Consumer Markets A Global View of Mergers and Acquisitions

8/3/2019 Consumer Markets A Global View of Mergers and Acquisitions

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Retail IndustryExecutive Survey

kpmg.com


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KPMGsBusiness Pulse SurveyKPMG LLP, the audit, tax and advisory firm, surveyed C-suite and

other top-level executives in the retail industry during the second

quarter of 2011.

Participants were asked about business conditions in their sector,

the most significant revenue growth areas, and factors that wouldimpede or support their sectors recovery. They were also asked to

provide insights into their capital spending and investing plans as

well as any challenges or opportunities that may lie ahead.

Responses were compared to the findings of a similar survey

conducted among executives in the second quarter of 2010.


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Contents

Foreword 2

Key Findings from the KPMGs 2011 Retail Industry Pulse Survey 4Business Conditions 4

Revenues 6

Headcount 8

Timeline for U.S. Economic Recovery 8

Factors Hindering Retail Sector Recovery 9

On the Path toward Growth 9

Capital Spending and Investing 10

A Closer Look at Regulation and Risk 11

Conclusion 12

KPMG: A Leader in Serving the Retail Industry 13

firmsaffiliatedwithKPMGInternationalCooperative(K

PMGInternational),aSwissentity.Allrightsreserved.24

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2 | Retail Industry Executive Survey

KPMG LLP (KPMG) is pleased to present the 2011 Retail Industry Executive Survey. This survey of 100 CEOs and other

C-level suite executives in the retail industry asked participants to assess business conditions, name the most significantgrowth areas for the sector, estimate a time line for full economic recovery, and identify the conditions that could help or

hinder economic recovery.

This survey was conducted during May and June 2011 and is a follow-up to the survey conducted in the second quarter

of 2010. In this publication, we share the findings of the survey and, where possible, compare them to those in the2010 survey.

This years survey found that industry leaders expect modest revenue growth and profitability improvement over thenext year. Executives indicated that the biggest drivers of revenue growth over the next one to three years will be

the retention and addition of customers, innovative merchandising strategies, market expansion, and increasedconsumer spending.

Retail executives anticipate gradual improvements in hiring, as they expect to keep headcount relatively thesame or to increase it slightly next year. However, one of out every five respondents indicated that they do not

think headcount will ever return to pre-recession levels.

Notably, the executives surveyed are not as confident of an economic rebound as they were a year ago. They

expect the economy to improve only moderately next year, and they do not anticipate a complete economicrecovery until 2013 2014 or later. However, more than half of the executives believe the retail sector will

recover ahead of the U.S. economy.

Despite this tempered outlook, these executives indicated that their companies have significant cash

on their balance sheets and they are investing it. They identified investing in organic growth, improvingoperational processes and related technology, and making changes to business models as their

top initiatives over the next two years. Almost half of the respondents plan to increase spending in

information technology (IT) over the next year.

Retail executives see high national unemployment and decreased consumer confidence assignificant problems. They have indicated that pricing pressures, lack of customer demand, andincreasing input costs are significant barriers to growth over the next year. They also indicated costs

of inputs and discounting as the greatest threats to profit margins.

We would like to thank those who participated in this survey and we hope the findings are usefulas you address the challenges and opportunities you face. We also welcome the opportunity todiscuss this study and its implications for your business in the year ahead.

Mark LarsonGlobal Sector Leader, RetailKPMG LLP

Foreword


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Retail Industry Executive Survey | 3



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Key Findings from KPMGsBusiness Pulse Survey

KPMGs survey reflects the responses of 100 retail

sector executives from large, U.S.-based companies

with $100 million+ annual revenue. The majority

of respondents (41%) work for companies with

annual revenues between $1 billion and $10 billion,

while 31% represent companies with annual

revenues of more than $10 billion, and 28% with

revenues in the $100 million to $1 billion range.

Seventy one-percent of these companies arepublicly-held versus 29% that are privately-held

companies.

Key findings from the survey included:

More than half of the executives surveyed expect moderateimprovement in economic conditions over the next year, but62% believe a full economic recovery will not occur until the

end of 2013 or later.

Retail executives see IT as a high priority investment area,

with 47% of respondents expecting to increase IT spendingover the next year.

Nearly 70% of survey respondents view data analytics as acore component of strategy and planning.

