A lot can happen in 25 years — like e-commerce evolving from a cutting-edge concept to one of the most important channels in retail.
In this episode of Industry Focus: Consumer Goods, Vincent Shen and senior Motley Fool contributor Asit Sharma explore some of the exciting trends that forward-looking companies are investing in today — trends that could give us a clue into how the consumer goods space will look in 25 years from now.
A full transcript follows the video.
This video was recorded on June 26, 2018.
Vincent Shen:¬†Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day.¬†I’m your host, Vincent Shen. We’re in the Fool HQ¬†studio today prerecording the show for¬†Tuesday, June 26th.¬†
As¬†you may have heard, we are in the middle of our latest theme week¬†as we celebrate the 25th anniversary of The Motley Fool. The¬†Gardner brothers founded the company in 1993 with an investment newsletter¬†distributed to, as¬†Tom and David describe it, a¬†rather small group of friends and family. Now, the Fool is¬†reaching millions of investors and empowering them with¬†the tools they need to take control of their financial future.¬†
To¬†celebrate the occasion,¬†I’d like to take this episode as part of the theme week and talk about investing in the context of companies and innovations that inspire. We’ve covered¬†upcoming trends before, but that’s typically been limited to the next year or maybe the next several years. What about 25 years from now? There are no doubt companies right now thinking about or even implementing technologies and¬†best practices that will be the standard in the year 2043.
Joining me for this episode is senior Motley Fool contributor, Asit Sharma, as usual¬†connecting with the studio on Skype. Hey, Asit! Hope all is well.
Asit Sharma:¬†Everything’s well. I find it very fun that we’re doing a show on the future, but speaking to you, listeners, from the past.
Shen:¬†[laughs]¬†Exactly, yes. Very¬†good point. Before we start digging in here, I’ll start by grounding the discussion¬†a little bit. Keep in mind that 25 years ago, only one in five¬†people had personal computers in their home. Traditional¬†retail establishments like shopping malls were still enjoying their heyday. The concept of e-commerce was bleeding edge, and the term itself had not even been coined yet, depending on who you ask.
Given¬†how much can and has changed in a quarter of a century,¬†I’ll confess that what started as a somewhat orderly plan and outline for this show¬†fell apart as Asit and I kept stumbling on these pretty cool private start-ups and large companies, too, that are¬†pushing the limit on both how businesses can operate more efficiently and also make the consumer experience that much better.¬†
Let’s start with¬†one of your picks, Asit. A company that you had mentioned to me was The Trade Desk, ticker TTD. Coincidentally, shares of Trade Desk have already doubled in 2018. Clearly there’s quite a bit of interest from the market right now in this company.¬†I’m curious what’s going on with Trade Desk, and¬†what you think they’re doing that points to the next 25 years.
Sharma:¬†So¬†many of the companies that we talk about on this show, Vince, are¬†trying to reach consumers. It’s a¬†consumer goods show. Trade Desk is a¬†technology company that really levels the ad-buying, the marketing space, for traditional consumer goods companies.¬†In the old way of doing things, you would go to an advertising agency, if you were a consumer goods company — and they still do — and¬†you have a budget, you write a check, and¬†the advertising agency will take care of all the various media spends.¬†
What Trade Desk¬†enables companies to do is to use their budgets for programmatic ad-buying — that’s ad-buying that’s partially run by algorithms. It’s ad-buying across media that’s very efficient, targeted, using data to hit your consumers, your target market, via a number of channels. It’s not just online, but TV,¬†audio — that’s radio — even traditional advertising types.¬†
Just to kick off the conversation,¬†we should think about companies that understand how we’ll be¬†consuming our different media. This is a very interesting company in the fact that it’s so targeted and uses data science¬†to help make each dollar more efficient.
That’s¬†not to say that the old way of marketing is going away. We¬†have the World Cup going on right now. The¬†big companies which sponsor major events will always have this traditional route of advertising, which is a mass approach for everyone. That’s how you build brands. But from getting to just building brands to converting customers in¬†whatever the discipline is, companies like The Trade Desk will make¬†other companies —¬†that is, those who sell the goods in the marketplace —¬†a lot more efficient.
