It's not easy to eliminate checkout—but investors want to make it happen

Investors are making bets on checkout-free retail, a category that is just as challenging as it is innovative. But it's payment technology's race to the moon, a chance to seize a favorable position in the struggle to save retail.

"There's an opportunity here to transform a multi-trillion dollar industry, and those opportunities don't come around that often," said Alastair Mitchell, a partner at EQT Ventures, a Stockholm-based firm that just participated in a $35 million funding round in Standard Cognition, a San Francisco company that builds checkout-free technology.

That doesn't sound like a lot. But the funding brings Standard Cognition's valuation to more than $500 million, or halfway to unicorn status. Standard Cognition opened its first store in late 2018, and is in the process of deploying its technology at general retailers.

Chart: Early stage checkout-free projects

Lots of other companies are pursuing checkout-free technology, which is still far from perfect. Microsoft this year partnered with Kroger to build checkout-free stores, Shell and IBM have run tests, and Sainsbury's this year launched its first checkout-free store in the U.K.. Amazon reportedly plans to open 3,000 of its Amazon Go stores, and Walmart has developers working in two labs to come up with technology that allows automatic checkout.

Despite its flaws, checkout-free technology gives brick and mortar stores more than just the chance to upstage Amazon Go — though they're very interested in that part of it. Amazon Go lets shoppers scan in with a mobile device and then uses cameras and sensors to detect which products they take with them. It's a model Amazon has refined to account for large crowds or other unfavorable shopping conditions.

But the innovation, if it works, also provides a way to turn decades-old retail outlets into something more resembling Uber: a data-rich relationship between retailer and consumer with an automatic transaction. Checkout-free technology can get rid of checkout lines, and it yields a harvest of shopping and payments data that rivals any e-commerce experience.

"If you walk down any High Street in Europe or Main Street in the U.S., retail stores are dying. They're shutting down," said Mitchell, attributing that to the influence of e-commerce giants such as Amazon and eBay, change in consumer tastes and behavior, shrinking margins and rising costs to run stores. "This new technology can, in one stroke, solve many of these problems. That's why it so exciting. But it's hard to deliver."

Checkout-free payment technology isn't universal and it doesn't always work the way stores would like. There's problems with store size, the intrusion of natural light into the sensors and the inability of sensors to identify lots of items, particularly produce, which is a staple of supermarkets. There are also signs that younger consumers don't necessarily want to get rid of all interaction that's tied to payments.

So far, Amazon Go has deployed only about a dozen stores and most other deployments are concept stores. Or in the case of larger deployments, such as Pittsburgh-based regional supermarket chain Giant Eagle, the project is a limited deployment in anticipation of a broader pilot, with the chain still considering what version of the technology to use. Grabango, the Berkley, Calif.-based checkout-free technology company that's supporting Giant Eagle's project, recently received Series A funding from Propel Venture Partners.

But it's the imperfections of the current technology that feed the excitement. There's a sense that some company or developer will find a way to make checkout-free technology work at scale over a large chain with footprints beyond that of a typical convenience store.

"The core of it is the one-click checkout for e-commerce. If you make checkout easy it boosts the search and other aspects of shopping," said Steve Sarracino, CEO and founder of Activant Capital, a Livermore, Calif.-based investment firm. "That same insight provided by e-commerce should apply to the offline world. If you can simplify checkout, you gain higher participation."

Activant's portfolio includes RetailNext, which develops sensors for in-store mobile point of sale and marketing.

The developers of checkout-free technology acknowledge the innovation still has work to do. Standard Cognition's San Francisco store was created primarily to show retailers what's possible, according to Michael Suswal, co-founder and COO of Standard Cognition.

Right now, autonomous checkout is best suited for smaller format stores, Suswal said, but he contends machine vision technology and hardware are expanding rapidly and are on a path to detecting hundreds of simultaneous shoppers and thus can handle larger store formats. The company also relies on cameras, and not turnstiles or shelf sensors, which Suswal says is more flexible and easy to deploy.

Standard Cognition has signed two customers to date: PALTAC Corporation, a Japanese pharmaceutical company; and a U.S. company that it has not named.

"Together, these two companies have tens of thousands of stores. We have implemented in a handful so far, with thousands more on the schedule before the end of the year," Suswal said.

The technology that underpins the checkout-free model is in need of improvement. Checkout-free stores are mostly reliant on older technology, since few companies have the luxury of building checkout-free stores from the ground up.

Most of the technology behind checkout-free projects uses radio frequency identification, according to Sarracino, who says the technology is hard to deploy and make flexible in a large retail environment, particularly when prices are supposed to match with items on shelves as consumers grab those items.

"You can't put RFID on an apple," Sarracino said. "The video technology is hard to do … so these companies are expanding to get consumers used to the idea and then perfecting the technology. The valuation [for these startups] would be in the billions if they had cracked the technology."

That's because of the ancillary value. The technology companies and retailers of course want faster checkout, but they also want a more robust and reliable record of how consumers are using their stores. A mix of cameras, sensors and mobile apps produces a reliable, constant flow of information about a store and its shoppers with a video trail that's not possible with traditional checkout.

"You can walk out of a store, and they store will know who you are and what you are buying, you'll get information about the store where that consumer is and when," Mitchell said, adding the potential exists to reduce manual labor in favor of sales and marketing expertise in stores. "That transforms promotions and customizes shopping. It cuts across all parts of the supply chain. It's not just the checkout. It's the full store experience, the inventory, shopper tastes, staffing and how store workers are deployed. All of these things are huge problems for retailers."

Nate Loewentheil, a senior associate at Camber Creek, sees supermarkets as having the greatest potential.

While much of the early deployments have been in supermarkets, their store layouts and foot traffic have also posed some of the greatest challenges to the technology. The Washington, D.C-based Camber Creek has portfolio that includes SalesWarp, an in-store order management and fulfillment firm, and Loewentheil said he's keeping an eye out for checkout-free technology.

"Physical retailers like supermarkets trying to draw customers have a big incentive here. People like picking out their food in person, such as fruits, vegetables and bread, and they just hate the friction," Loewentheil said. "So the only question for us is what kind of technology is likely to dominate the market."

The company that gets the technology to work at scale will be an attractive partner for a major artificial intelligence company, such as Google, Amazon, IBM, Tencent, Alibaba, Microsoft or Facebook, said Richard Crone, a payments consultant. "One acquisition of any of the providers in the autonomous checkout space will fuel a feeding frenzy to buy the remaining companies."

The technology, at its best, can also help determine what consumers "intend" to purchase before checkout.

"That is why check-in is the new checkout," Crone said. "Combine that with affective computing, or the science of using interpretive video to determine mood and emotions, and the retailer will know exactly how the consumer is feeling about the purchase."

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