Pinterest – the scary road to revenue…

Pinterest recently made two interesting and important announcements:

1. They would begin the long hard road towards monetization.

2. They would begin to also offer news and article related content

This sparked my interest. I decided to take this blog post as an opportunity to think through both the current opportunities as well as future possibilities for the company:

Curated verticals. I don’t have any inside information on user stats. I have no idea what the traffic patterns are or how user demographics breakout – but the single largest classification category has to be weddings. Weddings work well for Pinterest because they play to the company’s use case strengths:

  • Women aged 15-35
  • Unending and exhaustive research in pursuit of perfection
  • Aspirational purchasing
  • Inspiration to be saved for some future purchase date

Weddings as a use case will play well for monetization efforts because they are likely to be emotional high $ purchases. The exhaustive research allows for substantial user generated content and important opportunities to improve search capabilities and classifications. While weddings are probably the gold standard in terms of near-term opportunities, there are plenty of other high value verticals that also provide opportunity (home décor, high-end fashion, cars etc.).

Gifting. Multiple friends have recently received gifts on special occasions as a direct result of items featured on their Pinterest boards. This feat is impressive because of the lengths Pinterest has gone to control any links to outside websites. In its former incarnation the company actively patrolled pins to ensure that retailers and advertisers were not trying to circumvent the rules of no advertising. This often meant taking an image found on Pinterest, running a Google image search and then trying to track down the relevant retailer in order to make a purchase (assuming that the item was unique enough to warrant the effort). Clearly, gifting would be substantially easier if Pinterest allowed for click-throughs directly to retailers or created their own platform which allowed a user to directly make a purchase on Pinterest’s website..

Customized social and retail platform. You can imagine a day (in fact the technology exists already) where we each have our own personal measurements put up in the form of an avatar as a means to better visualize a garment’s fit, style, color and other intangibles. Pinterest is currently a place for self-expression and I could see a path whereby I create my own unique retail identity from which I set out to shop online. Adding on a social layer would only enhance the stickiness. If I were assured of fit and other intangibles I’d be far more likely to make purchases and retailers, knowing what my tastes are and feeling more confident in my decision making might be more likely to design and sell the more customized garments with a far lower risk of returned merchandise, or at least other sales targets to pursue. The data from Pinterest might also be valuable as source of  demand forecast information for retailers to minimize stock-outs and excess inventory write-downs.

I see very interesting potential in the future of the company, but there is obviously always room for improvement. The biggest concerns I had are 1) Maintaining the current feel of personalization and ensuring that users don’t feel like they are being spammed constantly. This will be a very tight line to walk. 2) Increasing engagement from men. Maybe this starts with sports, or funny YouTube videos, or cars, but the company possibilities will require some level of input from the men as well.

 

 


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Megamall Culture – A challenge for GCC online retailers

Think of GCC shopping and you would picture images of fantasy mega malls packed with shoppers looking to spend their non-taxable income. In a buoyant economy with strong fundamentals for digital adoption, early entrepreneurs aimed at replicating the shopper’s paradise into an online experience. They have spent their efforts developing the online business model – identifying monetization channels, setting up safe payment solutions and improving customer confidence, building their distribution capabilities and negotiating delivery costs, etc. Yet, very few were able to anticipate that the region’s mall culture could present a challenge for the online retailing space.

Indeed, in the GCC, consumers are immersed in an established mall culture that become a focal point in their every day’s lives – one of the few available avenues for social interaction for a population that spends, on average, 8 hours in a mall every week (highest in the world). As such, it was challenging for online retailers to increase their share of the consumers’ wallet, as those are looking for a time-filling social shopping experience rather than a more convenient online service. In fact, a closer view on the online shopping statistics reveals an even less enticing story for select consumables – fashion, electronics and home décor items. These were less favored by online shoppers as they present an integral part of their weekly shopping experiences.