Shen:¬†The¬†thing that really surprised me when I was looking into this company, in¬†terms of ad spending, digital ad spending has grown so quickly, from less than $5 billion in the late 90s to¬†over $200 billion last year. Now, it’s¬†surpassing some of the traditional mediums like television. Some of the tech that Trade Desk¬†implements, the algorithms, and this auction-based model, it allows them to handle an¬†incredible number of ad spots.¬†I think the number that I saw was 60 million per minute, or per second, even. It’s billions and billions of these spots per day. That’s not something that a traditional ad buyer is going to be able to do,¬†it’s just too much information, there’s¬†too much out there. Having this programmatic model is¬†definitely really interesting. I think it’s¬†definitely something that’s more sustainable and reflects,¬†more likely, what we’re going to see going forward in the future.
Related to that,¬†on the data side, you put New Oriental Education on our radar. This was a new name for my watchlist. The¬†company trades under ticker EDU,¬†and it offers test preparation and tutoring resources to students in China.¬†Revenue was up to $2.2 billion for the trailing 12-month period. What’s the picture for this one?
Sharma:¬†New Oriental is¬†a company that we’ve actually mentioned in passing on the show. We were going to include it on a show¬†in which we talked about some other educational companies, 2U¬†and Chegg¬†— this was about a year ago. — we¬†just didn’t have time.
It’s an interesting company. This is China’s¬†largest private provider of educational services. Looking¬†at that huge population in China, the middle class — you hear this analogy all the time, it’s as big as the United States and growing — there is a stampede. Because of that population being so competitive, the thing about being a student, the odds of you placing in a national exam against¬†thousands of other students, those probabilities are a lot lower than countries with smaller populations. There’s a massive need for¬†companies which only tutor or provide secondary¬†services to students. That’s what New Oriental specializes in.¬†
I really like their forward use of technology in that they have¬†applied artificial intelligence to tutoring. One example is an app¬†that they have called RealSkill.¬†RealSkill helps Chinese students learn English. Such a valuable skill on the international stage. If you’re going on to further education, you’re going to get a PhD, or perhaps even be in trade,¬†any type of global commerce that you might participate in in the Chinese workforce, you’ll need to speak English. That’s a sought-after skill¬†on the Chinese mainland. This app,¬†RealSkill, helps Chinese students learn English by looking at essays that the students write. You write an essay as a student, you¬†take a photograph and upload it to the server. The server instantly grades that¬†based on artificial intelligence and gives you feedback. It’s¬†said to be 93% accurate —¬†in other words, 93% accurate in terms of how an¬†accomplished English teacher might grade.¬†I’m not so sure of that as yet, but I admire the technology.
That brings me to one more related company. We’ve talked about Chegg on this show before. They are a company that started as a rental textbook company for students and now has moved into the tutoring business. Chegg just acquired a German company called Cogeon in¬†October of last year for about $15 million.¬†Cogeon, similar to New Oriental, has an app called MATH 42. If¬†you’re a high-school investor listening to us,¬†maybe you want to take a look at this app before school starts up in the fall¬†again. It’s pretty interesting.¬†
Similar to this other app, RealSkill, MATH 42¬†lets you solve problems, and then it will take you step-by-step through¬†what you did wrong. It also uses artificial intelligence to do assessment and adaptive learning. Once the¬†program gets a sense of what your weaknesses are in a particular math discipline, it can highlight what you need to work on and cut down your workload,¬†make you more efficient, and improve your score that way.
So I thought these are two companies which have done, actually, very well in the stock market but also have interesting, forward-looking products which will help them increase revenue in years to come.
Shen:¬†Awesome.¬†I think the AI essay grading, especially, for New Oriental is pretty incredible. I think back to my days doing Scantron tests,¬†that’s about as far as these systems could go, in terms of grading, just figuring out which little black dot you filled in with a pencil. That was as good¬†as it got. Now, having technology to read, and¬†not only that but interpret and grade¬†something as sophisticated as a¬†written essay, is really incredible.
I’m going to change directions now and pivot us¬†a little bit toward retail, both operationally and also in terms of the consumer experience. One¬†company that you brought up, Asit, that you wanted to talk about was called Trax,¬†which is private. Can you tell us a little bit about that?
