2023 Retail Predictions
Venture capitalists are, in some sense, professional predictors. We meet startups, and we predict that some will do well and some won’t. How well we are able to make these predictions is a large factor in our fund performance, as we put the capital of our limited partners to work, betting that our predictions are correct.
For that reason, prediction is a very important skill for a VC like me, and here I want to flex my prediction muscles and strengthen them. Ross already posted his predictions for the tech and VC world, and you can read them here. Below, I’ve posted my predictions for the world of retail and commerce. Each prediction is formatted as a statement, designed to be definitively judged to be correct or incorrect on January 1, 2024, followed by my confidence in this prediction.
The confidence level is important and was the most difficult part of this exercise for me. Not every one of these predictions will be correct; if they are, then I have done something wrong. Instead, I should be calibrating my confidence correctly. In other words, if I make ten predictions with 90% confidence, I should get one of those incorrect. If I make ten predictions with a 70% confidence level, I should get three of them incorrect. Prediction is hard, and I fully expect that many of my predictions will turn out wrong. With that in mind, here are my predictions for 2023.
Amazon is the retailer with the largest market cap: 95%
Currently, Amazon has a market cap of just under $1T, while the next largest competitor, Walmart, is less than half of its size. Still, this prediction isn’t the sure thing that it seems. Amazon has already lost about half of its value since its peak in mid- 2021. And if the rumors of a recession this year prove true, then ultra-low-cost Walmart could continue to gain ground on its higher-value competitor. Second, much of Amazon’s revenue comes from non-retail channels like AWS and Prime - they might decide to spin out their separate businesses, a tactic to allow them to focus and cut inefficiencies. If that happened, the market cap of Amazon, the retailer, would likely take a nosedive. Still, I feel confident that these are unlikely scenarios, and Amazon will still be on top next January.
2. Walmart Commerce Technologies is < .5% of revenue for Walmart: 75%
This may be one of my more controversial predictions: I don’t think Walmart Commerce Technologies (WCT) is going to do well. If you aren’t familiar, Walmart Commerce Technologies is Walmart packaging up its retail technology and selling it as a platform for SMB retailers. It’s part of Walmart’s push to diversify its revenue streams. They’ve rolled out Walmart +, a similar offering to Amazon Prime, and now WCT is a foray into retail technology.
The problem, in my opinion, is two-fold: first, Walmart is just not a technology company. Their core competencies are buying and selling goods - anything that doesn’t directly help them perform that task is doomed to failure. To be clear, Walmart has excellent in-house technology, but that technology has been developed to help Walmart perform its core mission better. But taking that core technology, adapting it to be useful for SMBs, and selling it to businesses is not something that Walmart has proven it can do. Silicon Road invests in commerce tech startups. We know exactly how difficult it is to build a product and sell it to small retailers, because we watch our portfolio companies do it every day. If you aren’t putting all your energy into it, it won’t work. This doesn’t hold for many tech companies, including Amazon - but I don’t think Walmart fits into that category.
Second, I don’t think SMBs trust the Walmart brand. Walmart is notorious for squashing the Main Street mom-and-pop retailers that they are now trying to court as customers. If I was a retailer who had survived the Walmart down the street stealing half of my customers (“There’s a Walmart within 10 miles of 90% of the US population,” brags Walmart on their Q3 earnings report), then I sure as heck don’t want to use their platform to run my business.
Also, Walmart has such high revenues, I have some cushion for this prediction. According to a quick Google, Walmart earned $573 billion in FY2022, so they would have to earn more than $2.37B from WCT this year to falsify this prediction.
3. E-Commerce sales stay below 16% of the total: 60%
Looking at the graph linked above, E-Commerce as a percentage of total retail sales grew steadily about 1% per year from 2014 to 2019, to about 11%. Then Covid happened, and it jumped all the way to 16.4%. As of Q3 2022, the last piece of data on the graph, it’s back down to 14.8%. If we naively continued the pre-Covid growth rate in 2023, then we’d end up at 16.05% after Q4 2023.
I don’t think this will quite happen. I think two factors will play into this - one, I think people will continue to want to shop in person after Covid. Second, E-commerce has the thorny problem of last-mile delivery to contend with, making it more expensive for either the consumer or the retailer. If we have a slight pullback in the economy sometime this year, then people may be willing to spend the time to drive to a store rather than pay extra. However, we have been seeing many creative BOPIS startups, reducing or eliminating this cost, and those may grow to pick up the slack. Overall, I am not very confident about this one.
Stripe does not go public this year - 70%
Stripe is the most valuable private tech startup in the US and the current leader in the online payments technology space, and rumors of a Stripe IPO have been swirling for years. Now, the WSJ reports that they have a one-year time limit to “decide if they’re going to go public.” They reportedly have employees with substantial stock options that expire this year - if Stripe does nothing, these options expire worthless. They have two options: go public (likely via direct listing), or do a secondary offering on the private market where an outside investor buys employees out.
We’ve seen an absolutely brutal IPO market in the past year. If you invested in the Renaissance IPO ETF (which invests in newly public companies for three years) one year ago, then today you’re down 37%, vs. down 6% on the S&P 500. In addition, going public brings onerous disclosure requirements that private companies don’t have to worry about.
My guess is that despite the hype, Stripe will choose to avoid the burden and volatility of going public and instead do a secondary offering.
