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The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape
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The New Face of Retail: Retail and Consumer Trends Reshaping the Landscape

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There are several trends reshaping the U.S. retail market today, from the decline of traditional media to smaller, more focused branding. In this webinar with ACG, L.E.K. Consulting’s Rob Haslehurst …

There are several trends reshaping the U.S. retail market today, from the decline of traditional media to smaller, more focused branding. In this webinar with ACG, L.E.K. Consulting’s Rob Haslehurst and Jon Weber discuss the trends reshaping the retail market today.

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  • 1. Bangkok Beijing Boston Chennai Chicago London Los Angeles Melbourne Milan Mumbai Munich New Delhi New York Paris San Francisco Sao Paulo Seoul Shanghai Singapore Sydney Tokyo Wroclaw The new face of retail Retail and consumer trends reshaping the landscape The materials contained in this document are intended to supplement a discussion with L.E.K. Consulting. These perspectives are confidential and will only be meaningful to those in attendance. L.E.K. Consulting LLC, 75 State Street, 19th Floor, Boston, MA 02109, USA T: 617.951.9500 F: 617.951.9392 www.lek.com ©2014 L.E.K. Consulting April 2014
  • 2. CONFIDENTIAL DRAFT 2 A number of major trends are reshaping the U.S. retail landscape The new face of retail More spending among high and low income levels as middle class is squeezed Hourglass economy 1 Population is becoming older and more ethnically diverse Demographic shifts 2 Information transparency and accessibility creating empowered, sophisticated consumers who expect more from retailers Uber consumers3 Digital tools and channels have reshaped the purchase cycle… and role of physical stores Omni-channel6 Paper and broad-based ad vehicles declining, but not dead Decline of traditional media 7 Balance of power has moved to new channel segments Channel shifts8 International markets provide source of growth in otherwise low growth world International10 Brands establishing direct consumer relationships and building own commercial channels (stores and e-com) Brands going direct to consumer 9 Consumers want specialized brands, products, and experiences that deliver on specific needs Smaller and focused is better 4 Brands / retailers building a deeper understanding of consumers and tailoring product, messaging, and experience to their specific needs One-to-one customer engagement 5 ©2014 L.E.K. Consulting
  • 3. CONFIDENTIAL DRAFT 3 The rising income inequality gap is squeezing the middle class, resulting in an “hourglass” economy Source: U.S. Census, CBRE; L.E.K. research and analysis ©2014 L.E.K. Consulting The new face of retail Top 20% Bottom 20% 50 100 60 0 10 20 30 40 70 80 90 Lowest quintile Second quintile 2005 2010 20121975 1980 Highest quintile Fourth quintile 1985 1990 1995 2000 U.S. shares of household income (1970 – 2012) 1970 Third quintile 1 2 3 4 5  The highest 20% of earners accounted for more than half of the income earned in 2013, up from 43% in 1970  Upper-middle class proportion of income has declined ~2ppt since 1970, largely at the benefit of the top quintile  Meanwhile, the share of middle- income households has markedly declined - Third quintile middle-class share has declined 3ppt since 1970, or 20% of its relative share  Lower-income households have largely maintained income levels and even increased spending power, due in part to government assistance (transfer payments, tax credits, subsidy programs, etc.) 1 2 3 4 5 Macroeconomic indicators suggest these trends are structural and unlikely to change in the near future Hourglass economy1
  • 4. CONFIDENTIAL DRAFT 4 The effects of the hourglass economy can be seen all around us Source: Bloomberg, Forbes, QSRWeb.com, USDA, Financial Times, Savings.com,, Euromonitor, NRN, company websites ©2014 L.E.K. Consulting The new face of retailHourglass economy1  Private label accounts for nearly 23% of unit sales in the U.S.  Dollar General added ~650 stores in 2013 and plans to open 700 additional stores in 2014  Deals offered by major department stores and apparel retailers increased 63% between 2009-2012, with average discounts rising from 25% to 36% over the same period  P&G developed dish soap Gain specifically targeting low-income brackets; the product achieved retail value sales growth of 70% in 2012  Fast casual restaurant traffic rose 8% in 2013, compared to a decrease of 1% and 2% for casual dining and midscale restaurants, respectively  The luxury market in the Americas grew ~4% p.a. from 2008-2013  Global sales at LVMH grew ~4% in 2013  Neiman Marcus experienced same store sales growth of ~6% in the first half of FY 2014  Whole Foods’ 2013 profit was up ~20% YoY  Patron Tequila has capitalized on “ultra-premiumization” to reach >2M cases/year  BMW posted record sales of over 309K units in the U.S. in 2013, representing 10% growth over 2012