Sharma:¬†Trax is a company which¬†uses data science to help consumer-packaged goods companies compete more effectively¬†in the grocery market. If you’ve invested in companies that are beverage providers or packaged goods providers — just to name a few, Coca-Cola, Procter & Gamble, Campbell Soup¬†— if you invest in these very staid and venerable names, you¬†already know that these stocks have either flat-lined or¬†perhaps have lost some value. The¬†reason is that retail on the¬†grocery shelf has become disrupted by online commerce. When¬†I order my groceries online and then drive up and pick them up and¬†take them away, I’m not even going into the store, so¬†I don’t see what’s happening in the store.¬†This¬†makes it a lot harder for the big companies to compete with newer brands that are popping up and grabbing shelf space.¬†
Now, if you are a company like Coca-Cola,¬†you need a tool to help you understand how you need to position your products and¬†even replace the old manual audit¬†process. This is the process where a field representative walks in¬†with a clipboard —¬†nowadays, OK,¬†maybe they have a tablet — and they mark off¬†what the inventory looks like on the shelves, they look at competitors’ positioning on the shelves, they look at what’s happening around the beverage space¬†to see where the snack is on the endpoints on the shelves.¬†All¬†of this manual collection of data is quickly becoming a thing of the past.¬†
Trax helps¬†companies by using a process which is¬†extremely interesting. A field rep now goes in and takes a picture. That picture is uploaded to a server, which then pummels the image and related images with a lot of data and provides analytics to a company like Coke to say, “Hey,¬†not only does your order point need to be adjusted, but we noticed that this salty snack has come pretty close by in many grocery stores. Our data tells us that¬†putting a sweeter drink on the shelf close-by might help.” It provides all kinds of intelligence that the big¬†consumer-packaged goods companies haven’t had access to.¬†
Therefore, it’s going to help these companies get¬†somewhat of their edge back.¬†In the longer-term picture — we can talk about this on a subsequent show — it’s still sort of difficult. But this is another, again, company using data science and analytics to help forward¬†consumer goods.
Shen: I think this is a shield, it’s a shield for these companies¬†to navigate the fact that a lot of consumer preferences are changing. I really like this idea. It’s a very elegant solution to the kind of problem that,¬†even as a longtime follower of companies like Coca-Cola,¬†I did not realize that they struggled with¬†some of this reporting and inspection, for example,¬†of the shelving for their products. Then, you find out that¬†it can take a long time for the company to get feedback on¬†the presentation on the shelf,¬†how that performs at the store with the¬†displays. These companies are very cognizant¬†of their packaging and labels and everything, and how that changes the consumers’ interaction and experience with the brand.¬†The more immediate feedback that a company Trax can offer, that can¬†pretty substantially impact the sales for the areas where¬†things are optimized. It can affect growth, so really interesting overall.
Next up,¬†we’re going to cover some related ideas in terms of the store aisle¬†experience and how that’s changing.
Going back to the consumer¬†experience in the store, what we were talking about with Trax¬†reminded me a little bit —¬†the concept, at least — of¬†Amazon¬†Go. This is the convenience store that made headlines earlier this year when Amazon opened it to the public. If¬†you recall, what makes the store so unique is that there are no checkout lines at Amazon Go. Instead,¬†customers swipe into the store, they connect the shopping basket to their accounts,¬†and then they just take whatever they want off the shelf and walk out.¬†
People¬†have already referred to this as the store of the future. I’ve seen some recent headlines saying that companies like Walmart¬†and Microsoft¬†are trying to find similar competing systems to this Amazon Go model. So maybe there is some stickiness here to the idea.¬†
But what Amazon Go has built out ultimately makes for a smoother, faster trip to the store for the consumer. They¬†also argue that employees can better spend their time focused less on the point-of-sale and more on service. That initiative, at least for Amazon, is getting expanded outside of the original Seattle locations to, potentially, Chicago and Los Angeles as well.¬†
Before we get too sidetracked on that,¬†I think the key innovation here is related to Trax in terms of the interaction with products at the store. Amazon Go,¬†in terms of the sensors they built that track¬†what people take off the shelf, or put back on, or whatever they put in their bag or their basket or whatever it may be — they¬†collect data on that.¬†I think it shows exactly how, or¬†at least closer to how,¬†people interact with different products.¬†
An¬†analogy I’d bring up here, the one we were talking about before we came into the studio, was¬†Netflix.¬†I’ve seen complaints recently in some of the TV and film communities and blogs I follow about the¬†quality of Netflix originals, for example, and¬†other content in the library. They’ll say¬†the originals are no good,¬†it makes no sense that the company can spend billions of dollars per year on what makes up a lot of what they consider bad movies. Frankly,¬†Netflix knows,¬†I think, what its subscribers watch better than even the subscribers themselves sometimes. Everything from how the content is consumed to when, on¬†what device, did you finish the episode, how about¬†the entire season, did you pause a movie and go back or end up abandoning it — all of these things, all of these trends in the genres,¬†the popularity of specific actors and directors,¬†can be analyzed based on the platform that Netflix has built.¬†
I know that retailers, for example, would kill¬†for that kind of granular data. If a department store — like Nordstrom, for example — could see how people navigate the racks at their store, what¬†they pick up, what they actually try on, the brands,¬†colors, having that kind of granularity would be an incredible boon¬†for these companies. I feel like Trax, Amazon Go, they’re¬†building out the technology that’s getting to a point where we’re getting closer and closer to that¬†being a possibility, that level of sophistication. I think it’s¬†going to be very powerful, in terms of the companies¬†matching the products they’re putting in their stores with the demand of¬†what consumers want, and¬†ultimately that being a better experience for everyone involved.