Forty-seven percent of respondents said their companyscurrent revenue is somewhat higher than last year, while 68%

anticipate a moderate revenue increase one year from now.

More than 50% of sector executives plan to add personnelin the next year, but nearly one quarter of respondentspredict that their companys U.S. headcount will never return

to pre-recession levels.

A significant majority of survey respondents (72%)

acknowledge that they have a great deal of cash on theirbalance sheets, and 44% say theyre already investing that

money or will before the year closes.

Business ConditionsEnthusiasm over the economic outlook has dwindled fromlast year. While more than half (59%) of retail sector executivesbelieve that the economy will improve over the next year, it isa marked difference from the prior year survey response of90%. Meanwhile, the number of executives who believe theeconomy will stay the same over the next year dramaticallyincreased to 33% in 2011, up from 8% a year ago.

Better next year About the same Worse next year

Key

2010 (Q2) 2011 (Q2)

90%

8%2%

59%

33%

8%



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A Modest Outlook for theYear Ahead

According to the retail industry executives surveyed,

business conditions are modestly improving but

at a slower rate anticipated by last years survey

participants. While this years respondents expect

moderate improvements to continue in revenue, the

economy, and hiring, they are fairly guarded in their

future outlook, believing a full economic recoveryis still several years away. Within the sector, pricing

pressures, lack of consumer demand, and increasing

merchandise costs continue as barriers to growth.

However, an expected increase in IT investment

over the next year may offer retailers the competitive

advantage they need to add new customers and

increase revenue from their existing customer base.



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RevenuesNearly half (47%) of respondents reported an increase inrevenues over the last year, while 36% said their revenues have

remained the same.

Increase in revenues About the same

Key

0

10

20

30

40

50

47%

36%

17%

Decrease in revenues

When asked to describe their revenue expectations a yearfrom now, 72% of this years survey respondents said they

believe revenues will increase, while 24% said they believerevenues will remain the same. This marks a drop from revenueexpectations in 2010, when 89% of respondents said they

believed revenues would increase over the next year and 11%said they believed revenues would remain the same.

Better next year Same next year Worse next year

Key

2010 (Q2) 2011 (Q2)

72%

24%

4%

89%

11%



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Customers Key to Revenue GrowthWhen it comes to driving revenue growth, its all about the

customers. Survey respondents cited retaining and addingcustomers as their companys top revenue growth driver

during the next three years. This marks a dramatic shift fromthe prior year, in which no survey respondents cited this as a

significant driver toward revenue growth over the next threeyears.

Biggest Drivers of Companys Revenue Growth:

Next 1 3 years

2010 (Q2) 2011 (Q2)

Product innovations

Focus on emerging markets

Merger and acquisition activity

Changed pricing strategies

Growth of green1

products/services

48%

38%

37%34%

29%

16%

14%

11%

8% 4%

Key

Retaining and adding customers

Innovative merchandising strategies

Expansion in core/new markets

Improving economic conditions

Increasing consumer spending

37%

5%

6%

29%

37%

11%

2%

5% 3%

1 Environmentally friendlyfirmsaffiliatedwithKPMGInternationalCooperative(KPMGInternational),aSwissentity.Allrightsreserved.24659NSS


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HeadcountForty percent of respondents noted an increase in headcountover the last year, while 31% acknowledged a decrease.

Retailers have higher hopes for the year ahead, with 52% ofsector executives expecting to add headcount and only 15%anticipating a decline during this time.

Increase About the same Decrease

Key

Headcount

within last year

Headcount

expected year ahead

52%

33%

15%

40%

29%

31%

Notably, almost a quarter (23%) of survey respondents expecttheir U.S. headcount will never return to pre-recession levels.

Headcount: Return to Pre-Recession Levels

Key

0

5

10

15

20

25

30

18%

25%

1%

16%17%

23%

Already at, or greater than, pre-recession level Second half of 2011

2012 2013 2014 or later Never

Time Line for U.S. Economic RecoveryRetail sector executives surveyed anticipate that the projectedtime line for an overall U.S. economic recovery is still a few

years away. More than half of respondents believe that theeconomic recovery will not occur until 2013 or later. This is adifference from the previous year, when 43% believed it would

take that long to achieve.

