6 retail trends & 7 ways amazon is changing everything

6 RETAIL TRENDS & 7 WAYS AMAZON IS

CHANGING EVERYTHING Deborah WeinswigManaging Director of

Fung Global Retail & Technology

May 12, 2016

HONG KONG NEW YORK LONDON

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About Fung Global Retail & Technology• The knowledge bank for the Fung Group• Focuses on emerging retail and tech

trends, specializing in retail and technology intersections, and building collaborative communities.

• Based in New York, London and Hong Kong

• Publishes thematic and global market research on topics such as the Internet of Things, digital payments, omnichannel retail, luxury and fashion trends and disruptive technologies.

• Fung Global Retail & Technology advises retailers, real estate developers and tech companies on projects situated at the intersection of retail, tech and/or fashion.

• Our team offers a robust knowledge bank and significant experience in the retail, fashion and tech fields. We are involved in many areas of the business and believe this allows us to offer a unique perspective by focusing on the future and where the sector is heading.

A Unique Combination Of Retail, Fashion And Tech

OUR EXPERTISE

FASHION TECHRETAIL

ENTREPRENEURSROUNDTABLEACCELERATOR

Our Partnerships With Accelerators

Yesterday’s Bombshell

Macy’s Bombshell: More Of The Same or Something New?• Cut FY16 SSS guidance to -3% to -4%, but

lowered EPS by ~15%– From $3.80-$3.90 to $3.15-$3.40– SG&A deleverage exceeds projections– Must ask: is it as easy to find cost cuts to

meet earnings?• Management called out elevated savings

rate, reduced share of wallet on apparel and excess inventories across the industry

• Strong dollar leading to reduced tourism in US market

• All reasonable – but is there something more at play?

Macy’s Bombshell: More Of The Same or Something New?• AMZN impact on traditional retail is not a

new story, but is the pace of share shift accelerating?

• AMZN results strong while traditional department stores starting to falter.

• If it is less about AMZN and more about slowdown of int’l travel, they should do relatively better than M?

• Not standing flat footed: all aware AMZN is here to stay, making investments to combat

• Macy’s is adding Backstage, its discounter offering and Blue Mercury Spas to current store locations.

AMZN

Macy’s

Target

Walmart

Dec-

14De

c-14

Dec-

14Ja

n-15

Jan-

15Fe

b-15

Feb-

15Ma

r-15

Mar-1

5Ma

r-15

Apr-

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May-

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y-15

Jun-

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Jun-

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l-15

Jul-1

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Aug-

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g-15

Sep-

15Se

p-15

Oct-1

5Oc

t-15

Nov-

15No

v-15

Nov-

15De

c-15

Dec-

15Ja

n-16

Jan-

16Fe

b-16

Feb-

16

-15%-13%-11%

-9%-7%-5%-3%-1%1%3%5%

With Store Traffic Down, In-Store Experience Is Key• US mall traffic has decreased for 37

consecutive months and continues to be challenging

• Malls have seen an average 9.1% YoY decrease in traffic since January 2015– High-end malls appear less affected– General Growth Properties: traffic up

2% in 2015– Simon Malls: traffic up 1.5% in 2015– Taubman Centers: traffic up in 2015 Source: RetailNext

Monthly US Store Traffic: YoY% Change

1

Experiential Retail: A Way to Bring Shoppers Back to Stores

• Urban Outfitters acquired the Vetri Family group of restaurants in 2015

• Club Monaco collaborated Café Myriade to open an in-store coffee shop in Montreal

Food & Beverage

In-StoreTechnolog

y

• Rebecca Minkoff offers interactive mirrors as well as virtual reality headsets in stores

• Tommy Hilfiger stores have virtual reality headsets that allow visitors to experience runway shows

Custom-ization

• In March of 2016, Nike revealed its app, Nike+, that gives shoppers the ultimate customized experience

2

Experiential Retail: Making the Experience Engaging • Urban Outfitters acquired the Vetri Family

group of restaurants in 2015• Club Monaco collaborated Café Myriade to open

an in-store coffee shop in Montreal

Food & Beverage

In-StoreTechnolog

y



Custom-ization

• In March of 2016, Nike revealed its app, Nike+, that gives shoppers the ultimate customized experience

