RMS: "The Future of Retail: Is It Coming Apart at the Seams?"

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Deborah Weinswig

Managing Director

[email protected]

US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016

Future of Retail: Is It Coming Apart at the Seams?

June 9, 2016

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Deborah Weinswig

• 12 years at Citi Research, where she served as Head of Global

Staples & Consumer Discretionary

• Top ranked analyst by Institutional Investor for 10 years

• Received Retail Leadership Award by Asia Retail Congress in

2016

• Named one of retail sector’s top 50 influencers by Vend in

2016

• Mentor to Accelerators such as Alchemist, Plug and Play,

New York Fashion Tech Lab, ERA, nest, Truestart and Cocoon

• Member of Hong Kong Business Angel Network, and Golden

Seeds

• CPA, with an MBA from the University of Chicago

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Retail, Tech, and Fashion

• Fung Global Retail & Technology advises retailers, real estate developers, tech companies,

and others on projects situated at the intersection of retail, tech and/or fashion

• Our team offers a robust knowledge bank and deep-rooted experience across the retail,

fashion and tech industries. We are involved in many areas of the business, which allows us

to offer a unique perspective on the future and where the sector is heading.

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All-Channel Universe

Order From

Fulfilled By

Where Received

Home

Elsewhere

Your Store

Different Store

Mobile

Direct DC

Store DC

Your Store

Different Store

Vendor

Home

Elsewhere

Your Store

Different Store

Source: Hudson’s Bay

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Retail Destruction

“We are seeing continued weakness in consumer spending levels

for apparel and related categories.”

-Terry J. Lundgren, Chairman and CEO of Macy’s, Q2 earnings call

“They (consumers) are not buying apparel.”

-Wesley McDonald, CFO of Kohl’s, Q2 2016 earnings call

“While apparel will always be important to JCPenney, we've

conducted a detailed review of our customers’ current and future

shopping patterns, and we'll start to strategically shift our

merchandising mix to sell more products and services that correlate

to where customers are spending the greater percent of their

dollars.”

-Marvin R. Ellison, CEO and Director of JCPenney

“There's no doubt that the luxury market is the most challenging

market we participate in right now. And you've seen that in the

results of companies across the luxury spectrum.”

-Gerald L. Storch, CEO of Hudson’s Bay

Company Actual Estimate

Kohl’s (3.9%) 0.2%

Nordstrom (1.7%) 0.1%

Guess (4,2%) (1.6%)

Macy’s (6.1%) (3.4%)

JCPenney (0.4%) 3.2%

Pottery Barn 0.2% 2.5%

H&M 5.0% 9.0%

Target 1.2% 1.7%

Foot Locker 2.9% 4.5%

Costco 0.0% 0.9%

Dollar General 2.2% 2.4%

Source: StreetAccount

Actual Comps/Sales Results Versus Estimates

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The Beauty Category Outperforms Apparel

“Selfie culture, if you take a photo 10 times today…the result is people are using more

makeup and more instant skin care.”-Fabrizio Freda, CEO of Estée Lauder, commenting on 11% growth in makeup sales in 1Q16

IndustryGlobal Revenue

2015

Annual Growth

10-15

Cosmetics $276bn 3.2%

Apparel $618bn 0.6%

Source: IBISWorld

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Up-Trending Education and Healthcare Expenditures…

At the expense of apparel and other discretionary categories

3%

2.3%

17%

1.0%

0%

5%

10%

15%

20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% of Total Personal Consumption Expenditure by Categories

Apparel Education Healthcare Cell Phones

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Experiences Trump “Things”

• Over the next 5 years US

consumer spending is forecasted

to grow by 22%; non-essential

categories, including vacations

and dining out, will see the fastest

growth, about 27% (Mintel)

• More than 3 in 4 millennials would

choose to spend money on a

desirable experience

• Experiences are what people use

to define themselves across social

channels

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The Instagram Effect

Never Be Photographed in the Same Dress Twice

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Beauty and Food Retailers are Immune from

Secondary Market

No market for used lipsticks or half-eaten sandwiches

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The Presidential Election: Cautious Consumers

• The 2016 presidential campaign is one of the most unpredictable election years

• Election cycles always prove to be consumer mood-dampeners

• The luxury sector is affected the most because most of luxury spending is mood-driven

• The US luxury market is in decline with no support from tourism and election uncertainty

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US: Election Years Influence Stock Market

Election

An early pullback in spending that

is followed by a strong recovery

later in the year.

