R&C Outlook

Insights for the retailand consumer industry

March 2015

Welcome to the March edition of R&C Outlook

Whilst retailers had a a stronger 2014 than previous years, it was stillchallenging and 2015 seems to continuing along the same path despite asubstantial reduction in fuel prices and continuing low interest rates. Manyretailers feel that consumer confidence is fragile and the upcoming FederalBudget will need to be carefully crafted to ensure we do not have a repeat oflast year when the budget measures impacted on consumer confidence.

Those retailers which are continuing to flex to meet the ever changingconsumer demands appear to be performing well, however those retailers thathave not changed their overall value proposition to meet their customersdemands are not trading well in the challenging conditions.

The falling Australian dollar will be both a positive and a negative for retailersand consumer goods organisations. With a weakening dollar, online sales maybe slower than in past years when the dollar was strong, however on thenegative side, we may well see price increases as organisations’ hedging coverprogressively runs out in the next six to twelve months. This may lead to lowlevels of inflation which is not all that bad. In order to minimise the costincreases from suppliers, organisations will need to drive their sourcingdepartments hard to optimise margins and also drive down the cost of doingbusiness. This drive toward enhanced sourcing will be vital to success as theinflux of global retailers continues to set up in Australia.

We have a great newsletter this month with major articles around Digital, Taxand Consulting.

Kind regards

Stuart HarkerAustralian Retail & Consumer Goods Consulting LeaderGlobal Retail & Consumer Goods Advisory Leader

In this issue:

1 Digital change & technology

2 Consulting

3 Taxation

4 Thought leadership

5 Upcoming events

Digital &technology

Why retailersneed a futureforwardcybersecuritystrategy

Tracking theborderlesscustomer

R&C Outlook | March 2015 |

Tracking the borderlesscustomer

In the US there has been a high level of interest andadoption by retailers of customer analytics, however thishas been met with some resistance due to data privacyconcerns. This resistance has done little to slow down theroll out of related technologies, with major providers ofthese services maturing their service offerings to evolveinto big data analytic style businesses able to drawinsights from the high volumes of customer datagenerated by location based tracking.

Most large scale retailers operate online stores in additionto their physical stores, and in a high percentage of theseonline properties, some form of measurement andanalytics is applied to find and address under performingareas or to optimise the placement of high performingoffers. In the past a lack of supporting technology hasmade it difficult for retailers to apply similarmeasurement and analytical processes to their physicalstores which is a missed opportunity.

With the shift in consumer behaviour and the 'always on'customer, retailers are having to rethink their businessmodel in order to meet their everchanging expectations.Customers are connected, simultaneous, mobile andborderless and the traditional business models lack ofintegration across physical and digital channels makes itdifficult to offer a consistent experience. Emergingtechnologies are now making this integration possibleallowing a retailer to engage with the customer seamlesslyas they move between digital to physical channels. This isreferred to as Connected Retail.

To assist with customer engagement some retailers areturning to technologies that allow the tracking ofcustomers through physical stores using Wi-Fi andBluetooth Low Energy (BLE, also known as iBeacon)technology. This capability has been around for a whilenow and with the maturation of big data analytics,retailers can now identify key business insights from thelarge volumes of data produced by tracking technologies.

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An obvious and well applied technique for iBeacontechnology is improving product and offer awareness bypushing information to a customer's smartphone whenthey are in proximity to a product or within a storesection.

With the large scale adoption of smart mobile devices inthe consumer market and the advanced capabilities theybring, such as iBeacon technology, there is now anopportunity for retailers to track and measure wherecustomers are within and around the shop floor. Inconjunction with emerging big data solutions, retailersnow have the opportunity to not only capture trackingdata but also to mine it to find key insights relating tocustomer behaviour.

As an indicator of adoption with mobile trackingtechnologies in the US, Macy’s, Target USA, Apple, MLB,Old Navy, JC Penney, BestBuy, and Crate & Barrel have allinstalled iBeacon transmitters in stores.

In Australia we still conduct over 90% of our transactionsin stores and it is estimated that 30% of smartphones soldcan talk to iBeacon enabled systems. iBeaconcompatibility is projected to grow to 80% as peopleupgrade devices. This means that bricks and mortarretailers can still find value through the introduction ofadvanced tracking, measurement and analytics to bothonline and in store customer journeys.

There are a number of opportunities that retailers caninvestigate in relation to this technology. The main trendsfrom retailers in the US are mainly in relation tooperations and marketing.

The ability to capture and analyse location based datafrom customers can create valuable insights in a timelymanner and in some instances in near real timedepending on the time sensitive nature of the decisionbeing made, for example, measuring wait times at thecheckout can allow a store manager to make a decisionwhether or not to open or close registers.

R&C Outlook | March 2015 |

Tracking the borderless customer

With in store location tracking,retailers can optimise store layouts byidentifying under performing areas ora retail space to achieve the desiredcustomer behaviour.

Marketing campaigns can also benefitfrom being able to combine analyticsfor customers who walk through theshop front and match up with thosethat interacted with an onlinecampaign to close the loop on digitalmarketing and the customerbehaviour.

An obvious and well appliedtechnique for iBeacon technology isimproving product and offerawareness by pushing information toa customer's smartphone when theyare in proximity to a product orwithin a store section.

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Through the use of real time locationtracking of customers, a storemanager can make more informeddecisions relating to store operations.By measuring dwell times atcheckout, combined with theestimated number of customers instore, a manager can predict whennew registers should be opened.