2

Experiential Retail: Customization and Personalization • Urban Outfitters acquired the Vetri Family

group of restaurants in 2015• Club Monaco collaborated Café Myriade to

open an in-store coffee shop in Montreal

Food & Beverage

In-StoreTechnolog

y



Custom-ization

• In March of 2016, Nike revealed its new app, Nike+, that gives shoppers the ultimate customized experience

2

Data-enabled personalized and

timely promotions

Track movement, behavior and preferences

Beacon-enabled location-based

advertising

Smart Malls: Reshaping the Physical Shopping Experience3

Partnered with HGTV to launch virtual and hands-on technology-based experiences

Formed strategic alliance with StepsAway, an in-mall mobile retail solutions provider offering shoppers smartphone access to hyperlocal in-store deals

Silicon Valley–based unit that designs and develops innovations to improve the retail experience

Smart Malls: Reshaping the Physical Shopping Experience3

Retail Store Closings and Openings Continue

2015• There was a 7% year-over-year

increase in store closure announcements

• There was 29% less square footage associated with announced store closures in 2015 than in 2014

• 16 retailers closed at least 10% of their stores between 2010 and 2015– Teen retailers appear consistently on

this list

Sears

aerie

Christopher and Banks

Abercrombie & Fitch

Pacific Sunwear

Kmart

Restoration Hardware

Office Max/Office Depot

Aéropostale

Saks Fifth Avenue

Bebe Stores

Hollister US

Lands' End

Staples

Barnes & Noble

New York & Company

Williams-Sonoma

JCPenney

Dillard's

Rite Aid Corp

Gap

-70% -60% -50% -40% -30% -20% -10% 0%

Change in Store Base: 2010–2015

4

Retail Store Closings and Openings Continue2016• Off-price/discount retailers are expected

to see major growth in 2016 as well as fast fashion brands

• Foreign discount grocers Aldi and Lidl plan to push US expansion

• E-commerce pure plays are opening stores

Retailer Number of Announced Store Closings

Walmart 269Men’s Wearhouse 250Sports Authority 140Sears 50Macy’s 40Kohl’s 18

RetailerNumber of

Announced Store Openings

Dollar General 1,000*

Forever 21 600

H&M 425

Amazon 400

Under Armour 200

Dick’s Sporting Goods 135–150

Ulta 100

Lidl 50

Aldi 45

Costco 32

Dollar Tree 13

Stein Mart 12

Target 11*In 2017Source: ICSC Research/PNC Research

4

Moving to Omni: Tech Investments Help Feed the Digital Shopping Habit

• Retailers are raising capital-spending budget for technology projects

• There is a 75% correlation between capex/sales and e-commerce sales/total sales for selected retailers:

“You have to spend money to make money”

Retailer Capex and Capex/Sales (2015)

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Gap

Kohl

’s

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s

Sear

s$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

0%

1%

2%

3%

4%

5%

6%

7%

8%

Cape

x ($

Bil.)

Capex/Sales

Source: eRetailer/company reports/Fung Global Retail & Technology

5

Moving to Omni: Operations and Channels

• L Brands moved to integrate its Victoria’s Secret direct-sales business — online — into the store businesses

• Victoria’s Secret discontinued catalogs in 2016, saving $100 million annually

• Aim to offer a seamless shopping across mobile, online and in stores

The Seamless

Experience

Same-day Delivery

• From test phase to full-scale operations:– Kohl’s expands same-day delivery to 7 new markets with Deliv

(April 2016)

– Best Buy expands same-day delivery to 13 new markets with Deliv (April 2016)

– Macy’s already in 17 markets with Deliv

Click & Collect

• Amazon UK has partnered with Barclays to use its outlets as collection points for deliveries

5

Evolving Pure Plays (Number of Actual/Planned Physical Stores)

AMAZON

ATHLETA

CASPER

AYR

YOGIBO

HARRY’S

1 400 120 1 3 2

3 21 1 1 7

4 27 25 12 2

6

Evolving Pure Plays• Millennials prefer mono-brand brick-and-mortar stores, and

they shift between online and offline along the shopping journey

6

Competing in an Amazon World7 Ways Amazon is Changing “Everything”

