We all know Wal-Mart (NYSE:WMT) dominates retail. The company racks up more sales than then next four largest retailers combined. Everybody also knows Wal-Mart has a problem in e-commerce, and that problem is named Amazon (NASDAQ:AMZN). Actually, it's two problems, the first of which is an anachronistic and manifestly unfair tax regime which continues to allow many online buyers to avoid paying sales tax. This article will examine the second problem, which is customer tracking and retention, and how Wal-Mart and other retailers can solve it, possibly with the help of InvenSense (NYSE:INVN).
Dwelling on The Situation
Despite the fact that Amazon's e-commerce sales are almost 6x Wal-Mart's, the latter's total retail sales are almost 7x that of Amazon. In fact, Amazon doesn't even make the top 10, ranking 12th on global the retail sales list. Even though Amazon tops e-commerce sales, 18 of the other top 25 companies are traditional brick-and-mortar stores. It would be far more accurate to say Amazon is dominating e-commerce than to say it is dominating retail. The problem, however, is in changing shopper patterns as exemplified by relative growth rates. According to Deutsche Bank (NYSE:DB), Amazon recently surpassed Wal-Mart in consumer electronics sales, and represents a whopping 90% of the growth in that segment.
As technology plays a progressively bigger role in our lives, that affects shopping decisions. Someone may be happy to stop by the local Wal-Mart when they know exactly what they want, but when a shopper wants to research these days, she does so online. In the process, e-commerce merchants learn not only what you bought, but what else you looked at without buying and how long you lingered over each item. This is known as dwell time, and it allows retailers to market and even stock far more effectively. Not having good dwell time information puts brick-and-mortar retailers at a severe disadvantage.
Attempts to gather such information at physical stores fall into three general categories:
- Low Tech: Retailers employee "greeters" at each store entrance, with clickers that do simple head counts. Deployment cost scales by number of entrances to the stores.
- Wireless Beacons: ShopperTrak would be an example of this approach, which tracks mobile phone locations by triangulating connections. This has the advantage of potentially tracking unique customers. Deployment cost scales linearly with physical store volume. By contrast, InvenSense's Coursa Retail requires just one Bluetooth beacon at each entrance.
- Specialized Cameras: These are a more accurate means of tracking customer location, but lack the uniqueness factor. (Facial recognition software has come a long way, but is not deployed for these sorts of purposes, as far as I know.) Prodco would be an example of this sort of operation, and deployment cost should also scale by store area (as opposed to volume).
A New Way - Thinking Inside the Big Box
InvenSense, which I've written about often in the past, is offering a new way to collect dwell-time information, called Coursa Retail. Integrating InvenSense's indoor navigation software with stocking systems could also eventually provide step-by-step directions to products, making a retailer's smartphone app sticky with customers. The benefits of that go well beyond no more having to ask "Where can I find...?" A branded application that shoppers actually use is the holy grail of modern retailing, as it provides additional promotional opportunities, both in store and out. In 2013, 80-90% of retail apps were used once and then deleted. Some progress has been made since then, but a December 2015 survey, limited only to those who already shop on their phones, says only 43% shoppers have kept a merchant app installed for more than a year. Thus, I think providing an augmented reality-style app that can actually enhance the in-store experience beyond what would be available on web browser will be key for Big Box chains to crack this nut.
Course Retail will undoubtedly be cheaper than the latter two dwell time options above, because unlike them, it integrates directly into a retailer's app with only one Bluetooth beacon per store entrance. In fact, my attempts to research the deployment costs of the technological competitors gave me the impression that they are already on the way out. Coursa Retail is also better than the low-tech approach in almost every way, as it gathers more than simple head counts, so it could potentially charge much more than it would cost to deploy greeters.
Quantifying the Opportunity for InvenSense
Nonetheless, given that I am unable to quantify high-end pricing for the other solutions, I'll simply do some calculations on the low-tech approach in order to take an educated guess at the minimum TAM (total addressable market) for Coursa Retail using stats from Wal-Mart's U.S. operations. That example is chosen because Wal-Mart not only dominates Big Box retail, it also dominates IT spending and innovation in that industry. Sadly, to my mind, the U.S. still dominates retail as well.
Wal-Mart pays its U.S. employees a minimum of $10 an hour. Minimum wages elsewhere in the U.S. may be cheaper, but I think $10 is a good figure when excluding the cost of benefits, etc. Wal-Mart has over 5000 locations in the U.S. and more than 11.5K worldwide, but I'll only count the U.S. super-centers, of which there are 3,465. My local store is open 6 am to 12 am 7 days a week, but let's say Wal-Mart were only to employ a single greeter for the busiest 12 hours of each day. The very conservative annual cost for employing greeters would then be: 3465 x $10 x 365 x 12 = $151,767,000.
Wal-Mart's percentage of overall retail is in the low double digits. However, its locations are probably a much larger percentage of Coursa Retail's target market. If we generously estimate Wal-Mart as 40% of the Big Box retail chain opportunity, that would mean the conservatively priced annual revenue opportunity for Coursa Retail in the U.S. alone is approximately equal to all of InvenSense sales for all of 2015. The impact to the bottom line would be far higher, as the product should have much lower costs, which do NOT scale linearly like hardware does.
Wal-Mart would, of course, be the acid test for Coursa Retail. It was chosen as an example because the numbers also happen to approximate the opportunity represented by the entire rest of the industry. All of these calculations are potentially material to InvenSense, and they have been completely overlooked by other analysts, who have focused on IoT and market sensor diversification. Investors reading such analysis should consider the execution risks and time involved with such projections. None of these calculations should be construed to represent my overall outlook for INVN stock, which has much more pressing issues, beginning with the Apple (NASDAQ:AAPL) report on Tuesday evening. InvenSense follows with its own report two nights later; I would be very happy to hear news of smaller deployments first, thereby proving the concept and enabling better terms with larger organizations later on. Regardless of whether or not it provides a Coursa update in this report, analysts who still regard InvenSense primarily as a motion sensor company are sorely lagging behind. The company's non-legacy opportunities are still speculative, but clearly quite substantial.
Summary - The Future of Retail
This article is meant to offer thoughts on the future of retail and how it will eventually progress beyond its current, awkward state. Just as Pokemon GO has created a craze by introducing a rudimentary version of augmented reality to gamers, traditional retailers will start to see a breakout when they can successfully begin to merge the online and in-store shopping experiences. Wal-Mart has long spent over $10 billion annually on IT, and has in-house development that can be expected to lead the way, with or without help from InvenSense. Wal-Mart reports again in the mid-August. Look for the IT spending trend to increase even as media marketing starts to decline.
Other outfits, like Target (NYSE:TGT), Home Depot (NYSE:HD) and CostCo (NASDAQ:COST), would probably need the help, though. Each of them will want to customize their approach to their specialties, offering customers better service and unique functionality in the process. For instance, in-store location might enable an app to offer advice or summon a representative, based on the section you are in. I think the base value proposition for doing this via the sensor-assisted applications approach is clearly irresistible. The adoption of this approach will eventually harm Amazon's retail operations, which is why Bezos is diversifying as fast as possible. In the meantime, the investment prospects for AMZN are still largely dependent on when the U.S. government can regain some semblance of functionality, particularly with regard to a long overdue remake of the tax code. Competitiveness depends on evolution, and that applies to societies as well as corporations.
Disclosure: I am/we are long INVN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.