2011 2012 2013 or later

Key

2010 (Q2) 2011 (Q2)

2%

36%

62%

0%

57%

43%

Looking forward, retail sector executives view external factorsas a greater cause for concern than internal factors. Sixty-

nine percent of respondents admitted being more concernedabout the economy, competition, and the impact of regulatorychanges over their ability to compete or whether they have the

right strategic direction moving forward (31%).

Which Concerns You More About Your Companys Future?

Key

0

10

20

30

40

50

60

70

80

69%

31%

External factors (I am more concerned Internal factors (I am more concernedabout the economy, competition, and the about our ability to compete and whether

impact of potential regulatory changes) we have the right strategy going forward)


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Factors Hindering Retail Sector RecoveryMore than half of survey respondents view a loss of consumerconfidence (69%) coupled with continued high national

unemployment rate (58%) as the two leading factors hinderingthe retail sectors recovery. Other leading factors cited includethe distressed real estate market (28%) and tighter access to

consumer credit (16%). These responses are in line with theanswers provided by sector executives surveyed a year ago.

Retail Factors Hindering Recovery

2010 (Q2) 2011 (Q2)

Uncertainty in the credit markets

Instability overseas2

Decreased investor confidence

Competitive threats from countries3

Other4

69%

58%

11%

28%

16%

15%

11%

9%9%

8%

Key

Decreased consumer confidence

Continued high national unemployment

Distressed real estate market

Limited access to credit for consumers

Increased government regulation

Limited access to credit for businesses

64%

66%

17%

28%28%

23%

20%

7%

29%

22%

On the Path toward GrowthSurvey respondents cite pricing pressures and a lack of

consumer demand as the most significant barriers to growthover the next year.

Barriers to Growth

Key

0

10

20

30

40

50

Pricing pressures U.S. dollar strength

Lack of customer demand Access to and managing capital

Energy prices Staying on top of emerging technologies

Inflation Lack of qualified workforce

Labor costs Risk management issues

Volatile commodity/input prices Other (please specify):

Regulatory and legislative pressures Foreign competition

Increased taxation Exchange rate fluctuations

45%

42%

22%21% 20%

17%

10%9%8%

6% 6% 5% 5%3% 2% 1%

Despite such barriers, 76% of survey respondents expect the

retail industry to experience growth increases over the nextyear. Of that amount, 60% predict modest gains of about 5% or

less, while 14% expect increases in the 6 10% range, and 2%believe growth will increase by 11 20%.

Retail Industry Growth Rate

Key

0

10

20

30

40

50

60

70

80

76%

16%

8%

Increase over next year No change Decrease over next year

2Turmoil in the Middle East/North Africa and the crisis in Japan3 Threats to U.S. business from Asia and abroad4 Other 2010 categories included: uncertainty of government regulatory actions; lack of

government regulatory action; and increase in IT-related fraud.



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Threat to ProfitsDiscounting and other sales incentives, merchandise costs,

and decreasing sales volumes were widely seen by sectorexecutives as posing the greatest threats to profit margins overthe next 12 months.

Greatest Threats to Profit Margins

Key

0

10

20

30

40

50

Discounting and other

sales incentives

Costs of inputs or merchandise

Decreased sales volumes

Administrative and marketing costs

53%51%

49%

22%

18%

11%

8%

1%

Inventory carrying costs

Foreign exchange variability

Regulatory compliance

Other

Capital Spending and InvestingTechnology will be an integral component of many retailers

future strategies as evidenced by their capital spending plans.Overall, 55% of survey respondents predict that their companys

capital spending will increase in the next year while 28%expect it to stay the same. Much of this spending is expectedin the areas of IT (47%), geographic expansion (29%) and new

products and services (27%).

Increased Areas of Capital Spending Over the Next Year

Key

0

10

20

30

40

50

Information technology

Geographic expansion

New products or services

Acquisition of a business

Advertising and marketing

Expanding facilities

47%

29%

27%

22% 22%20%

17%15%

6%5% 5%

2%

Business model transformation

Employee compensation and training

Green/sustainability initiatives

Research and development

Regulation/control environment

Other


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Data analytics has core strategic roleCustomer data analytics is critical to many retail companies

decision-making processes. A large number (69%) of surveyrespondents believe that data analytics is a core component oftheir strategic planning.

