24
Berkeley Research Group The Evolving Retail Landscape: Challenges and Opportunities November 2016

The Evolving Retail Landscape: Challenges and Opportunities 5... ·  · 2016-11-14The Evolving Retail Landscape: Challenges and Opportunities ... Sports Authority –Filed for Chapter

Embed Size (px)

Citation preview

Berkeley Research Group

The Evolving Retail Landscape: Challenges and Opportunities

November 2016

Berkeley Research Group

I. The U.S. Consumer

II. The Retail Landscape

III. A View From the Trenches

IV. Summary

Agenda

Berkeley Research Group

Consumers

Berkeley Research Group

3.3%

1.1%

5.3%

2.8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

0

50,000

100,000

150,000

200,000

250,000

300,000

YOY

% C

han

ge

Sale

s ($

m)

Monthly Retail Sales(excludes Motor Veh., Gasoline, Dining)

Retail Sales (excl. food services/dining, autos/parts & gas stations) YOY Sales Change

4

Retail sales since 2013 have shown aggregate growth of just 3%-4% annually vs. 5%-7% in the mid-2000’s and late-1990’s

Source: US Census Bureau

Berkeley Research Group

0

20

40

60

80

100

120

Consumer Sentiment (University of Michigan Survey of Consumers)

5

Consumer sentiment has been trending flat over the last year, and is currently near the 2-year low

Source: The Surveys of Consumers are conducted by the Survey Research Center at the University of Michigan. (https://data.sca.isr.umich.edu/survey-info.php)

Consumer Sentiment Index

2-year high 98.1

2-year average 91.8

2-year low 86.9

Current 87.9

Berkeley Research Group

14%

35%

31%

15%

5%

Very Good Good Neutral Not VeryGood

Not Good atAll

15%

57%

19%

9%

More Same Less Unsure

6

The consumer mindset heading to 2016 holidays? Many are “sitting the fence" with 51% feeling neutral or not positive – that could impact spending

BRG 2016 Retail Holiday Outlook, August 2016, N=1026

How do you feel about your personal financial situation right now?

Compared to the amount you spent on holiday gifts in 2015, do you expect to spend more, the same, or less this year?

Berkeley Research Group

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

$700

$750

$800

$850

$900

$950

$1,000

YOY

% C

han

ge

$ B

illio

ns

Outstanding Revolving CreditConsumer Credit (G.19 Statistical Release)

Revolving Credit ($B)

YOY Change

0%

1%

2%

3%

4%

5%

6%

7%

$11,500

$12,000

$12,500

$13,000

$13,500

$14,000

$14,500

YOY

% C

han

ge

USD

(b

illio

ns)

Disposable Income & Savings

Personal Disposable Income

Personal Savings (as % of Disposable Income)

7

Consumer debt burden continues to rise – personal savings rate has dipped since Q4-2015

Source: U.S. Federal ReserveU.S. Bureau of Economic Analysis, “Personal Income and Its Disposition (Months),” http://www.bea.gov/index.htm

Berkeley Research Group

4.9%

9.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

50

100

150

200

250

300

350

400

% u

nem

plo

ymen

t

No

n-f

arm

em

plo

ymen

t (0

00

)

U.S. UnemploymentMonthly Change, Non-Farm Empoyment U-3 U-6

8

U-3

Total unemployed as a % of the civilian labor force

(commonly reported “unemployment rate”)

U-6

Total unemployed as a % of the civilian labor force

(including persons marginally attached to labor force + total employed part time for economic reasons)

Source: U.S. Bureau of Labor Statistics

U.S. unemployment has stabilized at around 5%... while long term job growth has been positive, in the last 12 months growth has slowed

Berkeley Research Group

The Retail Landscape

Berkeley Research Group

Retail executives are feeling the impact of the new and more demanding business environment.

The rising challenges of new competition, technology, consumer demographics, etc. have caused unsettling shifts.

Few could have predicted these shifts when we entered the new millennium.

Major Disruptive Trends in Retail

Evolving Consumer Demographics: America is aging. Baby Boomers have driven U.S. retail for decades, but Millennial shoppers are now the majority.

Channel shift: Online shopping has grown at over 17% CAGR since the beginning of 2010, with online sales as a percentage of total retail sales nearly doubling to 8.1% through Q2 2016.

Technology: Advancements in mobile technology have forever changed retail, from the consumer experience to operations.

Mobility/Delivery: The true power of mobility and emerging delivery models are trends that will have a more profound impact on retail in future years.

The Role of Physical Stores: Omni-channel is NOT just about shopping online; success today involves effective integration of the online and in-store experiences.

