E-tailers’ three-to-five year business plans already materialised in 2020

The COVID-19 pandemic has driven many new consumers online, to the benefit of online retailers, or "e-tailers". Georgi Ganev, CEO of Kinnevik, discusses the company's investment philosophy based on behavioural and technological megatrends.



Georgi Ganev, CEO at Kinnevik

Georgi Ganev, CEO at Kinnevik

In the first issue of Nordea On Your Mind for 2021, ‘Pandemic overdrive for e-commerce‘, Johan Trocmé (JT) from Nordea Thematics talks to Georgi Ganev (GG), CEO at Kinnevik, about the company’s investment philosophy as an active owner in four digital consumer sectors disrupted by technological change.

He foresees the emergence of an ecosystem where new players can help incumbent retailers with fulfilment services or even an entire online platform. They will need it, as consumers will stay online, and minimum standards for fulfilment have risen sharply.

JT: Kinnevik has made a remarkable journey from being an industrial conglomerate to an investment company with a business portfolio worth over EUR 10bn spanning four digital consumer sectors. Would you tell us briefly about your investment philosophy, the choice of these specific sectors to invest in, and how you operate and contribute to creating value as an owner?

GG: Kinnevik has historically been good at finding and commercialising changing consumer trends which have disrupted industries and sectors, most often driven by technology. The most obvious examples are when we challenged the telecom and media markets in the 1980s and 1990s. Kinnevik was also very early to enter the market for classifieds ads, by investing in Avito in Russia, and we got involved in online retail by being an early investor in the German e-tailer Zalando. And we are continuing to monitor these consumer trends, which are all influenced or driven by the overarching digitalisation trend. Digitalisation is also having a huge impact on two more areas we have entered relatively recently: healthcare and food.

We are looking into how the technological changes and development will affect these industries, and trying to link this to other behavioural trends we are seeing, such as the growing focus among consumers on sustainability, in different forms such as healthy living and the environment. What we eat affects our health as well as our planet. And so does the way we choose to shop, which can be done more cheaply and efficiently. So, the starting point for our analysis is quite high level and macro oriented. From there, we funnel it down into sectors and companies, where we put a lot of emphasis on the entrepreneurial team running the business and whether we can see long-term profitability in the chosen business model. If we can, we are prepared to invest in the company with a long-term commitment, across the spectrum from early startups to established, more mature listed companies.

Kinnevik aims to be an active owner, with board representation, and typically a 15-25% ownership stake.

Our ambition is always to be an active owner, by which we mean an owner that can be close to a company in each specific phase of its growth journey. These phases can be very different, with different support needed by an early startup, compared with a scale-up about to launch internationally, or a more mature business making a major acquisition or merging with a rival. So we maintain close dialogue with the companies we invest in. We virtually always have board representation. We want a big enough ownership stake for us to be able to influence the outcomes of key decisions. This typically means an ownership stake of 15-25%. We don’t need to have full control over a business. We like to see other owners around the table who complement Kinnevik and who we can have close dialogue with, and together influence the company.

In the past three years, we have geographically focused on the US and Europe in our investments. In Europe, we have a special focus on the Nordic region, where we have a strong brand, and our strong network and deep local knowledge make us comfortable getting involved in new companies earlier. In Europe and the US, we invest in more mature businesses, and in recent years we have chosen not to invest in any developing markets. Our approach is to invest early in new technologies, when the solutions and business models are still being developed. We are comfortable with taking those technology and business risks, but there is a limit to how much total risk we are willing to take. If we add, for example, substantial political, regulatory or foreign exchange risks to the technology risk, the overall risk level for our investment could be too high in less stable or developed geographies.

Noym Kinnevik Breakdown Of Investment Portfolio Value By Sector 30 September 2020

Kinnevik Breakdown Of Investment Portfolio Value By Sector 30 September 2020. Source Kinnevik Q3 report

JT: E-commerce features heavily in your investment portfolio; the stake in Zalando is your biggest single holding, and your stake in Global Fashion Group is also in your top five, and you have other investments in Budbee, Mathem and Kolonial. You have been personally involved in the sector during your time as CEO of Dustin – how do you see digitalisation affecting the retail industry going forward, and what are the big trends and their drivers?

