Aron Bohlig and Chris Nealey

Here at ComCap our work extends across the digital retail landscape, we work with retailers, marketplaces, software providers, payments providers and logistics companies. We also work with agencies and systems integrators. This last sector is one of the most dynamic areas of our M&A and financing practices as the landscape changes based on retailer needs, new platform launches, and the strategies of the giant holding companies.

As such I was pleased to contribute to FitForCommerce’s recent report on the topic. Please see below for the link to the report and for my interview with FitForCommerce CEO, Bernardine Wu.

I hope you enjoy the article – I’ll be at Shoptalk in Las Vegas in March and have travel to NYC, Boston, London, Paris and Shanghai in the next month or so if you’d like to catch up.

DIGITAL COMMERCE SERVICES

Digital Commerce presents enormous opportunities, as well as challenges, for today’s retailers and brands. Whether strictly online or in omnichannel environments, consumers demand a higher level of service than ever before. An ever-evolving retail environment, and the increasing pace of new innovations further exacerbate the problem. The good news is that retailers and brands are not alone in trying to meet these needs. There is a wide array of outside resources, particularly Systems Integrators (SIs), digital agencies and other experts that can help build the creative and technological solutions required to meet, and exceed, customer expectations.

Bernadine Wu; Founder, FitForCommerce

Making Digital Service Partners work for you:

An interview with Bernadine Wu, Founder of FitForCommerce

Aron Bohlig, Founder of ComCap LLC, met with Bernadine Wu, Founder of FitForCommerce, to discuss what they learnt generating the new report “Digital Services: A complete guide to the Systems Integrators and Digital Services Partners”.

Aron: Bernardine, thanks for taking the time today. Certainly, I was pleased to contribute to your Digital Commerce Services Report. I wanted to follow up with you to find out some of the learnings that FitForCommerce experienced while developing the report and the Provider Directory database.

Bernardine: We’ve been in the industry for over ten years and have interacted with all the parties that we’ve covered in the report. That said, once we sat down and worked to map out the provider landscape, we were surprised at how many choices and how many approaches to market exist among agencies and systems integrators.

Implications for retailers:

Who you select to implement or support a software implementation, it can make or break that software purchase and the project overall.

Almost 70% of platform projects end in a “breakup” because of a poor fit or poor support. You should very carefully evaluate new agency relationships – especially post-implementation support – before committing wholeheartedly to a particular provider.

Be sure to hold the agency accountable for your business objectives. For example, they should be focused on profitable revenue growth, not just on achieving the launch date milestones or a quality metric related to number of bugs.

Many times, we talk to agencies that feel like they are “in the dark” about the real business objectives they are supporting. The project should be thought of as implementing technology to enable the business, not just a technology implementation. This does require deliberation on your part to define your strategy and KPIs – those that the agency should be achieving – and then agree on how you can jointly track and measure that success. Don’t be afraid to renegotiate your deal if you haven’t done this – but also be willing to offer some share of the upside to the agency if they help you hit your objectives. Provide them with a strong incentive to do so by having “skin in the game.”

Implications for private equity owners of retailers:

Every private equity firm should be evaluating all their agency relationships. Most retailers have multiple relationships, and an investor will typically benefit from having multiple portfolio companies. That means you have better data, and better leverage to make good decisions about your agency partners. Just as you would hold your hosting providers to SLAs and performance metrics, you should be holding your agency partners accountable to performance metrics. Doing so will both help execute on current projects and provide your other portfolio companies with a good basis for evaluating that agency for other projects.

Implications for systems integrators or agencies:

First off, get covered in the report! The landscape is getting more competitive as systems integrators are supporting multiple technologies and with multiple other services in a project. Picking which platforms you support and which services you provide is an important strategic decision – being the tenth provider for a major platform will not be a differentiator.

