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Do or Die: Retail Imperatives for Globalization, Personalization and Localization

  1. 1 DEBORAH WEINSWIG MANAGING DIRECTOR FUNG GLOBAL RETAIL & TECHNOLOGY October 18, 2016 Do or Die: Retail Imperatives for Globalization, Personalization and Localization
  2. 2 Today, We’ll Talk About: ConsumersRetailers TechnologyThe economy
  3. 3 FUNG GROUP TRADING LOGISTICS DISTRIBUTIO N RETAILING Li & Fung Limited Listed on SEHK Global Brands Group Listed on SEHK Fung Retailing Limited Privately Held Entity Convenience Retail Asia Limited Listed on SEHK Trinity Limited Listed on SEHK Branded Lifestyle Holdings Limited LiFung Kids (Holdings) Limited Toys “R” Us (Asia) Suhyang Networks UCCAL Fashion Group Privately Held Entities Fung Holdings (1937) Ltd. A privately held entity and major shareholder of the Fung Group
  4. 4 • Fung Global Retail & Technology publishes research that is available at • We advise retailers, real estate developers and tech companies on projects situated at the intersection of retail, tech and/or fashion • Our team possesses deep knowledge of and significant experience in the retail, fashion and tech fields A UNIQUE COMBINATION OF RETAIL, FASHION AND TECH RETAIL FASHION TECH
  5. 5 • The knowledge bank for the Fung Group • Consultancy for clients within and outside the Fung Group • Focuses on emerging retail and technology trends • Established in 2014 • Based in New York, with research teams in London and Hong Kong • 20+ analysts specializing in retail and technology • Publishes thematic and global market research on topics such as the Internet of Things (IoT), digital payments, omni- channel retail, fashion retail trends and disruptive technologies FUNG GLOBAL RETAIL & TECHNOLOGY HONG KONG NEW YORK LONDON RETAIL TECH MICRO MACRO RETAIL REAL ESTATE THEMATIC RESEARCHVR AI IOT DIGITAL DIGITAL DIGITAL DIGITAL
  6. 6 1. Macro Environment
  7. 7 • The US GDP annualized growth rate was 1.4% in 2Q16, following lackluster growth of 0.8% in 1Q16 and 0.9% in 4Q15. • Downward revisions to growth in prior periods were in government spending, inventories and net exports. US GDP GREW BY 1.4% IN 2Q16, BELOW EXPECTATIONS Source: US Bureau of Economic Analysis/Fung Global Retail & Technology US GDP Growth Rate 4Q153Q152Q151Q154Q143Q142Q14 4% 0.9% 0.8% 1Q16 2Q16 2.6% 2% 2.3% 2% 5% 1.4%
  8. 8 (0.5%) 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15 Feb 16 Aug 16 CPI-U CPI-U Less Food and Energy 1.50 1.75 2.00 2.25 2.50 Oct 15 Apr 16 Oct 16 US INFLATION PACE STILL MODEST US Gasoline PriceUS CPI: YoY % Change Source: US Bureau of Labor Statistics/Energy Information Administration $2.272 1.1% 2.3%
  9. 9 US FOOD-PRICE DEFLATION IMPACTING GROCERY RETAIL Consumer Prices: Selected Food Categories YoY % Change in Six Months Ended July 2016 Source: US Bureau of Labor Statistics (2.1)% (2.0)% (2.6)% (4.4)% (4.6)% Food at Home Total Bakery Products Dairy Products Fruits and Vegetables Meat, Poultry, Fish and Eggs • US food prices have fallen, impacting revenues in all grocery channels. • Declining US exports have pushed down domestic prices of fresh-food categories such as beef and poultry, while a surplus has depressed dairy prices.