GG: I had several operational leadership roles before joining Kinnevik, and the CEO role here at Kinnevik appealed to me much because the company wants to be an engaged and active owner rather than merely a passive investor. In this sense, my operational background has a natural relevance in this role. My specific prior experience from e-commerce can be helpful in our understanding of these consumer trends we have talked about.

The COVID-19 pandemic has lured many previously reluctant consumers online.

Although the online share of retail sales in some categories has now become quite high, we expect the migration from store-based to online sales to continue. The COVID-19 pandemic has sharply accelerated consumers’ digital behaviour, and I find it hard to see why this would reverse when the pandemic is over. Many new consumers have now been prompted, perhaps even forced, to try online shopping, particularly in the under-penetrated groceries category. Finding that it is convenient, time-effective and good for the environment, they should be strongly motivated to keep buying online. I also think both pure online retailers and omnichannel players with physical stores will greatly improve their fulfilment capabilities and improve the customer experience for home deliveries. This is why there are great opportunities for service providers like our portfolio company Budbee in last-mile deliveries, payment service providers, and suppliers of customer data analysis, to help professionalise e-commerce fulfilment and stimulate growth.

The whole ecosystem around e-commerce has evolved remarkably in just the last few years. I think this will continue. 20 years ago, we started seeing a shift from physical stores towards one or a few e-commerce players, such as Amazon. Now the shift is from offline to a range of different online players. E-commerce is increasingly being split between actual e-tailers and fulfilment and other service and platform providers.

Zalando is a good illustration of how this can work. It has a technical platform for e-commerce which it offers to retailers, who can choose if they want help with the whole value chain, from client acquisition to purchasing all the way to online sales and home delivery, or, if they prefer, to make use of some components of the platform. There are bricks-and-mortar retailers who use Zalando to establish and run an online presence, often including delivering goods to customers from their own physical stores. Platform thinking is becoming more important across the e-commerce space.

Sharply improved fulfilment has increased the attraction of online shopping versus physical stores, which is fuelling e-commerce growth.

As for growth drivers for e-commerce, I would point to the three “classics”: product assortment, price and quality of delivery. But consumers’ expectations for the quality of the last-mile delivery have increased dramatically. Price has become less critical than in the beginning. It is important that prices are competitive and stand up to scrutiny, but that is more of a basic hygiene factor.

Delivery expectations have evolved from “I will be happy if the goods are delivered at all” to being able to choose a delivery slot time “for when the goods are to be dropped outside my door”. And this shift has happened over perhaps the past five years. Few if any consumers are prepared to accept online shopping with a home delivery “sometime between 8am and 5pm” on a weekday, with physical reception and signature needed. Being able to offer superior fulfilment is becoming necessary, and has increased the relative attraction of online shopping versus visiting a store. And this is helping push the online migration of retail sales further.

JT: 2020 was largely defined by the COVID-19 pandemic. How have the e-commerce and related businesses in your investment portfolio been affected? Do you expect any impact from the pandemic on consumer behaviour to be permanent? Will it be good or bad for the retail industry?

GG: The COVID-19 pandemic is a terrible human tragedy, and we of course long for the point where we can finally leave it behind us. The growth we have seen for online retail is something we were expecting but spread out over several years. The pandemic accelerated the growth in 2020 by forcing changes in consumer behaviour. We already saw growth ambitions in three- to five-year business plans materialise last year.

The quality bar for e-tailers has been irrevocably raised.

Part of this is increased online shopping by already active consumers, but a big contribution comes from those who did not shop online but have now been prompted to do so. This has made a big difference and has been really valuable for e-tailers, as these new customers were previously more or less out of reach. Acquisition costs for this group of customers were too high, owing to their unwillingness to try online shopping. Now these customers have been added for free. This wave of additions of more reluctant late adopters to the online consumer population will ramp up pressure on the whole retail sector. Online retailers need to show a sufficiently high-quality customer experience for these new consumers not to jump ship and revert to physical store shopping after being disappointed. The quality bar for e-tailers has been irrevocably raised.

