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Brands and Retailers in the Golden Age of Cheap Gas & Cool Stuff

DEBORAH WEINSWIG Executive Director – Head Global Retail Research and Intelligence

Fung Business Intelligence Center Global deborahweinswig@fung1937.com

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Brands and Retailers in the Golden Age ü  Revenge of the Bricks — A Focus on C-stores ü  Cheaper Energy to Boost Consumer Spending ü  What’s Being Spent? ü  Wearable Tech ü  Digital Marketing ü  Restructured Economy ü  Uberfication ü  Disruption of Grocery ü  Holiday Comps at Amazon and eBay

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Brick & Mortar Investing in Tech Where are they spending?

•  Cyber Security

•  Personalization

•  Big Data/Prescriptive & Predictive Analytics

•  Beacons (Tracking Consumers)

•  Wearables

More than 40% used a smartphone or tablet for Black Friday activities (NRF)

Because mobile now accounts for more than 50% of all ecommerce traffic, it's absolutely essential that stores is optimized for mobile customers.

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Retailer Tech Spending Capex was approximately 3.6% of sales in 2013

Technology Capex: •  Walmart: 30% of capex in 2013; spending $1.2-1.5B

on e-commerce in FY2016 (= 9-13% of total)

•  Nordstrom: “Technology investments account for over 30% of our plan, up from roughly 20% historically”

•  Home Depot: “Tilting investments towards interconnected retail and technology”

0%  

2%  

4%  

6%  

8%  

JCPe

nney  

Nordstrom

 

Target  

TJ  M

axx  

Kohl's  

Macy's  

Walmart  

Home  De

pot  

CVS  

Sears  

Capex/Sales   Average  

Capex/Sales for Selected Retailers

Average  =  3.6%  

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Revenge of the Bricks – A Focus on C-stores

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Expanding the C-store Offer Evolving C-stores into a hybrid format with

•  Expanded Home Meal Replacement (HMR)

•  Click-and-collect services

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Expanding the C-store Offer 7‑Eleven, Inc. is the world’s largest convenience store chain with more than 54,200 stores in 16 countries

•  10,400 are in North America

•  More outlets than any other retailer or food service provider

•  7‑Eleven adds another store worldwide every 2.5 hours

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Strong Growth on Tap for C-stores

66.2  82.8  

116.9  

0  

20  

40  

60  

80  

100  

120  

140  

2008   2013   2018  

Sales  ($B

il.)  

North  America  

71.3  77.8  

103.2  

0  

20  

40  

60  

80  

100  

120  

2008   2013   2018  

Sales  ($B

il.)  

Western  Europe  

4.0  

6.1  

9.9  

0  

2  

4  

6  

8  

10  

12  

2008   2013   2018  

Sales  ($B

il.)  

Central  &  Eastern  Europe  

5.8  

9.9  

16.3  

0  

5  

10  

15  

20  

2008   2013   2018  

Sales  ($B

il.)  

LaKn  America  

1.9  2.8  

4.2  

0  

2  

4  

6  

8  

2008   2013   2018  

Sales  ($B

il.)  

Middle  East  &  Africa  

96.4  

143.3  

186.2  

0  

50  

100  

150  

200  

250  

2008   2013   2018  

Sales  ($B

il.)  

Asia  &  Oceania  

7.1%   5.8%   10.3%  

10.6%   7.9%   5.3%  

CAGR  2013-­‐2018  Source:  PlanetRetail  

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132,424 130,659

138,205

140,655

145,119 146,294

144,875 144,541 146,341

148,126 149,220

151,282

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US Convenience Store Count

Expanding the C-store Offer Evolving C-Stores in the U.S.

•  Over 150,000 stores (Y/E 2013), up 1.4% YoY •  Fastest store growth since 2008 recession •  Nearly 84% sell gas, up 2.7% YoY •  Single-store operators account for 63% of sales (not consolidated)

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Cheaper Energy to Boost Consumer Spending

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Falling Gas Prices = Windfall for U.S. Consumers Gas prices are down 40% since June and headed lower, one of the steepest drops since the 2008 financial crisis. Adds an extra $750 into consumer wallets on an annualized basis.