  10. 10 RESTAURANTS VS. GROCERY: A WIDENING GAP • US restaurant sales weakened in the second quarter, and many restaurant operators posted disappointing earnings results. • During the first seven months of 2016, the cost of eating at home declined, but restaurant operators raised their menu prices consistently, increasing the price gap between buying groceries and dining out. Monthly Retail Sales, YoY % Change Source: US Census Bureau 2.2% 7.5% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Grocery Stores Restaurants
  11. 11 2. Increased Price Competition; Online Grocery Set to Boom
  12. 12 • Across mature grocery markets, we see two growth areas: • E-commerce • Discounters • There is little overlap between the two segments: hard discounters avoid e-commerce. • Both fuel the trend for little-and-often shopping in smaller stores. • E-commerce and discounters both generate a need for top-up shops from other channels. Channel Fragmentation E-Commerce Grocery Discounters Dollar Stores/Pound Shops Little-and- Often Shopping Convenience Stores Food-Service Opportunities COMMON GLOBAL THEMES IN GROCERY
  13. 13 US GROCERY SEGMENT OVERVIEW SALES FORECAST (USD Mil.) Hypermarkets: >25,000 sq. ft.; supermarkets: <25,000 sq. ft. Discounters: Aldi and Lidl All values are in current prices Source: Euromonitor International 17,194 26,967 133,162 147,009 226,905 254,297 318,082 372,465 22% 16.4% 9.9% 0.5% 13.9% 8.3% 10.8% 13.4% 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 Discounters Convenience Stores Warehouse Clubs Traditional Grocery Retailers Drugstores/Parapharmacies Home Improvement Stores Hypermarkets Supermarkets Sales (2016) Sales Growth (2016-2020F)
  14. 14 PRICE INVESTMENTS RAMP UP • Walmart is providing stronger competition on price. • The retailer is continuing to implement a multiyear strategy of incremental price investment in the US business (estimated at $4 billion). • Kroger has responded aggressively: the retailer lowered the cost of 1,000 popular grocery items in 120 of its stores in 2016. Increasing competition has put pricing at the forefront of growth strategies.
  15. 15 DOLLAR-STORE OUTPERFORMANCE HAS DRIVEN COMPETITION… FY17 estimates are based on consensus estimates for Dollar General, Dollar Tree, Family Dollar and Fred’s, and on trailing-12-months data for 99 Cents Only (no consensus available). Source: S&P Capital IQ/Fung Global Retail & Technology • Dollar-store sector grew sales by 31% between fiscal years 2012 and 2016, from $34 billion to $45 billion. • Sector growth has been slowing, however, from 11.2% in fiscal 2012 to an estimated 5.0% in fiscal 2017. • Dollar General entered the price wars in August with an average price reduction of 10% across key categories. 34.2 37.4 39.6 42.1 44.8 47.0 11.2 9.5 5.8 6.3 6.3 5.0 0 2 4 6 8 10 12 0 5 10 15 20 25 30 35 40 45 50 FY12 FY13 FY14 FY15 FY16 FY17E Sales YoY % Change Top Dollar Stores: Sales (USD Bil., Left Axis) and YoY % Change (Right Axis)
  16. 16 …AND DOLLAR STORES HAVE CARVED SHARE IN THE GROCERY MARKET… Source: Company reports/S&P Capital IQ/US Bureau of Economic Analysis/Fung Global Retail & Technology Top Dollar Stores: Estimated Grocery Sales (USD Bil., Left Axis) and Grocery Sales as % of Total Spending on Core Grocery Categories (Right Axis) • We estimate that US shoppers spent some $31.1 billion, or 2.5% of total grocery spend, on grocery categories at the major dollar-store chains in fiscal 2017. • The dollar stores’ share of total grocery spend has been creeping up, but the sector remains niche. 22.3 24.8 26.6 28.3 29.4 31.1 2.0 2.2 2.3 2.4 2.4 2.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 0 5 10 15 20 25 30 35 FY12 FY13 FY14 FY15 FY16 FY17E Grocery Sales Share of Core Grocery Spend
  17. 17 • US grocery retail is a story of low and generally depleting margins. • Perennially low—and declining— margins have not prevented Amazon from pushing into grocery. • The scale of the market balances the low margins. • The costs of e-commerce are likely to exert further downward pressure. 5.5 5.3 5.4 5.2 5.1 4.7 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8 2010 2011 2012 2013 2014 2015 Aggregate Operating Margin of the Top Four Public Grocery Retailers with Operations in the US (%) Based on total company revenues and operating profits, including any non-US activities, for Ahold-Delhaize, Publix, Kroger, Walmart Source: S&P Capital IQ/Fung Global Retail & Technology …CONTRIBUTING TO MARGIN DEPLETION