  • 5. CONFIDENTIAL DRAFT 5 Note: * Non-Hispanics only Source: U.S. Census Bureau, L.E.K. Analysis ©2014 L.E.K. Consulting CAGR % (2012-20F) 0.9 3.2 2.0 1.0 2.3 0.8340 320 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 U.S. population by ethnicity (1980-2020F) Millions of people 2020F20121980 Total The new face of retail Demographic shifts are changing the composition of the U.S. consumer base Demographic shifts2 180 200 160 140 120 100 80 300 320 340 280 260 220 240 40 60 20 0 U.S. population by age group (1980-2020F) Millions of people Kids (3-8) Infants (0-2) 2020F 333 2012 314 1980 227 Young Adults (18-29) Middle Youth (30-44) Tweens (9-12) Seniors (60+) Mid-Lifers (45-59) Teens (13-17) 0.1 CAGR % (2012-20F) 0.4 0.1 0.5 0.3 0.7 0.8 Total (0.2) (0.5) 2.9 American Indian & Eskimo* White* Hispanic Black* Two or More Races & Other* Asian & NHPI* ∆ million people (2012-20F) 0.2 1.7 2.7 3.0 10.8 1.6 20.0 ∆ million people (2012-20F) 0.4 (0.3) 0.1 0.8 1.1 4.0 (2.5) 15.5 19.0 81% of U.S. population growth coming from Seniors (60+) 76% of U.S. population growth coming from Hispanic and Asian households
  • 6. CONFIDENTIAL DRAFT 6 The new face of retail Forward-looking consumer businesses are finding ways to exploit these trends Source: U.S. Census Bureau Consumer Expenditures Report, Euromonitor, Convenience Store News, Kurt Salmon, Latin Post, Whole Foods, L.E.K. analysis ©2014 L.E.K. Consulting Demographic shifts2 Aging population Ethnic diversity Broaden products and engagement tactics to cater to an older consumer base without losing focus on the younger demographic Evolve traditional approaches (product, marketing, distribution, etc.) to access growing ethnic consumer segments Channel and location presence Evolve product for consumers Tailored media / advertising • Hispanics spend more on food than any other item and more on apparel & services than any other consumer group • 61% of Hispanics shop with a child or another adult, vs. 38% of gen. pop. • U.S. Hispanics consume more media via mobile phones & magazines than non-Hispanics, but less on tablets & TV • Hispanics have a different channel mix (e.g., over-index in bodegas and dollar stores) • 7-11 growing in Hispanic neighborhoods to compete with bodegas Contemporary needs Tailored offerings for seniors Key segments intrinsically advantaged 1 2 3 1 2 3 • Retailers directly targeting seniors and giving them specific experiences / products (e.g., Amazon’s easy-to-navigate micro-site for older consumers) • Certain categories should see out-sized benefits due to key themes (e.g., travel & leisure, heath & wellness, etc.) • Today's seniors are different (e.g., live longer, are healthier) • They’re physically active and want to look / dress / feel younger • They are digitally savvy
  • 7. CONFIDENTIAL DRAFT 7 Today’s consumers are highly informed and savvy, which is raising the bar for retailers and brands to win their business Source: L.E.K. analysis ©2014 L.E.K. Consulting The new face of retail Customers “know” the products better… …understand they have a multitude of options… …know exactly what each of those options are charging…  Ability to instantly shop and compare across channels / brands  Access to countless sources of information  With online product reviews, real consumer experiences matter; it’s no longer just about marketing  A deeper understanding of products and their attributes means falling short on any one attribute can be devastating  Visibility and access to countless brands / products  Outside the confines of the physical (e.g., mall and shelf), the universe of options is vast and competition is much greater  Price transparency has never been greater  Consumers are sophisticated in comparing price and value  Digital makes everything convenient; there’s no longer a reason to pay higher price  Consumers don’t have tolerance for paying price premium Uber consumers3 …and therefore require true differentiation  The product and value proposition must clear and compelling  Need to differentiate and eliminate choice; consumers must want YOUR product