In high value product categoriescustomers could request support fromstore staff and have their locationknown so that store staff can locatethe customer and ahead of time knowwhat products they are standing infront of. This will allow stores to notonly provide prompt assistance butalso assign an staff member withappropriate knowledge.

Case Study: Solvup

A good example of using digital technology to reengineer the reverse logistics supply chain isSolvup.

Managing customer returns is a challenge for all players involved in retail – none more so than where high cost, high complexitygoods are involved. The Solvup platform has been developed as a whole of industry solution to create a great customer experiencein a cost effective manner.

Since late 2012, Solvup has become a regular fixture at electronics store counters in Australia, and is now being taken up overseas.

Solvup uses digital technology to reengineer the reverse supply chain with a cloud based “platform” approach.

A single software instance is used across stores, vendors and service agents, and this allows a rule based, transparent approachthroughout.

Solvup improves the returns experience though features such as:

• A single entry point into the world of replacements and repairs, with information being transferred between Solvup andvarious third party platforms.

• No need for stores to call ahead or log in to vendor specific systems to get authorisation or case numbers from vendors.

• Everything tracked against a unique SKU, allowing for validation, warranty and consumer guarantee periods, and onscreentroubleshooting.

• Triage undertaken at the counter while the customer is in store, thus encouraging lowest cost outcomes and returns avoidance.

• Centralised reporting used to drive store and service agent compliance.

• Automated customer communications via email and SMS.

Solvup is the result of a collaborative approach between major retailers, vendors and service agents. The result brings togetherretailers’ best practices and vendors’ insights and recommendations, at each and every transaction.

Solvup is run by retail services firm TIC Group which is an active member of PwC’s Retail and Consumer community.

R&C Outlook | March 2015 |

For more information,please contact:

John Riccio

National Digital Change Leader

+ 61 3 8603 4968

john.riccio@au.pwc.com

Tracking the borderless customer

Within the global start up space thereare now a number of dominantservice providers that have emergedwithin the customer tracking andanalytics category. Each of theseplayers provide comprehensiveanalytics, data capture approachesand are all based on cloudtechnologies. Three of the largest andmost progressive players in this spaceare AisleLabs, RetailNext and Euclid.

AisleLabs: Using mobile device Wi-Fi and geofencing techniques,AisleLabs is able to track themovement of customers in andaround a retailer's physical stores.

AisleLabs is able to visualise first timevs. repeat visitors, customer loyalty,customer dwell times, pathways, realtime and heatmaps. Analytics datagenerated from AisleLabs can becorrelated to transactional data todetermine key revenue drivers.

RetailNext: Provides acomprehensive analytics platformthat combines and mines data from arange of sources to create valuableinsights which allows retailers toimprove store layouts, fixtures,staffing, and even products that areon offer. Data is input from a varietyof sources that each retailer mayalready be capturing such as videocamera feeds, point of sale systems,Wi-Fi and Bluetooth enabled mobiledevices, staff schedules, and evenweather services.

Euclid: Are a technology companythat leverages Wi-Fi technologies totrack and measure mobile devicemovements within a specified space.By utilising the unique identifier eachmobile device has from its networkinterface, Euclid is able to sense howsmartphones flow through a space,how long they stay, and how oftenthey return. If there is no or limitedWi-Fi technology in place, Euclid canprovide dedicated Wi-Fi unitsdedicated to the cause of capturingand forwarding tracking information.The benefit with Wi-Fi sensingtechniques is that a mobile devicedoes not have to be preinstalled witha retailer app for it to be detected, itonly has to have Wi-Fi turned on.

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Each retailer looking to implementthis capability needs to addresstechnology related challenges to allowthe free flow of customer databetween internally and externallyhosted systems. A key challenge willbe how to leverage cloud basedservices through the delivery of anaggregation layer to integrate theoutside world to internal systems in areliable and secure manner.

With regards to analytical insightcapabilities, a cloud based partner isideal as analytical processes will overtime require the scaling up of storageand processing requirements to mineinsights from a continuously growingdata repository. To do this in houseeven on existing hardware runningvirtualised machines can be expensiveand inefficient. Data volumesproduced by this type of capability isvery large. For instance RetailNextcurrently tracks more than 65,000sensors installed in thousands ofretail stores with a single customervisit alone generating over 10,000unique data points.

With the expanding adoption of cloudservices to enhance the broadercustomer experience retailers need toalso tackle the challenge of how toblend customer tracking data withinformation generated by cloudpartners such as Solvup (refer casestudy) to better service the customerand to streamline store operations.

Although iBeacon based solutions canfacilitate a rich set of interactionsbetween the customer and the retailerit is important to note that for BLE towork the customer needs to have

Bluetooth enabled and have aspecifically designed applicationinstalled that allows communicationto happen. This presents two majorchallenges to retailers, how to enticethe customer to install the applicationin the first instance and then onceinstalled, how to convince them toovercome any concerns they have onprivacy.

To entice customers to download anapplication that facilitates the captureof tracking information retailers needto provide customers with a mobileapplication that focuses on acustomer need not the retailer’s needto track movement. If the customerdoes not see the value for them theyare less likely to install the applicationon to their phone.

To address the second challengeretailers need to be open and honestwith customers as to what data isbeing captured and what it is beingused for. Users of digital services andsocial networks are protective ofpersonal data if they suspect misuse,however the likes of Facebook andGoogle services prove that people arewilling to share information openly.