10

A demanding and unsettled retail environment will continue to challenge retailers and suppliers

Berkeley Research Group

Evolving Demographics

Millennials’ total population in the U.S. has surpassed Baby Boomers

This younger consumer is reaching their prime spending years, while Boomers fade into the sunset of their lives (and spending impact)

Millennials are very different from the rest of the consumer population, both in they ways they shop and how they spend their money

This shift will dramatically impact the approach retailers take to interact and connect with their customers

11

Retailers must embrace the evolving consumer demographic – and understand the business impacts

75.377.8

80.6 81.079.2

73.8

65.7 65.7

64.2

60.1

51.7

31.4

71.8

60.9

40.7

21.0

2.6

0

10

20

30

40

50

60

70

80

90

Projected U.S. Population by Age GroupMillennials Gen X Baby Boomers

Source: U.S. Census Bureau, Population Division 2014 National Population Projections NP2014_D1: Projected Population by Single Year of Age, Sex, Race, and Hispanic Origin for the United States: 2014 to 2060 File: 2014 National Population Projections Release date: December 2014

Berkeley Research Group

Omni-Channel Challenges

U.S. online sales exceeded $340 billion in 2015 – expected to increase 57% to $535 billion in 2019

Price transparency online is a game-changer for consumers and retailers

Retailers must invest in IT infrastructure - advanced analytics drives success

Master logistics and inventory processes –distribution network and supply chain are critical

Adapt marketing strategies to the omni-channel reality –customer communication is a key to success in today’s retail world

12

To survive and thrive in today’s retail environment, companies must prioritize the omni-channel challenges/initiatives

261

298

341

385

432

482

535

$0

$100

$200

$300

$400

$500

$600

2013 2014 2015 2016* 2017* 2018* 2019*

$ b

illio

ns

U.S. Retail E-Commerce SalesSource: U.S. Census Bureau, * = projections

Berkeley Research Group

Shoppers are no longer just shopping …… They are on a Mission!!

13

Technology has changed the way we shop…Millennial shoppers – the so-called “Digital Natives” are having a major impact

Shoppers’ habits have changed drastically because of new technology

Consumers rely more and more on online product and pricing information

The shopping experience extends beyond the four walls of a store

Shoppers are well-prepared prior to arriving to shop

Retailers and mall owners must adapt to these changing habits

Berkeley Research Group

Physical Stores Imperatives

Omni-channel demands effective integration of online and in-store experiences

Online shopping influences in-store expectations (service, products, convenience AND the availability of digital tools in-store to assist with product information, payment)

Excel on retail basics –customer service, hassle free shopping, value, in-stock

Create an overall experience that brings customers back

How important is it to you that stores you shop at carry items that represent the needs/characteristics of your local community?

67%76%

66%61%

33%24%

34%39%

Total Millennials (18-35) Gen X (36-51) Baby Boomers (52-70)

Important Not Important

Thinking of when you shop in-store, what are the reasons you typically leave a store without making a purchase?

14%

15%

17%

21%

26%

31%

39%

51%

60%

Found lower price on my mobile while shopping

Service was bad

Store was too crowded

Checkout lines were too long

An advertised item was out of stock

Did not like the item once I saw it/tried it on

Did not have the right size or product type

Price was too high

Could not find what I wanted

BRG 2016 Retail Holiday Outlook, August 2016, N=102614

Stores still matter: Omni-channel success requires the right in-store experience, creating a seamless experience for shoppers across all channels

Berkeley Research Group

To create the right store experience the mall as we know it must evolve –an effort that will involve retailers and mall operators

15

Retail boom fueled by the middle class and Baby Boomers

Anchor tenants were key to mall success

Logistics was a key driver

Mobile technology and social media have had major impact on consumer behavior

Shopping in-store is less about transactions, and more about the experience

What experiences will retailers have to offer?

How can mall owners better serve and support their tenants?

Can online be fully integrated with in-store in a way that drives mall traffic?

The anchored mall in the past was the

standard for shopping

The mall today…retail redefined and still

changing

The mall of the future?????

Berkeley Research Group

A View From the Trenches

Berkeley Research Group

31

34

38

31

2013 2014 2015 2016 (YTD)

Retail Bankruptcies

Since the beginning of 2016, 31 retailers with assets or liabilities exceeding $10 million have filed for bankruptcy protection

17

Retail bankruptcies continue to demonstrate the challenges retailers face

Source: The Deal

Slow economic growth, increased competition, and growth in ecommerce have forced retailers to shut down stores. Store closings include:

Walmart (January 2016) – Announced plan to close 269 stores (154 in the U.S. and 115 internationally)

Staples – Closed 73 North American stores in 2015 and in March 2016, publicized a plan to close 50 additional stores

Sports Authority – Filed for Chapter 11 bankruptcy in March 2016 (converted to Chapter 7) and closed all 463 stores

Macy’s – In August disclosed plan to close 100 full line locations in early 2017; in November 2016 announced sale of five stores to General Growth Properties for $46 million

Sears (August 2016) – Closed 68 Kmart and 10 Sears stores

Berkeley Research Group

What we are seeing today with our clients

Major landlords waking up to the new reality of retail

• Vacancy rates remain at 10-11%; well north of pre-recession levels of ~ 7%

• Simon and GGP take ownership in reorganized Aeropostale…are we moving to a different model of landlord/retailer partnerships?