Sources:  Energy  Informa7on  Agency,  Interna7onal  Monetary  Fund  and  Rhodium  Group  

2.60

2.80

3.00

3.20

3.40

3.60

3.80

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Retail Gasoline Price ($/Gallon) Through December 1, 2104

2013 2014

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Falling Gas Prices = Windfall for US Consumers The IMF raised its 2015 forecast for US GDP growth to 3.5% from its prior 3.1% estimate, in part due to lower energy costs

2.4%

1.8%

1.2%

0.8%

0.8%

0.5%

-4.7%

-5.4%

-8.6%

-10.2%

-13.6%

-15.8%

-18.1%

-20% -15% -10% -5% 0% 5%

South Korea

India

Japan

Germany

China

U.S.

Russia

Nigeria

United Arab Emirates

Venezuela

Iraq

Saudi Arabia

Kuwait

Falling  Gas  Prices  =  Windfall  for  US  Consumers  

Sources:  Energy  Informa7on  Agency,  Interna7onal  Monetary  Fund,  and  Rhodium  Group  

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U.S. GDP Forecast

U.S.  Real    GDP  Growth  

2013  (Actual)   2.2%  

2014  (Forecast)   2.2%  

2015  (Forecast)   3.5%  

Source:  Interna7onal  Monetary  Fund    

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Why Oil Has Plunged Too Little Demand

•  Stalled recoveries in Europe and Japan

•  Slower demand growth in developing countries, notably in China

•  Americans are driving less and doing so in more fuel-efficient cars

Sources:  Energy  Informa7on  Agency,  US  Federal  Highway  Administra7on  

(4)  

(2)  

0    

2    

4    

6    

8    

0  

5  

10  

15  

20  

25  

1971   1977   1983   1989   1995   2001   2007   2013  

Passenger  Car  Fuel  Efficiency     Million  of  Vehicle  Miles  Traveled  YoY  %  Change  

Miles  p

er  Gallon  

Growth  in  M

iles  Driven  

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Why Oil Has Plunged Too Much Supply

•  Shale-oil boom has increased US daily oil production by nearly 50% since 2007

Figure  shown  for  2014  is  an  es7mate  Sources:  Energy  Informa7on  Agency,  US  Federal  Highway  Administra7on  

US  Overtakes  Saudi  Arabia  in  Petroleum  Products  

6

8

10

12

14

16

14 12 10 08 06 04 02 00 98 96 94 92 90

Petroleum and other Liquids Production Millions of Barrels per Day

Saudi Arabia United States

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Dining & Home Goods to Benefit Most •  Lower gasoline prices should

continue to spur spending on casual dining and entertainment

•  Cheaper energy should also bolster furniture and home-goods sales, as lower fuel bills makes owning a home more affordable

•  Discount chains are best positioned to benefit from the extra spending power of value-conscious lower-income families Through  October  31,  2014  

YoY  Seasonally  adjusted;  YTD  unadjusted  Source:  US  Department  of  Commerce  

Retail  Sales  YTD  2014  

(1.7)

1.6

1.7

2.1

2.8

5.5

Clothing and Accessories

General Merchandise

Electronics & Appliances

Furniture & Home Goods

Restaurants & Bars

Total  Sales  (ex  Auto)      +3.3%  YoY  

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What’s Being Spent?