  18. 18 INTERNATIONAL DISCOUNTERS ARE ALSO TAKING SHARE… Share of grocery retailers sector as defined by US Census Bureau. Source: Company reports/Euromonitor International/National Retail Federation/ US Census Bureau/Fung Global Retail & Technology • Aldi is expanding its store base and Lidl plans to enter the US market by 2018. • The UK grocery sector shows that German hard discounters can break out rapidly and gain share, hitting nondiscount grocers. • In the US, Aldi and Trader Joe’s have each been growing market share steadily. US: Share of US Grocery Sector for Aldi, Trader Joe’s and Lidl (%) 1.6 1.7 1.8 1.9 2.0 2.1 2.6 1.3 1.3 1.4 1.4 1.6 1.7 2.2 0.4 0 1 2 3 4 5 6 2010 2011 2012 2013 2014 2015E 2020E Aldi Trader Joe's Lidl
  19. 19 …AND LIDL IS AN EMERGING COMPETITOR • Lidl planning to open 150 stores by 2018. • Store size is planned to be 36,170 sq. ft., competing with Walmart’s Neighborhood Market format. • Lidl offers a broader product portfolio and more brand names than Aldi does: it is a cross between Walmart and Trader Joe’s. • Lidl has expanded its fresh range over the last two years and is expected to compete in that category in the US.
  20. 20 E-COMMERCE IS MAINTAINING GROWTH IN THE US… 8.1% US E-Commerce Retail Sales as % of Total Sales 2Q16 Online Offline Offline sales comprise more than 90% of total sales, but e-commerce accounts for most of the growth. US E-Commerce Retail Sales as % of Total Retail Sales 2Q10–2Q16 Source: US Census Bureau 4.4% 4.8% 5.3% 5.8% 6.3% 7.1% 8.1% 2Q 2010 2Q 2011 2Q 2012 2Q 2013 2Q 2014 2Q 2015 2Q 2016
  21. 21 …AND IS THE NEXT GROCERY BATTLEGROUND Walmart and Kroger piling in will spark accelerating growth in online grocery Source: Kantar Worldpanel/IRI/Fung Global Retail & Technology US: E-Commerce’s Share of FMCG Sales 2014–2017E Selected Countries: E-Commerce’s Share of FMCG Sales June 2016 0.4% 1.2% 1.4% 1.7% 1.7% 5.3% 6.9% 16.6% Italy Germany US Spain Netherlands France UK South Korea 0.8% 1.1% 1.4% 2%+ 2014 2015E 2016 2017EE
  22. 22 DRIVING UP BASKET SIZES WILL BOOST US ONLINE GROCERY Most US online grocery shoppers are not doing a major shop online…yet. Source: Mintel/Brick Meets Click/Fung Global Retail & Technology US: Percentage of Online Shoppers Who Describe This as Their Most Recent Online Grocery Trip (4Q15) US: Percentage of Shoppers Who Bought Groceries Online in the Past Year 61% 15% 12% Specific Product Major Grocery Shop Subscription-Based 19% 31% 2014 2015 +63%
  23. 23 WALMART, KROGER AND OTHERS WILL DRIVE UP BASKET SIZES US online grocery will move from small orders to regular, big-basket purchases • 2016: - Publix partners with Instacart • 2015: - Kroger rolls out ClickList - Target partners with Instacart • 2014: - Walmart rolls out Grocery Pickup - Whole Foods Market partners with Instacart
  24. 24 WALMART IS PUSHING INTO E-GROCERY Source: Company reports April 2011 Launched Walmart To Go, a grocery home delivery service in San Jose October 2013 Launched Walmart To Go in Denver January 2014 Grocery pickup live in 11 stores in Denver September 2014 Walmart Grocery Pickup launched in Northwest Arkansas June 2016 Announced partnerships for same-day delivery of groceries with Uber, Lyft following partnership with Deliv. October 2016 Announced grocery pick-up will be in 100 markets, or approximately 600 stores, by the end of this year. 2015 Grocery pickup is in 23 markets by ear-end 2016 Grocery pickup expanded to 60 markets by 2Q FY2017