Along those lines, you need to have a well-developed sales and marketing team – the days of winning business from a platform provider by buying a software sales rep dinner is over – you need to go directly to the brand or retailers to win the business. Ten years ago, systems integrators were “selling developers” – now you need a brand based on real differentiated process, intellectual property and portfolio successes.

Develop a clear and comprehensive go-to-market strategy that involves your sales processes. For example, participate in thought leadership opportunities that can then be used by sales as another touch-point with the brand or retailer.

Being seen as an expert in topics such as best practices for creating and executing an RFP can be the differentiator in selections where the services providers are similar in other critical selection criteria. Finally, add your company to the FitForCommerce Provider Directory where you can list your company information and solution capabilities.

Retain in-house or outsource?

However, determining what should be retained in-house and when to outsource other activities is not an easy decision. There are hundreds of services partners that support the retail industry, each with their own set of strengths and areas of focus. For retailers and brands, it starts with identifying internal competencies and resources available to determine what to keep in-house. Then they must effectively and efficiently surround their team with a partner that has the complementary expertise and resources

Aron Bohlig; Founder, ComCap LLC

A Key Resource: The FitForCommerce Provider Directory

Looking for a new solution? The Provider Directory put together by FitForCommerce is a go-to resource used by retailers, brands, wholesalers and distributors to research and evaluate technology and service providers.

 

All securities transactions are offered by and conducted through ComCap LLC, a broker-dealer registered with the SEC, and a member of FINRA and SIPC. This communication is for information purposes only and should not be regarded as a solicitation or offer to buy or sell any security or financial instrument and any email received with instructions to purchase or sell securities will not be acted upon. Pursuant to SEC and FINRA regulations, all incoming and outgoing email of persons associated with the broker-dealer are subject to review by the firm’s compliance administrators, principals, and its regulatory agencies.

Copyright © 2019 ComCap LLC member, FINRA & SIPC, All rights reserved.

 

 

Matt Nemer and Chris Nealey

The boards of directors for most of the leading US retailers and restaurant chains have a surprisingly low number of members with digital experience. For the top 100 consumer chains, we estimate that less than 10% of their boards seats are occupied by someone with broad digital, online commerce, or technology experience. In fact, 40 companies do not have a single director that specifically brings this expertise. This is a material gap in an age when digital touchpoints impacted an estimated 49 percent of total retail sales and Amazon is taking more than a third of all sales growth in the US. Is it possible that this broad lack of digital expertise at the board level has delayed the response to a shifting retail environment and the many symptoms that come with that including poor financial results and financial restructurings? Absolutely. More that twenty years after Amazon was founded, it is only just now becoming commonplace for retailers to hire a chief digital officer, or to make corporate venture capital investments. As for Amazon: 5 of the company’s 9 board members have digital experience, including Tom Alberg (Madrona Ventures), John Brown (Chief Scientist at Xerox PARC), Jonathan Rubinstein (HP, Palm, Apple), Patricia Stonesifer (Microsoft), and of course, founder Jeff Bezos.

Retail Boards Are 9.1% Digital, 90.9% Analog

The analysis: We examined the board members of the top 100 retailer and restaurant chains, including a deep dive into 858 individuals to determine if they had prior digital experience, including a prior operating role in digital or broader technology expertise. We also considered the directors to be digitally savvy if they were tenured board members at other companies that would provide that perspective. In some cases, it was obvious where the director had leadership experience at Google, Facebook, etc. In other cases, the director worked at a leading private equity or venture capital firm, putting them in frequent conversations around emerging business models. In total, 120 out of 858 directors had digital experience. Across all categories, the average board was 9.1% digitally savvy and 90.9% analog – 40 companies had 0 digitally savvy board members.

Boards with zero digital experience

Can Grocery Adapt To Amazon / Whole Foods Without Digital Expertise?