In this context, online entrepreneurs had to quickly ramp up their value propositions and find new ways to channel consumer spend from offline retailers to their online platforms. A social mindset had to be overcome. Hence, they had to resort to different tactics, beyond the promise of “shopping convenience from your own home.” Examples range from claims of competitive discounts with alerts when prices hit low to offering an SKU range that is more varied than Brick-and-Mortar businesses’. Even recently, a local consortium has ventured into setting up the region’s first e-mall with interactive experiences that could simulate a mall culture in a virtual environment.

Today, online retailing is gaining more traction in the GCC. Well-established early entrants are growing at over 20% per year. Yet, as the appetite of consumers continues to grow in this space, I am quite intrigued how online retailers will adapt their business models to market realities as well as alter the shopper attitude in a “mall” culture. I wonder if online retailing could ever change the social mindset and steal the crowd out of the malls. You never know in a region that managed to build a palm in the ocean or a ski arena in a mall. You can never stop to wonder what is next.

 


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The explosive growth of e-commerce in the last decade has certainly raised questions as to whether there are limits to its take-over of the brick and mortar world. The global consumer’s increasing dependence on online and mobile platforms to communicate and digest information, as well as his/her willingness to partake in technology-enabled experiences, have certainly challenged the need for physical stores to sell physical goods. With this said however, despite the undeniable power of the internet in delivering unprecedented marketing, data collection and monetization capabilities to retailers all over the world, many global luxury brands have, since the very beginning, vowed to never sell their products online. At the same time, even the strongest retailing brands that have relied solely on the e-commerce platform have begun to incorporate physical stores to their overall strategy, recognizing the limits to their ‘curating’ the online experience for customers.

With the online play becoming a critical element of growth and penetration for western brands in emerging markets, several luxury good companies (i.e., Burberry, Hermes, Gucci…etc.) have begun to mobilize global online communities and made efforts to monetize those interactions either through their own sites or third party e-commerce platforms. On the other hand, a strong contingent of brands (i.e., Prada and Chanel) remains beholden to its longstanding conservative stance. For these companies, the thesis, that the in-store world remains the sole venue that can truly carry with it the brand value and identity of a retail company, remains a strong one. For the same reason that many of the most prestigious luxury brands have remarkably been able to shy away from franchise models, in the name of tighter control over brand equity, distribution, customer service and customer experience, they have also steered clear of selling their products on the internet. For the time being, at least, “selling online” continues to carry with it a stigma of reducing brand prestige and value not only by eliminating the exclusivity and luxe experience that is created in multi-million dollar flagship stores, but also by unintentionally generating an aura of product commoditization in the eyes of consumers. For this small group at the upper echelon of the retail market, brick and mortar will likely never die as the effectiveness and profitability of online sales comes at an immeasurable cost to their perceived brand – likely the hardest element of their business to repair.

While the importance of physical stores are clearly critical to those retailers that have only existed and grown offline, even the younger brands (i.e., eBay, Bonobos, Warby Parker, Etsy, Baublebar…etc) that have operated solely online are evolving their models to include a brick and mortar component, coining the ‘click to brick’ retail model. Regardless of the strategic initiatives taken to create operational efficiencies in shipping and return or ‘checkout’ and payment processes to optimize the customer buying experience, even the most pure play e-commerce companies recognize the importance of human contact with sales associates, the product and the brand itself. Each of these elements has played a tremendous role in increasing the basket/order sizes of customers and their willingness to return to these stores for more, and so far, e-commerce platforms have been limited by existing technological capabilities to translate these physical offerings to an online world. Why else would young startups that have witnessed overwhelming success online, bother with the costs, investments and capital intensity of operating stores or ‘showrooms’. Without product demos or consumer interactions with the products themselves (feel, smell, sight…etc.), it is difficult for a broader retail landscape to move online, but even those already online are seeking ways to connect better with consumers offline. Interestingly, retailers have brought technology into their stores because of this – moving more towards optimizing online and/or mobile capabilities to enhance the in-store experience (i.e., leveraging mobile technology platforms for product reviews, price comparisons…etc.), and away from replacing this experience entirely with websites.