Pre-Election

The best stock market returns

compared to post election,

midterm and election years. 14%

5%

5%

7%8%

0%

4%

8%

12%

16%

Pre-Election Midterm Post-Election Election Year Average

Source: Bloomberg

S&P 500 Average Returns

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The Consumer Hourglass

• The top half and bottom half are doing better,

with outperformance at the bottom

• The “consumer hourglass” phenomenon

generates opportunities in the value-for-

money segment

Squeeze in the Middle Segment Neiman Marcus

Saks

Nordstrom

Bloomingdale’s

Dillard’s

Macy’s

Kohl’s

Sears

JCPenney

Target

Walmart

Costco

TJ Maxx/Off-Price

Primark

Aldi / Trader Joe’s

Dollar Stores

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Four-Quadrant Disruptors FrameworkNAME UR

PRICE

SELF-

CHECKOUT

EVANGELIZE

THRIVE

EXPERIENTIAL RETAIL: MAKE THE STORE AN AWESOME

PLACE

CUSTOMER

ENGAGEMENT: HOW DO YOU CONVERT THE CONSUMER

ALL CHANNEL: The CONSUMER CAN SHOP WHEREVER

+ WHENEVER

REACTION COMMERCE

NEW RETAIL MODELS:HOW WILL THE CONSUMER SHOP IN

THE FUTURE

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Top 20 Retail & Retail Tech Trends for 2016

1. Store Traffic

2. Experiential Retail

3. Smart Malls

4. Augmented Reality

5. Virtual Reality

6. Robotics

7. Facial Recognition

8. Wearables: All About

Medical

9. Evolving Pure Plays

10. Loyalty Programs

11. Influencers

12. Consumers Have Full Power: Name Ur Price

13. Consignment

14. Subscription Economy

15. Sharing Economy

16.17. Rental Economy

17.18. Caring Economy

18.19. Silver Economy

19.20. Amazon Leads Retail Growth

20.21. Artificial Intelligence

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1. With Store Traffic Down, In-Store Experience Is Key

• US mall traffic has decreased for 41

consecutive months and continues to

be challenging

• Malls have seen an average 9.1%

YoY decrease in traffic since January

2015

– High-end malls appear less

affected

– General Growth Properties:

traffic up 2% in 2015

– Simon Malls: traffic up 1.5% in

2015

– Taubman Centers: traffic up in

2015

Source: RetailNext

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2. Experiential Retail:

A Way to Bring Shoppers Back to Stores

• Urban Outfitters acquired the

Vetri Family group of restaurants in

2015

• Club Monaco collaborated Café

Myriade to open an in-store coffee

shop in Montreal

• Rebecca Minkoff offers interactive

mirrors as well as virtual reality

headsets in stores

• Tommy Hilfiger stores have

virtual reality headsets that allow

visitors to experience runway

shows

• In March of 2016, Nike revealed

its app, Nike+, that gives

shoppers the ultimate customized

experience

Food &

Beverage

In-Store

Technology

Customization

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Making the Experience Engaging



headsets in stores




shows




experience

Food &

Beverage

In-Store

Technology

Customization



2015



shop in Montreal

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Customization and Personalization



headsets in stores




shows




experience

Food &

Beverage

Customization

In-Store

Technology



2015



shop in Montreal

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3. Smart Malls:

Reshaping the Physical Shopping Experience

Data-enabled

personalized and

timely promotions

Track movement,

behavior and

preferences

Beacon-enabled

location-based

advertising

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4. Augmented Reality

uses augmented reality and configurable 3D models of

products to drive sales and conversion

Augmented Commerce

Click and see the

products in 3D at home

Augmented Stores:

“Endless aisle” or virtual

showroom

Augmented Sales

A B2B sales tool for

sales associates to use

with customers

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5. Virtual Reality Market Size & Growth Rate:

$3 Billion @ 80% (2016)

means presenting the senses with a computer-generated

virtual environment

• VR—Oculus Rift headset

• Samsung’s Gear VR headset to be priced at $99 and to hit stores next year

• Widespread adoption of VR in the retail space is expected in as little as three years