For the bricks-and-mortar retailers, not having an online sales channel will no longer even be an option. I think the physical stores will still have a role to play. Consumers will want to visit them for inspiration, to enjoy the social experience and do other things than just browse goods. But all retailers will have to acknowledge that online will be a dominant sales channel.

I think this is fundamentally positive for the retail sector. Instead of a painful, drawn-out process lasting many years, there has been a shock during the pandemic triggering a big wave of investments starting in 2020, which will ultimately benefit both the industry and consumers.

Retailers are now under more pressure to go online, but new players are available to help with that.

As hard as it may be for entrenched traditional retailers who have been unable or unwilling to build a viable online presence, the big difference in 2020 or 2021 versus before is that now there are these third-party players in the retail ecosystem which can help. Services can now be bought externally, from a total online experience for your brands from a player like Zalando to specific services such as last-mile home delivery by a player like Budbee. These options were not available in the past.

JT: Do you see any constraints on a continued shift from store-based to online shopping? Are there technological or logistical challenges? Is sustainability an issue, with home deliveries and returns creating more emissions?

GG: The whole industry needs to get better at explaining its total impact on sustainability. It is easy to focus purely on home deliveries, but this is not the whole story. Parcels can be aggregated for a much more efficient delivery route and combinations of products from different categories in the same delivery. And beyond the deliveries, taking groceries as an example, delivering from a centralised warehouse significantly reduces the level of waste in fresh goods compared with keeping local inventories in a large number of widely spread food stores. Planning and optimisation based on data analysis means bread will be sold out from the warehouse every day. In local food stores, lots of bread will be unsold, go stale and become waste. And as a third example, the sustainability footprint of building, establishing and running a physical store, in terms of use of materials and energy, and people working there and going to and from work – that compares extremely unfavourably to delivering from a warehouse.

Online retail is more sustainable than offline.

Georgi Ganev, CEO at Kinnevik

Claiming that home delivery of a product bought online is a net negative contribution to sustainability would mean you have not understood the full value chain, and what is actually happening. It is the other way around.

One possible constraint on growth might be the classic 80/20 rule, perhaps being able to reach 80% of the population with 20% of your investments. There will be part of the population that may not have the same access to new delivery platforms and models, which are an essential part of the online shopping customer experience. In order for these people to be serviced properly, which is very important, more flexible solutions may be required. It may turn out not be environmentally or economically viable to offer home deliveries of groceries by a MatHem vehicle to every household in Sweden. But it may be possible to use local hubs, from which people in the most sparsely populated areas can pick up goods they have purchased online. And challenges like this are often even more obvious in developing economies. It is the same dynamic as in telecom network coverage, which is tightly regulated in most markets.

JT: If you had to guess today, what could Kinnevik’s investment portfolio look like in 2030, in terms of sectors, types of businesses and concentration?

GG: We do not really actively pursue portfolio balance on an ongoing basis. We like to spread our risks by investing in companies with different levels of maturity in their businesses. But ultimately we are here to support new entrepreneurially driven companies and help them grow into big, successful businesses. It is very difficult to predict which specific ones will really take off and have such success that they grow into a major chunk of our total portfolio in the future.

I can say that we will continue to invest in the food area, given what a big supertrend we are seeing there. Food affects so much of our current portfolio. To us, it is also obvious that the digitalisation of healthcare is still only in its infancy. With an ageing population and complex healthcare, digital tools will be absolutely critical for making healthcare more efficient.

Kinnevik's investment portfolio in 2030 will likely have big exposure to food and healthcare.

CC: I think ten years from now, Kinnevik’s portfolio will still have a major exposure to food and healthcare. In online retail, I expect that we will see new categories in our portfolio in ten years’ time which will have successfully applied concepts and approaches used by categories that have today become more widely accepted online and achieved higher digital penetration, such as apparel. And some of those categories might be ones we do not see as obvious candidates today.


Johan Trocmé and Viktor Sonebäck

If you are a corporate client and want to access the full Nordea On Your Mind report, please contact Viktor Sonebäck.

And don’t miss the related podcast with Johan and Viktor.

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