Use of Data Analytics for Strategic Decisions and Planning

Key

0

10

20

30

40

50

60

70

Core component of strategy and planning

Considering using in strategy and planning

Not using in strategy and planning

Do not know

69%

22%

5% 4%

News reports continue to call attention to companies havinga great deal of cash on their balance sheet but lacking the

confidence to invest. Among the retail executives surveyed,72% believe their company has significant cash on itsbalance sheet, of which 31% acknowledge that investment is

significantly under way.

Investment Timeframe

Key

0

10

20

30

40

Investment is significantly under way Second half 2012

Second half of 2011 2013 and beyond

First half of 2012 Not likely to invest

31%

13%

25%

7%

13%11%

Expansion into new markets, technology, and marketing andcustomer programs are seen as the top three highest-priority

investment areas for their companies, according to surveyrespondents.

Investment Priorities

Key

0

10

20

30

Expansion into new markets Not likely to invest/dont know

Technology Strategic acquisition

Marketing/customer programs New facilities

31%

17%

13%

11%10% 10%

8%

A Closer Look at Regulation and Risk

Regulatory Impacts

A large majority (76%) of sector executives believe they areprepared to seize opportunities resulting from public policy and

regulatory changes, while 17% are unsure and 7% report beingunprepared. Interestingly, the exact types of opportunities that

will arise from such changes are still somewhat unclear, asnoted by 39% of the executives surveyed.

Key

0

10

20

30

40

Do not know Increased overseas expansion

Changing business structure More capital investment

Increased domestic expansion Increased mergers and

acquisitions activity

39%

28%

15%14%

12%

9%



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Risk PoliciesWhen asked what challenges existed within their organization

that might prevent establishing a formal risk policy, surveyrespondents cited culture and behavior (39%) as the biggest

obstacle, followed by process integration and operationalefficiency challenges.

ConclusionWhile the road to recovery seems to be on a slow path,

retail executives continue to forge ahead with modest

expectations for the year ahead. Industry executives

believe the economy, revenue, and hiring will see

moderate improvements in 2012, but remain guarded

longer term, not anticipating a complete economic

recovery until 2013 2014 or later. According to survey

respondents, a lack of consumer confidence and a high

unemployment rate continue to hinder the retail sectors

recovery, while pricing pressures and a low consumer

demand are seen as the most significant barriers to

growth over the next year. Sector executives say they will

spend the cash that has accumulated on their balance

sheets on IT to gain a competitive edge in attracting new

customers and growing revenue from existing customers.

As a result, data analytics is seen as a core component of

their strategic planning in the year ahead.

Key

0

10

20

30

40

Culture and behavior Dont know

Process integration/efficiency Shared resources across

of operations the organization

Clearly defined roles and responsibilities Governance framework

39%

31%30%

25%

15%

8%


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KPMG: A Leaderin Serving the

Retail IndustryThe retail sector continues to face a demanding market

environment that requires companies to adjust and

actively manage change that may impact sales and

performance.

Having the right professional services firmone with

the industry depth, knowledge and insight to help

clients address their most pressing issues and achievetheir goalsis critical. KPMGs Retail practice includes

professionals with the knowledge, experience, and

skills to help our clients address their most pressing

challenges, sort through todays complex business

problems, and achieve their goals.

Working with our international network of member firms,

we serve clients worldwide, developing insights into

major business trends and helping to enhance future

plans. Our long-term experience in retail enables us to

offer the company-specific guidance needed to help our

clients become or remain market leaders.

Cooperative(KPMGInternational),aSwissentity.

Allrightsreserved.

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KPMG LLP, the audit, tax and advisory firm, is the U.S. member of KPMG International Cooperative (KPMG International), a Swiss

entity, KPMG Internationals member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.

2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the U.S.A.

The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 24659NSS

InterActionActivityCode: MTL10324

Key Contacts

Mark Larson

Global Sector Leader, Retail

T: 502-562-5680

E: [email protected]

Patrick Dolan

National Line of Business Leader

Consumer Markets

T: 312-665-2311


John Atkinson

National Audit Leader, Retail

T: 612-305-5459


Brian Campbell

National Tax Leader, Retail

T: 614-249-1879E: [email protected]

Ray Kansal

National Line of Business Director

Consumer Markets


Jenna Stoneberg

National Marketing Director

Consumer Markets


kpmg.com

Consumer Markets A Global View of Mergers and Acquisitions

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