• Industry even has a new term for selling via VR: v-commerce

Source: Digital Trends/Ad Age

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6. Robotics

• Starwood Hotels is using robotic butlers in the Aloft Silicon Valley hotel

• Suitable Technologies: entire store with telepresence robots

– Robots created for corporate boardrooms

– Allow users to interact remotely from home

(or wherever they are)

– In the Suitable Technologies

showroom, salespeople appear only as robots

– SoftBank’s new robot Pepper is capable of engaging customers as a

sales assistant in store

Market Size & Growth Rate:

$2.5 Billion @ 14% (2015)

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7. Facial Recognition

The global advanced Facial Recognition market expected growth: $2.77 Bil. in 2015 to $6.19 Bil. in 2020 (CAGR

17.4%)30% of retailers are using facial recognition technology to track customers in stores (ICSC)

Applications are

increasing: health,

wellness, beauty and

advertising

In 2015, Walmart tested

with FaceFirst

Intel released RealSense

facial recognition

technology in 2015

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8. Top Wearable Medical Trends 2016

Electronic glasses that

enable blind to see

3-D Printing: Prostethics Second Generation

Hearing Aid

Created by eSight

Seen at 2016 WEAR

Conference in Boston

Created by Enabling the

future.org

Allowing consumers to design

and DIY

Created by ReSound

Smart hearing aids controlled

on iPhone, or iPad. Users can

adjust volume, treble, bass.

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9. Evolving Pure Plays

(Number of Actual/Planned Physical Stores)

1 400 120 1 3 2

3 21 1 1 7

4 27 25 12 2

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10. Loyalty Programs: Case Studies

Today’s Loyalty

Cards with bar codes, reward

programs

Use of gamification (membership

levels, points, leaderboards)

Last-generation Loyalty

Coupons, membership

cards

Tomorrow’s Loyalty

Smartphone based

Integration of tracking status,

payment, gift cards, ect.

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11. Influencers: A Marketplace

• Marketers felt the biggest issue is

scale, with 59%, intending to

increase their influencer marketing

budgets. (Tidal Labs)

• A transparent marketplace can:

– Search all influencers by

relevant attributes

– Streamline process to cut

overhead

– Remove friction in reaching

out to startups via email

– Problems the sector is facing:

fragmentation, scale, and

authenticity

Main Challenges When Rolling Out Influencer

Engagement Strategy

Source: Augure/State of Influencer Engagement Survey

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11. Influencers: A Few Voices Reach and Impact Many

Vloggers Blogs Influencers

Joy Cho

12.8M

followers

Chris Ozner

Over 75M

daily users

Nash Grier (age 16)

1.5B plays per day

Leandra Medine

Over 2.6M

followers/month

Aimee Song

Over 2M

followers/month

Zoe Sugg

Over 1.6M

followers/month

Carli Bybel

Over 1.2M

followers/month

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12. Name your price

• Name-your-own-price model: allows customers to state the price they are willing to pay

• Dynamic pricing and data-driven repricing: prices change in response to real-time supply

and demand

• 40% of retailers plan to use cloud/Saas solutions for dynamic pricing

• Implementing dynamic pricing can improve revenues and profits by 8% and 25%,

respectively

Source: WisePricer

Best Buy and

Walmart

implement price

changes over

50,000 items

per month.

Amazon changes

prices every 10

minutes or more!

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12. Consumers Have More Power:

Name your price

is a smart wishlist generator for customers

Follow friends’ and

families’ wishlists on

social media

Slide price bar to

indicate the price you

want to pay

Set an expiration date for

auto-buying service when

the app discovers a sale

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12. Consumers Have More Power:

Name your price

is an app that empowers customers through PAY WHAT YOU

WANNA PAY

Discretionary Nice-to-

Have product

categories

Slide the price bar to

indicate customer

willingness: a lower

price corresponds to a

longer waiting time

Inventory turnover

maximization for retailers

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13. Online Fashion Consignment Takes off

• Online resale fashion industry is worth $25 billion by 2025

• Rise of retail brands’ resale programs

• Consumers are convinced by the great quality of the secondhand apparel bought via online

platforms

• Societal shift toward less ownership — the art of decluttering

• 87% of individuals who bought secondhand clothing online shifted their spending away from off-

price retailers.