  • 8. CONFIDENTIAL DRAFT 8 For example … Source: Pew Internet & American Life Project, Google Shopper Marketing Council Insights ©2014 L.E.K. Consulting 21 15 9 0 5 10 15 20 25 30 2010 15% Researched a Product / Service Online Yesterday (2004-2010) % of Americans 20072004 Mobile is accelerating this trend 79% of smartphone owners use their device to assist with shopping at least 1x / month; of these shoppers: 44% make price comparisons 44% find promo offers 31% find product information 31% find product availability in-store 30% find product reviews 84% use to help shop while in-store Uber consumers3 The new face of retail
  • 9. CONFIDENTIAL DRAFT 9 Consumers have increasingly higher expectations of retailers and brandsAbilitytobuyonline, pickupin-store 50% 71% Abilitytoviewin-store inventoryonlineSource: Forrester, Accenture, Oracle ©2014 L.E.K. Consulting Consumers expect … 73% Onlineandin-store pricingtobethesame 61% Onlineandin-store promotionstobethesame Responsewithin 2hoursofcomplaint onTwitter 52% Uber consumers3 The new face of retail
  • 10. CONFIDENTIAL DRAFT 10 These rising consumer expectations are putting pressure on retailers to evolve their go-to-market strategies to meet consumers’ needs Before… Today! Price Selection Convenience Availability Selection, Availability, Price, Convenience Free shipping / returns Multi-channel shopping, delivery, & returns Bigger selection Same / next day delivery Personalized experiences Uber consumers3 Impartial recommendations Consistent engagement Easy navigation Promotions Whatever, wherever, and whenever The new face of retail ©2014 L.E.K. Consulting
  • 11. CONFIDENTIAL DRAFT 11 Brands are becoming increasingly specialized across categories … and bigger is not always better The new face of retail Source: Company websites, L.E.K. analysis ©2014 L.E.K. Consulting Smaller & focused is better 4 Food & beverage Personal care Apparel & accessories Other Energy / recovery Sport performance Healthy lifestyle Cosmetics Health & wellness Bath & body Outdoor apparel Focused lifestyle Active lifestyle Technology Fitness & clubs Fast food
  • 12. CONFIDENTIAL DRAFT 12 Brands and retailers are building more robust datasets of their customers; sophisticated data analytics can unlock substantial benefits via more tailored strategies (experiences, messaging, assortments, offers, etc.) The new face of retail Source: Experian, Company websites, L.E.K. analysis ©2014 L.E.K. Consulting One-to-one customer engagement 5 Transaction history Behavior by channel Demographic information Stated preferences Sophisticated data analytics Tailored offerings delivering enhanced value to consumers based on their specific needs Personalized messages perform 10x better in terms of revenue generated per message, than traditional batch and blast emails
  • 13. CONFIDENTIAL DRAFT 13 Deeper insights are enabling companies to establish stronger connections with consumers and deliver a more compelling value proposition The new face of retail Note: * As told to Advertising Age Source: Advertising Age, MGI, ICLP, Internet Retailer, Retail Touch Points, Company websites, L.E.K. analysis ©2014 L.E.K. Consulting One-to-one customer engagement 5  Shoedazzle steers customers in the direction of the product which they would most likely be interested in by collecting shopping preferences via a quiz prior to giving the customer product recommendations “… We ask them what they’re looking for next month… They tell [our client services team] what they’re looking for and ultimately that information informs the algorithm …” Chief Marketing Officer, Shoedazzle  Harrah’s considers its loyalty program “the vertebrae of the company” and utilizes customer data to personalize the guest experience before, during, and after visits “… We know if you like golf, chardonnay, down pillows, if you like your room close to the elevator, which properties you visit, what games you play, and which offers you redeem …” Former CMO, Harrah’s*  Amazon utilizes collaborative filtering to generate add-ons and adjacent product recommendations - The company attributes up to 30% of sales to its recommendation engine  Williams-Sonoma uses personalized e-mail targeting by combining shopper history with broader demographic information on ~60 million households (e.g., income, home values, and number of children) - The company cites a 10-18x better response rate of these targeted emails  Revolve Clothing allows shoppers to build their own digital boutiques, which they curate with assortments of their favorite products and designers from the store - The company cites that shoppers using the interactive feature are 6x more likely to convert than consumers that browse on the standard e-commerce site
