Edit No. 17: The convenience retail industry is at a crossroads

I’m very excited that Foxtrot Market is announcing a big new round of funding today that will allow the company to continue with its rapid expansion plans. Wittington Ventures co-led the previous round with New York-based Imaginary Ventures back in February of 2020.

It’s been remarkable to witness Foxtrot’s omni-channel approach to convenience retail being validated by a once-in-a-lifetime pandemic. Here’s a link to the announcement in the press, and visit this link to read the official Wittington Ventures article that outlines our team’s core investment thesis.

As the Wittington Ventures article states, the retail industry has been in a constant state of flux over the past decade, where the rise of social media and e-commerce has oriented consumer buying behaviour towards a variety of new online channels. These new channels are increasingly informing how people discover products, engage in transactions, and ultimately access the items they purchase. And as online commerce penetration accelerates ,  retailers are actively contemplating how to refactor their physical store presence and e-commerce operations for a new omni-channel reality.

I believe Foxtrot is the new benchmark for omni-channel retail, where experience and quality aren’t being compromised. The reason to visit a Foxtrot store is for a beautiful café experience, chef-prepared grab-and-go meals, and exclusive-to-Foxtrot private label brands. And if you want the experience from home and live near a store location, Foxtrot — through its own network of delivery carriers — can get items to your front door in under an hour. Nationwide deliveries across the U.S. are coming soon too.

Foxtrot’s experience contrasts with that of mass market corner store chains that are increasingly looking to compete on value and automation. Many of the incumbent convenience stores offer a lot of the same competitively priced products from big CPG companies that we know and love. Indeed, these chains can (and do) feature private label brands and proprietary meals that have allowed them to reach cult status. And many also have strong customer loyalty programs powered by gamified mobile applications. But if the physical stores of these mass market chains largely mimic each other, and a bulk of their merchandising remains similar to Amazon’s and goPuff’s (a new U.S.-based e-commerce startup for the convenience market with a 24/7 delivery service), then there is a risk of traditional convenience retail becoming a commodity that is increasingly difficult to differentiate around.

I discovered a neat post on the Kearney website (Kearney is an American management consulting firm) that articulates these thoughts more succinctly:

As a result of changing consumer demographics and lifestyles, retailing is bifurcating between two distinct shopping experiences: “chore-based” replenishment of regularly purchased items which lend themselves to home delivery subscription models and will therefore take consumers out of physical stores over time; and experiential or event-based discretionary shopping that encourages visiting stores and surfing the Internet.

Brick-and-mortar retailing was built on a foundation of product, location-based convenience, and price competition. Today, and for the foreseeable future, attempting to compete on product and location-based convenience for “chore” shoppers is a formula for failure as improved manufacturing practices continue to close the product quality differentiation gap, digital competitors enter the scene, omni-channel fulfillment options drive convenience, and younger consumers reject traditional brand status. This suggests physical stores need to compete on experience.

If we observe the convenience retail market along these lines, and as bifurcating between two distinct shopping experiences — value-based vs. experiential — then Foxtrot sits on the latter end of the spectrum. I suspect, alongside the minds at Kearney, that the latter end of this spectrum is the side you want to be on as an insurgent startup in this space.

Given my enthusiasm around the Foxtrot announcement today, I’ve compiled some links to news articles below that point to interesting and emerging trends in the convenience retail industry.

Let’s get started.

🗞️ News

1. Bloomberg — Amazon Go Rival Bets Pandemic Made Case for Cashierless Stores [Feb 17, 2021 | Matt Day]

• Standard Cognition — a provider of an autonomous checkout tool that can be installed into retailers’ existing stores — has raised money from investors at a $1 billion valuation.
• As noted by Bloomberg, Standard offers a package of cameras and software that tracks browsing shoppers and automatically charges them when they exit — similar to the Amazon Go shopping experience. Circle K, the convenience store chain owned by Alimentation Couche-Tard Inc., is installing Standard’s technology in an Arizona store. Compass Group PLC, a U.K.-based food-service conglomerate, is also a customer.
• Standard participated in the Y Combinator startup accelerator in 2017 and competes with other startups in the space such as Grabango, AiFi, and Zippin — each of which have raised notable rounds of financing.

My commentary:

With some of the biggest convenience store chains in the world looking to partner with startups that can give them Amazon Go-style capabilities, it’s evident that the major market incumbents are squarely competing on value and speed. They want to get inventory in the hands of customers as quickly as possible in-store and online.

The strategy makes sense, considering over 61% of the nearly $700 billion in revenue generated by the North American convenience market comes from in-store sales as opposed to fuel sales — speed is the name of the game. But what happens as gas stations disappear in favour of electric vehicles? What’s the end game when all traditional convenience stores eventually become robotized and look and feel the same? My hunch is that’s when the incumbents really start leaning into their merchandising and product mix strategies to continue differentiating, and invest heavily in their own branded private labels — we’ve talked about the importance of this strategy for retailers before.

