The Future of Shopping

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When Irishman Paul Kenny launched Cobone, a Groupon clone, in the United Arab Emirates in 2010, he needed to make a few adjustments to the model: customers in the region aren’t used to paying online — and many don’t yet trust digital delivery — so although they sign up for daily deals via their computers Cobone uses couriers on motorbikes to physically deliver coupons and collect cash at the door.

While Groupon struggles to penetrate the Middle East and Living Social, another U.S. daily deal start-up, has pulled out of the region, Cobone has gone on to attract tens of millions of dollars from investors such as Tiger Global and win accolades and market share: Kenny was named an Ernst & Young Emerging Entrepreneur of the Year in 2012 and Cobone now serves customers in Saudi Arabia, Egypt, Jordan, Lebanon, Qatar and Kuwait as well as the UAE.

“Today we have two million subscribers and we are one of the biggest e-commerce companies in the region,” says Kenny. Some 20% of its customers still insist on paying and having their coupons delivered in person but that is down from 80% 24 months ago, proof that Cobone is making inroads in convincing locals to buy online. The potential is huge as e-commerce in the Middle East is just getting started and 70% of the population is under 30.

Cobone’s story underscores a number of market trends: the first to come up with an e-commerce model — even those who start out as wildly successful U.S. companies — are not necessarily the ones who will win in foreign markets; Europeans have become expert at adapting e-commerce models to individual markets and building out to other markets in rapid succession; and some of the biggest opportunities for e-commerce companies are in emerging countries.

That said, only about 5% of global shopping is done online so e-commerce has by no means reached its peak in even the most developed markets. “We still haven’t figured out what to do with about 95% of retail,” says Sonali de Rycker, a partner at London-based Accel Partners and a scheduled speaker at DLD 2013. The way to capture those purchases will be through mobile, she predicts. “Nearly half of local shopping now starts on a mobile browser,” says de Rycker, “and approximately one in three mobile transactions are actually done in a store.”

The lines between online and the high street are clearly blurring and mobile is playing a key role. If pundits are right it won’t be long before carrying separate coupons, alongside the sophisticated e-wallets on mobile phones in developed markets, will seem as outlandish as having them delivered by motorcycle.

Starting this year mobile payment services will be merged with gift cards and loyalty and rewards programs, potentially transforming shopping more in the next few years than the Internet changed retail so far because it will impact everything people buy.

What will the future of shopping look like? Online-only stores such as Warby Parker and Fab will open bricks and mortar outlets. No more worrying about redeeming coupons or loyalty points — anything you have earned in the online or offline world will be digitally recorded and automatically deducted at time of purchase, no matter where you buy. Since payments are mobile they will no longer be tied to old-fashioned cash registers, freeing sales assistants inside stores to help customers check out and pay from the aisle or the changing room. Window shopping will take on a whole new meaning: city dwellers out for a stroll will scan items on mannequins with their mobile devices and click to buy and ship, even if the high street store is closed for the day (see the front page photo). Context-relevant location-based shopping experiences will become the norm, meaning customers will be able to skip waiting in line, by ordering remotely and picking up their food or favorite drink in-store.

In this new omni-channel world, merchandise and promotions will not only be consistent across all retail channels, adapting to consumers who want to use different channels simultaneously, the offers will be personalized according to a specific consumer’s purchase patterns, social network affinities, website visits, loyalty programs, and other mined data.

The fact that two-thirds of adults now access the Internet through mobile phones — and that the penetration of mobile phones is higher than that of computers in emerging markets — means that markets like the Middle East are likely to leapfrog from rudimentary e-commerce into the omni-channel world.

“According to Google by 2019 two-thirds of purchases will be omni-channel-enabled: one-fifth will be bricks and mortar only and around 15% will be online only,” says José Neves, founder and CEO of Farfetch, a start-up headquartered out of Portugal and England, which provides an online mall for fashion boutiques around the world to sell their wares.

Building E-Commerce Giants

Creating an omni-channel shopping experience for consumers presents opportunities for established companies like PayPal and Google as well as start-ups. Sweden’s Wrapp, for example, is already trialing a service that combines its social online gift cards with PayPal’s mobile wallet and it is interested in striking similar deals with other players. And Farfetch wants to become a pioneer in creating an omni-channel high-end fashion experience, says Neves, a scheduled speaker at DLD 2013.

