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DEBORAH WEINSWIG
MANAGING DIRECTOR
FUNG GLOBAL RETAIL & TECHNOLOGY
October 18, 2016
Do or Die: Retail Imperatives for
Globalization, Personalization and
Localization

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Today, We’ll Talk About:
ConsumersRetailers TechnologyThe economy

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FUNG GROUP
TRADING LOGISTICS DISTRIBUTIO
N
RETAILING
Li & Fung Limited
Listed on SEHK
Global Brands Group
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Privately Held Entity
Convenience Retail
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Privately Held Entities
Fung Holdings (1937) Ltd.
A privately held entity and major shareholder of the Fung Group

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• Fung Global Retail & Technology publishes research that is available at www.FungGlobalRetailTech.com
• 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

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• 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
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DIGITAL
DIGITAL
DIGITAL
DIGITAL

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1. Macro Environment

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• 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%

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(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%

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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.

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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

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2. Increased Price Competition; Online Grocery Set to Boom

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• 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

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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)

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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.

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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)

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…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

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• 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

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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

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…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.

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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

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…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

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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%

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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

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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

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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

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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

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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

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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

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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

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3. Changing Consumer Behaviors

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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

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…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

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…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

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4. Retail Tech Strategies

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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

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THE JET.COM ACQUISITION IN NUMBERS
Walmart’s major push into US e-commerce
Source: Walmart

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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.

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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.

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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

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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

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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
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

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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

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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.

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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.

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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.

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Q & A
DEBORAH WEINSWIG
MANAGING DIRECTOR
FUNG GLOBAL RETAIL & TECHNOLOGY
deborahweinswig@fung1937.com
www.FungGlobalRetailTech.com