Looking at specific retail categories, Grocery and Restaurant chains had the lowest digital representation on their boards with an average of 8% and a max of only 36%, which is ironic given Amazon’s recent acquisition of Whole Foods. Not to mention the explosion of venture investments into disruptive food businesses, including those focused on home delivery, meal kits, smart vending machines, and even pizza making robots. Specifically, three large grocery chains Giant Eagle, HEB Grocery, and Publix Supermarkets do not have any digitally native board members and have an average director age of 70 years old. On the other hand, 3 of the directors at YUM! Brands have digital experience and the average age is 59 years. This includes, Michael Cavanagh (Comcast CFO), Thomas Nelson (High Technology Group at Morgan Stanley), and Mirian Graddick-Weir (25 years at AT&T).

Costco Clear Standout In Mass Merchant Category

The mass merchant category also doesn’t look digitally savvy with digital directors comprising only about 13% of the board, on average, surprising given the broad selection of branded products that are usually easily attainable on Amazon or other digital platforms. Laggards such as Big Lots, BJ’s Wholesale Club, Dollar Tree, Stater Bros., and SUPERVALU did not have a single board member with digital experience. In fact, Costco significantly skewed results for the overall category with 6 of their 13 board members having digital experience including directors Susan Decker (Yahoo), and Jeffrey Raikes (Microsoft). It would be fair to point out that Costco is notably late to ecommerce, although the membership club model is the original engine that powers Amazon Prime. QVC has 4 digitally experienced directors including “cable cowboy” Dr. John Malone.

Hardlines Retailers Lead The Retail Landscape With Digitally Experienced Boards

The hardlines category was the top overall retail subsector with around 17% of their boards comprised of directors with digital experience. Laggards such as Lowe’s, Bed Bath & Beyond, Sears, and Ace Hardware didn’t have a single board member with digital experience. On the other hand the boards at Gamestop, Advance Auto Parts and William-Sonoma have broad digital experience. Specifically, William Sonoma has director Sir Anthony Greener (previously Reed Elsevier) and Robert Lord (previously CEO of AOL Platforms) while Advanced Auto Parts boasts directors Brad Buss (QLogic Corp Director) and Fiona Dias (previously EVP of Strategy for Radial).

Softlines Boards Are A Little More Digitally Savvy Than Average

The softlines category was a little above the overall retail sector with 12% of their board members comprising of directors with digital experience. Laggards included Foot Locker, Burlington Coat Factory, and L Brands. Leaders included The Gap, and J.C. Penney. The Gap benefits from its San Francisco location with Brian Goldner (Hasbro CEO and former Tiger Electronics COO) and Dr. Bobby Martin (ran technology services for Dilliards).

CVS Leads Convenience / Drug, Overall Category Is Middle Of The Pack

The convenience / drug category is roughly in line with the broader retail space, as about 10% of their boards are comprised of directors with digital experience. Laggards in the category were 7-Eleven and Rite Aid, both with no digitally-experienced directors. Drug chains CVS and Walgreens led the category with board members such as CVS’s David Dorman (Prior AT&T Corp CEO) and Mary Schapiro (NASDAQ).

Source: CapIQ
1) National Retail Federation
https://nrf.com/resources/retail-library/the-state-of-retailing-online-2017-key-metrics-business-objectives-and

 

All securities transactions are offered by and conducted through ComCap LLC, a broker-dealer registered with the SEC, and a member of FINRA and SIPC. This communication is for information purposes only and should not be regarded as a solicitation or offer to buy or sell any security or financial instrument and any email received with instructions to purchase or sell securities will not be acted upon. Pursuant to SEC and FINRA regulations, all incoming and outgoing email of persons associated with the broker-dealer are subject to review by the firm’s compliance administrators, principals, and its regulatory agencies.

Copyright © 2019 ComCap LLC member, FINRA & SIPC, All rights reserved.

 

 

WELCOME TO THE CLIP!

This is our new bi-weekly newsletter where we do a deep dive into a digital commerce topic. Each issue is a unique and timely analysis, never a regurgitation of news. This analysis goes out to our contact list including public / private companies, venture and private equity investors, and other participants in the digital commerce sector. Our inaugural issue takes a close look at digitally native vertical brands and capital raising efforts on the sector.