But when it comes to global e-commerce — whether it is selling physical goods or providing new types of mobile payments — it is all about execution, adaptation to local markets and who has the deepest pockets — not about who has first-mover advantage.

Five years ago every VC in the Valley told start-ups to first focus on the U.S. — you can always move into Europe or Brazil later, recalls Hussein Kanji, a partner at London-based Hoxton Ventures. But that advice changed after European start-ups started systematically cloning U.S. start-ups in foreign markets. Take Glossybox: a clone of New York-based Birchbox, Berlin-based Glossybox boasts 200,000 subscribers across 16 countries, compared with Birchbox’s 100,000 subscribers throughout the U.S. In December Glossybox announced it had shipped its two millionth box and has received $72.4 million in overall financing; investors include Rocket Internet, Holtzbrink Ventures, and Investment AB Kinnevik.

After watching what happened to Birchbox and others Fab moved early to buy the teams of young, global competitors, snapping up Germany’s Casacanda and the U.K.’s Llustre in 2012. And, it is now leveraging London-based Atomico’s funding, international contacts and experience to further its global expansion, says Fab co-founder and CEO Jason Goldberg, a scheduled speaker at DLD 2013.

That said, to date, few e-commerce companies have managed to become truly global. To build successful global companies great execution is more important than innovation, says Marco Rodyznek, a partner at corporate finance boutique Noah Advisors.

So is large amounts of money. E-commerce start-ups are capital intensive. “You can easily burn $100 million in the process of scaling a global ecommerce business,” says Michiel Kotting, a principal at Accel Partners. Amazon had to raise over a billion dollars through bonds in order to raise enough money to fund its international and category expansion.

The key to the success of Rocket Internet, a Berlin-based incubator which scouts for successful business models and then clones them in new markets, has been good execution and deep pockets coupled with a very focused local approach. Rocket is currently operating over 50 such companies in Europe, Asia and South America (see the related story about Rocket Internet on page 21).

The success of Zalando, a global hybrid Zappos and Asos clone that is considered one of Rocket’s flagship companies, can be partly attributed to heavy TV advertising. Zalando, which is expected to go public in 2013, built its brand in its home market through a deal with Germany’s ProSiebenSat.1, a mass media company that operates commercial television and premium online and generates some €1.5 billion in TV ad revenues per year.

In a maturing TV ad market, ProSiebenSat.1 was actively searching for new growth segments to leverage its excess ad inventory and decided to take an innovative approach by selling prime time ad spots to start-ups at a discounted rate plus revenue share and equity stakes, says Christian Wegner, a member of ProSiebenSat.1’s executive board and a scheduled speaker at DLD 2013. Zalando is among six start-ups that took the media company up on its offer. The German TV giant launched a contest at the November NOAH tech conference in London, giving away millions of euros worth of ad spots to other start-ups, and it now operates a division called Seven Ventures that takes majority stakes in start-ups targeting the German market and tries to help make them market leaders through TV advertising.

Germany is a hub of sorts for new European e-commerce ventures, as teams there start out with as many as 25 different nationalities, and are global in focus from the start. “There is a lot of global cross fertilization going on – looking at best practice everywhere and combining one business model with another,” says Christophe Maire, a Berlin-based business angel who invests in e-commerce companies like Monoqi, an online design shop that sells curated high-end products.

He and other investors in Europe say it is wrong to paint the Continent as the land of copycats. Innovative European companies like Asos and Net-a-Porter helped pioneer fashion e-commerce and became global champions. France’s vente-privee.com, which now generates $1.5 billion in revenues, gave birth to the flash sales model which has since been copied around the globe. And the Samwer brothers have trained an army of young managers in the art of execution and taking companies global. As these managers leave Rocket they will seed the next generation. Already two of Rocket’s former top managers – Christian Weiss and Florian Heinemann – have launched their own fund, called Project A, which invests part of its money in European start-ups with original technology or business models.

Look for plenty more innovative e-commerce companies to come out of Europe, in areas such as fashion and travel, says Frédéric Court, a general partner at Advent Venture Partners.

Winning big in omni-channel e-commerce will ultimately depend on access to consumer data and insights about customers – who they are, what they like, and where they are at a given moment. “The innovation we are seeing from incumbents is very exciting,” says Accel’s de Rycker, who adds that the creation of new services by established players such as PayPal could lead to joint ventures with start-ups or acquisitions. But “what is the winning hand and how it will all play out is something we still don’t know,” she says.

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