  25. 25 AMAZONFRESH IS LIKELY TO HIT BACK… Amazon is the most popular site for grocery…but it is not AmazonFresh. Amazon plans to fight back against Walmart’s and Kroger’s encroachment by expanding AmazonFresh: • Curbside pickup has been recently rumored. • Using third-party couriers, as it does in the UK. • Cutting charges: in October 2016, it cut the fee from $299 per year to $14.99 per month. • Currently operates in 10 markets in the US, but is expanding to Seattle, Los Angeles, San Francisco, San Diego, New York, Philadelphia, Baltimore, Sacramento and Boston. US: Proportion of Online Food and Beverage Shoppers Using Amazon Services for Food and Beverage Shopping Feb/Mar 2016 (%) 49 18 11 Prime AmazonFresh Prime Now Source: Cowen and Company
  26. 26 AMAZONFRESH EXANSION Source: Company reports 2007 AmazonFresh launched in Seattle 2013 AmazonFresh launched in Los Angeles and San Francisco 2014 AmazonFresh launched in San Diego, New York, and Philadelphia 2014 Announced a $299 annual fee October 2016 AmazonFresh fee reduced to $14.99 per month 2015 AmazonFresh launched in Baltimore and Sacrametno 2016 AmazonFresh launcehd in Boston and London
  27. 27 1. Collection: • Walmart and Kroger each now offer grocery collection at about 400 stores, and Walmart is ramping up to 600. • Amazon is reportedly set to launch collection services via stand-alone brick-and-mortar stores and curbside pickup. 2. Instacart: • Whole Foods Market, Publix and Target are using third-party delivery service Instacart, cutting out the need to invest in their own fulfillment operations. …BUT US RETAILERS ARE LIMITING COSTS Source: Company reports
  28. 28 AMAZON: TRYING TO OWN THE RETAIL ECOSYTEM 0% 2% 4% 6% 8% 10% 12% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Walmart’s and Amazon’s Sales as % of Total US Retail Sales Walmart Amazon Source: Company reports/US Census Bureau/Fung Global Retail & Technology • In 2015, Amazon accounted for 24% of US retail growth and 60% of US e-commerce growth. • The company is becoming ubiquitous, turning into its own retail ecosystem: - Leased 40 air cargo planes in 2016 - Operating an airbase in Cincinnati and is reportedly considering buying an airport in Germany - Rumored to be planning to open convenience store locations
  29. 29 AMAZON: TRYING TO OWN THE RETAIL ECOSYTEM Source: Company reports/Cowen Group/Business Insider 6.16 8.69 11.52 14.51 17.52 20.37 23.26 0 5 10 15 20 25 2015 2016 2017 2018 2019 2020 2021 Amazon: Projected Food & Beverage GMV (USD Bil.) 33.3% 26.4% 2021 2016 Amazon: Projected % of Online Grocery GMV
  30. 30 3. Changing Consumer Behaviors
  31. 31 30% 34% 34% 35% 38% 38% 37% 36% 45% 46% 51% 52% 54% 56% 56% 58% 59% 69% Grocery Beauty Health Men's Children's Women's Home Automotive Electronics Share of Digitally Influenced In-Store Sales in the US, by Category (2016) Digital Mobile CONSUMERS ARE CONNECTED AND INFORMED… Most offline sales are digitally influenced Source: Statista/Deloitte
  32. 32 …AND THEY SHOP DIFFERENTLY FOR DIFFERENT PRODUCTS... Source: Walker Sands Online vs. In-Store Shopping Preferences of US Consumers, 2016 32% 33% 49% 56% 65% 66% 67% 71% 76% 77% 92% 68% 67% 51% 44% 35% 34% 33% 29% 24% 23% 8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Books Electronics Office supplies Sporting goods Luxury items Pet supplies Tools Household goods Clothing and apparel Consumer packaged goods Food/grocery Share of respondents Prefer to purchase in-person Prefer to purchase online
  33. 33 …AND ACROSS GENERATIONS • Large variability between generations when it comes to online shopping for groceries Percentage of US Shoppers Who Have Used an Online Channel to Shop for Groceries (Aug 2016) Source: Prosper Insights and Analytics 35.5% 28.1% 15.5% 14.2% 24.9% Millennials Gen X Boomers Mature Total
  34. 34 4. Retail Tech Strategies
  35. 35 RETAILERS ARE OPERATING IN AN 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 Company
  36. 36 THE JET.COM ACQUISITION IN NUMBERS Walmart’s major push into US e-commerce Source: Walmart
  37. 37 THE JET.COM ACQUISITION: SMART CART TECHNOLOGY Smart Cart technology: - Dynamically reprices products to reflect the true marginal cost of getting the product to the customer. - Makes big baskets more efficient: works more like a trading platform than an e- commerce platform. - Empowers customers to forgo returns in exchange for optimizing basket cost.
