The retail software market is not a single field in which large scale, generic products thrive. It’s a series of niches; some larger than others, in which sector specialists with deep domain knowledge and long term customer relationships prosper. Universe Group, which reported last week, is one of these. Shareholders will be hoping it can translate strategic intent into profit although the share price itself seems a little stuck.
Universe has pretty much cornered the market for independent petrol retail, boasting Valero, MFG and MRH among its customers, amounting to over 1200 sites. Under the HTEC brand, Universe provides a full turnkey solution of POS, payments and loyalty software, hardware and support. Excluding acquisitions (of which more below) revenues grew 16% to £16m in 2014. It has invested in updating its software and, most importantly its payment service, to the latest standards including P2PE.
Deep domain knowledge makes Universe hard for any competitor to displace. In part, this is about long-term client relationships which which were highlighted by its rather unexpected win for the technology platform underpinning Morrison’s Match & More loyalty scheme.
Beyond customer intimacy, Universe also has all the necessary integrations into petrol forecourt software and fuel card schemes, many of which are awkward to replicate. It’s not that new entrants couldn’t make the necessary investments, it’s more that the business case looks rather speculative when you’re considering moving into a relatively small market characterised by dominant and entrenched suppliers. In addition to Universe, there’s Torex Micros Oracle to bargain with.
Universe’s management recognise the limited growth potential in petrol and have been bulking up with acquisitions in convenience and CTN’s. The first was Indigo Retail in 2013. This business supplied point of sale and loyalty software to convenience stores and generated sales of £2.1m sales with £0.43m EBITDA. The purchase price in a cash/shares/performance deal was worth about 1 x sales.
It’s hard to make any money in IT services these days but the capability is essential for traditional software vendors to win and keep customers. Universe next bought 40-strong Retail Service Team (£3m turnover, no profits) for just £150K. Management says that this acquisition improved group margins so evidently some significant synergies have been made since the transaction.
Then last week Universe acquired Spedinorcon, another specialist retail software business that services 1500 CTN’s. Spedi’s financials are not disclosed but couldn’t have been too healthy either. The purchase price was just £30K up front plus performance related fees expected between £150K and £250K. Spedi’s special assets are software that mangages newspaper distribution (not very exciting in 2015) and integrations to the order management systems of about a dozen leading wholesalers.
Wholesaler integrations can be tough for competitors to copy too but the CTN market hasn’t had much technology innovation for years and is likely to be relatively open to the new wave of cloud based products (Vend, Revel etc) coming on to the market. Universe is in a good position to win but will need to increase Spedi’s R&D spend to ensure its products are up to date. This screenshot from the Spedi website shows the scale of the challenge.
In the world of iPhone 6 and app stores, the technology actually deployed by small retailers remains bafflingly expensive, archaic and inflexible. Now, a new idea called Poynt may allow merchants to leap a generation and join the retail mainstream.
Typically, a shop has three technology touch points:
- A payment terminal supplied by the retailer’s bank (or a recommended partner of the bank). The bank works with the manufacturer (normally Ingenico or Verifone) to control the software, firmware and user experience on the terminal but has little incentive to innovate. 3rd party services such as tax free shopping or gift card schemes are difficult to integrate and generally only supplied on the bank’s terms.
- An EPOS system provided by one of several hundred sub-scale technology vendors lacking the resources to move ahead. This typically runs installed software on a locked-down Windows PC linked to a touch screen, scanner and cash drawer. EPOS vendors are notoriously recalcitrant when it comes to integration with 3rd party services.
- A PC in the back office used for payroll, stock control, accounting and placing orders with suppliers. Increasingly, these functions are also available on the shopkeeper’s mobile device too but don’t talk to either the EPOS or the payment terminal.
There’s a huge amount of technology innovation happening in retail right now – cloud based sales analytics, iBeacon based loyalty schemes and P2P financing initiatives to name but three. Sadly, while SME core payment and EPOS systems remain isolated and stranded old, inflexible technology, it will be hard to get full advantage of the best of the new ideas.