R&C Outlook | March 2015 |

Why retailers need a futureforward cybersecuritystrategyDecember 2013 was a watershedmoment for retailers worldwide – andnot because of a slump in holidaysales or sweeping changes tocustomer behaviour. Instead, it wasthe month that saw a group ofunknown Russian based hackers whoused a form of malware to infectTarget USA’s point of sale systems,steal credit and debit card accountnumbers from 40 million customers,and a further 70 million email andmailing addresses to sell on the blackmarket, altering the way retailersaddress cybercrime in the process.

Twelve months later, incidents ofcybercrime have gathered speed andintensity but retailers remain woefullyunprepared. According to the 2015Global State of InformationSecurity Survey (GSISS), a yearlyPwC report that takes a critical look atthe rate at which retailers around theworld are responding to theaccelerating cybersecurity challenge,the number of hacks in 2014increased 19% when compared with2013 but information security budgetsfell an alarming 15%.

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Serious holes in datagovernance

Retailers are often prone to taking acompliance checklist approach tocybersecurity and focus most of theirattention on Payment Card IndustryData Security Standards.

Unfortunately, a data governancestrategy that’s equipped to tackle realworld cybersecurity challenges callsfor policies around the creation, use,storage and deletion of information aswell as knowledge about where data isstored, how to manage access tosensitive information and governpermission levels granted to thirdparty suppliers. When it comes torobust data governance policies in theretail sector, GSISS identified majorflaws. Only 57% of respondentsdeploy secure access controlmeasures, 54% maintain an up to dateinventory detailing how and wherecustomer and complete data is storedand collected, and 51% have written asecurity policy for off premisesstorage, access and transport ofcompany information.

Here are some of the most importanttakeaways from GSISS 2015.

Data compromises growin size and scale

In its 2013 Data Breach Investigationsreport, Verizon counted 467 retailcompromises around the world withpayment card data the main target for95% of hacks across the retail sectorand christened the period “the year ofthe retailer breach”. But in 2014,breaches that saw 56 million creditcard and pin numbers stolen from USchain Home Depot, and payroll datapilfered from UK supermarket giantMorrisons, suggests that this trendshows no signs of slowing down.

Although nation states, hacktivits andorganised crime rings are the fastestgrowing segment of cybercriminal,PwC research found that 34% ofattacks could be traced back tocurrent employees and 30% to thosewho had worked for the company inthe past. It also detected a 27% leap inincidents linked to third party serviceproviders, contractors and businesspartners who often enjoy access to acompany's data and network.

R&C Outlook | March 2015 |

Why retailers need a future forward cybersecuritystrategy

A rise in third partythreats

PwC research showed thatcyberthieves are increasinglypenetrating retailers’ networks andPOS systems by following trails left bythird party vendors and contractors.This highlights the need for a tieredvendor-management program thatanalyses, assesses and managespartners in line with risks to thebusiness.

New technologies, newrisks

There’s no denying that technologiesand platforms like cloud computing,smartphones, tablets and socialmedia are helping retailers embracethe agile mindset that’s critical tocompetitive edge. However, this suiteof new technology also demands arevised approach to cybersecurity.The PwC survey discovered that 29%of retailers experienced securitythreats as a result of mobile devices –but only 51% have a dedicated mobilesecurity strategy in place. This isfurther compounded by the jump inBYOD (bring your own device)policies, which – if unmonitored –pose further threats to corporatenetworks.

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A future forward take oncybercrime

Although retailers seem to befocusing more on some strategicpractices, falling security budgets anda trend that saw retailers cut securityspending more heavily than consumercompanies, suggests that there ismore work to be done. For retailers, astrong cybersecurity strategy involvesaligning information security withbusiness needs, identifying andprotecting sensitive assets andongoing investment in employeesecurity awareness and trainingprograms – anything less won’t cut it.

For more informationabout cybersecurity andthe retail and consumersector download the 2015Global State ofInformation SecuritySurvey:www.pwc.com/gx/en/consulting-services/information-security-survey/industry/retail-consumer.jhtml

For more information,please contact:

Steve Ingram

Partner

+61 3 8603 3676

steve.ingram@au.pwc.com

Shane Bell

Director

+61 3 8603 0241

shane.bell@au.pwc.com

Consulting

Setting up shop

R&C Outlook | March 2015 |

Setting up shop

The store has been, and will alwaysremain, at the heart of the retailindustry. However, the sector isundergoing an unprecedentedtransformation that is having asignificant impact on the profitabilityof once thriving store networks.Retailers are facing decreasingmargins as a result of downward pricepressures and increasing costs. At thesame time, the role that stores mustplay as part of the shopping journeyof today’s informed and empoweredconsumer is changing, bringing abouta need for greater investment in thesenetworks. These key industry trendshave elevated the importance ofanalytics to drive greater profitabilityboth now and into the future.

Growing MarginPressures

There is no denying that a strongstore network is still critical to thesuccess of most Australian retailers.The challenge they will encounter,however, is in maintainingprofitability in the face ofsimultaneous revenue and costpressures.

From a cost perspective, both rentand store wages, two of the biggestoperating cost categories for retailers,are expected to increase in the future,outpacing anticipated sales growth.Store wages are expected to grow by2.5%-3.5% 1. Similarly, rental costsare expected to continue to grow at4%-5% per annum (rents haveincreased by ~4% nationwide in thepast year, with New South Walesrecording a significant rental hike of~11% and rents in Victoria up ~8%

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Turning the dial on storenetwork profitability

In order to drive a sustainable stepchange in store network profitability,we believes that a systematicassessment is required in order toalign the location, size and offering ofstores to existing and future marketrequirements. This type of analysiscan be of significant value to allretailers regardless of the size andmaturity of their store networks.

