I was commissioned to write an in-depth piece about tech platforms for trade magazine Retail Week.
Becoming Amazon – should more retailers develop their own tech platforms?
By Manfreda Cavazza – 13 July 2021
The dramatic increase in online shopping during the past decade has sparked a surge in innovative technology businesses being spun out of the retail sector. In some instances, these ecommerce and logistics platforms have become the fastest-growing and often most highly-valued part of a retail business.
- Retailers will have to embrace online and digital at an increasing pace going forward.
- Experts believe there is plenty of potential for retailers to create their own tech businesses.
- One of the determining factors of pure tech businesses is their complexity.
As retailers seek out new growth opportunities in the wake of the coronavirus pandemic, should more businesses consider ploughing resources into ramping up their technology divisions and selling their expertise, a la The Hut Group (THG) and Ocado?
Amazon, as is so often the case, was a trailblazer in this arena. The etail titan launched its cloud computing arm Amazon Web Services (AWS) in 2006 after becoming frustrated in its hunt for suitable storage and database solutions elsewhere in the market. It is now Amazon’s most profitable division.
Last year, AWS – then led by Jeff Bezos’ successor as chief executive, Andy Jassy – posted an operating profit of $13.5bn (£9.8bn), accounting for almost two-thirds of Amazon’s group earnings.
Others have followed Amazon’s lead, albeit in different ways. Online grocer Ocado now licences its automated warehouses and logistics solution to international grocers; Canadian ecommerce platform Shopify started life as a snowboard retailer; The Hut Group counts Hotel Chocolat and Homebase among the customers of its Ingenuity division; MyWardrobe HQ now offers rental and resale options on brands’ existing websites through its My Ventures white-label; and, most recently, Next launched its Total Platform last year to help smaller fashion brands sell online.
These retail-focused platforms are going toe-to-toe with well-established competitors created by tech giants, including Salesforce Commerce, Magento Enterprise, Amplience, Hybris, IBM Websphere and Oracle Commerce.
But despite the plethora of platforms on the market, investors are undoubtedly interested in retailers’ tech pivots and believe they have the required ingredients to succeed.
THG has undergone a dramatic transformation from selling CDs online to becoming a specialist in nutrition and beauty. Its Ingenuity arm, which provides other brands with a direct-to-consumer digital platform, commanded a $6.3bn (£4.5bn) investment from tech investment giant SoftBank when it snapped up a 19% stake in the business in May.
James Sawley, head of retail and leisure at HSBC Corporate UK, says the investment in THG Ingenuity is a testament to the attractiveness of so-called end-to-end platform solutions – at a time when consumers are increasingly seeking to purchase directly from brands.
According to THG’s IPO prospectus published last year, the demand for outsourced direct-to-consumer (D2C) technology is on the rise. The global outsourced D2C technology market within fast-moving consumer goods (FMCG) was estimated at £41bn in 2018 and is forecast to hit £114bn in 2023 – a 23% compound annual growth rate.
However, Sawley warns that whilst the Covid crisis has forced ecommerce businesses to leverage their technology and fulfilment capabilities, not all such platforms will attract higher market valuations.
“You’ve got an end-to-end solution, which is a pure technology play, generating even higher margins, of over 25%”
“There are broadly three different platform models: ecommerce, marketplace and end-to-end platform solutions,” Sawley explains. “With ecommerce, the profitability margin is lower, at around 5-10%. This is because you’ve got to take all the inventory risk on the balance sheet and the working capital requirements are quite high, so it’s harder to grow quickly.
“There’s a more compelling model, a marketplace, where you don’t take an inventory risk. Instead, you’re leveraging your customer base, technology and warehouse and fulfilment infrastructure to sell third party products where you can achieve higher profit margins of around 10-20%. And then you’ve got the end-to-end solution, which is a pure technology play, generating even higher margins, of over 25%.”
According to figures from US data and software company FactSet, ecommerce businesses such as Asos, Boohoo.com and Boozt will have an enterprise value of approximately 1.5 times sales in the next 12 months. However, companies that have created marketplaces or end-to-end platform solutions, such as Next, Ocado and THG, will demand valuations between 2.5 and 3.5 times sales. Businesses like BigCommerce and Shopify are worth a staggering 30 times sales.