  • 14. CONFIDENTIAL DRAFT 14 The traditional purchase path … The new face of retail Awareness Consideration Purchase Intent Omni-channel6 Source: L.E.K. analysis ©2014 L.E.K. Consulting
  • 15. CONFIDENTIAL DRAFT 15 … has been dramatically changed by technology The new face of retail Educate Compare Reflect & share Omni-channel6 Awareness Consideration Purchase Intent ©2014 L.E.K. Consulting
  • 16. CONFIDENTIAL DRAFT 16 The lines between offline and online shopping experiences are blurring In-store Online 51% Research online and visit store to purchase 44% Research online and buy products online 17% Visit a store first, and then purchase online 32% Research online, visit store to view product, then return online to purchase Source: Google Think Insights ©2014 L.E.K. Consulting The new face of retailOmni-channel6
  • 17. CONFIDENTIAL DRAFT 17 Some examples of the way consumers are engaging outside the store … 52% of shoppers share retail-related posts via social media, of which: • 51% post pictures of items they’re interested in • 37% post items they’ve purchased • 29% post about coupons / sales 65% of tablet device owners used their device for shopping activities in Q3 2013 Blogs are most likely to influence a purchase after retail / brand sites; they rank favorably for trust, popularity & influence Source: Nielson, JiWIre, Shop.org, Business Insider ©2014 L.E.K. Consulting The new face of retailOmni-channel6
  • 18. CONFIDENTIAL DRAFT 18 The new face of retail Retailers are experiencing a significant channel shift as consumers increasingly utilize e-commerce in lieu of stores *Note: 2011 is the most recent year with annual figures; analysis excludes Building materials and supplies stores, Health and personal care stores, and General merchandise stores because of data limitations, and Nonstore retailers and Gas Stations because of relevance Source: U.S. Department of Commerce, L.E.K. analysis ©2014 L.E.K. Consulting Store-based retail sales are not growing; virtually all growth in consumer spend is being captured by e-commerce Omni-channel6 7 2 4 5 7 8 9 18 22 0 2 4 6 8 10 12 14 16 18 20 22 U.S. online sales as percent of total retail sales* by product category (2013E) Percentage Computerand electronics Appareland accessories Books,music,video Auto&parts Furnitureandhome furnishings Healthandpersonal care Toysandhobby Foodandbeverage Total 82,046 133 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 In-store E-commerce Change in U.S. retail sales, 2006 – 2011* $M
  • 19. CONFIDENTIAL DRAFT 19 *Note: Traffic data is collected from 60,000 traffic-tracking devices installed at malls and large retailers Source: Wall Street Journal, ShopperTrak, L.E.K. research and analysis ©2014 L.E.K. Consulting 18 21 25 34 0 5 10 15 20 25 30 35 40 2013201220112010 Total mall and large retailer foot traffic for November and December 2010-2013 (ShopperTrak) Billions of Visits* -20% The new face of retail The widely cited fall in mall traffic is the most visible sign of the rapid change that retailers are facing Omni-channel6 • Fewer store visits and transactions • Non-destination categories (e.g., impulse, add-on purchases) particularly at risk • Stores are playing new roles  Traffic to U.S. retailers is declining, in large part due to a shift to digital tools and e-commerce - There is a lesser need to go to stores given other options for research and purchase  Shoppers also aren’t using physical stores to browse as much anymore - Shoppers visited an average of 5 stores per mall trip in 2007, vs. 3 stores in 2013  These trends continue to prevail and should drive even further e-commerce penetration
  • 20. CONFIDENTIAL DRAFT 20 The new face of retail To win business in this new multi-channel environment, companies must define what ‘omni-channel’ means for them and make investments to enable this Omni-channel6 Channel strategy Single view of the customer Organizational alignment Fulfillment / logistics Marketing Merchandising Increased: Traffic Engagement Sales Loyalty Seamless, holistic customer experience Omnichannel interactions Foundational enablers 1 2 3 4 5 6 ©2014 L.E.K. Consulting
  • 21. CONFIDENTIAL DRAFT 21 We believe that developing an omni-channel strategy is best done by considering the needs across the full consumer lifecycle The new face of retailOmni-channel6 Learn Research Purchase Support Share Consumer engagement lifecycle Product Whatever Whenever However Channels Marketing and tools Increase awareness Share and socialize Expand community Drive consideration and selection Post-purchase support Facilitate the purchase process Source: Company websites; FierceRetail; BusinessInsider ©2014 L.E.K. Consulting