OVERALL E-COMMERCE SALES GROWTH CONTINUESTO OUTPACE TOTAL RETAIL SALES GROWTH

Source: Census Bureau

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-30%

0%

30%

60%

E-Commerce Only Total Retail

E-Commerce Sales Growth vs. Total Retail Sales Growth

AMAZON SALES GROWTH FAR OUTPACES US RETAIL SALES GROWTH• Accounted for $0.42 of every $1.00 of

growth in US e-commerce in 2015• Also generated 27% of total retail

growth in the United States

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015(10%)

5%

20%

35%

50%

Amazon Sales Growth US Total Retail Sales Growth

Source: Bloomberg and US Census Bureau

Annual Sales Growth

SINCE THE START OF 2016 WE HAVE BEEN MONITORING AMAZON NEWS ON A DAILY BASIS

1. Amazon Prime Is Taking Off

Explosive Growth in Prime Subscribers• Estimate of 54 million

prime memberships (CIRP)– 51% jump YoY in 2015

• Most households do not hold multiple memberships– About 46% of US households

have just one member– Costco has 44.6 million paid

members and 81.3 million cardholders

Source: Business Insider

Prime Offerings• Shipping

– Free 2 Day shipping• Prime Now

– Same day delivery within a 1 to 2-hour window of select items in select metro areas

– No extra fee, $5 tip encouraged• Video

– Stream thousands of movies and TV shows on over 600 devices

– Focusing on original content– Spends around $3 billion annually on streaming

content, and is expected to grow• Music• Unlimited photo storage in the cloud

Prime Purchases vs. Average Amazon• Prime members spend about $1,100 a year

– Plus varying membership fees• Non-members spend an average of $600 a

year• Amazon Flywheel

– More attractive to customers as more items are prime eligible

– More vendors want their products to be eligible for Prime status to participate in Amazon's fulfillment

– Prime becomes even more attractive to customers, feeding a cycle of momentum

Dash Buttons• One-click physical buy button

– Seamlessly restock household essentials• Prime-eligible items only

– Amazon is selective as to which brands can participate

• Takes a percentage of each order• Turning into additional Ad revenue source

– Amazon looking to tap into the $77 billion digital ad spend market with this service, especially CPG brands.

• Kwik is creating similar buttons that are open to any retailer

Amazon Video Direct• Users can upload original or

licensed content• Ad supported• Can designate access:

– Free to everyone, can rent or own, subscription, or Prime only

2. Prime Now is Redefining Logistics

Amazon Prime Now• Free 1 or 2-hour shipping

– Select metro areas– Suggested $5 tip– Can be changed up to 48 hours after delivery

• Cowen estimates that 25% of Prime Members have used Prime Now. Previously only on apps, now also available on the web

• Expanded internationally:– UK, Italy, India, Japan

• Limited items, but includes many categories from food to electronics

Redefining Logistics• Signed two deals to lease 40 airplanes• Supplementing existing network to ensure

capacity to support 1–2 day delivery options• Currently relies on UPS, USPS and FedEx for

delivery– Slowly taking over operations and relying less

on 3rd parties

• Spent $11.5 billion on shipping in 2015, up from $8.7 billion in 2014– New logistics service could lower these costs

• Logistics could eventually become client-facing business like AWS

• Amazon has deployed an estimated 30,000 Kiva robots in its fulfillment centers

Number of Amazon Employees

Source: Company Reports

CompanyLatest Funding

Roundcurbside $25 Million deliv $28 Million Doordash $40 Milliondrizly $13Million Instacart $220 Millionmunchery $85 Million nestdrop $150K postmates $80 Million roadie $10 Millionshyp $50 Million

Other Same-Day Delivery Startups

3. Amazon Home Services Could Shake Up Several Industries

Home Services Market Size• $400 Billion (Angie’s list)• 85 million Amazon customers purchasing products that

need installation or assembly• 7.6 million Americans working in “gig economy” by

2020

Amazon Home services COULD shake up furniture and appliances industries• Amazon is combining delivery of larger

products with seamless assembly.• Orders are growing at 20% a month since

launch• Home Services offers 36 million pre-packed

services on the site, compared to the 2 million it offered when it first began offering local services last year

