Innovation – Fuel, A McKinsey Company https://get.fuelbymckinsey.com Wed, 29 Jan 2020 17:14:35 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 Sizing Up The Subscription E-Commerce Market: 2018 Update https://get.fuelbymckinsey.com/article/sizing-up-the-subscription-e-commerce-market/ https://get.fuelbymckinsey.com/article/sizing-up-the-subscription-e-commerce-market/#respond Wed, 25 Sep 2019 19:10:46 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The U.S. subscription e-commerce or box market continued its strong growth in 2018. Based on our analysis, the largest subscription e-commerce companies generated $7.5 billion in sales in 2018, up about 30 percent over the prior year. We estimate the total market size for subscription e-commerce services is about $12 billion to $15 billion. Largest […]

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The U.S. subscription e-commerce or box market continued its strong growth in 2018. Based on our analysis, the largest subscription e-commerce companies generated $7.5 billion in sales in 2018, up about 30 percent over the prior year. We estimate the total market size for subscription e-commerce services is about $12 billion to $15 billion.

Largest subscription e-commerce companies

To estimate market size, we analyzed Internet Retailer’s 2019 US Top 500 list of the largest e-commerce companies by sales, identifying the 16 that are primarily subscription-based. In total, these companies brought in $7.5 billion in revenue in 2018, up from $5.8 billion in 2017. (Exhibit 1.) Since 2014, the market has grown at a compound annual growth rate (CAGR) of nearly 60 percent.

Exhibit 1

HelloFresh passed Stitch Fix to become the largest subscription e-commerce company, with $1.4 billion in 2018 sales (up 119 percent from 2017). Stitch Fix fell to second place despite growing sales 26 percent to $1.2 billion. TechStyle Fashion Group, Blue Apron, and Dollar Shave Club rounded out the rest of the top five. (Exhibit 2.)

In addition, HelloFresh and Naked Wines had the highest sales growth from 2017 while Blue Apron was the only company on the list to see sales decline, with a drop of 24 percent from 2017.

Exhibit 2: Largest subscription e-commerce companies based on sales

Overall market size

We believe these figures, though helpful, are incomplete. Based on analysis of both published and private data, we estimate that additional sources of revenue not captured in Internet Retailer’s list to be approximately $5 billion to $8 billion. Examples of such sources include:

  • Companies that offer subscriptions but where the revenue from subscriptions is difficult to break out from overall financials, including subscription services from large online and traditional retailers such as Amazon, Walmart, Target, Sephora, Nordstrom, Overstock, The Honest Company, and Boxed.
  • Companies that are big enough to make the list but are not included, perhaps because they did not make their information available. For example, a recent report suggested that FabFitFun, which is not on the Internet Retailer US Top 500 list, generates more than $200 million in revenue a year.
  • Companies that are too small individually to make the list but that collectively could generate significant revenue.

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Taking into account this revenue in addition to the $7.5 billion identified by our analysis, we estimate the total market size of the subscription e-commerce market to be about $12 billion to $15 billion.

We believe the market is poised for continued growth.

  • As our prior research suggested, just over half of online shoppers are aware of even one of the leading subscription e-commerce companies [see Thinking Inside the Box]. As awareness grows, we would expect more consumers to try and eventually subscribe to these services.
  • In addition to the startups that highlight our list, an increasing number of larger brands have announced new subscription e-commerce services in 2019 including Nike, Macy’s, Bloomingdale’s, Urban Outfitter, and Banana Republic. Amazon also is continuing to expand its subscription offerings in apparel. We believe these new services will drive increased sales as well as raise overall awareness for the category.
  • Lastly, although funding is down from the its peak in 2015, VCs continue to invest in subscription e-commerce startups. Over the past three years, for example, such companies have raised close to $2.5 billion in VC funding, including nearly $400 million through August 2019.

Fuel will continue to regularly update our market sizing estimates as new data comes in, especially given the rapid growth we continue to see in the subscription e-commerce market.

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An Early Look Inside the D2C Startup Playbook https://get.fuelbymckinsey.com/article/an-early-look-inside-the-d2c-startup-playbook/ https://get.fuelbymckinsey.com/article/an-early-look-inside-the-d2c-startup-playbook/#respond Mon, 18 Mar 2019 18:24:59 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Fuel recently launched ConsumerRadar, a benchmarking tool for direct-to-consumer (D2C) startups measuring more than 50 distinct metrics. The participating startups provide Fuel with high-level acquisition and financial data, and receive a detailed report showing how they compare to a cohort of peers. Over the next few months, we’ll be sharing more insights for the broader […]

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Fuel recently launched ConsumerRadar, a benchmarking tool for direct-to-consumer (D2C) startups measuring more than 50 distinct metrics. The participating startups provide Fuel with high-level acquisition and financial data, and receive a detailed report showing how they compare to a cohort of peers. Over the next few months, we’ll be sharing more insights for the broader community from these findings. For more information about participating in ConsumerRadar please click here.