  38. 38 MARKETPLACES COMPLEMENT THE E-COMMERCE OFFERING Marketplace wars: • Walmart is ramping up its marketplace seller numbers and is adding around 1 million SKUs per month, mainly through its marketplace (~20 million SKUs). • This year, Amazon is set to become a majority marketplace, in terms of the share of units ordered from its site.
  39. 39 A HARDWARE PIPELINE INTO E-COMMERCE: AMAZON Amazon is extending services to homes with IoT products: Alexa • Amazon’s Alexa/Echo has become the central nerve system of the connected home. • Tie-ins with Amazon Prime Now and other Amazon retail services are natural extensions. • Amazon Prime members now make up more than half the online retailer’s customer base. • There were an estimated 63 million Prime members in June 2016. Source: Consumer Intelligence Research Partners
  40. 40 A HARDWARE PIPELINE INTO E-COMMERCE: AMAZON Amazon is extending services to homes with IoT products: • One-click physical Dash button: seamlessly restocks household essentials. • Prime-eligible items only: Amazon is selective about which brands can participate. • Takes a percentage of each order. • Amazon is looking to tap into the $77 billion digital ad spend market with this service, especially with CPG brands. • is creating similar buttons that are open to any retailer. Source: Forrester Research
  41. 41 USING MOBILE: SCAN-AND-GO APPLICATIONS • Kroger and Walmart have tested and deployed in-store scan-and-go technologies. • The technology allows customers to use their smartphones as a scanning device or to scan items while shopping for faster checkout and to track what their purchase total will be. • Incremental spend goes up by about 10% for Sam’s Club shoppers who use the service. Source: Company reports
  42. 42 ELECTRONIC SHELF LABELS: FLEXIBILITY AND PRICE MATCHING Market for electronic shelf labels to reach $2 billion by 2019 • French retailers, including Carrefour, Casino and Leader Price, have deployed electronic shelf tags to boost productivity. Thanks to this labeling system, one person can change all the prices in a French supermarket with a few clicks. • Some systems can handle up to 90,000 price updates an hour. • Kroger is experimenting with smart shelves in the US. Source: ABI Research
  43. 43 AUGMENTED REALITY: THE NEXT BIG THING IN IN-STORE TECH? Pokémon Go: augmented reality combines physical and virtual experiences Unlocks retail traffic from the increased footsteps of Pokémon players Jawbone UP Users: Total Number of Steps Taken by Those Posting to Social Media with a Reference to Pokémon Go Offers special coupons to gamers Source: MarketsandMarkets Combined AR and VR markets will reach $151 billion by 2022
  44. 44 LOOKING FOR INNOVATION EXTERNALLY: TARGET More retailers are investing in technology partnerships to drive innovation. • Target is the latest retailer that is partnering with an accelerator (Techstars) to invest in and develop innovative companies. • The first demo day was held in September in Minneapolis. Target CEO Brian Cornell: One of the biggest lessons [the startups in the program] taught me was speed. The juxtaposition of our operation and theirs was stark.
  45. 45 DISRUPTOR: BYTE FOODS • Fresh-food vending service in the Bay Area. • The employer pays a small monthly fee for the service, and can choose to subsidize all, some or no employee food purchases. • Byte stocks its 150-plus pantries daily with a rotating selection of salads, sandwiches, soups and other items. • All food that goes uneaten is donated and redistributed to nonprofit groups.
  46. 46 DISRUPTOR: SHELFBUCKS • Shelfbucks created a sensor-based platform that communicates with shoppers who have downloaded the store’s mobile app, which sends digital content about the product to the customer. • Smart POP displays enable consumer engagement tracking and more informed merchandising decisions. • Raised $6.5 million in 2015 to roll out platform and increase headcount.