The¬†next example I’d like to bring up is with two companies that you called out to me. Those are with Alibaba¬†and Ikea. Do you want to talk a little bit about that?
Sharma:¬†Alibaba, very interesting company. Obviously, as many of our investors know, a competitor to Amazon, also wants to be a dominant force in world e-commerce. They have a virtual reality shopping mall, which, interesting enough, hasn’t really taken off. It’s still in¬†experimental phase. Basically, you need a VR headset to shop this mall. Once you do, you can walk through this unpopulated retail¬†experience — there aren’t other people walking around. You can¬†look at an item, point to it, and basically by looking, purchase the item.¬†
I’ve talked about¬†Singles’ Day on this show before. That’s the day, once a year, that Alibaba has its big e-commerce day and runs¬†a lot of promotions. That’s a watermark for this technology. It should occur in October of this year. We’ll see how that comes along.¬†
But I’m very interested in the fact that companies are now using virtual reality to substitute for these large-scale, very¬†walking-intensive brick-and-mortar experiences that we have. I personally have written about companies like TJX, that’s TJ Maxx. You walk into a TJ Maxx, and you can see that traffic isn’t going anywhere. That company is doing very well. Malls, on the other hand, seem deserted. It’s a function of the technology that, in reducing this¬†having to go through a mall, but being able to look and purchase what you want, may spell¬†the doom of larger brick-and-mortar, big box retail, but, it may make it more vibrant¬†in the future.¬†
I actually think that, because a company like Ikea is testing this technology, we’ll see modifications to the actual physical experience. To take a little segue, Ikea is employing a very similar technology which will let customers,¬†instead of traversing that huge store and having a few arguments with your spouse over a long day,¬†you can put on the goggles and go right to the section that you’re interested in and potentially¬†order furniture. This is also in development. It’s¬†not going to replace the Ikea experience, but it may mean that they get more incremental sales.
I think, where we’re¬†headed with virtual reality headsets is¬†not necessarily a replacement of brick-and-mortar experience but an enhancement of — to¬†make it more efficient. The bottom line, though, as we’ve talked about a lot in the past couple of years, is that only the most efficient stores with the strongest attractors of traffic are going to survive.
Shen:¬†Yeah.¬†I will add to that — and, this is the last idea that I have for these trends and¬†some of these technologies and innovations¬†that have really jumped out to us, and¬†it’s similar to this¬†example of what Ikea is doing¬†with the show-rooming. Also, we’ve talked previously,¬†Lowe’s¬†trying to use virtual reality technology to give people the ability to get a sense of¬†what that remodeling project might look like, what the home might look like. They’re testing that. It’s a really interesting way to engage their customers and interact with their customers,¬†get them thinking about projects. Maybe seeing the room with the new walls,¬†some of the new curtains and the new hardwood floors, for example, will inspire them to take action on that remodel a little bit more quickly.
The¬†other example I wanted to call out, this was also in more recent news from the past year, is¬†with Nordstrom, for example, and their Nordstrom Local, these concept stores. Much smaller locations, practically zero inventory compared to their full-size, full-line¬†department stores. Very service-focused. The way that they approach it is kind of like a fitting room, a big fitting room for a customer to come in¬†try things on.