The startups

The startups came from categories that included apparel, home goods, and pet care. The group had an average founding date of 2013 and had annual revenue of $30 million in 2017. The analysis featured an infrastructure and tools survey. Participants used a 1-5 scale to self-report their perceived proficiency across 22 metrics related to data usage, marketing technology and automation, and agency relationships.

While the current data set is somewhat limited, the initial results raise some interesting questions about how D2C ecommerce startups engage customers, leverage data, and think about their marketing ROI.


Figure 1. ConsumerRadar self-reported survey (n=8), cohort results.
Scoring: 1 = low capability, 5 = high capability “Companies that focused on triggered email use and personalization, when accounting for other variables, had approximately 2X higher growth efficiency than the cohort average.”

Paid social dominates spend, but this is shifting  

Unsurprisingly for D2C, the group are strong believers in paid social media (average of 4.85/5). They spend a significant portion of their budget through these channels and leverage advanced targeting options to reach specific audiences. However, many startups expressed a desire to cut back due to increasing acquisition costs coupled with diminishing returns, instead looking at less-costly channels. In many cases, companies were shifting budgets to traditional offline channels including out-of-home, radio, and direct mail – based on successful limited-geography tests.

Triggered emails and personalization drive better growth efficiency

Most of the group reported strong expertise in email marketing. The startups made email onboarding a priority, including the use of a series of personalized triggered emails within the first few weeks after purchase (4.60/5). Most also had a dedicated email strategy with always-on campaigns (4/5).

Usage was more mixed when it came to triggered emails based on certain behaviors onsite, such as abandoning a cart, and personalizing emails based on previous customer interactions (3.85). Companies that focused on triggered email use and personalization, when accounting for other variables, had approximately 2X higher growth efficiency than the cohort average.

3rd party data and leveraging agencies

None of the companies in the cohort used a DMP (Data Management Platform) to enhance the targeting of paid media (1/5). This likely stems from the high cost of setting up and managing a DMP for a startup under $100 million. Very few of the participants had set up organizational standards for managing 3rd party data (1.70/5).

The findings were mixed for agency partners. Three quarters of the startups had engaged an agency to some extent over the prior calendar year, but agencies were generally not viewed as thought leaders or strategic partners. Instead they were used mostly for execution and occasional staff augmentation (2.30/5). Whether this is a function of the early life-stage of our companies, or a sign that more marketing teams are bringing capabilities in-house is something we intend to explore further.

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Moving forward

Over the next few months we would like to include more startups in the benchmarking in order to conduct a more rigorous analysis to further correlate practices with growth efficiency. If a consumer startup could benefit from a personalized report showing how it measures up against a cohort of peers across 50+ customer acquisition and business health metrics – visit here to get started.

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Blockchain Stalls, Synthetic Fraud, and AI Helping Humanity https://get.fuelbymckinsey.com/article/blockchain-stalls-synthetic-fraud-and-ai-helping-humanity/ https://get.fuelbymckinsey.com/article/blockchain-stalls-synthetic-fraud-and-ai-helping-humanity/#respond Thu, 24 Jan 2019 19:53:22 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Do You Even Blockchain? Blockchain buzz continues to drive intense interest in experimentation. But that fervor has cooled off significantly. Axios reported an 80% drop in the use of “blockchain” on corporate earnings calls in 2018. And a recent McKinsey article outlines “Blockchain’s Occam Problem.” The authors state that blockchain has failed to advance out of its […]

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Do You Even Blockchain?

Blockchain buzz continues to drive intense interest in experimentation. But that fervor has cooled off significantly. Axios reported an 80% drop in the use of “blockchain” on corporate earnings calls in 2018. And a recent McKinsey article outlines “Blockchain’s Occam Problem.” The authors state that blockchain has failed to advance out of its early “pioneering stage” and the key to finding real value in blockchain is applying it when it’s the simplest solution available.

From the article:

“There is a clear sense that blockchain is a potential game-changer. However, there are also emerging doubtsA particular concern, given the amount of money and time spent, is that little of substance has been achieved. Of the many use cases, a large number are still at the idea stage, while others are in development but with no output. The bottom line is that despite billions of dollars of investment, and nearly as many headlines, evidence for a practical scalable use for blockchain is thin on the ground.”

