It is an increasingly common idea that no industry is safe from disruption, and where we see innovation, investment money will often follow.

It is an increasingly common idea that no industry is safe from disruption, and where we see innovation, investment money will often follow.

The changing face of the consumer and the impact this has on an industry, is a fascinating prospect for an investor, for two key reasons. Firstly, the incumbents often aren’t able to move as fast as dynamic new companies and secondly, during times of disruption and rapid change, there is an openness to innovation from small companies that is rare to see during more stable times.

So, with this in mind, what type of companies are winning investor cash in the retail sector and what will be hot in 2014?

Firstly we need to consider the impact of changing consumer expectations on driving the development on technology – and vice versa. The proliferation of the internet, and subsequent confidence in online retail, is fuelling high consumer expectations. We expect unlimited choice, access to user reviews, and ability to interact with the retailer in near-real time. Ecommerce is set to grow by almost 50% over the next five years to be worth over £50bn in 2018, when one pound in every seven spent on retail, will be made online.

This is why some of the most exciting companies from an investment perspective are those that are smart enough to create a business model that responds and taps into changing consumer habits and demand. I think the key themes for 2014 will be around customer choice, incentivisation, customer communication and enhancing the user experience.

1.       Customer choice

The likes of the ‘Amazon Generation’ can’t help but expect a wide range of choice. Therefore, investors are particularly open to considering companies that can support businesses ability to create wider product offerings. Take the example of Rangespan, an ambitious technology company, developing market analytics and supply chain systems, that enables retailers to optimise and massively expand their product range, and has landed customers like Argos and Tesco.

2.       Incentivisation

Customers are less loyal than ever and more likely to shop around for the best deal. So again, we are looking for opportunities that can help solve this growing problem and enable businesses to convert their customers into loyal advocates. If you can get it right, then the metrics speak for themselves – one to watch in this space is Shopa, which is now the world’s largest shopping network where members discover popular products and earn cash when they buy or share them with friends. Ecrebo is another interesting company tapping into this trend, using existing till hardware to provide customers with targeted and relevant coupons.

3.       Customer communication

Social media has had a game-changing impact on how brands communicate with customers but effectively harnessing social media is a constant challenge to businesses of all sizes. The likes of Conversocial enable businesses to manage social media as a large-scale customer service channel and now have customers like Tesco, Barclaycard and Costa using their services to more effectively manage the way they communicate with their customers. 12Mass are also looking to plug this space, using analytics to inform Twitter and Facebook communication with customers.

4.       Enhancing the user experience

Consumers are increasingly looking for online retail experiences that mirror the offline pleasures of shopping whilst maximising conversion. Amplience drives profitable omnichannel revenue growth through rich customer experiences and have worked with retailers of all sizes, from small online boutiques to global brands to help transform channel and campaign performance – any business that can give examples of increasing conversion by 300% or reducing media production costs by 80% (as Amplience can demonstrate) are clearly creating value and are likely to thrive.

Focus on customer needs

All the businesses mentioned here are rapidly growing companies that are run by great teams and are focused on a real customer need. And what’s more these trends aren’t limited to just the retail space – we see companies making headlines every day for the way they are using technology to meet changing consumer attitudes.

Just look at Sofar Sound, which is using social media to connect music lovers with ultra-intimate gigs. There are so many fundamental shifts happening in the retail industry that fast moving, innovative and customer obsessed businesses have never been better placed to thrive, and I can assure you that the best Venture Capital funds will be helping them on their way.

George Whitehead, Head of Venture Partners, Octopus Investments