For retailers who are looking toexpand their store networks orexperiment with new store formats,this analysis should form the first stepin identifying potential locationsbased on a three layered process:

1. Determine who and whereyour target market is. Thisinvolves running customeranalytics and segmentation overAustralia’s population andunderstanding the attributes thatdrive customer behaviours acrosssegments (including shoppingfrequency, purchasing occasions,preferred locations and value).From this information, thelocations which best target keycustomers, either based on placeof residence, place of work orduring key travel and commutecan be identified. Analysis ofcustomer segment attributes canalso provide invaluable insightson the most appealing storeformats, product offerings andmarketing messages.

over the period2, particularly in highfoot traffic locations. The recent fallsin the Australian dollar willcompound these factors, significantlypushing up the costs of sourcing rawmaterials and products frominternational suppliers.

For retailers with an establishedpresence in Australia, growingcompetition levels will also have asimultaneous revenue impact.Competition within the Australianmarket has significantly increasedover the past decade as a result ofinternational players setting up shop(e.g. Aldi, Zara, H&M and Uniqlo etc.)as well as the emergence of a growingpopulation of new low cost pureonline players (e.g. Kogan, Alibabaetc.). The result is that a significantnumber of retailers are seeing theneed to revisit their pricing or riskseeing their customers walk out thedoor.

The margin pressures resulting fromthe above are not only having animmediate impact on the bottom lineof retailers; it is also affecting theircompetitiveness in the future. Someretailers are finding it difficult to findthe funds to invest into their stores inorder to deliver the improvedproposition and service standardsthat today’s consumers expect. Theyare also unable to commit therequired investment into developingthe omnichannel technologies andinnovations that will be critical totheir ongoing success. The need forgreater store network profitability inorder to free up funds forreinvestment is therefore greater thanever before.

1 Citi, What’s In Store, Issue 64, 8 Nov 20132 CBRE, Q4 Australian Retail MarketView report

R&C Outlook | March 2015 |

Setting up shop

2. Determine the intensity of competition for potential storelocations. This requires pinpointing key competitors within and aroundthe defined store catchment areas and estimating the risks they representto store performance based on existing and anticipated share of wallet.

3. Understand the size of the prize. This involves looking at theunderlying local economic and demographic trends, as well as plannedchanges to store catchment areas (e.g. transport and infrastructurechanges) to estimate how customer demand and value are expected tochange into the future.

Fusing the above three layers together makes it possible to identify drivers ofindividual store performance and therefore the optimal location of new stores.Critically, consideration must be given to how any proposed new storenetworks can be optimally serviced from a supply chain perspective in order toensure that the right products are offered at the right location and time.

For retailers with already established store networks, this analysis presents theopportunity for quick profitability gains through the development of actionplans to cost effectively turnaround poor performing stores. This includesconsideration of opportunities to downsize stores, refocus ranging, or closestores at the earliest available opportunity. To gain these insights, a similarlymulti layered process needs to be followed to develop an effective strategy andaction plan for each store:

1. Review historic store profitability. This forms the starting point forthe analysis in order to isolate poor performing stores (store EBIT as apercentage of rental costs, labour costs, or total costs can be used toaccount for differences in store location and size). This analysis should becompleted at a category level in order to generate more granular insightson what is and isn’t working.

2. Overlay customer and competitor analysis. The addition ofcustomer analysis, with a particular focus on target customer segments,and competitor analysis will provide insights into which elements of storeperformance are driven by differences in store catchment demographicsand competition levels. This analysis can also provide insights intovariances in category level performance across the network as well as whatelements of performance are internally or externally driven.

3. Benchmark store cost performance. This benchmarking willhighlight where there are opportunities to take costs out of the networkwhile minimising sales impacts. This includes looking at key metrics suchas rental costs as a percentage of sales, labour costs as a percentage ofsales and similar metrics for other cost of doing business (CODB) lineitems.

Based on the above analysis, retailers can identify, for each of its poorperforming stores, whether there are opportunities to improve salesperformance by optimising merchandising and store space allocations.Similarly, they will have an understanding of where they have opportunities toreduce their cost base by optimising resourcing levels in stores, looking tonegotiate lower rent costs, or downsizing their stores by pushing poorperforming categories online. Where no feasible turnaround plan exists,retailers can also make informed decisions to close stores as soon as possible.By quickly addressing poor performing stores, retailers can alleviate themargin pressures resulting from growing costs while also freeing up capital forreinvestment into new, more profitable store locations, in store servicestandards, innovative omnichannel experience elements, and other parts oftheir business.

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R&C Outlook | March 2015 |

For more information,please contact:

John Studley

Partner

+ 61 3 8603 3770

john.w.studley@au.pwc.com

Philip Otley

Partner

+ 61 2 8266 0565

philip.otley@au.pwc.com

Setting up shop

Introducing PwC’sGeospatial EconomicModel (GEM)

To support retailers in navigating thecomplexities of these types ofanalyses, PwC have created a solutioncalled GEM that capturesmacroeconomic, demographic andretail trends across Australia at amore granular location based levelthan typical data sets. Unliketraditional economic datasets whichprovide only high level perspectives,GEM tells us how our economy isworking ‘on the ground’, aroundstores and across networks.

A number of the data assets withinGEM have been PwC developed, suchas population, workforce andeconomic prosperity projections outto 2020, which are critical fornetwork planning. These data assetscan be combined with a retailer’s datasources to develop a detailedunderstanding of the market, keyinfrastructure assets such as road andpublic transport routes, travelpatterns, own and competitor storelocations and attributes, andcustomer demographics andbehavioural characteristics.

