Updates, updates…

Some more follow-ups this week:

  • coupa-softwareEarlier this month Coupa Software proved to be one of the very few completed AND successful tech IPOs this year, despite reporting a loss of $24m for total sales of $60m. The shareholders were wise enough to limit the sale to $153m worth of shares, a fraction of the $1bn+ total enterprise value, in order to price the IPO at the top of the range. On the first day of trading the share price had jumped by 121.7% to $39.71, although it has since cooled down to c.$27. In any case this event shows a clear investor appetite for this kind of assets – good news for the likes of Uber and Airbnb.
Coupa Software share price evolution in USD since IPO. Source: Yahoo Finance
Coupa Software share price evolution in USD since IPO. Source: Yahoo Finance
  • On the contrary Theranos, once valued at $9bn, is close to bankruptcy after the FDA pointed out failures in its patient data collection procedures, highlighting the risks for investors who put their money in unicorns operating in ‘regulated’ areas such as healthcare or financial services – remember Lending Club.
  • Credits: rt.com
    Credits: rt.com

    Airbnb is facing ‘life-threatening’ disputes in New York and San Francisco whose governors have expressed the intention to rein the ‘short-term rental’ offering in. It is indeed argued that this type of systems contributes to the increase of rents in tight dwelling supply areas since landlords prefer to rent unoccupied flats on a short-term basis rather than putting it back on the market. So far the New York governor has approved a law which allows the city to fine landlords who list apartments for rentals of less than 30 days – a ‘half-baked measure’ difficult to enforce given that the authorities do not have access to the landlords’ identities.

  • After China, Uber is facing tough competition in Russia where Yandex Taxi, funded by the eponymous deep-pocketed search engine, has decided to cut its minimum base fares in half, leading to a taxi driver protest.
  • More generally the funding environment for start-ups has deteriorated slightly as investors prove increasingly selective in their investment decisions. Venture capital investment in European companies dropped 32% yoy in Q3, in line ith the 35% YTD drop noticed in California. The IPO window has also proven more and more difficult to reach, with investors perceiving some proposed valuations “ludicrously overpriced compared to existing peers”.
  • Credits: www.juancole.com
    Credits: www.juancole.com

    Twitter is back in the doldrums after the last takeover candidate, namely Salesforce, dropped the case after careful deliberations. The share price had already taken a hit after Microsoft denied interest, lowering the competitive tension. Although some experts believe that the company would represent a great ‘trophy asset’ for an activist shareholder, management has now shifted its attention back to streamlining its cost structure, initially designed to serve more than 500m users, way higher than the actual user base (300-350m). This exercise will result in 300 employees losing their job this year, according to Bloomberg.

Twitter share price evolution over the last 60 days in USD. Source: Yahoo Finance
Twitter share price evolution over the last 60 days in USD. Source: Yahoo Finance
  • Carrefour and Auchan have launched initiatives to tap into the wisdom of start-ups to boost their digital capabilities. Les Echos reports that Carrefour has built relationships with more than 150 start-ups and has invested in the VC fund Partech Ventures while Auchan organised earlier this month its first ‘Salon des start-ups’. Due to its close proximity with historical retailers, Lille appears as the spearhead of ‘French retail tech’, having hosted the #conext show as well.
  • UBS became the latest major bank to join the ‘robo-advisor trend’ after it announced that it would roll-out such a service in the UK no later than next month. This decision will make the service available to users with as little as £15k in personal savings, although the 1% annual fee levied for customers investing solely in ‘passive’ funds is still high compared with industry best practices. In the same vein Charles Schwab announced its robo-advisor service was now managing more than $10bn in assets, a c150% yoy growth. The first independent ‘French tech’ player, Yomoni, has much more modest ambitions, targeting $1bn of AuM by 2020.
  • Apple reported its first annual decline (9%) in iPhone sales volumes (in line with analysts’ expectations) despite the misfortune of the Samsung Galaxy S7.
Updated chart showing yoy ASP and sale volume evolution for the iPhone. Sources: SEC filings, author analysis
Updated chart showing yoy ASP and sale volume evolution for the iPhone. Sources: SEC filings, author analysis

That’s it for now!