With the virtual reality application, the thing that I think could really change that part of the consumer shopping experience is, small companies, one I found¬†that was profiled by the National Retail Federation called Zeekit. They can get a scan¬†of your body so that the sizing and the way things fit on you is much more accurate. Then,¬†you have a company like¬†Stitch Fix¬†that collects tons of data points on each garment — how it fits, the exact measurements in certain places. Again,¬†in that case, for¬†their use of data, they want to know that the customers are about to get some item of clothing in their next Fix that’s¬†going to fit well for them.¬†Well, if you combine these two things, I feel like you create a really ripe¬†opportunity for what amounts to a virtual dressing room.¬†
I’ve seen this idea in movies,¬†for example, before; in books before. It’s¬†not quite there yet, though you have companies like¬†Zeekit working on it. Some of the demonstrations that I’ve seen are pretty compelling. Instead of seeing random models on a page while you’re shopping online for a new jacket, for example,¬†it’s you on the page. I think that can be really powerful as a way to engage with¬†customers.
Another¬†industry that has started to leverage this a little bit is car manufacturers. At car shows, for example, they will use virtual reality so¬†you can see the interior of a new model, so that they can showcase a virtual showroom with a lot of different models of the vehicles that they’re producing, and see them in that way without actually going to a dealership.¬†This is¬†definitely getting more into the wilder territory,¬†in terms of some of the trends that we’re seeing that we’ve talked about, but this is one that I think is really cool, and the possibilities are up to what people can imagine, and then applying the technical expertise needed to make it happen.¬†
I will end with that. Any final comments from you, Asit?
Sharma:¬†Yeah, absolutely. One overarching thought about, we’ll use¬†fashion as the metaphor, when you’re looking at companies which are employing technology in the future in the consumer goods space, over the next year or two, and you’re¬†trying to figure out what’s good to invest in — it should be on either end of the technology spectrum.¬†
Either you’re going to look at a company like Trade Desk,¬†which is more of a technology company, and is¬†just using analytics to do one thing, which is make ad-buying¬†more efficient with a lot of really cool permutations; or, you’re looking for a combination of technology and high-touch. By that, I mean, let’s take Vince’s¬†examples of both Stitch Fix¬†and also Nordstrom. They have something very similar in common. When you¬†go into the Nordstrom Local store, there’s a lot of technology there that can help you figure out what you should be wearing, but they also have this stylist there,¬†someone who’s very knowledgeable, to assist you in figuring out, “This looks good on you.”¬†
The¬†same is actually employed over at Stitch Fix. That¬†company, as we talked about on a recent show,¬†uses a lot of algorithms to figure out¬†what they should send you next. But you¬†also have this function of the stylist. There is what Stitch Fix calls a¬†collaborative algorithm. It’s¬†working with the customer to try to find out what’s best for that customer, his or her sense of style,¬†what they’ve worn before, ordered before, what their fashion needs are.¬†
When you see companies that have,¬†for lack of a better term,¬†I’ll call it the humanity, to combine great data science, algorithms, analytics, with a personal touch for the consumer, you know¬†you have a winner there. We’ve talked about Nike¬†maybe even a couple of years ago now, in terms of personalization and customization. That’s the key to¬†figuring out, alongside a good set of financials, if you should invest in one of these forward-looking¬†consumer companies for the long-term.
Shen:¬†I know we’ve mentioned quite a few different tickers and companies today. We really use those to showcase some of these trends and these really exciting developments. But, overall, I think that’s a really good way to put it. With the way people are trying to look at consumer now, the service side of it is very important, the personalization side of it is very important. Then, coupling that with a unique experience to get people in the store — sometimes that might be having¬†really good inventory turnover, whether you’re a TJ Maxx, or that might be completely changing what your store is like with some of the new concept stores, pop-up shops that are out there.¬†
Again, for¬†consumer and retail, those are some of the trends that have really inspired us to look for what companies are excelling with some of these developments. We’ll definitely be following those and tracking those for the next 25 years. Thanks a lot, Asit, for being here!
Sharma:¬†Thanks very much, Vince! Good to be here!
‚ÄčShen:‚Äč Fools,¬†thanks again for tuning in!¬†I’ll be back next week. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear during the program. Fool on!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Netflix, Stitch Fix, and The Trade Desk. The Motley Fool recommends New Oriental Education & Technology Group, Nike, and Nordstrom. The Motley Fool has a disclosure policy.