Advantages of a sector focus
Whilst the technical expertise of businesses like Ocado Solutions and THG Ingenuity are clearly key in building successful platforms, other factors have led to their successes, including their keen understanding of the grocery and FMCG sectors respectively.
Sawley suggests there is merit in leveraging a niche area of expertise upon which to build successful technology businesses. He cites Watch Finder, which sells second-hand luxury watches, and World of Books Group, which comprises Ziffit, World of Books, and Shopiago – all circular economy businesses that enable more goods to be reused.
My Wardrobe HQ’s creation of resale and rental technology platform My Ventures offers a similar example. It evolved after the business realised that the complex technology it had built in-house for fashion rental was hard to find elsewhere and could be licensed to third parties.
Chief operating officer Natalia Pawlak, who leads the My Ventures business, tells Retail Week: “Returns processing is such a headache. Most brands and businesses just don’t want to deal with that piece. We’re talking about single SKU reverse logistics, a process that typically has 45 stages, each fully tracked and recorded.
“We consider the whole journey, from warehousing to condition reports to pricing, photography, listing, mending and alterations, fulfilment. What’s more, each item is going out more than once.”
My Ventures is already working with the likes of Harrods, Vivienne Westwood, Browns Bride and Eco-Ski, all of which are seeking ways to tap into the burgeoning resale and rental market. According to GlobalData, the second-hand market grew 25 times faster than the broader retail market in 2020 and is set to more than double in size to be worth $64bn (£46.5bn) in the next five years.
Pawlak adds: “Brands are just starting to realise the potential of the rental and resale market. But the processes and experience needed to deploy these solutions are not there.
“Investing in the tech and changing the internal operations to launch a successful platform is a massive undertaking. The operational business model might be there, but it’s the technology that is the enabler.”
One of the determining factors of pure tech businesses such as THG Ingenuity and My Ventures is their complexity. As a result, Pawlak argues that only the most experienced and successful retailers are likely to succeed in creating such divisions.
HSBC’s Sawley agrees, pointing to the vast array of services THG Ingenuity offers its customers. The platform includes manufacturing, warehousing, product development, data science, consumer insights, real-time data, payment options, creative, marketing tools and web hosting, to name just a few.
“Why doesn’t everyone become a platform? Well, it’s a complicated thing to pull off,” Sawley states. “That said, investors are always looking at growth markets and at disruptive companies. Everyone is looking for the next Amazon.
“Covid has accelerated the trend for more retail being done online. There remains a lot of interest in the retail sector, especially as quantitative easing means that there’s just a lot of cheap money out there looking for a home.”
Looking for the next Amazon
Becoming the next Amazon might be a tall order, but experts believe there is still plenty of potential for retailers to create their own tech businesses, especially if they can improve processes in less glamorous retail functions such as warehousing, supply-chain management and sourcing.
Last year, for instance, designer Stella McCartney partnered with tech giant Google and WWF Sweden to create an environmental data platform that enables more responsible sourcing decisions in the fashion industry. And Rapanui has launched Teemill, a fully vertical ecommerce platform that allows brands to design and print T-shirts using sustainably sourced fabrics.
Matt Truman, chief executive and co-founder of retail and consumer-focused investment firm True, believes there are a number of retailers, including Marks & Spencer and Decathlon, that are well-placed to develop platform businesses of their own, despite ever-increasing competition in this space.
“Retailers who have a platform need to consider what the assets are that they bring to the brand they wish to entice to the platform,” he says. “The key assets are customer base, logistical capability, brand enhancement, potential bricks distribution and marketing skills to enhance the platform over time.
“There are only a few who possess this asset base. M&S has millions of people in its customer base and covers brand, across several demographics and categories, so could be a candidate. Likewise, Decathlon could be a contender – it’s a business that dominates the category, has the multichannel distribution and has shown an awareness for innovation and new brand investment.”
