adopter recognized the potential of radio frequency (RF) inventory systems, and began by running RF systems alongside human inventory management. This allowed time to iron out the kinks before making a larger shift.
It’s shopping, not buying
Staying at the cutting-edge of technology innovation is important, but it’s not the only determinant of success. We also want companies that are staying close to consumers. Consumer activity isn’t all about convenience—a fact that’s often missed by investors. There’s a ritualistic activity in shopping, otherwise it would just be buying. This is why the Internet didn't put malls and lifestyle centers out of business—they're bigger than ever—even though all of the internet bulls were calling for their demise 13 years ago. It's also the reason that streaming didn't put the exhibition movie business out of business (also bigger than any time in history). People want the experience of going to a theater. In other words, it's not just about the consumption of a product, it’s about how the product is consumed. If it were just about the content, we could “eat” intravenously but we don't; sometimes we want a trip to a steak house, sometimes we want to zip through a fast-food drivethrough.
Investing successfully is about bringing together different skillsets, and they’re not all financial. To find the future winners and avoid the losers before it’s obvious to everyone else, you need to be a student of industries, companies and history—and of what consumers want.