Global Retail Trends For 2016 Deborah Weinswig Executive Director, FBIC Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 @debweinswig

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Agenda • About Fung Business Intelligent Centre (FBIC)

• Top 16 Global RETAIL Trends for 2016

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Fung Business Intelligence Centre (FBIC) • Established in 2000 and headquartered in Hong Kong • FBIC serves as the knowledge bank and think tank for the Fung Group – Collects and analyzes market data on sourcing, supply chains, distribution and retail – Provides thought leadership on technology and other key issues

• New York–based Global Retail & Technology team – Follows broader retail and technology trends – Provides advice and consultancy services to colleagues and business partners of the Fung Group – Builds collaborative knowledge communities

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Futureproofing • Anticipating future trends and developments • Plan for future value and avoid obsolescence – What problem are you trying to solve? – How will it be used? – How robust does it need to be?

• Ensure flexibility to manage changing formats and deployment patterns

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Our Partnership With Accelerators Alchemist Accelerator is an accelerator exclusively for startups whose revenue comes from enterprises, not consumers.

CoCoon is a coworking space where entrepreneurs, creative talent, successful leaders and investors meet, collaborate and deliver results together. Member companies get access to networking opportunities, work space, a photography studio and mentors. Entrepreneurs Roundtable Accelerator (ERA) provides participant companies with an intensive four-month program, with the goal of helping early-stage companies progress rapidly into exciting, viable businesses. New York Fashion Tech Lab is an accelerator that is a result of a collaboration between the Partnership Fund for New York City, Springboard Enterprises and major fashion retailers. It focuses on early- and growth-stage companies. Plug and Play is a global innovation platform. It connects startups to corporations, and invests in over 100 companies every year. Its 360° ecosystem allows for remarkable innovation to take shape on an international scale. Techstars is a global ecosystem that empowers entrepreneurs to bring new technologies to market wherever they choose to build their business.

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Fung Capital/FBIC Commerce Technology Landscape

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GLOBAL RETAIL TRENDS FOR 2016 1. Smart Malls

9.

2. Silver Economy

10. The Store Gets a Makeover

3. Luxury Retail Landscape in Asia

11. Athleisure

4. Online Fashion Resale

12. Where to Find Growth: Off-Pricers

5. Sharing Economy

13. Caring Economy

6. One-Child Policy in China

14. Customer Loyalty

7. Social Media Sways Shopper

15. Amazon Becomes a Force in Omni-Channel

8. Home Improvement Market

16. Experience Economy

Growth of E-Commerce

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1. Shopping Malls Getting “Smarter” Pressure from e-commerce and oversupply in some markets will make malls “smarter” • In 2014, 44% of all the new shopping malls opened globally were in China, saturating the market

Selected features of the “Feifan” App

• Social media - Shanghai’s Cloud Nine and Shenzhen’s SEG Plaza are using WeChat to reach shoppers directly with news and loyalty programs • Mobile apps - Wanda has partnered with Baidu to create the one-stop-shop app “Feifan” for in-mall use • Holistic Data Analytics - Senzhen Rainbow, Xientendi use retail, shopping mall (beacon), and search engine data to analyze shopping behavior and deliver personalized promotions

Source: FBIC

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1. Shopping Malls Getting “Smarter” Pressure from e-commerce and oversupply in some markets will make malls “smarter” • Westfield operates Westfield Labs – a Silicon Valley-based unit which designs and experiments with retail innovations – Malls include: touchscreen displays, electronic parking assistance, free Wi-FI

• HGTV partnered with Macerich shopping malls to launch virtual and hand-on technology-based experiences – Traffic at those [10] malls was up 45%

• RetailNext formed strategic alliance with StepsAway, an in-mall mobile retail solution provider offering shoppers smartphone access to hyperlocal in-store deals – Timely, relevant promotions that measure the redemption and conversion rate

– If data shows that shoppers frequent healthy food options, it can drive the opening of health-food restaurants in mall’s food court

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2. The Silver Economy The silver market represents 23% of the worlds population and it’s getting more connected • 23% of world population (1.64 billion) is aged 50+

• 55+ control more than 75% of America’s household wealth of $81.5 trillion (US Federal Reserve) • Smartphone ownership among aged 65+ increased from 5% in 2012 to 27% in 2015 (Pew Institute) • 58% of seniors aged 65+ in the US are online, 41% in Europe • Internet use and broadband adoption rates continue to climb among older adults

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2. The Silver Economy Telehealth and proliferation of retail clinics will drive additional traffic to retailers in 2016 • CVS partnered with three tele-health service providers in 2015 and acquired Target’s pharmacy and clinic businesses Number of US Retail Clinics

Global Revenue – Tele-health Devices and Services

4,000

5.00

4.50 3,000

4.00

3,000

2.83

$ Bil.