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Machine Learning vs Synthetic Fraud

One of Fuel’s most popular articles last year was about the emerging $20 billion dollar ID verification-as-a-service market. The need for innovation in biometric ID verification remains important. A recent McKinsey article states that “synthetic ID fraud” is now the fastest-growing form of financial crime in the USA. 

From the article: “Synthetic IDs are created by applying for credit using a combination of real and fake, or sometimes entirely fake, information. The application is typically rejected because the credit bureau cannot match the name in its records. However, the act of applying for credit automatically creates a credit file at the bureau in the name of the synthetic ID, so the fraudster can now set up accounts in this name and begin to build credit.”

The authors propose an approach that incorporates machine learning to uncover critical third-party data to verify if the info given matches that of a real person.

How AI Can Help Humanity

The World Economic Forum has a short write-up of McKinsey Global Institute research on how AI can help humanity. The 160 social-impact use cases are framed across the 17 UN sustainable development goals – aimed at helping hundreds of millions of people.

Among the examples highlighted in the research:

The MGI research concludes: “What we found is that AI could make a powerful contribution to resolving many types of societal challenges, but it is not a silver bullet – at least not yet. While AI’s reach is broad, development bottlenecks and application risks must be overcome before the benefits can be realized on a global scale.”

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Fuel’s Reading List – The 2018 Summer Edition https://get.fuelbymckinsey.com/article/fuels-reading-list-the-2018-summer-edition/ https://get.fuelbymckinsey.com/article/fuels-reading-list-the-2018-summer-edition/#respond Fri, 17 Aug 2018 19:06:56 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ As we head into the tail end of summer in the northern hemisphere, the Fuel team wanted to share a few of the books that have inspired us over the past few months. Some are well-known in the startup world like Bad Blood (a finalist for the Financial Times and McKinsey Business Book of the Year Award). Others are instant classics […]

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As we head into the tail end of summer in the northern hemisphere, the Fuel team wanted to share a few of the books that have inspired us over the past few months. Some are well-known in the startup world like Bad Blood (a finalist for the Financial Times and McKinsey Business Book of the Year Award). Others are instant classics like John Doerr’s Measure What Matters.

So, in no particular order, they are:

Gisa Springer – UK Lead

Startup – A Novel (Doree Shafrir) – It actually came out last year, but I’ve only just gotten around to reading it. It’s a pretty acerbic take on startup culture – including its enshrined pillars of grand ideas, big money and sexism at the workplace. Set in NYC and written by an ex-BuzzFeed editor, it offers glimpses in what start-ups aspire to be, and what they, sadly, can turn into. Bonus points to the author for explaining the particularities of Twitter, Snapchat and Slack along the way. Very entertaining – and somewhat scary – read!

Ken Fenyo – Consumer Markets Lead

Shoe Dog (Phil Knight) – This autobiography covers the growth of the company from its early startup days to its launch as a public company.  This is a fun and fascinating read and a great reminder how hard it can be to create a startup.  Knight started Nike (originally Blue Ribbon Sports) to pursue the Crazy Idea that people would want a better running shoe.  For most of the first 20 years as a company, Nike lived at the edge of bankruptcy – the company was bootstrapped and plowed every penny it made back into acquiring or manufacturing more shoes to sell.   The company survived in this pre-VC world based on tenacity, passion, a great team, and not a small amount of luck.  Good reminder for startups that perseverance is perhaps the most important skill to master to build a successful company.

The Wright Brothers (David McCullough) – The Wright brothers were fantastic engineers who married creativity and a methodical attention to detail.  Starting first with kites, then moving onto gliders, until finally creating the first powered airplane.  Similar to many startups today, the Wright brothers took a test and learn approach to innovation – they were constantly tweaking their designs, testing them, and then revising every element of their plane to make it fly better and longer.   As with many great ideas (and great companies) it took Wilbur and Orville years and many, many demos to prove the value of their invention and prevent copycats from stealing their designs.“Let employees determine how they can also contribute to OKRs and adopt more frequent conversations with recognition and feedback.”

Let employees determine how they can also contribute to OKRs and adopt more frequent conversations with recognition and feedback.

Judy Wade – Global Lead

Measure What Matters (John Doerr) – In the past two weeks a startup CEO and one of the most creative minds in their profession both mentioned they were reading this book.  While many of us are now familiar with the OKR (Objective Key Results) approach, reading the book was a good reminder that there should always be two types of objectives – committed objectives where the goal is to achieve 100% of the objective, and stretch objectives, where the goal is to potentially fail as much as achieve them.