• Sentiment toward secondhand has shifted

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Barter Instead of Buying- reKindness

is a unique “swap to shop” online fashion barter

community

Barter spare clothes in

reKindness’s

community closet

online and at local

events

Reduce personal

environmental footprint

by recycling clothes

De-clutter mass-market

items to make life less

stressful

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14. Subscription Economy:

Beauty and Fashion Are Growing

Pijon, Stitch Fix,

Convenience and curated products for consumers

Recurring revenue model for retailers

styling subscriptions are becoming popular

Office supplies present an opportunity

Market Size & Growth Rate:

$3 Billion @ 20% (2016)

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15. Sharing Economy:

“Uberifying” Virtually Every Industry

Disruptors: Uber, Airbnb, Lending Club, WeWork

• Valuations of sharing-economy companies have skyrocketed

• Revenues are projected to catch up to aggressive valuations

• Sharing-economy market:

$15 Billion 2013 $335 Billion

2025CAGR: 29.5%

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16. Rental Economy: Fashion Rental Leading

Disruptors: Style Lend, VillageLuxe, Le Tote, Lena the Fashion Library and Borrow For Your Bump

(maternity)

Following Rent the Runway, a new generation of fashion-rental companies has emerged

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17. Caring Economy Promotes Startups for Social

Good

Disruptors: TOMS, Reformation, Warby Parker, NOURI, SoapBox Soaps, Zady, GoodXChange

• Promotes social activism over self-indulgence

– Consumers, especially Gen Z, demand integrity from brands and retailers

• Startups with social missions apply market-based strategies to achieve a social goal

– TOMS, the shoe company, has a “one for one” business model

– Reformation designs and manufactures sustainable apparel; sources sustainable fabrics

and vintage garments

– Kohl’s Cares gives back to communities with Salina Yoon children’s books

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18. Silver Economy:

Demographics Create Opportunities

• “The Grey Market” : older consumers

may be an engine of growth in the

sluggish global economy

• Silvers are those aged 65–85 years

old, while super silvers are 85+

• The United Nations forecasts that the

60+ age group will grow from 12.3% of

the global population in 2015 to 16.5%

in 2030

• In 2015, consumers aged 65+

accounted for around $7 trillion, or

approximately 17%, of total worldwide

consumer spending

• Spending by silvers is expected to

grow 114%, 2015 – 2030, outpacing

population growth of 56%Source: UN Department of Economic and Social Affairs, Population

Division, World Population Prospects: The 2015

Revision/International Labour Organization, World Social Protection

Report 2014–15/Euromonitor International/Fung Global Retail &

Technology

56%

114%

Population Spending

Estimated Growth in Senior Population and

Spending by Seniors, 2015–2030

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19. Amazon Leads Retail Growth

• Accounted for $0.51 of every

$1.00 of growth in US e-commerce

in 2015

• Generated 24% of total retail

growth in the United States

• New Amazon services are

changing consumer preferences

Amazon Annual Sales Growth

Source: Bloomberg and US Census Bureau

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19. Amazon Leads Retail Growth

PROS

• 110 Amazon Dash Buttons available

• Two-day shipping on all items

• Set up with existing Amazon account

• Dash Buttons are available to Prime members for $4.99 each, with a $4.99 credit

after the first order

CONS

• Does not provide data to brands

• Selective regarding which brands can participate

• Controls the channel while promoting private label brand

• Items must be Prime-eligible

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20. Artificial Intelligence: Amazon Echo & Alexa

• Paired with Alex, Echo allows for “always on” AI in your home – without

needing your phone or pushing a button.

• Echo becomes the central nervous system of the connected home

Ford is partnering with Amazon to integrate vehicles with Echo, Amazon’s smart-home device

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21. Israel-China Silk Road

• Are Israel and China creating a Silk

Road for startups?

• China is a “mobile first” country

• Chinese companies are developing

apps

• In 2014, Chinese investors invested

US$302 million in Israeli companies,

and in 2015, that number rose to

more than US$500 million, a

significant increase.

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Bonus:

Fung Group’s Explorium Project in Shanghai

Explorium a retail “omni-platform lab” consisting of a 60,000

square foot space in Shanghai that has an interconnected

digital network of services, including a mobile shopping

application, an i-beacon tracking solution and a data analytics

platform.

Partnership with IBM

and Pico35 Participating

Brands

12,000 Employees as

Shoppers

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Thank You!Deborah Weinswig

Managing Director

[email protected]

US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016

June 9, 2016