3.00

1,800

2,000

1.78

2.00

1.12

1,000 1.00

0.44

200 0

0.70

0.00

2006

Source: IHS

2014

2016F

2013

2014

2015

2016F

2017F

2018F

Source: Convenient Care Association/Merchant Medicine

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3. Luxury Retail Landscape in Asia Luxury outlook meek – landscape is changing as demand in China slows • In China, customers no longer want to show off wealth as much as previously and shoppers have generally become more educated • According to Bain & Co, nearly 50% of Chinese luxury purchase were made by the consumers abroad, another in part by overseas agents, or “DaiGou” • Chinese tourists jumped 23% to US$229 billion in 2015, and by 2020, they’ll be spending US$422 billion • Asian markets, such as Japan, benefit from more Chinese tourists , but weak Yen has impacted domestic consumption

Source: Louis Vuitton

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4. Online Fashion Resale • Online consignment is attractive to VCs; expect more funding and industry consolidation in 2016 • Industry consolidation has already started. Last week Threadflip announced closure and partnership with Le Tote, following Bib + Tuck’s acquisition by Crossroads in the middle of 2015 • Online resale industry is estimated to be a $34 billion industry according to ThredUP; SnobSwap estimates market growing at 10% CAGR • Heavy venture capital investment in online consignment (over $450 million) – ThredUP raised $81 million in Series E funding in September 2015

• Patagonia, Eileen Fisher and H&M launched resale programs • Mobile is hot in resale; over 45% of thredUP’s sales come from mobile devices

Source: Upfront Insights

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5. Sharing Economy The big players will become even bigger in 2016

Valuations: Selected Sharing Economy Startups

• Next big industry to be disrupted is healthcare. Lookout for Doctor on Demand, Pager, Studio Dental and MedZed

Startup

• Sharing economy companies are maturing and becoming more sophisticated – AirBnB and Uber launched separate apps for business

• 2016 may see first big sharing economy IPO • Revenues are projected to catch up with aggressive valuations; sharing economy to grow at a CAGR of 32.6% until 2025, according to PWC

Industry

Valuation

Uber

Car Sharing

$62.5 B

Airbnb

Peer-to-Peer Accommodation

$25.5 B

Didi Kuaidi

Car Sharing

$16.5 B

WeWork

Office Sharing

$10.0 B

OLA

Car Sharing

$5.0 B

HomeAway

Peer-to-Peer Accommodation

$3.0 B

Lyft

Car Sharing

$4.0 B

Instacart

Logistics/Delivery

$2.0 B

Prosper

Peer-to-Peer Lending

$1.9 B

TransferWise

Finance

$1.0 B

Funding Circle

Finance

$1.0 B

Source: Company Reports/Analyst Estimates

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6. One-Child Policy in China The impact on consumption could hit this year, driven mainly by expectant parents • Starting in 2016, couples in China will be allowed to have two children without risk of fine

• The first wave of the second-child boom is expected in 2017, but expectant parents could increase consumption as soon as this year • Estimates are that the number of newborns will increase by 3– 8 million each year to approx. 20 million newborns per year. • Huatai Financial estimates that the relaxation of the one-child policy could create a $15 billion market • The second-child boom will benefit several categories, including food and dairy, healthcare, garments, automotive and education

Breakdown of child-related consumption by category 37.6%

Education

24.4%

Food and Beverage

18.8%

Apaprel

10.4%

Entertainment

8.8%

Toys 0%

10%

Child-related consumption of total family daily expenditure

20%

30%

40%

33%

Source: Insite/ FBIC

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7. Social Media Sways Shoppers Social media will become more commerce-driven and the impact of influencers will increase Peter Xu Weibo Profile: Gucci

Pinterest: Buyable Pins

• In 2015 Pinterest introduced “Buy it” button, and Instagram expanded its ad program • Twitter, Facebook and Youtube also becoming more commerce-friendly and are experiment with buy buttons • Fashion bloggers are becoming more influential than celebrities when it comes to influencing buying decisions in the US • In China, “verified” Key Opinion Leader with over one million fans on the microblogging platform, Weibo, are used by brands such as Burberry, Tommy Hilfiger, Gucci, and Diane von Furstenberg with great effectiveness Source: SocialBrnadWatch