There were good examples of how companies celebrate failure, although I think companies can do even more – especially in startup environments where failure and pivoting have to be part of the DNA.   At Second Life where I worked for a time, if an engineer screwed up, they had to wear Shrek Ears for the day.  Wearing these wasn’t to make a mockery of you.  If you were wearing the Shrek Ears you got extra love (and Second Life had a love machine but that’s another story) and support. You were celebrated for taking a risk.

The second element I enjoyed was ensuring the OKR process is both top down (3-5 company goals) and bottom up, meaning team members should have some flexibility to determine how they can achieve these OKRs. One example is Google’s famous 20% free time for engineers to figure out how they can achieve Google’s objectives.

Finally, I liked the concept of moving from annual performance reviews to CFRs (Conversations with feedback and recognition).   The concept of moving to more frequent conversations where you provide both feedback and recognition is even more important in the often stress-filled, higher risk environment that is a startup.

I recommend this book for a company adopting or tinkering with their OKRs. Especially if you can include stretch objectives and support failure. Let employees determine how they can also contribute to OKRs and adopt more frequent conversations with recognition and feedback.

Richard Acton-Maher – Product Manager

Bad Blood: Secrets and Lies in a Silicon Valley Startup (John Carreyrou) – Like many of us, I was glued to the Theranos story as it developed. After the book came out, it was recommended to me by at least five friends or colleagues within weeks. Anyone who’s ever been involved in a startup has heard advice like these a million times: “be aspirational”, “fake it ‘til you make it”, “have a big vision”, “sell ahead of where your product is today”. What intrigued me by this story is that, at the headline level, what Theranos was doing sounded no worse than simply taking this common startup advice. Now I know the reality was much worse. This book is an up-close and cautionary tale of how innocent and virtuous aspirations can gradually cross the line into outright lies and deception. Reading it felt very familiar, as if I were sitting around a table sharing startup war stories with old colleagues. This was a big part of the reason I couldn’t put it down.

Jesus Bolivar – Platform Product Manager

Sapiens: A Brief History of Humankind (Yuval Noah Harari) – This book’s main argument is that homo sapiens came to dominate the world because it is the only animal that can cooperate flexibly in large numbers. The author argues that the ability of humans to cooperate in large numbers arises from its unique capacity to believe in things existing purely in the imagination, such as gods, nations, money and human rights. The book claims that all large-scale human cooperation systems – including religions, political structures, trade networks and legal institutions – owe their emergence to our distinctive cognitive capacity for fiction. Most interesting quotes:

“You could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.”

“Large numbers of strangers can cooperate successfully by believing in common myths. Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination.”

Greg Tapper – Go to Market Senior Expert

Shoe Dog (Phil Knight)  – I picked this up because Bill Gates said it was possibly his favorite autobiography. We all know how the story ends of course—Knight builds one of the greatest brands we know today and virtually 99% of us have interacted with. The bigger attraction is the storytelling itself. I especially liked the beginning, the middle, and the end. Rumor has it that Knight sat in on creative writing classes with undergrads at Stanford. They must have been great classes because the writing is philosophical, human, and authentic. There’s youthful meanderings, love, money, success and failure, world travels, Eastern philosophy, heartbreak and tragedy. This isn’t a story about building a mega-corp, though businesspeople and entrepreneurs alike will appreciate that. It’s the story of an extraordinary person who built and extraordinary company and has lived a meaningful life.

Marshall Maher – Manager, Content Marketing

High Growth Handbook (Elad Gil) – This book has been getting a lot of well-deserved buzz since it published recently – and Gil is a well-known entity having worked with some of the most successful unicorns around. It’s a series of interviews and insights with some of the legends of the startup scene. It covers the fundamentals of what founders need to know and in order of growth stage. But one thing I really liked was the idea of creating a manual for coworkers on how to deal with you. It sounds weird but read it – it makes a lot of sense and it gets very specific (“I love FYI emails but only if you put FYI in the subject, so I know it’s FYI…”). There are a ton of insights around product market fit, scaling, culture, org, etc. Short and impactful – it should be on every founder’s list.

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Checking Out Amazon Go https://get.fuelbymckinsey.com/article/checking-out-amazon-go/ https://get.fuelbymckinsey.com/article/checking-out-amazon-go/#respond Tue, 19 Jun 2018 19:08:25 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ I finally visited the Amazon Go store in Seattle last week.  I thought the ability to walk out of the store without waiting in line was a great customer experience.  The visit also re-enforced my belief that computer vision and deep learning will revolutionize how retailers operate. The Amazon Go store, located in downtown Seattle […]

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I finally visited the Amazon Go store in Seattle last week.  I thought the ability to walk out of the store without waiting in line was a great customer experience.  The visit also re-enforced my belief that computer vision and deep learning will revolutionize how retailers operate.