Through its ability to fuse multipledata sets, GEM can heatmap potentialstore locations by applying acombination of lenses based on aretailer’s specific requirements. Italso has the ability to undertake

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relative benchmarking of stores inorder to understand their trueperformance, controlling for externalfactors and giving a holistic view ofperformance based on the ‘retailpotential’ of a location. At a moregranular level, store format, size andranging decisions can also be testedall the way through to what productscould be pushed online and madeavailable for purchase throughdedicated terminals within stores.

Final say

The retail industry is currentlyundergoing a major transformationthat is affecting the profitability ofpreviously thriving store networks.This is happening at a time when theneed for investment into thesenetworks is also critical given theevolving needs and expectations oftoday’s savvy consumers. As a result,Australian retailers need to getsmarter about their store networksand act quickly in order to stay aheadof the curve.

Getting both the store location,and the products offered in thislocation right has never beenmore important.

Figure 1: An example of how GEM brings together all relevantdata sets to determine the optimal retail offering.

Taxation

InternationalTax:Base Erosion andProfit Shifting -what is all the fussabout?Turning great

ideas intosuccessfulproducts:NPD frameworks

R&C Outlook | March 2015 |

International TaxBase Erosion and Profit Shifting- what is all the fuss about?

What is happening on the global stage?

The debate as to whether multinationals are paying their ‘fair share’ of tax isnot confined to Australia. It is a global issue which is being tackled by theOrganisation for Economic Co-operation and Development (OECD) togetherwith member countries of the G20. In 2013, the OECD expressed concern thatthe international tax system had not kept pace with rapid structural changes inthe global economy. Its two greatest concerns are2:

1. Large multinationals being able to structure their affairs in a manner suchthat tax is paid nowhere in the world; and

2. The alleged ease with which multinationals can shift profits betweenjurisdictions in a manner inconsistent with the economic substance of theiroperations.

The OECD announced a significant review would be undertaken to addressthese concerns. This was the genesis of the Base Erosion and Profit Shifting(BEPS) Project. A 15 point Action Plan covering a range of differentinternational tax and transfer pricing issues was subsequently released in 2013by the OECD3. At its core, the Action Plan sought to develop guidelines toensure profits are taxed where the economic activities generating profits areperformed and where value is created4.

The following issues being addressed as part of the 15 point Action Plan are ofparticular relevance for the retail and consumer sector:

1. Tax challenges associated with the digital economy5.

2. Transfer pricing issues relating to intangible property6.

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Over recent months, the tax affairs ofa number of high profile retail andconsumer organisations weresplashed across the front pages of ourmedia. The underlying theme of thearticles was the same: aremultinationals paying their ‘fairshare’ of tax? The effectiveness of theinternational tax system has become asignificant issue, so much so thatpoliticians, nongovernmentorganisations, not for profitorganisations and even consumershave become involved in the debate,as highlighted in a previous article inR&C Outlook1.

In this article, we summarise some ofthe key recent developments in thisongoing debate – globally and locally– and their potential application tothe retail and consumer sector.

1 PwC Australia, ‘Tax legality vs. tax morality: A brandreputation issue?’ R&C Outlook (August 2013).2 PwC Australia, An interview with Pascal Saint-Amanson BEPS (February 2014).3 OECD, Action Plan on Base Erosion and ProfitShifting (2013).4 OECD, Guidance on Transfer Pricing Aspects ofIntangibles (2014) p 3.5 OECD, Addressing the Tax Challenges of the DigitalEconomy (2014).6 OECD, Guidance on Transfer Pricing Aspects ofIntangibles (2014).

R&C Outlook | March 2015 |

International TaxBase Erosion and Profit Shifting - what is all the fuss about?

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Trademarks and tradenames

A second area of particular relevanceto the retail and consumer sector isthe allocation of profits to tradenames and trademarks.

For many retail and consumercompanies, their most valuable assetis their brand. As a key asset andsignificant driver of value, significantprofit is often attributed to the brandowner.

The OECD has identified a number ofissues in relation to the attribution ofincome to brand ownership includingthe following:

1. Legal ownership of brands mayreside with a company in onejurisdiction, whereas entities inother jurisdictions maysignificantly enhance the value ofbrands through marketing. Howmuch profit should be attributedto the brand’s legal owner if thatowner doesn’t perform functionswhich enhance the brand value?

2. Other entities within amultinational group may fundactivities associated withprotecting and enhancing brands.What part of profits relating tobrand ownership should beattributed to the party fundingthe protection and enhancementof brands?

The OECD’s response to these andother similar questions is thatmultinational enterprises mustattribute profits relating to brands tothose entities that – through theiremployees and assets – create,protect and enhance brand value. Thelegal owner of brands, without theperformance of any associatedfunctions, will not be entitled to anyrelated return, other thancompensation for holding title.

This is a complex area with the OECDseeking to make a clear distinctionbetween legal and economicownership of brands.

The Digital economy

A significant concern of the OECD isthat the fundamentals ofinternational tax, developed by theLeague of Nations almost 100 yearsago7, have not adapted to the rapidintegration and digitisation of theglobal economy. These concerns canbest be illustrated by considering thefollowing example.

Imagine it is 1995. A large USwomen’s fashion retailer wants toenter the Australian market. Howdoes it do this? Chances are, it will setup an Australian company, open achain of stores in Australia and beginselling. The company then paysAustralian tax on its retail profits.