On the whole, it is difficult to predict how new technologies and tastes will alter the current pace of e-commerce adoption in what remains of the offline world. While many of the barriers for e-commerce are engrained in technology, some of the larger hurdles are created simply by human buying psychology which simply has not fully caught up, and perhaps never will.

References & Articles

http://www.forbes.com/sites/onmarketing/2013/05/02/making-the-best-of-a-digital-situation-what-luxury-brands-can-do-to-catch-up-online/

http://www.luxist.com/tag/richemont+group/

http://www.businessweek.com/articles/2013-06-05/another-experiment-in-e-commerce-to-brick-and-mortar

http://www.practicalecommerce.com/articles/4114-Ecommerce-and-Brick-and-mortar-Retail-Converge


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The advent of Online retail pure players in non-food categories feels like an old obvious story which has been told too many times already. Unwary at first and reassured by Amazon’s negative results in its early years, brick and mortar retailers now struggle to counter their emerging online competitors on that turf. Grocery retailers however have a slightly different story. Legal, sanitary and logistical constraints regarding the handling of perishable products limited online pure players to regional niches: Fresh Direct in New York or Amazon trying it out in Seattle (for now…). Brick and mortar retailers’ websites such as Peapod do better in terms of geographical coverage, leveraging the implantation of their stores, but struggle likewise in terms of adoption: total online grocery purchase still barely reached $12 Bn in 20111, a mere drop in the $1 trillion+ of the US grocery shopping market2.

 Explaining and solving the limited success of online grocery shopping is one of the major challenges the industry has to face as it is increasingly pressured to grow in a saturated environment. After all, grocery websites have tried to apply the same recipes which made a success of Amazon & cie. A possible explanation is that while buying a book is an impulse purchase Amazon’s large offer helps satisfy quickly, grocery shopping is ultimately a regular chore that should not deserve cannibalizing our precious leisure time at home. Convenience is one of the major criteria for a customer to choose a specific grocery store5 and the current online solution just does not do the trick. Indeed, grocery shopping is the kind of task one has to do but wants to get rid of as fast and seamlessly as possible, ideally at a time already wasted.

 Since getting customers to visit a store is too cumbersome, and having them use their spare time to browse for groceries too intrusive, retailers had to come up with an alternative. Lately, a few have been trying to use the time wasted on commuting by bringing “virtual stores” directly on their customers’ path: billboards in train stations and busy city centers displaying grocery products and their QR codes. After downloading the retailer’s app, the customer simply scans the desired product code (much like he/she would place them in a shopping cart), checks out and chooses between home delivery or nearby store pick-up. The assortments displayed on the billboards have the exact same look & feel of the physical stores customers are used to visiting, thus improving the reality of the grocery shopping experience.

This blend of online and offline has more than one benefit. Not only does this platform saves the customer a trip to the store or time browsing a website, it most of all gives him or her the satisfaction of having saved precious time. Instead of merely replacing “going out” by “going online”, this makes a sacrificed timeframe productive. It also serves a great educational purpose for customers still wary of shopping groceries online: by mimicking the brick and mortar grocery shopping routine engrained in the collective unconscious it helps reluctant customers cross the chasm of the first online grocery purchase.

 In 2012, several retailers have conducted similar “virtual store” experiments worldwide: Peapod in Chicago6, Carrefour in France7, Tesco in Korea and the UK8 or the online retailer Yihaodian in China9. In every case, they triggered significant app downloads, usage and valuable feedback from customers. For instance, Tesco’s Korean virtual stores increased the UK-based retailers online customers by 76% and revenues by 130%8.

While this is by no means a demonstration of a sustainable alternative revenue stream, these encouraging results constitute a clue that virtual stores “intercepting” customers on their way home could very well be a powerful lever to drive online grocery shopping. For retailers the economics of virtual store seem similar to full online retail, and the logistical challenge is still a crucial profit factor. However, virtual stores add a new real estate twist to the equation as actors will compete for the best billboard locations. This might very well be the edge brick and mortar actors needed to boost their online competitiveness: finding the best city locations is a skill they spent the last 20 years perfecting.