The Amazon Go store, located in downtown Seattle near Amazon’s headquarters, opened to the public earlier this year after several years of employee testing. The store features what Amazon calls “Just Walk Out Shopping,” which automates the checkout process so that you just walk out and Amazon bills you for what you take.  Amazon is reportedly planning on rolling the store format out to several additional markets, including San Francisco and Chicago.

Customer experience

The Amazon Go store is not merely a good experience.  It is a GREAT experience.  While the pace of adoption will depend on store format and size, it’s hard to imagine automated checkout won’t become the industry standard over the next 5-10 years.

The customer experience is both easy and fun:

  • You scan a QR code via the Amazon Go app to enter the store (the app is linked to your Amazon Prime account).
  • You grab what you want (I put some items into a reusable shopping bag and some into my pockets).
  • When you are done, you just walk out of the store (see figure 2). It feels a bit odd to check out this way at first – it almost feels like stealing.
  • Amazon then charges you for what you bought.
Figure 1: Check-in/checkout

My receipt was spot on. For example, Amazon charged me for the bagel I stuffed into my pocket but didn’t charge me for the Cheerios I picked up and eventually put back before leaving.

No one shops for the checkout experience.  Checking out is a necessary evil required to tally your purchases and pay. By automating the checkout process entirely, Amazon is able to speed up the shopping trip and reduce operating costs. While retailers have experimented with other options such as scan and bag, mobile POS, self-checkout, nothing I have seen beats the speed and convenience of Amazon Go.

Merchandising

Amazon Go is a small format convenience store (1800 square feet) with a focus on fresh prepared foods (see Figure 2). In addition to prepared food and meal kits from Amazon and local vendors, the store also carries a mix of packaged goods, refrigerated items (e.g., yogurt, milk, cheese), frozen food, and Amazon logo items.  There was a small amount of Whole Foods 365 private label products as well.

The store also sells wine, and there was an employee stationed at the wine section to check IDs.  It will be interesting to see how this process gets automated over time – perhaps using facial recognition to confirm identify and age.

The store does not carry hot food (coffee, soup, etc.) or random weight fruits or vegetables, most likely because of the difficulty of accurately tracking and charging for these items using computer vision.

Figure 2: Prepared food selection

The selection is highly curated. I imagine over time Amazon will adjust the assortment mix based on sales, customer shopping behavior, and local demographics.

Technology

There is A LOT of technology in the store, particularly in the ceiling (see figure 3).  As the image shows, there are cameras every foot or so.

Figure 3: Technology in Ceiling

Computer vision uses AI and deep learning to analyze digital images and videos.  According to their website, Amazon Go uses this technology coupled with sensors to track each person in the store, what they take off the shelf, put back, and carry out of the store.

Given the amount of hardware in the store, it’s hard to imagine Amazon Go is scalable or affordable for most retailers as it is currently constructed, or the right choice for consumers who are looking for fresh fruit and veggies.  However, it is likely that Amazon and startups targeting the space will rapidly innovate to bring down costs and increase effectiveness.

But the technology works well today.  Amazon charged me only for the things I bought.  It did not charge me for items I picked up and put back – or for free items (including a reusable shopping bag and cream cheese for my bagel).

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Interestingly, it took about 10 minutes from the time I left the store to receive my receipt (I did two trips into the store and this happened both times).  I am not sure why.  It could be as simple as a slow email server, but my guess is that either a) the technology takes several minutes to process the video from your trip to figure out what you actually bought and/or b) there are humans reviewing the results from the video analysis to ensure accuracy.

In summary, Amazon Go is a great customer experience.  And while the current technology set up might not be scalable, automated checkout is likely to become the industry standard in the coming years at a store near you.

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The next $20 billion digital market – ID verification as a service https://get.fuelbymckinsey.com/article/the-next-20-billion-digital-market-id-verification-as-a-service/ https://get.fuelbymckinsey.com/article/the-next-20-billion-digital-market-id-verification-as-a-service/#respond Mon, 04 Jun 2018 19:13:24 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The steady shift toward online transactions, and the rise of crypto currencies, are helping create the next $20 billion market.

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The steady shift toward online transactions, and the rise of crypto currencies, are helping create the next $20 billion market.