Source: Pinterest

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7. Social Media Sways Shoppers “Social selling” will reach a new level of importance Coach Handbags: Marketing and Selling on WeChat

• WeChat leads the way in social selling - “B2C2C” model (recommended purchase by friends) is the most advanced form of social commerce

Red Envelope: Viral Sharing

Lifestyle Content: 57,161 view

• WeChat allows content distribution, targeted campaigns, inapp payment, friend/influencer recommendations • Before Singles’ Day in China, brands and retailers engaged shoppers actively on WeChat via: – Reward vouchers for fans who post a branded message or share it directly to with their friends – Sharable WeChat stickers : The Cambridge Satchel Company partnered with Chinese KOL and artist, Zang Xiaobai to launch themed Singles’ Day illustrations Source: WeChat

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8. Home Improvement Market The positive trends in the US home improvement market will continue

• •

Housing market continues to recover: rate of household formation above the 50-year average in 2015

The HIRI forecasts the US home improvement market growing at a 4.5% annual rate between 2016 and 2019 Lowe’s and Home Depot have had solid comps of nearly 5% in recent quarters: – –

•

Lowe’s is seeing growth in average ticket size and number of transactions Home Depot is seeing faster-than-average growth in big ticket items, looking to execute omni-channel strategy

2015: Above Average Household Formation 2,000 1,600 Households (thousands)

•

1,500

Average = 1,200 1,000

500

0 Household Formation

Home e-tailers like Wayfair and Houzz offer unique shopping experiences which appeal to millennials

Average

Source: S&P Dow Joes/Moody’s Economy.com

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9. Growth of E-Commerce Strong Growth in E-Commerce Channels Propels More Retail Tech Spending • We expect US retailers to increase spending on technology to expand e-commerce and omni-channel capabilities

$1.0

2.0%

$0.5

1.0%

$0.0

0.0%

2014 Tech Capex

Source: Company Reports

2015 Tech Capex

Walmart

3.0%

TJX Companies

$1.5

Target

4.0%

Sears

$2.0

Nordstrom

5.0%

Macy's

$2.5

Kohl's

6.0%

JCPenney

USD Bil.

$3.0

Home Depot

• Amazon added Prime Now to eight metro areas in 3Q 2015, allowing for free 2 hour delivery and paid 1 hour delivery in 17 locations worldwide

7.0%

CVS

• Home Depot is completing an Ohio fulfillment center, allowing them to ship to 90% of US customers within two days

$3.5

Capex/Sales

• Walmart improved app and their website’s checkout process, cutting checkout load time from 7.2 to 2.9 seconds, increasing conversions by 2%

Total CAPEX for Major Retailers

2014 Capex/Sales (Right Scale)

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9A. Growth of E-Commerce E-Commerce players go offline •

•

Millennials prefer mono-brand brick-and-mortar stores, and they shift between online and offline along the shopping journey

Retailer

# of Stores

1

Warby Parker: Targeting millennials –

Started exploring offline with pop-ups and a showroom in its NYC office; now expanding to over 20 cities in the US

1

–

Warby Parker’s stores make more than $3,000 per sq. ft., putting the retailer in an elite category with companies such as Tiffany and Apple

20

–

Offline feeding ecommerce : more than 85% of store shoppers will later visit the website, increasing the chances for further orders

26 Source: Company Websites

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10. The Store Gets a Makeover Stores will make the shopping experience more fun and entertaining to drive traffic •

“Retailtainment” is being added to stores by incorporating interactive components in the customer experience

•

Urban Outfitters, Club Monaco and Kohl’s are part of a trend of retailers that are opening coffee shops and restaurants in their stores. –

In 2015, Urban Outfitters acquired Vetri Family group of restaurants

•

Rebecca Minkoff and Tommy Hilfiger have provided shoppers with VR headsets to re-experience runway shows

•

Proliferation of mobile apps to improve in-store experience: –

Tommy Hilfiger VR experience, Source: New York Times

customizable shopping list, location-relevant promotions, and product and inventory information Urban Outfitters Coffee Shop, Source: parhamsantana.com

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11. Athleisure Athleisure is no longer just a trend— it is now a lifestyle

Annual Revenue of Leading US Sporting Goods, Footwear, and Apparel Retailers 2014 (USD) Walmart*