2. More than $100B worth of funds are sent through FedNow in total: 80%
FedNow is the instant payments system being rolled out by the Fed this year, with the pilot program set to kick off this summer. Similar to services like Zelle, FedNow promises near-instant settlement, with the recipient of the funds able to access the money within minutes. This could have a huge impact on the payment landscape.
Today, the main issue with Zelle is that people don’t trust it. Fraud and scams are rampant, and banks typically provide victims with no recourse. This is one of the challenges with instant settlement - it’s much easier to reverse a payment when the funds haven’t actually moved yet, as in ACH payments. Still, according to their website (which predictably has a different narrative around the fraud), $155B in funds was sent through Zelle in Q2 2022.
The federal government has a good track record of protecting consumers. I believe FedNow will have more built-in protections and better restitution for victims, as well as the authority of the federal government. If they can convince people to trust this new payment rail, they have a chance to disrupt not only Zelle, but also the trillions in domestic wire transfers and additional trillions in credit card and debit card payments as well. The question is - can they build trust quickly enough to get people to switch in the second half of this year? Payments are notoriously complex and sticky - FedNow will have to be a much better solution than what exists today to compel people to switch. I believe that they can pull it off.
3. No top 10 US retailer begins allowing crypto as a payment method: 90%
The top ten retailers by US sales today, according to NRF, are:
3 Costco Wholesale
4 The Home Depot
5 The Kroger Co.
6 Walgreens Boots Alliance
8 CVS Health Corporation
9 Lowe's Companies
10 Albertsons Companies
As far as I know, none of them currently accept cryptocurrency as payment, nor have any announced plans to do so. If cryptocurrency is ever going to move past its current status as a speculative investment and function as an actual currency, being able to make purchases with crypto at top retailers will be essential. But after the crash in the crypto markets last year, capped by the spectacular collapse of FTX, many top brands are distancing themselves from the crypto world. Tesla, for example, put a bunch of bitcoin on its balance sheet in 2021, but quickly divested it as the price plummeted in 2022.
Given the volatility of the crypto markets in 2022, I just don’t see crypto being a priority at top retailers this year, even for techy retailers like Amazon. The currency risk as prices fluctuate, as well as the reputational risk of being associated with scams and fraud, is too great.
Ratio of inventory to sales as measured by the Census Bureau increases from 1.35 to 1.4: 75%
The story of the past three years has been supply-chains failing as demand outpaces supply. This manifested itself through extensive shortages of goods in store, longer lead times for shipments and materials, and quickly rising prices. The U.S. Census Bureau has a great metric they measure - the ratio of inventory to sales. A 1.0 would correspond to businesses selling every single piece of inventory. In November 2021, this metric was at 1.26, lower than at any time in the last 10 years.
Then, the pandemic stimulus dried up, the Fed started hiking interest rates, and inflation started eating into household savings. Consumer demand began easing, and supply chains began recovering. The graph above reflects this, with the inventory/sales ratio creeping up to 1.35 as of November 2022.
I predict that these trends will continue in 2023 - interest rates will continue rising, we may see a mild recession, and consumer demand will continue to fall. As a result, I think that businesses will continue to grow their excess inventory, as sales continue falling. Of course, retailers might make the same prediction I’m making, and adjust their manufacturing down to get ahead of this - in that case, the inventory/sales ratio may not change very much at all. But I don’t think they’ll be able to react fast enough, and we’re going to see an increase in overstock in retail.
2. Microsoft invests at least $5M in or acquires a self-driving trucking startup: 90%
I think Microsoft is going to enter the self-driving space, based on the fact that Google, and to a lesser extent Apple, are already in this space. It seemed inevitable that Microsoft tried something in autonomous driving, and trucking could be a good place to start given Microsoft’s skill at enterprise sales. Microsoft apparently had a similar idea; this article from a couple of weeks ago says Microsoft is considering investing $10M into self-driving trucking startup Gatik.
Of course, “considering” is not the same as a done deal. And this actually contradicts a blog post from 2019, where Microsoft says their strategy for the autonomous vehicle space is to support the infrastructure via Azure and other existing products, and not direct investments. But I think the FOMO will be too strong, and Microsoft will pull the trigger - if not with Gatik, then some other startup.
3. I am unable to order an item from Amazon or Walmart that will be delivered by drone to my home in midtown Atlanta: 95%
According to McKinsey, 2000 commercial drone deliveries happened every day worldwide in 2022. Drones are no longer a science project - there are real commercial applications. But it’s important to think about the use cases where drones make sense.
On average, drones are still more expensive than just delivering via a car or truck. Most of that cost is labor - FAA regulations mean that there has to be a trained drone operator monitoring the drone at all times. So drones make a lot of sense for applications where traditional vehicle delivery is difficult. For example, in rural areas with terrible roads, drones could be cheaper than trying to navigate with a car. For delicate payloads, like temperature sensitive pharmaceuticals, drones may actually be safer than entrusting a human driver.
But I live in midtown Atlanta, which is dense and urban. It is not difficult to deliver packages to my building via car - in fact, it is likely very cost effective, since there is a high probability there are several deliveries a driver can make nearby. Drones, on the other hand, will have a difficult time navigating the buildings and construction of the city. Atlanta was not built with drones in mind. While I would love to live in the sci-fi future, I can’t envision a world where drones make sense for my situation.
Those are my predictions for 2023. As I said, I know that some of these will be wrong; but I believe it’s important to be able to put my beliefs to the test. Silicon Road is aiming to be the premier fund for commerce, and getting better at predicting the trends in commerce will only make me a better investor.