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Creating the Next Generation of Grocery Loyalty https://get.fuelbymckinsey.com/article/creating-the-next-generation-of-grocery-loyalty/ https://get.fuelbymckinsey.com/article/creating-the-next-generation-of-grocery-loyalty/#respond Wed, 04 Apr 2018 19:19:07 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The next generation of loyalty programs are starting not in the grocery aisle, but in Silicon Valley. While taking advantage of new technology comes naturally to direct-to-consumer e-commerce startups, brick and mortar retailers are still catching up. Best-in-class loyalty programs go beyond static shopper and punch card loyalty programs. They leverage digital technology to keep […]

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The next generation of loyalty programs are starting not in the grocery aisle, but in Silicon Valley. While taking advantage of new technology comes naturally to direct-to-consumer e-commerce startups, brick and mortar retailers are still catching up. Best-in-class loyalty programs go beyond static shopper and punch card loyalty programs. They leverage digital technology to keep customers coming back.  And this increasingly means working with retail tech startups creating leading edge loyalty, personalization, and marketing tools.

I moderated a panel at Shoptalk on Next Generation Loyalty with Marcus Pfruender from Metro AG, a German retail and wholesale group with 760 wholesale stores in 25 countries; Tarang Sethia from 7-Eleven; and Cheryl Williams from Wakefern, the largest retailer-owned cooperative in the U.S. which supports 344 Shoprite and other supermarkets.  We discussed how these retailers are taking advantage of digital and other new technologies to increase long-term loyalty.  Here are some of the key takeaways:

More than just money

The best loyalty programs need to deliver value beyond monetary rewards.  McKinsey recently surveyed ~10,000 consumers across 9 industries on the perception and influence of loyalty programs.  Unsurprisingly, customers care first about monetary rewards within a loyalty program.  However, it is nearly as important for consumers to feel special and recognized, for example with surprise and delight offers.

Digital technologies provide a vastly expanded set of options to create more relevant, engaging, and easier-to-use loyalty programs.  Here are some examples of how Metro, 7-Eleven, and Wakefern have transformed their programs from print to digital:

  • Expanded reward program options. 7-Eleven has moved from a paper-based punch card program for coffee and a few other items (e.g., buy 6 cups of coffee and get 1 free) to a mobile points-based program that rewards shoppers for everything they buy.  The program also provides shoppers with bonus point offers (e.g., buy 2 Cokes and get 500 bonus points) that provide value without discounting.
  • Digital coupons. Wakefern was an early adopter of digital coupons; in total Wakefern has delivered over 1 billion digital coupons since it launched its program in 2011.  Digital couponing also offers a simple way to deliver surprise and delight offers.
  • New ways to communicate. In China, Metro delivers its entire loyalty program, including registration and all communications, via WeChat, the popular messaging and social media app.  Metro has also incorporated real-time communication and heavy gamification to better appeal to its Chinese customers.
  • Affinity clubs. 7-Eleven offers frequency clubs customized to what customers like – for example Diet Coke vs. Red Bull.
  • 3rd party partnerships. Retailers can extend their loyalty programs by partnering with 3rd  parties. Most obviously, retailers should work with CPGs to create and fund digital coupons and other promotions.  APIs also make it much easier to work with a broader range of partners.
  • AR and gamification. Retailers can use AR and gamification to create richer and more fun shopping experiences.  7-Eleven for example is using AR to create a Pokemon Go type game to promote the upcoming Dead Pool movie.

More than just the loyalty program

It’s important to set a broad vision for building loyalty.  7-Eleven’s vision, for example, is to make every visit more valuable.  This broad vision provides a platform for not only its loyalty program but for other innovations.  Some options we discussed during the session:

  • Incorporate a broader set of capabilities. 7-Eleven is adding multiple new tools to its digital experience to engage shoppers beyond its loyalty program, including a digital wallet, the ability for gas customers to pay at the pump with a phone scan, money transfers, integrated e-commerce delivery, and in-store pickup.
  • Leverage new technology to improve the overall customer experience. Retailers increasingly see out-of-stocks as a loyalty issue: shoppers get annoyed when the item they want is not on the shelf, reducing the likelihood they will come back next time.  To reduce out-of-stocks, Wakefern is experimenting with computer vision technology mounted on shopping carts to identify areas of out-of-stock and prompt store associates to replenish shelves.  Wakefern is also developing AI solutions to improve forecasting and replenishment.  Lastly, no article on loyalty or retail would be complete without mentioning Amazon Go, which is creating a checkout-free shopping experience for the company’s Prime loyalty program members.
  • Deliver value-added services. Metro’s loyalty program is focused on its wholesale customers, including retailers and restaurant owners.  In addition to cash back, Metro provides loyalty program members with access to exclusive professional content and advice, relevant insurance services, and even recycling options for used cooking fat.