A couple of updates

I have been covering a rather large range of topics over the last few weeks. Some of them made the headlines again more recently. A couple of examples:

  • new-nuclear-build
    Credits: www.edfenergy.com

    Despite all the execution risks involved Theresa May approved the Hinkley point project. As mentioned in my post published in April, she did not have the hardest role, however: EDF (and the French State) will have much more to lose.

  • Ecommerce is forming an increasing share of our daily purchases, with 48% of French people said to have made at least a clothing purchase since the beginning of the year. Traditional retailers such as FNAC, Carrefour, Lecler, Darty etc. account for 8 of the top 15 ecommerce platforms in France. On the other hand, the lack of ecommerce capabilities has been highlighted as one of the main reasons for Primark’s disappointing performance this quarter.

In my next post I will address ‘unicorns’, the not so rare anymore start-ups valued at $1bn or more. I will focus in particular on the term ‘valuation’; there are interesting thoughts to have in mind when dealing with this dangerously hot topic.

Retailers: stuck between a brick and a hard (market)place

The last few years have seen incumbent ‘brick-and-mortar’ retailers being challenged by new entrants playing the ‘online’ card. In the UK, although 85% of retail sales are still made at ‘offline’ (or ‘store-based’) retailers, according to the Centre for Retail Research, the momentum is clearly in favour of online, which has been enjoying a value growth of 15% in 2015 compared with 2% for the ‘store-based’ market. Given this trend, online should overtake offline by 2026 – and yet the tipping moment may happen earlier.

Online retailers benefit from generally lower prices (inherited from a leaner cost structure and a heavily centralised purchasing strategy), a typically broader assortment and, more importantly, a great knowledge of customers’ preferences which enable targeted marketing operations. Amazon’s recommendation engine is lauded as one of the most efficient, generating an estimated 20-25% sales uplift by either classifying items through their attributes (‘content-based filtering’) or analysing user behaviour (‘collaborative-based filtering’).

Small but tremendously impactful.
Small but tremendously impactful.

Convenience in general, and delivery time in particular, used to represent a major drawback of ecommerce. Massive investments in supply chain (including truck fleets) and the proliferation of pick-up points (such as Amazon lockers or through partnerships with local offline retailers) have shifted the balance of power – ‘next-day delivery’ is increasingly often seen as the ‘new normal’ – and the prospective advent of drones could speed up the circuit even more.

Facilitating mobile payment is also a key consideration to convert the visit into a hard sale. Typing bank card details on a mobile device can be tedious and potentially unsafe. This may explain why although many retailers report that up to 70%-80% of website browsing occurs through customers using mobile devices, only 28.6% of UK online retail sales were made through those devices (as opposed to PCs) in 2015.

On their end, ‘offline’ retailers have been trying to address the customer knowledge gap, historically through loyalty cards which are now complemented by more technologically advanced methods. Several start-ups, such as France-based Openfield, track visitors in shopping malls (up to 40 000 customer journeys per second) to infer their preferences – the visitor can be identified when he uses one of the shopping centre terminals. Gathering offline customer information is also the aim of Index, a Google Wallet-backed company.

‘Offline’ retailers are also trying to turn their weaknesses, namely a numerous workforce and expensive real estate-related expenses, into strengths. Relying on the power of their ecommerce website for ‘casual’ purchases, retailers are now increasingly transforming their stores into showrooms, where in-store staff are here less to ‘sell’ than to ‘advise’ – the relevance and the quality of the interaction could only be reinforced by a more precise knowledge of the customer’s preferences ex-ante. The ‘human factor’ is a clear advantage over online retailers which have been developing machine learning-based bots as ‘humanised’ customer service interfaces.