It is this ability of large companies totransact via online platforms, withoutthe need for a physical presence in acountry, which is causing the OECDto question whether there is a needfor some fundamental changes in theway in which tax is levied. TheOECD’s final report on the issuesassociated with the digital economy,Addressing the Tax Challengesof the Digital Economy (2014),leaves many questions unansweredand for consideration by other OECDworking groups. The OECD concludesthat given the integration of digitaltechnology into so many industrysectors, it is not possible to ring fencethe ‘digital economy’ from theeconomy at large. Only one set ofprinciples in relation to taxationshould apply to the global economy.

7 Coates, WH, League of Nations Report on Double Taxation (1924).

R&C Outlook | March 2015 |

For more information,please contact:

Peter Konidaris

Specialist Taxes and NationalBusiness to Consumer Leader

+61 3 8603 1168

peter.konidaris@au.pwc.com

Jenny Elliott

Partner, Transfer Pricing

+61 3 8603 3753

jenny.elliott@au.pwc.com

International TaxBase Erosion and Profit Shifting - what is all the fuss about?

What is being done inAustralia?

Treasurer Joe Hockey has declared a‘fight against tax evasion andavoidance’ to ensure companies inAustralia ‘pay their fair share of tax’8.Both the current and formergovernments have prioritised tacklingBEPS on a number of fronts. Some ofthe more significant ways are asfollows:

1. Australia led the charge againstBEPS at the G20 Summit inBrisbane in November 2014, withAustralia insisting action be takento improve the ‘fairness of theinternational tax system’ and ‘tosecure countries’ revenue bases’9.Australia has been at theforefront of this global debatesince 2013.

2. Australia’s transfer pricing lawswere rewritten 18 months ago toimprove consistency with themost recent OECD thinking.While the arm’s length principleremains the cornerstone ofAustralia’s transfer pricing rules,there have been somefundamental changes to the ruleswhich will have an impact on thepreparation of transfer pricingdocumentation, as follows:

• To be eligible for penaltyprotection in the event of atax adjustment, transferpricing documentation mustbe prepared by the date of thelodgement of the tax return.

• Consistent with the themesendorsed by the OECD, theATO will be able toreconstruct transactionscompanies enter into withinternational related partieswhere the economicsubstance does match thelegal form. This aspect of thelaw change is controversial.

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3. The Senate announcing aninquiry into ‘tax avoidance andaggressive minimisation’. Anumber of ASX listed companieshave been targeted by the SenateEconomics References Committeeand may be requested (or evenrequired) to give evidence beforethe Committee in June 2015.

What should Australianretail and consumercompanies do?

The OECD is moving and Australia isvery active in pushing for change, asare many other OECD membernations. We are starting to see someof this change implemented in theOECD Guidelines. However, as BEPSis moving from the theoretical phaseto the implementation phase, we arebeginning to see reluctance by theOECD to publish tangible solutionsand less consensus amongst membernations. The US, for example, hasbeen slow to openly endorse thechanges proposed by the OECD.

BEPS will continue to move, but howquickly it moves is uncertain. Ofgreatest concern is that somecountries adopt the OECD’s newguidelines into law while others maylargely ignore them. This will lead toan increase in the level of disputesand the potential for double tax.

Australia is arguably already largelyBEPS compliant with new laws whichrecognises economic substance overlegal form. Australian taxpayers willneed to consider the level of riskassociated with their internationaldealings and respond to the lawchanges accordingly. It is alsoimportant for companies in the retailand consumer sector to be aware ofdevelopments in OECD thinking toadequately prepare for what may beon the horizon.

8 Hockey, J, Media Release: ‘Global leaders to tackle profit shifting and taxevasion’ (20 September 2014)9 G20, G20 Leaders’ Communiqué Brisbane Summit (15-6 November2014)..

R&C Outlook | March 2015 |

The R&D Tax Incentive cande-risk your investments ininnovationFinancial support is available for Australian companies to create new orimproved products, processes, and services. The support, in the form of theR&D Tax Incentive program, has been in place in various forms over the last29 years, yet it still retains a level of complexity that many companies don’tunderstand what it is for or how to apply for it. Many retail companies aremissing out on this opportunity.

Technological innovations in the retail sector are changing the way we buy andsell things both in store and online. The need for innovation to maintain andgrow a market position is well documented and not a debate in need ofreopening. Rather, the purpose of this article is to talk about a great programavailable from the government to help retailers and consumer good companiesde-risk their investments in innovation.

The research and development (R&D) Tax Incentive is a government programthat provides up to a 45% refund of monies spent by businesses creating newthings or improving old ones. The program aims to increase competitivenessof businesses, and improve productivity by incentivising businesses toundertake innovation and R&D that result in economy wide benefits toAustralia.

PwC has a large team across Australia dedicated to supporting companiesclaim the R&D Tax Incentive. Over the past year alone, we have supportedcompanies in the Retail and Consumer space to claim R&D benefit forinvestments such as:

• Customer analytics and segmentation for dissemination of personalisedloyalty offers to members.

• Development of new flavours and textures of organic pasta.

• Improving a manufacturing line process by building custom software.

• Creation of a range of carbonated drinks with new combinations of naturalextracts and botanicals.

• Implementation of a tailored POS system, with complex integrations acrossmultiple systems.

• Automating responses to customer reviews and product ratings acrossonline channels.

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Eligibility criteria: Yourbusiness:

Is a profit entity.

Spent more than $20,000 lastfinancial year.

Is within 10 months of the 2013/14financial year.

Is incorporated as a company.

Is registered in Australia.

Earned less than $20 millionrevenue last financial year.