Personalize, personalize, personalize

Personalization is the core of a modern loyalty program.  Although retailers collect vast troves of data on consumer behavior, they often struggle to take advantage of it.  Retailers need to invest in the technology and talent to make personalization come alive.  This means investing heavily in analytics and also recruiting the right talent and partners to bring in new skills.

To stay ahead of the curve, Metro, 7-Eleven and Wakefern are testing artificial intelligence to automate and enhance their personalization programs.  By identifying hidden patterns in consumer behavior, AI can allow retailers to more tightly align incentives and consumer preferences.  For example, most offers today are personalized based on what you already buy.  AI, however, can uncover latent demand patterns – the items consumers don’t buy today but might like to buy at the right time and price.

 “Always be in beta”

Ok, I stole this quote from the other panel I moderated on startup food and beverage companies.  But I think it applies even more to loyalty.

Retailer loyalty programs often launch with great fanfare.  There are months (and sometimes years) of careful loyalty program design.  There are launch parties in-store.  There is a slew of online and offline marketing.  There are training sessions for store employees.  That all lasts about two weeks.  After that, most loyalty programs sit unchanged for years. Eventually even the best-designed programs risk becoming little more than background noise, undermining their value to create customer engagement and incremental sales.

Instead, marketers need to continuously enhance and upgrade loyalty programs to keep them fresh.  7-Eleven is in a period of rapid innovation, rolling out a new mobile rewards program and testing new features such as chatbots, scan and pay, on-demand ordering for delivery or in-store pickup.  Wakefern has also continued to evolve its loyalty program, first launched in 1989, by adding digital coupons, digital wallet integration, smart kiosks in store and more.  Wakefern also continues to test new concepts such as scan and bag and AI to better personalize offers.  Metro has also remade its loyalty program from paper-based to digital.

Get In Touch

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Reach Out

How can established retailers build the capabilities and skills needed to execute these best practices? One critical strategy is to tap startup innovation to deliver the next generation of shopping experiences and “create value beyond the check.” This doesn’t necessarily mean creating a corporate venture capital fund or making a lot of equity investments. While such tools can be a part of a partnership approach, it is more important to find and scale technology that will drive the next phase of growth and figure out how best to incorporate that technology.  At a minimum, established retailers need to:

  • Create a strategic roadmap for external startup innovation that identifies critical opportunities where startups can accelerate growth.
  • Develop a process for identifying and evaluating startups for partnering. Retailers need to establish a systematic process, not an ad hoc effort.  While corporate VCs or Silicon Valley offices can surface opportunities, startup innovation ultimately needs to be owned by the operating executives responsible for delivering results.
  • Create game plans for piloting and scaling startup partnerships. Retailers need to ensure they move at the right speed.  Startup innovation can’t move at the typical 3-5-year pace of internal IT investments.  At the same time, retailers need to tailor the pilot process to the stage and resources of the startup.  It is better to rapidly test and learn in a limited number of stores than to go broad too quickly only to have startup run into cash flow, manufacturing, or supply chain problems.

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Israeli Innovation Visits: Connecting to a Powerhouse of Innovation https://get.fuelbymckinsey.com/article/israeli-innovation-visits-connecting-to-a-powerhouse-of-innovation/ https://get.fuelbymckinsey.com/article/israeli-innovation-visits-connecting-to-a-powerhouse-of-innovation/#respond Thu, 02 Mar 2017 20:46:50 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ McKinsey’s Fast Growth practice has been helping multinational corporations boost their innovative capabilities by opening the door to this vibrant ecosystem and leading them on Israel Innovation Visits. A concentrated hub of innovation Israel has been consistently recognized as one of the highest performing innovation centers in the world. Israel has the highest VC investment […]

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McKinsey’s Fast Growth practice has been helping multinational corporations boost their innovative capabilities by opening the door to this vibrant ecosystem and leading them on Israel Innovation Visits.

A concentrated hub of innovation

Israel has been consistently recognized as one of the highest performing innovation centers in the world. Israel has the highest VC investment rate per capita in the world [1] and is the third largest source of foreign companies listed on the NASDAQ exchange [2]. Five billion dollars of venture investment flow to Israeli companies annually [3]. Israel is ranked the 2ndmost innovation intensive economy by the World Economic Forum [4], has the highest rate of expenditure on R&D in the OECD [5], and has the most scientists and engineers per 10,000 workers in the world (135 in Israel, compared to 85 in the United States) [6].

