Known as incorporating “The Internet of Things” (“IoT”) into their products, smart companies are using this strategy to differentiate themselves in the market and drive higher conversion rates. As an investor, you should be looking for companies that are pushing the envelope to stay in front of this trend, as consumers have demonstrated their willingness to pay a premium for connected products, which will drive margins and stock prices.
From “smart thermostats” to “tech shirts,” the apparel makers and manufacturers to watch are undoubtedly the ones connecting their products to the Internet and adding digital applications catered to meet the ease, convenience and sophistication that today’s consumer has come to demand. We’ve all become accustomed to the fact that our laptops, tablets and smartphones have this level of connectivity. The next step is the interconnection of video cameras, car sensors, fitness tracking wristbands, and even pacemakers. According to Gartner reports that IoT-connected physical objects will grow to 26 billion units by 2020 (excluding smartphones, tablets and laptops), and IoT product and service suppliers will generate incremental revenue of more than $300 billion in 2020.
How should an investor evaluate the opportunities in IoT? :
- Infrastructure providers
- Manufacturers of connected devices
- Retailers selling to connected consumers
With any new technology deployment, the early winners are often those companies which provide the infrastructure. During the telecom boom of the 1990’s, for example, the winners were the manufacturers of fiber optic cable and components. Companies that manufacture the infrastructure of the IoT – processor chips, wi-fi networks, sensors, etc – are clearly poised to profit from this explosion. Goldman Sachs, which is bullish on IoT as an investment thesis, indicates that some of the companies best positioned to gain include Cisco Systems ,Qualcomm and Freescale Semiconductor.
Investors should also consider software companies that provide tools for product developers, such as CAD and product lifecycle management systems. Some of these companies are incorporating tools specifically geared toward the development of IoT-connected products. One such example is PTC, which is on an aggressive IoT path, having recently acquired two fast-growing IoT tools companies – ThingWorx and Axeda.
Manufacturers of Connected Devices
Moving beyond the infrastructure, it gets a little harder for investors. Let’s look at the manufacturers of IoT-connected devices. In many markets, products have become commoditized. Take thermostats, for example, where little has happened since the introduction of the digital programmable device. Now, enter the new wave of “smart thermostats” from companies like Nest (acquired by Google in the first quarter of 2014), where their wi-fi-connectivity allows remote access via a smartphone or laptop, and the devices self-program as they learn your schedule. Suddenly, the historic $30-60 thermostat is worth more than $200 per device.
Turning to apparel. If you watched the US Open, you noticed the fast-moving ballboys and ballgirls wearing Ralph Lauren shirts with oversized Polo logos. What you may not know is that these are the new Polo Tech shirts, which transmit biometric data to a smart phone or tablet. Add a dash of technology and a $50 shirt becomes a $200+ “thing”.
Many other examples abound. The hot topic of wearable technology continued this September at Fashion Week in New York City, where Neiman Marcus’ fashion director Ken Downing noted that, “Technology is what’s moving fashion forward.” Apple’s Watch, is the latest in the “things” market, while Tory Burch has already connected designer jewelry to the Internet by leveraging Fitbit technology which tracks steps, calories and sleep cycles.
Consumers are willing to pay premium prices for connected devices, so investors would be wise to look for manufacturers that have a clear IoT strategy as part of their product roadmap.
So what does the IoT mean for retailers? I believe it has the potential to create revolutionary change for the retail industry. Why? So far, most of the technological advances that have occurred in retail have been in e-commerce. Recommendation engines, dynamic pricing systems, unique offers – all of these techniques are being used by Amazon and other e-commerce systems to drive larger shopping carts and higher conversion rates. The challenge is that online shopping still accounts for less than 15% of the total retail business. The majority of sales still occur in good old-fashioned brick-and-mortar stores. Retailers have struggled to find ways to apply the same techniques used online to drive conversions in-store.
Enter the Internet of Things.
“A lot of the things we discovered we can do online, now, with the Internet of Things, we can also do offline,” says Michael Chui, partner at the McKinsey Global Institute.
With inexpensive sensors or beacons placed in the store, RFID tags on products, and an app installed on a shopper’s phone, it is now very feasible to track customer shopping behavior in-store and make unique offers at the right time to drive a conversion. A consumer will pick up an item, the sensor on the product will interact with the shopper’s smartphone and direct her to a nearby rack for a recommended accessory, including tailored content.