9.6

Dick's Sporting Goods

6.5

Target*

• Yoga/athletic-inspired look, being embraced by people striving to live a healthier, more active life • Many athleisure lines have been launched at large department stores, including Nordstrom and Kohl’s • The casualization of the workplace is a driving factor

4.3

Academy Sports + Outdoors

4.1

Bass Pro Shops

4.0

The Sports Authority

3.4

Cabela's**

3.2

Nike

3.0

Recreational Eqipment Inc. (REI)

2.2

Foot Locker

• Technical businesses that offer a specific type of athleisurewear, such as Nike and Under Armour, should do well in 2016

2.0

Lululemon Athletica

1.8

The Finish Line

1.8

L.L. Bean

1.6

Kohl's*

1.5

Gander Mountain

Source: SportsOneSource

* Athletic only ** Merchandise sales

1.3

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12. Where to Find Growth: Off-Pricers Off-price will continue to be a big source of sales growth •

Off-price chains sell high-profile brands and designer goods for 20-60% less than department and specialty stores –

•

T.J.Maxx and Marshalls pump out roughly $304 in sales per square foot, on average, and Ross generates about $288 in sales per square foot versus JCPenney, $101 sales per square foot, and Macy’s about $158 (eMarketer)

Sales will increase by 6% to 8% over the next five years in the US, outpacing the apparel sector by 4% (Moody’s) 1972

1950

1976

2010

2015

Nov 2015

1956 1973

1995

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12. Where to Find Growth: Off-Pricers Off-price will continue to be a big source of sales growth • Ross Stores plans to double its store count from the 1,210 Ross Dress for Less stores it currently operates • Nordstrom Rack opened 27 new stores in 2015, and plans to exceed 300 stores by 2020 • Macy’s launched Backstage concept-plans for 50 stores; Kohl’s unveiled Off-Aisle concept

Nordstrom and Nordstrom Rack Store Count 2010–2015 194

200 176

170 143

140 117 120

117

110

117

116

119

108

80

• Primark launched in the US in September 2015 and will be a driving force in the market

50 2011

2012 Full-line Stores

2013

2014

2015

Nordstrom Rack

Source: Company Reports

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13. Caring Economy We expect more retailers to implement sustainability practices in 2016 • Social activism over self-indulgence

– Consumers, especially Gen Z, are increasingly demanding integrity from brands and retailers • Startups for social good apply market-based strategies to achieve a social goal

– TOMS, the shoe company, has a “one for one” business model – Reformation designs and manufactures sustainable apparel, sourcing sustainable fabrics and vintage garments – Social innovation hubs —The Good Lab in Hong Kong

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14. Customer Loyalty More retailers will facilitate personalized experiences for customers via loyalty programs • Customer loyalty has become increasingly difficult to generate and maintain in the omni-channel world • Walmart launched Savings Catcher in 2014 to give customers the difference in price if a product is cheaper elsewhere • American Express launched Plenti, allowing customers to earn rewards points from AT&T, ExxonMobil, Hulu, Macy’s, among others

• Smartphone apps are becoming more prominent in loyalty programs, likely to replace plastic cards more in the years ahead

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15. Amazon Becomes a Force in Omni-Channel Amazon has the leading edge, but Walmart will provide plenty of competition • Amazon is following the lead of other online pure plays such as Warby Parker, Bonobos and Birchbox by venturing into the physical space

• E-commerce, brick-and-mortar, click-and-collect and offline-to-online will all work together seamlessly in the new retailing landscape

Amazon.com Global Net Revenue by Category

80.0 Net Revenue ($ Bil.)

• In 2015 Amazon’s market capitalization far surpassed Walmart’s at $317 billion vs $196 billion (Jan 2016)

100.0

60.0

40.0

20.0

0.0 2006

2007 Media

2008

2009

2010

2011

Electronics and other products

2012

2013

2014

Other activities

Source: Company Reports

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16. Experience Economy We expect the experience economy to grow significantly during 2016 • According to a Harris Poll survey in 2014: – 78% of millennials prefer to spend money on an experience than goods – 69% of respondents said they believe attending live experiences helps them connect better with friends, community and people around the world

• Mintel expects vacations and tourism to beat out all other categories between 2014 and 2019, at 27%

• Startups have entered the scene to capitalize on the experience economy: IfOnly, Zaptravel, Gigzolo

Source: Company Websites

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THANK YOU! Deborah Weinswig Executive Director, FBIC Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 @debweinswig

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