Some of the leading technologies used globally have been developed in Israel: the disk on key, internet firewall protection, chat and voice-over-IP technologies, life changing medical devices, drip irrigation technologies, navigation apps, sensor technologies applied in car safety devices, and many more.

Israeli innovation crosses sectors such as cybersecurity, IoT, automotive, semi-conductors, medical devices, and agricultural technologies.

Success Factors

Israel’s success is the result of a combination of factors, including its unique history and a strong entrepreneurial culture.  Israeli companies also enjoy access to capital, governmental support, and a highly educated workforce—fostered in part by mandatory military service, which facilitates the transfer of knowledge and ingenuity to the civilian market and inculcates a culture of success with limited resources.  One example of the contribution of the military sector to the civilian tech ecosystem can be found in the cybersecurity field: tech transfer from the defense establishment has made Israel a world leader in the development of cybersecurity technologies. And this expertise has attracted significant private investment.  To date, 20% of global investments in cybersecurity are in Israel-based companies [7].

Multinational presence

Over the years, multinational companies have recognized the innovative culture and potential of the Israeli market, and set up a presence in Israel, either by acquiring local startups or by establishing R&D centers. A partial list of multinationals corporations that have established a significant presence in Israel includes:   Microsoft, Motorola, Google, Apple (three R&D centers), Facebook, Berkshire-Hathaway, Intel, HP, Siemens, GE, IBM, Philips, Lucent, AOL, Cisco, Applied Materials, IBM, J&J, EMC, and General Motors.

Israel Innovation Visits

Bringing these trends together, McKinsey’s Fast Growth Practice has launched an initiative to connect innovative incumbents with the best of the Israeli tech sector.  The “Israeli Innovation Visits” connect our deep understanding of corporations and their key innovation pain points with our expertise in and familiarity with the Israeli startup ecosystem. The innovation visits are an integral part of a corporation’s digital journey in which the client identifies the core issues it wishes to address, travels to Israel for a focused visit in which key executives meet the innovators who would be most relevant to their needs, structure, and organizational DNA.

On a typical 2-3 day visit, we connect our traditional clients with the leading players in the Israeli ecosystem including startups, VCs, corporate innovation centers, academic centers, and others. The Israeli Innovation Visits have been helping leading multinationals design their approach for engaging with the Israeli innovation ecosystem.

As a result of their visits, numerous clients have taken steps to more closely integrate their own innovation practices with those in Israel.  Among other outcomes, the innovation visits have led to:

  • Strategic partnerships between multinational corporations and Israeli startups to develop and roll out new technologies and products;
  • Multinationals setting up local scouting teams in Israel;
  • Corporate investment in Israeli venture funds; and
  • Public sectors actors adopting Israeli practices to create their own local innovation hubs.

Get In Touch

Let us know what you’re interested in and we’ll be in touch.

Reach Out

One of our recent clients, a VP of a multinational bank had this to say about his visit:

“I wanted to thank you for putting a fantastic agenda together which was flawlessly executed every step of the way.   Your choice of firms, venues, serial entrepreneurs, and themes was outstanding.   We learned so much about the fintech and cyber ecosystem in Israel, and what makes it so special.  Thank you also for arranging a few opportunities to learn more about the country, its people and the history.”

[1] EY Global Venture Capital Trends 2015, IVC,  National Venture Capital Association, World Bank (country population data); National Venture Capital Association, http://nvca.org/pressreleases/58-8-billion-in-venture-capital-invested-across-u-s-in-2015-according-to-the-moneytree-report-2; EY Report, http://www.ey.com/Publication/vwLUAssets/ey-global-venture-capital-trends-2015/$FILE/ey-global-venture-capital-trends-2015.pdf

[2] Nasdaq.com, February 2016

[3] IVC, http://www.ivc-online.com/Research-Center/IVC-Publications/IVC-Surveys/High-Tech-Capital-Raising

[4] Lobal Competitiveness Report 2016-2017, http://www.nmi.is/media/338436/the_global_competitiveness_report_2016-2017.pdf

[5] OECD Science, Technology and Industry Scoreboard 2015, p.98, http://www.keepeek.com/Digital-Asset-Management/oecd/science-and-technology/oecd-science-technology-and-industry-scoreboard-2015_sti_scoreboard-2015-en#page98

[6] The Global Prosperity Index, 2011, http://martinprosperity.org/media/GCI%20Report%20Sep%202011.pdf

[7] Israel’s Cybersecurity Industry in 2016, Startup Nation Central, February 2017

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