What we should conclude from this post is that online and offline desperately need each other, and this balance will probably hold for at least the next few years. The combination of offline and online, both in terms of customer knowledge and product offering, will yield the best results – that is at least the bet that many offline retailers, including Walmart and Auchan, have made. The Paris-based Galeries Lafayette have understood the need to work together, not fight, by collaborating with Plug & Play, a Californian incubator, in order to support “around 20 start-ups per year”. Another good example of online-offline symbiosis comes from Instacart, an app (i.e. an online-based tool) which relies on an express check-out system within and a detailed aisle mapping of existing grocery stores to complete deliveries in an hour. Better than Amazon, for now.

Credits: www.reference.com
Credits: www.reference.com

Update (13/09): Talking about customer knowledge, TechCrunch wrote an article today about Breinify, a start-up that not only tries to anticipate what you may fancy, but also adds a time element to the recommendations (e.g. it will endeavour not to recommend pizzas or beer at 9 am).

The future of UK retail in 7 questions (2/2)

[continued from Monday]

Credits: gograph.com
Credits: gograph.com

5. How can retailers use innovation to stop the decline?

To embrace the change rather than trying to fight it in vain, retailers and department stores have started to invest in homegrown start-ups and accelerators. The win-win deal is clear: retailers remain at the forefront of technological innovation applied to their industry while entrepreneurs get instant access to a huge playing field for their products. Unsurprisingly, corporations have become almost as important as VC funds for the funding of accelerators.

Split of accelerator funding by primary source. Source: OpenAxel in the FT.
Split of accelerator funding by primary source. Source: OpenAxel according to the FT.

As previously mentioned, the online and ‘brick-and-mortar’ worlds will be more and more interlinked and the development and use of multi-channel CRM tools will play a great role in ensuring the coherence of the customer journey. Well-designed and innovative apps, allowing fast navigation, speedy checkout and nicely showcasing products will also boost sales – Asos is often mentioned as a ‘best-in-class’ example in that respect.


6. Should retailers own or rent their walls? Or should retailers simply sell their estate and move to an ‘online only’ model?

For years retailers have been told to own their walls. The cost of purchasing and maintaining their estate more than offset the sum of expected future rents which have been increasing at a fast pace – at least more rapidly than inflation. Furthermore, retailers were making a wise investment given soaring real estate prices across the country and especially in ‘prime locations’. Today, one can wonder if the equation still holds. Commercial real estate is expected to take a hit, crystallised by (but not only due to) Brexit, and rent inflation may cool down as a consequence.

This dilemma is worth considering as the ‘online only’ model represents a very difficult customer proposition which has been mastered so far only by a handful of players, including Asos or Made.com. Raising brand awareness and subsequently developing a brand image without any physical shop windows has proved an increasingly daunting challenge in an environment already saturated with incumbent brands. Furthermore, brands with a fading image lose pricing power – Uniqlo is one of the most recent victims of that rule.

Conversely a brand without any ecommerce operations is overseeing a strong growth driver. Some retail experts explain Primark’s recent under-performance by its absence of online shopping website – in this particular case, such a website would prove economically unprofitable for Primark given its low price points.


7. What will be the impact on the commercial property market?

The impact is still hard to assess. One could imagine that the change in culture, lifestyle and demographics, partly embodied by the rise of online, has made the need for physical retailers less obvious and therefore would expect a steady increase in the shop vacancy rate. Actually, the opposite is true: according to the Financial Times, the proportion of vacant shops fell to its lowest level since 2009.

Two possible cumulative drivers can be brought forward. First, service providers, such as restaurants, cafés and hairdressers, have taken the spots left vacant by retailers. Second, historically low interest rates have facilitated the access to debt and therefore boosted the creation of small business ventures – which this kind of service providers typically are.

