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Berkeley Research Group
I. The U.S. Consumer
II. The Retail Landscape
III. A View From the Trenches
IV. Summary
Agenda
Berkeley Research Group
3.3%
1.1%
5.3%
2.8%
-8%
-6%
-4%
-2%
0%
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4%
6%
8%
0
50,000
100,000
150,000
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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
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20
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Consumer Sentiment (University of Michigan Survey of Consumers)
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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
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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
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$1,000
YOY
% C
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Outstanding Revolving CreditConsumer Credit (G.19 Statistical Release)
Revolving Credit ($B)
YOY Change
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6%
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$11,500
$12,000
$12,500
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$13,500
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$14,500
YOY
% C
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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
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% u
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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
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
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535
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$100
$200
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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
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?