• Prepackaged or custom services

Amazon Thinks Big (Items)• Amazon wants to sell bigger things

– Decreasing barriers to large appliance and furniture purchases• Amazon increasing capacity for large items

– About 12 warehouses just for big products• More than 1 million items with option for assembly or other

services• Services available without items

– Landscaping, house cleaning

DIFM vs. DIY• US aggregate spending on consumer home

improvement, professional maintenance, repair & operations and DIFM services: $550 billion [source]

• Home Depot: $89 billion in annual sales in 2015• Younger shoppers less familiar with DIY, affluent

older shoppers look for professionals to do work for them

• UK home ownership skewed toward older generations

• US growth in multifamily homes driving demand for home improvement services

Other DIFM Players• Integrates:

– TaskRabbit, Take Lessons, Pep Boys

• Competes with:– Angie’s List, Yelp, Google

• Task-related startups:– Fiverr, Handy

4. Echo+Alexa Is a Sleeper

Echo is a sleeper hit along with Alexa• Paired with Alexa, Echo allows for “always on” AI in your

home – without needing your phone or pushing a button.• Echo becomes the central nervous system of the connected

home.• Advertising tie ups with Capital One and other finance firms

are in the works. • Tie ins with Amazon Prime Now and other Amazon

retail services are natural extensions.• Echo is on back order, prompting other device

makers like Google's Nest to work on their own look-alike services.

• First launched in 2014– Purpose not entirely clear– Originally panned by critics, many were finally won over

Growing Virtual Assistant Market• Global market worth $5.1 billion by 2022 (Transparency Market Research)• North America has largest market share of smart virtual assistants at 39%• Asia Pacific expanding at a 33.4% CAGR

New Sizes and Features• Always-on feature• Constantly adding new skills

– Add events to calendar with voice commands

– Check stock quotes• Enables smart home actions

– Takes advantage of IoT capable devices throughout the home, connects to them all

• New form factors:• Echo Dot, Amazon Tap

Cross-selling Amazon Media Content• Purchase Kindle books via

Alexa or have Kindle e-books read to you• Control through Amazon Fire

TV Stick• Purchase additional Amazon

content

Partnerships• Users can access banking functions with Capital

One– Adding additional revenue stream

• Music requests can be made to Spotify• Users can order an Uber via Alexa• Ford is looking to use SYNC Connect with Alexa

– Allow customers to access vehicle from inside home

• Hands free delivery from Domino’s is under development

Other AI Personal Assistants (Fix formatting)

Platform Launch Date Key Features

Apple Siri Oct. 2011 Integrated into multiple devices, including the iPhone, iPad, iPod Touch, Apple Watch and Apple TV

Google Now Jul. 2012 Relies on predictive technology to anticipate the user’s information needs

Microsoft Cortana Apr. 2014 Employs progressive intelligence; the system asks permission before accessing a user’s information on a device instead of automatically recording information

Facebook M Aug. 2015 Uses human intelligence to train and improve AI

Hound by SoundHound Mar. 2016 Comprehends natural language; is capable of handling sophisticated commands

Mobvoi Aug. 2014 Chinese AI personal assistant that is available on iOS, Android and its own smartwatch

Viv Under Development

Next generation of intelligent virtual assistants. Viv is able to create its own code and find answers, supplying the missing link between human and information

Source: Company official websites/Financial Times

5. Disrupting the Office Supply Market

US Office Supply Market

2008

2009

2010

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E$0

$5,000

$10,000

$15,000

$20,000

$25,000

• $16.8 billion market in 2016• 48% of Staples sales come from

core office supplies, ink and toner products

• Staples and Office Depot control 67% of store based office supply sales in North America– Attempted merger blocked by FTC

Sales Value of Office Supply and Stationery Stores in US (Mil. $)

Source: US Census Bureau/Statista*Estimate

Amazon Business Accounts• About 300,000 businesses had opened accounts with Amazon in

the first 11 months of its Amazon Business service.• Successor to Amazon Supply• Free 2 day shipping on orders of $49+ of office supplies• Companies can approve employee purchases

– Can pay invoices rather than upfront• Already has some control over 3rd party sellers, contrary to

original testimony in Staples/Office Depot hearings

6. Amazon Moving into Apparel

Amazon Is Poised to Become Largest US Apparel Seller in 2017

TJX

Walmart

Macy's

Amazon

$0 $5 $10 $15 $20 $25 $30

Estimated US Apparel and Accessories Sales 2017 ($ Bil.)