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Consumer Spending Breakdown

Source: Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, September, 2014  

Average Annual Income Before Taxes $63,784 AVERAGE ANNUAL EXPENDITURE

TOTAL $51,100 Food 11.7%

Housing 30.4%

Utilities, Fuels and Public Services 6.6%

Cellular phone services 1.6%

Footwear 1.0%

Apparel and Services 2.8%

Beauty 0.7%

Other 35.1%

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Xiaomi is Now the Third-Largest Smartphone Brand in the World

3Q 2014 Market Share

3Q 2013 Market Share

3Q 2014 / 3Q 2013 Growth

Samsung 23.8% 32.5% (-8.2%)

Apple 12.0% 12.9% 16.1%

Xiaomi 5.3% 2.1% 211.3%

Lenovo 5.2% 4.7% 38.0%

LG 5.1% 4.6% 39.8%

Others 48.6% 43.2% 40.8%

Total 100% 100% 25.2%

Source:    Interna7onal  Data  Corpora7on  (IDC)  

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Wearable Tech—Disruption on the Horizon

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Apple Watch Top 3 brands have 31% of $64B market

Apple Watch expected to do $3.8 billion in the first year

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Who Is the Hardest Hit?

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Who Else Does it Hurt?

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Digital Marketing

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Digital Advertising to Dominate in 2016 Digital receiving new money because marketers can prove that digital works (Forrester)

Sources:    Forrester,  PWC,  and  eMarketer.com  

0

20

40

60

80

100

120

2012 2013 2014 2015 2016 2017 2018 2019

Radio Digital TV

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Facebook vs. TV Networks

58%

73%

83% 89%

63% 68%

63%

42%

0%

20%

40%

60%

80%

100%

18-24 35-34 35-54 55+

Daily Reach: Facebook vs. Network Television, Nov. 2013

Big-4 TV Networks Facebook Source:    L2  

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Restructured Economy

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It’s a Subscription Economy Subscription-based and recurring revenue business models are in vogue, for practically every type of product

•  It’s actually not that new: Businesses have been selling monthly subscriptions for all sorts of goods and services for years, But the real news is that more and more industries are dipping their toes—a rare few even jumping in head-first—to a subscription-based, recurring revenue model.

•  Pijon:

•  Zuora unveiled the latest version of what it calls “relationship business management” software—a suite that lets companies transition and maintain a shift from a traditional to a subscription-based revenue model

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It’s a Rental Economy Convenience is the way of the future, and people have never been more receptive to products and services that make their lives run more smoothly.

Highly innovative rental services that capitalize on both cost-efficiency and ease of use

•  Luxury fashion accessible to more people

•  Peer-to-peer network for vehicle sharing

•  Zipcar

•  Rent the Runway

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It’s a Freelance Economy 34% of workforce are freelancers (53 million): How non-traditional jobs add up in a survey of U.S. workers, here is how it breaks down

2.8  M,  5%   5.5 M,

10%  

9.3 M, 18%  

14.3 M, 27%  

21.1 M, 40%  

Freelance Business Owners

Temporary Workers

Diversified Workers

Moonlighters

Independent contractors

Sources:    Edelman  Berland,  as  commissioned  by  the  Freelancers  Union  and  Elance-­‐oDesk  

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Uberification

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$0.2 $1.5 $12.5 $49.5

$307.5

$1,507.5

$2,707.5

Aug 2009 Oct 2010 Feb 2011 Dec 2011 Aug 2013 Jun 2014 Dec 2014

Uberification Growth of UberNow in 52 countries

Valuation from $18 billion in June to $40 billion in December — doubling in just six months

Uber also wants to be your “delivery guy” •  UberFresh

•  Uber Corner Store

Uber’s  Funding  History  (CumulaKve,  in  Millions)  

Source:  CrunchBase  

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Uberification The Uber logic: The sharing and on-demand economy

•  Millennials less willing to “own” stuff

•  “Convenient tech”—power in the pocket

•  Quick service

•  Consumers are going to demand faster turnaround times on everything at the convenience levels they have become accustomed to

78%  

52%   54%  

68%  

81%  

43%   44%  

66%  

Asia-­‐Pacific   North  America   Europe   Global  Average  

Willing  to  share  own  assets  Wiling  to  share  from  others  

The  Rise  of  the  Sharing  Economy  

Source:  Nielsen  

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35

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Disruption of Grocery

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Disruption of the Grocery Industry Global Grocery Market: $4 Trillion

U.S. Grocery Market: $600B •  Percent Online: 1.2%

Approx. 12% of Internet users have bought grocery items online

Leading Players •  Fresh Direct

•  Google Express

•  Instacart

•  Ocado

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Ocado Ocado is an online supermarket and the world’s largest online food retailer.