Here’s where Poynt comes in. It’s a new concept in payment terminals from Osama Bedier, the ex-Google mobile payments supremo, which could be the hub around which these new applications cluster.
Here are six reasons why Poynt might disrupt this market:
- Poynt has its own Android based OS and comes with an SDK and app store. Developers are welcomed not shunned. This should make Poynt the payment partner of choice for the next generation of EPOS vendors such as Vend. It should also be the ideal platform for loyalty schemes, tax free shopping providers, footfall monitors and anyone else that needs a technology point of presence in shops.
- The appstore is already looking good. Launch partners include Vend, Kabbage (financial services), Swarm (sales analytics), Bigcommerce (online sales platform) and Intuit.
- Prices are keen. Poynt says that it’s going to make its money from commission fees from the partners. The device retails at $299 and that compares favourable with a list price of c. $350 for a standard Ingenico iPP350.
- Poynt is working with the channel not against it. Most SME’s will continue to rent payment terminals from their bank so Poynt has signed up two large US banks as distributors. Poynt’s enhanced platform should allow these banks to offer a better customer experience than today.
- The machine is really elegant and looks rather more Apple-like than any of the old-style machines commercialised by Ingenico or Verifone. It will attract a ready market with brand-led retailers.
- The timing is perfect. The Americans are finally adopting chip & PIN so every payment terminal in the States needs replacing. That’s a great market to be selling to.
Poynt represents a break from the locked-down approach of the past. Launching at time of unprecedented market demand and with a very open approach to a previously closed eco-system, it could well become the in-store technology hub we’ve been waiting for.
Orderbird, a Berlin based EPOS start-up that targets the SME’s in the hospitality industry has just raised $10m taking its total fundraising to $18m. The cash will be used to expand outside its core German-speaking markets where it now claims over 2.000 customers. The UK is first on the list.
Orderbird primarily provides EPOS software that runs on iPads. It’s not cheap. Prices start from around £50/month for the software plus an upfront £599 for installation and some hardware. Over the five to ten year life of an EPOS system this is much dearer than a traditional Window-based till system which would retail at around £1200 with ongoing fees of around £50/year.
The largest investor is Concardis, a leading Germany merchant acquirer, and integrated payments are key selling point. Card processing fees – 1.7% for debit and 2.7% for credit – are rather high but a rather novel integrated card reader is free of charge.
SME commerce platforms of all kinds are very attractive to investors at the moment; partly because the payment industry is flush with cash and struggling for new ideas. However, this is a very tough market to make real money in.
SME EPOS is highly competitive and many of the new entrants struggled to differentiate themselves. Moreover, the market size frequently over-estimated. For example, Cybertill has been selling successfully selling cloud-based EPOS for over 10 years, operates in over 5.000 sites but has revenue of just £6m.
Some of the more ambitious investment cases are driven by the prospect of using an iPad EPOS system as a means of generating additional profit from signing SME’s to loyalty schemes, footfall generators, customer insight reports and payment processing.
Even well financed new entrants such as Orderbird will face three major challenges:
- SME customers remains highly conservative in their buying behaviour. They are deeply suspicious by nature and most are not attracted by whizzy dashboards and digital loyalty schemes. They need to see a sales rep making a demonstration before buying.
- Selling new ideas to SME’s is expensive and it’s really difficult to make the economics work with a direct approach. Businesses like Orderbird will need channel partners. This is where Vend is being smart but (of course) channel partners need paying and this eats into margins.
- The existing EPOS industry (which has deep customer and channel relationships) will up its game. Many longstanding vendors have already begun moving to the cloud and from Windows to iOS.
The market for SME retail technology is competitive and expensive to reach. My recommendation to Orderbird and others is to target larger customers. Enterprises are less satisfied with existing suppliers (eg Micros) and and more interested in new ideas around loyalty and footfall.