In practice, though, bargaining power has started to move away from the seller. Two shopping developments have been sold at a significant discount to their original price – the transaction was completed pre-Brexit – and investment into retail property was down 54% in Q1 16 compared with Q1 15. More generally, brands will increasingly focus on prime locations where their products can be showcased at the expense of ‘tier 2’ areas such as suburban shopping centres whose transactional role will be increasingly filled by online shipments. As a consequence, some analysts believe that the UK market can now be covered with 80 to 100 stores as opposed to 200 in the past.

The UK retail industry is definitely facing challenges and shops have been asked with new roles. As announced, this will impact the demand for ‘brick-and-mortar’ sales locations – and ultimately the equilibrium of the commercial real estate market.

The future of UK retail in 7 questions (1/2)

Credits: gcmagazine.co.uk
Credits: gcmagazine.co.uk

Brexit has recently cast light on the future of the commercial real estate market in the UK. We will definitely tackle this topic in the near future. In the meantime, nonetheless, I thought it was worth getting back to the basics of one of the key underlying markets, i.e. retail, and ask ourselves 7 questions to understand the future of this market. Grocers and ‘non-food’ retailers follow different dynamics, I will therefore limit the discussion to the latter.

As usual, I thought this topic would be covered in only one post. In hindsight, I believe it would be more digestible to cut it in two halves – the second part will follow later this week.


  1. What is the current state of the UK ‘non-food’ retail market?

In a couple of words: not great. The recent misfortunes of BHS and Austin Reed are only the visible manifestations of a deeper trend. Total UK retail sales rose 1.2% on a 12-month average basis, the lowest growth since 2009. According to the latest British Retail Consortium – KPMG survey, in-store sales were particularly affected, falling 1.9% over the three months to June, and 2.2% on a like-for-like basis. The industry has been suffering from constant price pressure over the last decade.

CPI evolution for various perimeters. 2008 = 100. Source: ONS
CPI evolution for various perimeters. 2008 = 100. Source: ONS

Note : The informed reader will have spotted the ‘ups & downs’ generated by the bi-annual sales periods.


2. Are there winners though?

As in many other countries, online is the most dynamic segment of the UK retail market, although it is not immune to global market slowdowns – the latest BRC – KPMG online retail sales monitor reported a 9% growth of online in June 2016 compared with 18% a year ago. Massive online marketing initiatives such as ‘Amazon Prime Day‘ generate positive externalities for the online industry as a whole.

Source: FT
Source: FT

Looking at particular brands, Next, Ted Baker, New Look and pure online player Asos have reported relatively positive sales trends compared with their competitors.


3. Is it all about price?

No. Earlier this month Primark reported its first drop in like-for-like sales for 15 years, echoing the similarly difficult times Poundland is facing in the supermarket segment.


4. Can ‘brick-and-mortar’ sales still be considered in isolation from online? And can stores still be considered as pure points of sale?

Historically ‘standalone’ retail sales could be analysed using the following formula:

Sales = Footfall * Conversion rate * Avg. item price * Avg. quantity

Over the last few months, industry insiders have raised the alarm bell based on a drop in footfall and a very modest increase in average item price (see the clothing & footwear inflation chart above as an example) which have not been offset (yet) by a similarly significant increase in conversion rate (i.e. the share of visiting customers who end up making a purchase) and/or the average number of items per basket.

Unfortunately (or fortunately), one corollary of the previous answer is that this formula cannot be considered as valid any more. This is especially true in the UK where consumers buy more online per head than in other developed economies.

Today stores are increasingly considered as showrooms where consumers get to know a brand and its latest products, hence the refocus on prime locations. The trend is likely to accelerate given the progress made in ‘last-mile logistics’ as proved by Amazon or Ocado. Delivery from a warehouse to the end-customer’s house used to be complicated to plan and very often poorly (if not randomly) executed – actually it is still the case for the vast majority of retailers willing to enter the delivery space. As progress keeps being made in that space, we should see customers going to the shop to get information, then shop online and ultimately be delivered at their door or in convenient locations such as Amazon Lockers.

[to be continued on Thursday…]