However, Truman warns that, Ocado aside, retailers do not usually possess significant technical expertise. He adds: “The notion of retailers building their tech competency is fraught with difficulties as you are competing with the best and the most capitalised in the world, so the decision to pursue this shouldn’t be taken lightly. Demonstrating differentiation is critical. It’s not enough to just build a platform.”
The emerging retail platforms
|Platform||What it does||Services||Clients|
|THG Ingenuity||Fully managed, fully hosted ‘software as a service’ solution to FMCG brands wanting to sell directly to consumers.||Print on-demand, personalisation, manufacturing, warehousing, R&D, data science, customer feedback, real-time data, payment options, translation, creative, logistics network, inventory merchandising, digital services, branding, customer service.||Nestle, PZ Cussons, Homebase, Group L’Occitaine, and Clorox, ESPA.|
|Next Total Platform||Comprehensive solution enabling fashion retailers to trade online.||Website, call centres, warehousing, distribution, returns and retail services.||Childsplay Clothing Laura Ashley, Victoria’s Secret UK and Reiss (launching in February 2022.)|
|Farfetch Platform Solutions||White-label solutions for luxury fashion brands and retailers.||Global, multi-channel, API-enabled platform, global websites, apps or WeChat stores, back-end infrastructure, warehouse inventory management, in-store pick-up and consumer returns.||JW Anderson, Thom Brown, AMI Paris and Harrods.|
The Lego bricks approach
Yet as the co-founder of data analysis firm Dynamic Action, Michael Ross, points out, developments in Application Programming Interface (API) technology – the software that allows two applications to talk to each other – have made it much easier for businesses to create platforms using what he calls a “Lego brick approach”.
“There’s so much componentry out there; it’s much easier to assemble the various bricks than it was 15 years ago,” Ross argues. “If you’re a Walmart or an Amazon, your problems are so complex, and you’ve got such scale that you’re genuinely going to be solving problems that frankly no one else will be solving. So, you will be developing your software: it’s a critical part of your business. But most retailers don’t want to write custom code or do any software development at all,” says Ross – an attitude that would prevent retailers from creating truly bespoke and unique platforms that could be sold to other businesses.
“The choices are essentially between building a kit-car, which is the componentry approach, driving a fully assembled car or having a chauffeur-driven car,” Ross analogises. “Next’s Total Platform is the middle one – they give you the keys to a lovely, shiny car and you get to drive it. THG is one step further. They essentially drive the car for you.”
“You have to ask: ‘what is the point of a retailer?”Brian Kalms, AlixPartners
Although it could represent a fresh avenue for growth if retailers are able to successfully emulate the likes of Next, THG and Ocado, the debate about whether or not to create a bespoke ecommerce platform could detract from the core model, AlixPartners managing director Brian Kalms argues.
“You have to ask: ‘what is the point of a retailer?’ Most successful retailers will focus on at least one of these five things in a bid to differentiate themselves from their competitors: range, price, location, service and innovation. But unfortunately, many retailers are not technologically sophisticated, and that’s because being technically brilliant is not going to be a differentiator,” Kalms states.
He suggests that, since IT is a significant capital expense, most retailers have taken a “skimp and save” or “make-do” approach to retail technology in the past. That means retailers’ tech capabilities often aren’t strong enough to license to other businesses.
The growth of online retail
One thing is clear, however – retailers will have to embrace online and digital at an increasing pace going forward. In 2020, online retail delivered its sharpest ever year-on-year growth of 46%, according to ONS figures.
In its Top500 report, research firm Internet Retailing predicted a continued shift towards online and omnichannel services, an increased reliance on loyalty and greater use of mobile during 2021 and beyond. According to the report, the rise of marketplaces and the moves made by social media and video platforms such as Instagram, Facebook and YouTube to facilitate sales from their feeds will also have a profound impact.
The demand for sophisticated ecommerce is therefore not going away. There is an opportunity for tech-savvy businesses with expertise across the customer, logistics and marketing functions to capitalise on this trend by launching their own platforms – but only if it does not steal focus from the core business of retailing.