R&C Outlook | March 2015 |

For more information,please contact:

Charmaine Chalmers

Partner, R&D Tax

+61 7 3257 8896

charmaine.chalmers@au.pwc.com

Marcus Tierney

Partner, R&D Tax

+61 3 8603 4358

marcus.tierney@au.pwc.com

Mark O’Neill

Nifty R&D Product Owner

+61 3 8603 3568

mark.j.oneill@au.pwc.com

The R&D Tax Incentive can de-risk yourinvestments in innovation

It’s commonly misconstrued thatR&D is only done by large companiesdeveloping new products in theirlaboratories. Most of the time that’snot the case. Almost every type ofbusiness does R&D in one form oranother regardless of how small or bigthey are.

The claim process for eligiblecompanies is available between thestart of the financial year (1st July)through to lodgement deadline atmidnight on 30th April for spend thatoccurred in the previous financialyear. As the process involvescompletion of an application formsent to AusIndustry and thecompletion of a Tax IncentiveSchedule sent to the ATO, it can be alittle daunting and many businessesturn to the support of a specialisedR&D provider to help submit theirclaim. This is especially the case forlarger businesses where theinnovation occurs across multipleprojects, spanning several years withcomplicated financial accounting inplace.

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The Federal Government has recentlypassed a bill which limits the totalcosts of R&D claimable to $100m.This will impact the largest part of themarket, but won’t have an impact ofthe vast majority. If you are interestedin learning more, then please contactus.

At the smaller end of the market, it isPwC’s belief that the process can bemassively simplified and that this hasacted as a blocker to companiesaccessing the program. As a result,PwC has released Nifty R&D(www.niftyforms.com) whichallows small businesses to completetheir R&D return online. Claims takeabout 30 minutes to complete and arereviewed by a PwC Consultant forpeace of mind. This kind ofinnovation has reduced the time tolodgement from weeks down to a dayor two for our smaller clients.

For more information about theR&D Tax Incentive program,there is lots of free informationto be found atwww.niftyforms.com/knowledgebaseor just call us on 1800 778 939.

Thoughtleadership

Globalpublications

Australianpublications

R&C Outlook | March 2015 |

Australian publications

Connected and curated – Long live the Store!

The 'always on' customer will drive a return to the store where theywill demand a connected and curated experience.

At the beginning of retail, there was a store… and it's not yet dead

As one of the most successful and customer-focused pure play retailers,Amazon, plans it's expansion offline… this perhaps heralds that a shift in retailis occurring… and it's swinging back to the store!

According to our recent research, 68 percent of Australian consumers are stillprimarily using physical stores as an integral part of the shopping process. Infact, the research revealed that for 37 percent of Australian consumers themain issue with online shopping was the 'inability to touch and feel a product'.It seems that the traditional notion of physical retailing is… not so dead afterall.

What is clear from the research, is that the retail experience both off andonline needs to evolve for various reasons.

The retail industry has certainly born the brunt of the rapidly changing digitalecosystem, which has predominantly been driven by consumers.

However there is a change afoot with businesses, retail or otherwise, beingable to 'connect' the dots through technology and their own existing systems tooffer a far superior experience - anticipating and surpassing customer needs.

However, this change does not come lightly and requires businesses tocritically review their internal operations, processes, culture and metrics inorder to achieve this.

To download a copy of thepublication and view a shortvideo, please go to:

www.pwc.com.au/industry/retail-consumer/publications/connected-curated-retail.htm

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Contacts

Stuart Harker

Global Retail & Consumer AdvisoryLeader

+61 3 8603 3380

John Riccio

National Digital Change Leader

+61 3 8603 4968

john.riccio@au.pwc.com

Andrea Marffy

Retail & Consumer Event Manager

+ 61 3 8603 3245

andrea.marffy@au.pwc.com

R&C Outlook | March 2015 |

Australian publications

20

The Science of Alliances

Success factors in JointVentures and Strategic Alliances

A run of major joint ventures andstrategic alliances in 2014 signals anemerging growth trend in Australia’sM&A environment.

We believe that the adoption ofalliances by Australian corporates islikely to grow rapidly, as the highlevel of domestic consolidation forcescompanies to seek growth beyondtraditional markets. Recent PwCresearch found that 43% of AustralianCEOs plan to enter a new alliance in2014, up from 28% in 2013.

While many corporates haveprofessionalised their approach totraditional M&A over the past fewyears, most have not yet developedsuch a rigorous approach to alliances.Although alliances share somesimilarities with traditional M&A,there are critical differences betweenthe two. This means that a typicalM&A approach will not be successfuland that an alliance specific approachis required.

The prize is worth pursuing. Mostcorporates will not achieve theirgrowth aspirations alone, withoutharnessing the complementarycapabilities of partners. ‘Best in class’alliance practitioners have a 45%higher success rate. We believe thatagile leaders in the future will developenterprise wide capabilities enablingthem to be as adept at alliances asthey are at traditional M&A.

R&C Deals Digest

PwC's R&C Deals Digest takes a lookat the deal-making activity across theAustralian retail and consumer sector.

Each month we'll provide a snapshotof:

• Sector trends

• Retail trade results

• Announced deals

• Retail sector trading multiples

• News headlines across the sector

To download a copy of thepublication, please go to:

www.pwc.com.au/consulting/assets/publications/Science-of-Alliances-2014.pdf

To download a copy of thepublication or subscribe tofuture editions, please go to:

http://www.pwc.com.au/deals/publications/rc-deals-digest.htm

R&C Outlook | March 2015 |

Global publications

18th Annual CEO Survey

Retail and Consumer focus

Retail & Consumer Goods CEOs are less upbeat about the state of the globaleconomy than last year, but they remain fairly confident in their ability togenerate growth over both the short and mid term. Both sectors are looking tothe US and China for growth, followed by Germany for retail CEOs and Brazilfor consumer goods CEOs.