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Matt Nemer and Chris Nealey

DNVBs have raised ~$900mn this year – but the market is not as healthy as it appears

It was recently reported that John Hancock Investments and several other mutual funds marked down their investments in Warby Parker to a much lower valuation than the previous round so we decided to take a look at the funding environment for digitally native brands.

The term digitally native vertical brand (DNVB) was coined by Andy Dunn, CEO of the recently acquired men’s apparel company Bonobos. DNVB’s continue to disrupt the B2C market and we are tracking more than 300+ companies in this sector with a focus on 5 separate categories: Accessories, Apparel, Beauty, Home, and Wellness. Of these, there are 110 companies that have raised private capital with data reported into various databases including Crunchbase and CapIQ. 2014 and 2015 were boom years for DNVB’s raising between $800-900mn in both years, only to get cut in half in 2016 as tech VCs backed off of the gas after a general lack of ecommerce exits and Amazon fears. Although this year looks like a return to boom times, it might be slightly misleading and look to be more in line with 2016. Year-to-date funding is around $900mn and should break $1bn by year end but there have been several large rounds that inflate the numbers including with Peloton’s enormous $325mn round in May and Casper’s $170mn round in mid June, boosting both the Home and Wellness categories. The bottom line is that excluding these outliers, 2017 doesn’t look much better than 2016.

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DNVB’s raise every ~330 days

We took a deeper dive to look at DNVB fundraising activity, specifically how much have companies raised from Seed through Series C, and how often do they raise? DNVBs in the apparel and home category raised around 1x per year. While DNVBs in the accessory category raised funds more frequently at a median of every 253 days.

Taking a more granular look by round for Series A financing, DNVBs across all categories raised around $7-$8 million. Accessory DNVBs graduating from Seed to a Series A came in at the lowest time between their next raise of every 233 days, with Warby Parker completing a Series A round 78 days after their Seed round. Hayneedle raised the largest Series A at $22.0mn and Mizzen Main’s had the smallest Series A at $1.2mn.

Looking at Series B rounds, Beauty was a huge standout with investments at 2.0x-2.5x larger than any other category due to companies such as Glossier and Birchbox, which could be due to a multitude of things; high margins, good ship to weight ratios, and naturally high repeat rates.

Looking at Series C rounds, Beauty DNVB’s saw investments much lower in comparison and days in between a Series B and C much farther apart. Wellness companies however saw days in between come at the lowest level with around ~355 days, while accessories saw the largest median Series C rounds of $40.0mn.

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Bubble of DNVBs that haven’t raised in 700-900 days

We did find a bubble of companies sitting in a range of 700-900 days since their last fundraising – namely companies like American Giant, Draper James, and Trumaker. Who could be at a crossroads of a few things; profitability, extinction, or not looking to give up any more equity. There were also companies who have not raised capital in the past 4 years, including Cuyana (likely doesn’t disclose their funding round), DailyBurn, and J. Hillburn.

Bottom Line: DNVB funding is off from 2014/2015 levels. The bright shiny object changes from year to year and now it is wellness/home. We have the most comprehensive DNVB database – so e-mail if you’d like to learn more.

Source: Crunchbase, CapIQ

 

All securities transactions are offered by and conducted through ComCap LLC, a broker-dealer registered with the SEC, and a member of FINRA and SIPC. This communication is for information purposes only and should not be regarded as a solicitation or offer to buy or sell any security or financial instrument and any email received with instructions to purchase or sell securities will not be acted upon. Pursuant to SEC and FINRA regulations, all incoming and outgoing email of persons associated with the broker-dealer are subject to review by the firm’s compliance administrators, principals, and its regulatory agencies.

Copyright © 2019 ComCap LLC member, FINRA & SIPC, All rights reserved.