•  Sales rose by 14.9% YoY to $500 M (£311.4 M) in the 16 weeks to November 30 as more people switched to buying groceries online.

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Disruption of the Grocery Industry What’s different in Home Delivery 2.0:

•  Leverage existing infrastructure •  Focus on delivery and customer service •  Use clever pricing

– Instacart marks up products, rather than charging a large delivery fee

•  Make clever acquisitions – Amazon hired people from Webvan and

bought Kiva

Mistakes learned from Webvan (TechCrunch):

•  Wrong target audience segmentation and pricing

•  Complex infrastructure model

•  Too much money, expanded too fast

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Holiday Comps and 3Q Earnings

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Holiday Comps at Amazon and eBay

Amazon +20.7% vs. eBay +14.7% for Holiday YTD

2014 2013 Channel Cyber Five Holiday YTD Dec. Week 1 Cyber Five

Total YoY 20.6% 15.9% 14.8% NA Amazon 23.8% 20.7% 20.8% 34.9%

eBay 20.5% 14.7% 14.0% 29.7%

Comparison Search Engines (-1.2%) (-8.8%) (-8.2%) 17.7%

Google Search 5.8% 2.7% (-0.2%) 125.8%

Search 19.1% 13.3% 7.9% 11.6%

Other Third-Party Mktng 54.4% 45.7% 44.0% NA

Source:  ChannelAdvisor  

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Several Retailers Report a Strong Q3 Walmart: In-line Q3, comp of +0.5% (first positive comp in 7 quarters), raised guidance

•  “The highlights for the quarter include the positive comp in Walmart U.S. … [and] the 21 percent increase in e-commerce sales globally”

Target: Beat in Q3, comps of +1.2% (ahead of expectations of comps +0-1%), raised guidance

•  “We’re encouraged by the improving trend we’ve seen in our U.S. business throughout the year … and we are looking forward to delivering an outstanding store and digital experience to our guests.” ”

G-III: Record Q3, comps +12%, sharply raised guidance

•  “Our sportswear and dress businesses also contributed to our increased sales and earnings … We are expecting a good holiday season for both our wholesale and retail businesses.”

Restoration Hardware: Beat in Q3, comps +22%, raised guidance

•  “Our ability to curate and integrate new products, categories and businesses, then test and rapidly scale them across our multi-channel platform, is at the core of our ability to gain significant share and outperform our peers in the home furnishings marketplace”

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Gamification

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Gamification For many, shopping has become an unpleasant experience

We are increasingly using our mobile devices for everything

•  Mobile traffic accounted for 52.1% of all online traffic on Thanksgiving 2014, the first time mobile traffic has outpaced PC traffic

Gamification uses elements from computer and video games

We seek desire, rewards, and visibility by our peers

Zipline’s  Slots  Tycoon  

Trivver’s  Aback  on  Titan  

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ZIPLINE Direct and real-time top to bottom communication

Real time results

Incentivizing through gamification •  Three key stores have 500 surplus units of a blue sweater. Top

management can send real-time data directly to managers and associates with a two-hour sale window, incentivized by a financial or bonus reward given to the associate who is able to sell the largest number of units.

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The Future

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Toilet Hackathon A child dies due to poor sanitation every 20 seconds

Funded by the ever-present Gates Foundation: a $1.50 latrine pan that cuts down on sanitation-related disease transmission by sealing off pit toilets.

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THANK YOU!

Deborah Weinswig Executive Director – Head Global Retail Research and Intelligence Fung Business Intelligence Center Global deborahweinswig@fung1937.com