Source: Cowen & Company

• Amazon is poised to surpass Macy’s to become the biggest US apparel seller by 2017

• Amazon sells about 343,000 different kinds of items in leading brands versus an average of 85,000 for Macy’s and Nordstrom

• The brands listed on Amazon are in direct competition with those sold at department stores, such as Nicole Miller, Calvin Klein, Kate Spade, Lacoste and Levi Strauss

Amazon Led Apparel Sales Growth in 2015Am

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illio

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(5%)

0%

5%

10%

15%

20%

25%

30%

Source: Company reports

Annual Sales Growth by Company - 2015

• Amazon led the group of top 19 apparel companies with growth of 26% in 2015

• Fast Fashion Top 5 include Inditex and H&M

• Walmart’s apparel, Gap, Macy’s and Isetan Mitsukoshi each posted sales declines for the year

• North American Apparel Sales grew at 2.5% in 2015 (PwC)

Amazon’s Foray into Apparel 1995Amazon Launches 2006

Acquired

2002Expansion into Apparel

2009

Acquired

2011

Acquired

2015Private Label Launched

2015Amazon apparel generates $16.3 billion in sales*

*Based on our estimates, includes 3rd party sellers

Amazon Quietly Launched Private Label

FRANKLIN & FREEMAN

SOCIETY NEW YORK

SCOUT & ROLARK & RO

FRANKLIN TAILORED

JAMES & ERIN

Marching Forward in Private Label Opportunities

• Fast fashion and basic categories are under-represented on Amazon

• Forever 21, H&M and Uniqlo each have less than 80 SKU’s on the site while Coach and Michael Kors each have at least 16,000

• Nike has the most SKU’s with more than 115,000

• Amazon launched 1800 stock-keeping units within seven private label brands in 2015

• Brands ranging from men’s dress shoes, suits, accessories, women’s casual, fashion and kidswear

• Amazon is aggressively hiring private label talents, including merchandiser and fit specialist.

Amazon Web Services—The Secret Weapon

Amazon Web Services—the Secret Weapon• AWS: a $10B revenue run rate

business– 64% revenue growth and $604M+

in operating income in 1Q16– Accounted for 56% of Amazon’s

operating income in 1Q16– Total CapEx $9.5B TTM

2013 2014 2015

$3.1

$4.6

$7.9

AWS Revenues ($ Bil.)

CAGR = 59.2%

Booming Cloud Services Business• Software-as-a-Service (SaaS) to remain

dominant computing type– Infrastructure-as-a-service (IaaS)

expected to grow at a 27.0% CAGR– Platform-as-a-service (IaaS) expected to

grow at a 30.6% CAGR• By 2018, most vendors will have shifted

to SaaS/PaaS• Large companies to account for $80B of

2019 spending• SMBs expected to account for 40% of

spending during 2015–2019E2015 2019E

$70

$141

Worldwide Spending on Public Cloud ($ Bil.)

CAGR=19.4%

Source: IDC, 2016

AWS: Dominant Market Leader in Cloud

• Amazon ranks #1 with >30% share• Microsoft ranks #2 and

is fastest-growing, still has < 10% share• IBM, Google and

Salesforce. com round out the top five

Amazon Still has a lot of Room to Grow

Summary of Markets ($ Bil.) Market Market Size (2015) AMZN Size (2015) Share

US Retail $4,699 $99.1 2%

US E-commerce $341 $99.1 29%

WW Public Cloud $84 $7.9 9%

Global Logistics(1) $186 N/A N/A

US Grocery $983 $32 4%

US Apparel $267 $16 5%

Global Intelligent Virtual Assistant $0.6 N/A N/A

TOTAL $6,220 $107 2%

Source: Companies/comScore/Cowen & Co./Euromonitor/IDC/US Census/Fung Global Retail & Technology(1) DHL+FedEx+UPS+USPS

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