Contacts

John Maxwell

Global Retail & Consumer Leader

+1 973 236 4780

Stuart Harker

Global Retail & Consumer AdvisoryLeader

+61 3 8603 3380

Harry Doornbosch

Global Retail & Consumer Tax Leader

+1 31 8 8792 3683

Explore the data at:

www.pwc.com/ceosurvey

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R&C Outlook | March 2015 |

Global publications

22

Total Retail 2015

Retailers and the age ofdisruption

Today’s retailers live in an age ofconstant disruption.

In fact, the retail environment forretailers has never been morecomplex, as consumers continue todevelop their own approach toresearching and purchasing products,both online and in store. The result isthat many retailers are leftoverstored, making lower marginsand experiencing reducedprofitability.

The evolution of the physical store isjust one of four major disruptors inour PwC’s Total Retail 2015: Retailersand the Age of Disruption. Thissurvey, our eighth annual study in aseries tracking changes in globalconsumers’ shopping preferences, isour biggest one yet: 19,000 onlineusers representing 19 countries.

PwC's Global Data &Analytics Survey 2014

Big Decisions™

Our global survey of 1,135 executives,conducted by The EconomistIntelligence Unit, looks at the mostsignificant decisions about thestrategic direction of the business andthe impact of data and analytics.

How is decision makingchanging in retail as a result ofdata and analytics?

To download a copy of thepublication, please go to:

www.pwc.com/bigdecisions

To download a copy of thepublication, please go to:

www.pwc.com/gx/en/retail-consumer/retail-consumer-publications/global-multi-channel-consumer-survey/index.jhtml

R&C Outlook | March 2015 |

Global publications

23

2015-16 Outlook for theR&C products sector inAsia

This report, produced in cooperationwith the Economist Intelligence Unit,discusses the outlook for six retail andconsumer products subsectors in Asia— food and general retail, fashion andapparel, online retailing, fast-movingconsumer goods (FMCG), luxurybrands, and durable consumer goodsand electronics.

It focuses in particular on the keymarkets of China, India, Japan,Taiwan and Hong Kong with furtherprofiles of Indonesia, Malaysia,Singapore, South Korea, Thailand andVietnam.

It looks at how the industry is faringin 2015 and is expected to growthrough 2018, and the opportunitiesand challenges in the years ahead.

World in 2050

Could Australia fall out of theG20?

In PwC's latest World in 2050 reportwe present economic growthprojections for 32 of the largesteconomies in the world, accountingfor around 84% of global GDP.

We project the world economy togrow at an average of just over 3% perannum in the period 2014 - 50,doubling in size by 2037 and nearlytripling by 2050.

But we expect a slowdown in globalgrowth after 2020, as the rate ofexpansion in China and some othermajor emerging economies moderatesto a more sustainable long term rate,and as working age population growthslows in many large economies.

What is the forecast forAustralia?

Australia will slip from 19th place in2014 to 29th of the largest economiesin the world in 2050.

Two years after the last update inJanuary 2013, today's 'World in 2050'extends coverage to include eightadditional countries, six who will havesurpassed Australia by 2050:Bangladesh, Egypt, Iran, Pakistan.

To download a copy of thepublication, please go to:

www.pwc.com.au/consulting/assets/publications/World-in-2050-Feb15.pdf

To download a copy of thepublication, please go to:

www.pwchk.com/home/eng/rc_outlook_201516.html

www.pwc.com.au/industry/retail-consumer

© 2015 PricewaterhouseCoopers. All rights reserved.

PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separatelegal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation withprofessional advisors.

Liability limited by a scheme approved under Professional Standards Legislation.

WL127006817

Retail & Consumer contacts:

Stuart HarkerAustralian Retail & Consumer Goods Consulting LeaderGlobal Retail & Consumer Goods Advisory Leader+61 3 8603 3380+61 418 339 231stuart.harker@au.pwc.com

Australia:

John RiccioNational Digital Change Leader+61 3 8603 4968+ 61 419 275 097john.riccio@au.pwc.com

Paddy CarneyPartnerAssurance+61 2 8266 7312paddy.carney@au.pwc.com

Lisa HarkerPartnerAssurance+61 3 8603 2147lisa.harker@au.pwc.com

New Zealand:Julian PriorPartner+64 9 355 8591julian.m.prior@nz.pwc.com

Peter KonidarisPartnerSpecialist Taxes and NationalBusiness to Consumer Leader+61 3 8603 1168peter.konidaris@au.pwc.com

Suzi RussellPartnerSpecialist Tax+61 2 8266 1057suzi.russell@au.pwc.com

Sarah SavillePartnerCorporate Tax+61 2 8266 8665sarah.saville@au.pwc.com

Daniel RosenbergPartnerPrivate Clients+61 3 8603 3886daniel.rosenberg@au.pwc.com

Kate WarwickPartnerAdvisory+ 61 3 8603 3289kate.warwick@au.pwc.com

Thank you to our contributors:

Mark O’Neill, Jarrod Dumble, Shane Bell, Sammy Moneer, William Van, TomIkeringill, Jenny Elliott, Clare Power

If you have any feedbackfor us, or if there are anytopics or issues you wouldlike to see in upcomingeditions, please contact:

Stuart Harker

+ 61 3 8603 3380

+ 61 418 339 231

stuart.harker@au.pwc.com

Andrea Marffy

R&C Industry Manager

+ 61 3 8603 3245

andrea.marffy@au.pwc.com