1: http://www.consumerreports.org/cro/magazine-archive/2011/september/shopping/online-grocery-shopping/overview/index.htm

2: http://www.cdfifund.gov/what_we_do/resources/Understanding%20Grocery%20Industry_for%20fund_102411.pdf

3: http://foodbeverage.about.com/od/Market_Updates/a/Wal-Mart-Plans-To-Open-Its-First-Wal-Mart-Express-Stores.htmhttp://foodbeverage.about.com/od/Market_Updates/a/Wal-Mart-Plans-To-Open-Its-First-Wal-Mart-Express-Stores.htm

4: http://adage.com/article/news/size-matters-retail-size/233372/

5: http://hu.nielsen.com/site/documents/Nielsen_StoreChoice_ValueReport_Dec07.pdf

6: http://supermarketnews.com/retail-amp-financial/peapod-expands-virtual-stores

7: http://www.carrefour.com/cdc/group/our-business/latest-store-openings/carrefour-launches-two-virtual-stores.html

8: http://www.shop2mobi.com/virtual-qr-code-store-examples/

9: http://www.powerretail.com.au/technology/chinese-online-retailer-opens-virtual-stores/


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Amazon Kindle Fire: Subsidizing its Way Into Your Pocket Book

For $159, you can get a wi-fi enabled, full color 7” screen Amazon Kindle. If this price seems low to readers, it’s because it is—initial estimates for the first generation Kindle Fire were that the hardware costs of the product amounted to approximately $209, while its pricetag remained at a measly $199.

I was one of the 6.7 million consumers who jumped at the opportunity to buy this tablet almost as soon as it came onto the market. I’ve never owned a kindle or e-reader before. Additionally, I find myself second-guessing an iPad purchase each time I contemplate one—I’m simply not willing to fork over $500 or more for another device, which would surely find itself awkwardly positioned in between my large screen HTC EVO 4G phone handset and my Ultra-thin notebook computer. But WHY has Amazon ran down this hardware path with such vigor and at such staggering low (negative on hardware alone) margins? Furthermore, why have the financial markets rewarded Amazon for this initiative?

One might think that Amazon’s Prime offering which enables users to stream unlimited video is a significant new profit strategy for the firm. At $79 per year, Amazon Prime is certainly an attractive revenue stream for the firm, and a recurring revenue stream at that. That said, the true benefit to Amazon here is that it bundles Free Prime Shipping for users of the service. This may leave many readers wondering what free shipping and movie streaming have to do with one another. The answer is that Amazon needs two phenomena to occur in order to gain ‘wallet share’ among users—first, it needs to have their website or app in the hands of an growing population, and second, it needs to provide almost any product that users could seek out online and make it ridiculously easy to purchase. The Amazon Kindle Fire achieves both these goals—it makes  it unbelievably cheap to penetrate a new user base by offering tablets (seemingly a must-have these days) to the masses, many of whom, like me are turned off by both the price tag, closed architecture and ubiquitous fruit logo on the iPad. Next, it allows users to shop easily on their Fires, order with one-click and for many items, receive free 2-day shipping.

So, how does this all add up and why does the market reward Amazon with a staggering P/E multiple compared with peers? The market sees the Kindle Fire family as a way to quietly sneak into consumer’s homes, wrapped in banner ads for your favorite movies and television and to become the easy shopping buddy for the couch potato (most of America). Let me tell you, ordering 50 Keurig coffee cups between streaming episodes of Friends is so easy, even grandma could do it (well, maybe). Amazon is luring you into its marketplace, and offering you some tantalizing media and hardware in return—taking a page from the retail king Wal-Mart’s strategy of using loss leaders to attract hoards of customers to their megastores.


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