Intellectual property as reliable collateral with a liquid market and valuation standards

• Behind inventory, IP has recently become the most valuable asset in distressed sale transactions

• Private equity and hedge funds beginning to become active investors; likely moving toward bundling portfolios of IP in CLO type transactions

Capital structures are more volatile than most CFO’s appreciate

• Scenario planning is often lacking; visibility into liquidity is well behind EBITDA planning

• Vendors are more fragile than ever, factors and credit insurers highly focused on credit exposure

• CDS trading is on the rise; given the leverage of many retailers, this could add volatility in distressed situations

18

Berkeley Research Group

Key Events• The Sports Authority bankruptcy – Chapter 11 liquidation; Dick’s purchases IP/lease designation rights• Golfsmith – Canada going concern sale; US liquidation with Dick’s purchasing IP/lease designation rights• Sports Chalet – liquidation, closed 47 stores• Performance Sports Group – Chapter 11 reorganization• Bass Pro Shops purchases Cabella’s• Eastern Mountain Sports and Gander Mountain – specialty chains• Hibbert, Big 5, Champ’s Sports, Modells – regional chains • Amazon, Walmart challenging for dominance in the category

Key Suppliers – some segments continue to retain strong position, other struggling• Strong athletic brands (Nike, Adidas and Under Armor) continue to battle for share• Sporting Goods: Equipment sales down • Footwear: Highly competitive segment• Golf: Manufacturers have flooded market with product and cannibalized pricing• Gun manufacturers: Election cycle driving higher sales• Camping goods: TBD• Snow/Ski: Hoping for sales uptick following last two difficult winter seasons

Key Trends• Athlete-Leisure market expanding rapidly, numerous brands and retailer extending into space• Weaken consumer interested in golf has driving substantial decline in equipment and apparel sales• Trend to e-commerce purchasing is tracking /leading (??) overall shift in consumer • Online sales shift reducing productivity of Retail space and challenging 4 wall profitability• Experience based / Retail-entertainment is attractive to consumer but poses challenges for retailers

Sector spotlight: Sporting Goods industry is experiencing substantial upheaval and is at a pivot point

19

Berkeley Research Group

Case Study: Key Takeaways from The Sports Authority

No proprietary offerings in assortment – products can be bought anywhere, including online. Reliance on slow moving hard goods to fill large boxes

Business had become vendor centric, not customer centric

Lack of organic growth vs. growth by acquisition; lack of continuity across store portfolio

Disparate channels of competition – other sporting goods retailers, mass merchants, online, specialty retailers

Key vendors also major competitors, e.g., Nike, UA, etc., creating price competition in the segment and a “race to the bottom”

Allocation of best product is restricted and unpredictable

Choked on real estate – too many stores as online competition grew

Zero wiggle room to be creative – financial leverage limited flexibility to execute a turnaround

Dispute between term lenders and consignment vendors resulted in little to no replenishment and ultimately a liquidation

20

Berkeley Research Group

Case Study: Aéropostale

21

Events Leading to Bankruptcy

Competition from big-box stores, non-branded clothing, online merchants and “fast fashion” rivals

800 locations in the US and Canada; 40% sales drop between 2011 and 2015

Company accused lead lender of using a supplier it controlled to steer the chain into bankruptcy and buy it on the cheap

Berkeley Research Group

Case Study: Aéropostale (cont.)

22

Transaction No. 1 mall developer (Simon) teams up with No. 2 mall developer (General Growth) JV includes Authentic Brands Group, Hilco and Gordon Brothers Middle East mall model where landlords own shopping centers and retail operations

of stores has been referenced Total sales value of $243M (240+ store chain); purchase puzzled Wall Street Simon’s share $33M, small compared to Company’s $65B stock market value Focus is mostly motivated by the prospect of hefty profit thanks to low price paid

Current Situation and Next Steps Overall store count increased to 500+ stores after concessions from other landlords Owners now believe Aéropostale could bounce back and double its store fleet More store profitability than Simon/GGP thought; every store profitable The next chapter begins 1 January when all 500+ stores will go operational The joint partnership transaction, a first in American history, may have longevity and

could spur copycat buyout models

Berkeley Research Group

CEO Concerns

Omni-channel imperatives and how it impacts the business model

Technology capabilities – big data, logistics, inventory, marketing and communications, in-store systems, etc.

Evolving U.S. demographic – impact on customers AND employees

Supplier relationships, sourcing

New competition and shifting competitive pressures

Organizational design that addresses the ever changing retail landscape

Cybersecurity

CFO Concerns

Robust business planning process

Management of indirect spending

Store 4-wall profitability

Store portfolio optimization

Margin / pricing pressures

Managing working capital

Funding required capital expenditures

Corporate cost structure (SG&A)

Effectiveness of FP&A organization

Creating / managing flow of information to successfully manage the business (dashboards)

23

What keeps CEOs and CFOs up at night?

Berkeley Research Group

www.thinkbrg.com

We thrive in the midst of tough, high-stakes challenges.