In any case it’ll be interesting to see how cashierless technology evolves, especially given Amazon’s large investments in the space through its own Amazon Go store format. For the concept to really take off, setup costs need to steadily decline while simultaneously showing a clear ROI on a per-store basis. Let’s drill into this new tech a bit deeper…

2. TechCrunch — Amazon expands its biometric-based Amazon One palm reader system to more retail stores [Feb 1, 2021 | Sarah Perez]

• Last fall, Amazon introduced a new biometric device — Amazon One — that allows customers to pay at Amazon Go stores using their palm.
• The device is now being rolled out to additional Amazon stores in Seattle — an expansion that will make the system available across eight total Amazon physical retail stores, including Amazon Go convenience stores, Amazon Go Grocery, Amazon Books, and Amazon 4-star stores.
• The Amazon One system uses computer vision technology to create a unique palm print for each customer, which Amazon then associates with the credit card the customer inserts upon initial setup. Customers don’t have to connect their existing Amazon accounts to use the service, but if they do, they’ll be able to see their shopping history on the Amazon website.

My commentary:

Amazon has multiple physical store locations now in the U.S. under a variety of banners — from Amazon Go convenience stores to Amazon Fresh grocery stores. This new biometric-based palm reader system shows a “master plan” to start weaving together its capabilities in physical and online retail to deliver the most frictionless value-based shopping experience to its customers. When people think Amazon, they think speed and value. With incumbent mass market convenience stores ostensibly on a collision course with Amazon via partnerships with startups such as Standard, it’ll be interesting to see who comes out on top or whether they can all co-exist. But as their respective in-store experiences coalesce around automation, then in time everyone will have to find new ways to continue differentiating against one another — I struggle to think of “how” other than through brand, experience, and products (for the tenth time 🙃).

It’s worth noting there are ongoing data concerns associated with autonomous checkout technologies too (in addition to setup costs), as well as policy concerns around the tech presenting barriers for people in low socio-economic groups who largely pay in cash. This technology still seems a few years out from wide adoption but it’s certainly picking up steam, thanks in part to the pandemic.

3. TechCrunch — Delivery company goPuff is in talks to acquire the UK’s Fancy [Feb 15, 2021 | Steve O’Hear]

• goPuff — a vertically integrated and digitally native convenience store — was recently valued at $3.9 billion and has raised $1.35 billion in funding to-date from prominent backers such as Accel. It operates in 500 U.S. cities and is very acquisitive, most recently purchasing alcohol-focussed BevMo.
• The company is in talks to acquire Fancy — its U.K. counterpart operating in four cities. Both companies contract their own fleet of drivers and operate their own micro-fulfillment centres that are designed specifically for online ordering and hyper-local delivery.
• Europe is seeing a slew of startups inspired by goPuff’s vertically integrated model. They include Berlin’s Gorillas and London’s Dija and Weezy, and France’s Cajoo. Some claim to focus more on fresh food and groceries, while others focus on a higher-margin convenience store offering.

My commentary:

I wanted to share this article to round out my thoughts earlier around the convenience retail market bifurcating between two distinct shopping experiences: value-based vs. experiential. As mentioned, competing on the basis of value and speed alone is extremely difficult in 2021. With so many incumbent businesses now planning for automated stores and vertically integrated e-commerce services that offer 24/7 hyper-local deliveries, how can you possibly win as a new entrant? There’s also Amazon doing all of the above at the same time. That’s why I’m fired up about experiential convenience. I think it’s a whitespace in the market that only a few new players are paying attention to while everyone else is obsessing over value and speed alone. Probably because it takes time to build an enduring brand and get real-world experiences right.

💰 Funding

See below for a list of digital commerce startups that have announced a funding round in the past two weeks:

• Xingsheng Youxuan | Chinese grocery app | $2B | Sequoia Capital China
• Branded | Digital consumer products platform | $150M | Target Global
• Locus Robotics | Autonomous robots | $150M Series E | Multiple leads
• Standard Cognition | Autonomous checkout | $150M Series C | SoftBank
• Instabox | Last-mile delivery solutions | $90M Series B | EQT Ventures
• Fabric | Headless commerce | $43M Series A | Norwest Venture Partners
• Maisonette | E-commerce for children | $30M Series B | G Squared
• Mesh Payments | B2B payments platform | $13M | TLV Partners
• SoLo Funds | P2P lending | $10M Series A | ACME Capital
• Talkshoplive | Live shopping video app | $3M Seed | Spero Ventures
• Reflaunt | Fashion resale software | $2.7M | MadaLuxe Group
• Xingsheng Youxuan| Chinese grocery app | $2B | Sequoia Capital China
• Brightly | Eco-friendly products | $1M | Multiple leads