  • 22. CONFIDENTIAL DRAFT 22 Engagement with traditional media continues to decline… The new face of retail Decline of traditional media 7 Source: Editor and Publisher Yearbook, Alliance for Audited Media, Nielsen Media Research ©2014 L.E.K. Consulting 4343 49 52 54 0 5 10 15 20 25 30 35 40 45 50 55 U.S. weekday newspaper circulation (2004-12) Millions of subscriptions 121008062004 -8 -9 -8 -9 -11 -15 -10 -5 0 5 10 15 U.S. magazine single-copy sales (2008-12) Percent change in sales 121110092008 0 1 2 3 4 5 6 7 8 9 10 12100806 U.S. broadcast television ratings (2004-12) Average rating per night 2004 CBS ABC NBC
  • 23. CONFIDENTIAL DRAFT 23 … however, the growth of digital provides retailers with increasing opportunities and formats to engage with consumers The new face of retail Decline of traditional media 7 0 5 10 15 20 25 30 35 40 45 50 20122011201020092008200720062005 U.S. advertising revenue by media (2005 – 2012) Billions of dollars Newspaper Internet Radio Cable television Broadcast television Note: * “Social media advertising” encompasses all money spent on ad formats across social networks, including both display and native advertising Source: Pew Research Center, IAB, PWC, BIA / Kelsey ©2014 L.E.K. Consulting CAGR % (2005-2012) (1.1) 16.8 3.7 (12.1) (2.7) 0.0Total Marketers are still spending the same amount on advertising, but through different media 11 10 8 7 6 5 0 2 4 6 8 10 12 14 16 U.S. social media advertising growth (2012-17F)* YoY percent growth 17161514132012 Social media advertising is projected to grow at a CAGR of ~19% through 2017
  • 24. CONFIDENTIAL DRAFT 24 Retailers and brands are working hard to effectively realign their marketing strategies in this environment Marketing objectives Reactivate lapsed customers Build awareness Engage / retain customers Acquire new customers Stimulate purchases Marketing tools The new face of retail Decline of traditional media 7 How do you effectively deploy these tools? ©2014 L.E.K. Consulting
  • 25. CONFIDENTIAL DRAFT 25 The balance of power within the retail channel has also evolved dramatically The new face of retail Note: 1Excludes food, motor vehicle and parts dealers, and gasoline stations; 2Includes H&M, Inditex and American Apparel; 3IIncludes TJX, Ross Stores & Stein Mart; 4Includes mass merchants (e.g., Wal-Mart); 5Includes Dick’s Sporting Goods, Staples, Office Depot, Barnes & Nobles, PETCO, PetSmart, Toys R Us, Best Buy, Circuit City, Bed, Bath & Beyond, Guitar Center, Linens and Things & Borders Source: U.S. Department of Commerce, WSJ; TJX Investor Information; International Council of Shopping Centers; ICSC; L.E.K. analysis ©2014 L.E.K. Consulting Change in U.S. Retail Sales by Select Channels (2003-2013) 1 CAGR % Total Retail Sales 1 : 4.0% -2.0 2.6 3.1 3.7 5.1 5.4 6.9 7.1 11.7 -12 -8 -4 0 4 8 12 Department Stores Grocery Big box specialty5 Off-Price Retail3 Fast Fashion2 Outlet Stores Drug Stores Dollar Stores Mass Merchants & Clubs4 • Growth supported by the entry of international retailers such as Zara, H&M and Uniqlo • U.S. sales at Zara more than tripled between 2007-12 and Uniqlo plans to expand its store count from ~20 currently to 200 by 2020 • Costco grew from ~430 to ~650 locations from 2003-13 • Walmart and Target successful in expanding geographically and driving traffic with super-center format • ~4,300 and ~2,800 stores added at Dollar General and Family Dollar, respectively, since 2003 • Growing market share by substantially expanding food & consumables offer, growing private label, and building destination categories • Subject to industry consolidation (e.g., Eckerd, Duane Reade) • Faced challenges in some categories (e.g. photography) which the category has sought to counter by placing more focus on grocery type items & increasingly fresh food • Competing with warehouse clubs and supercenters at the lower end • Premium / specialty segment (e.g., Whole Foods) seeing continued growth • More brands going direct with own stores and online • May/Federated merger resulted in net store closings • Many regional department stores have declared bankruptcy (e.g., Hacketts, Loehmann’s & Mervyn’s) • Model which delivers treasure hunt for top brands at great value has driven consistent growth, even through tough market conditions • TJX added ~650 stores between 2003 and 2013 and plans to add ~100 new locations across the U.S. in 2014 • Outlet center openings have grown from ~2 per year in 2008 to ~8 per year in 2011 • Center owners have relaxed or abandoned former radius restrictions • Channel has struggled to compete on the basis of breadth of product range since the emergence of online retailers such as Amazon • Littered with bankruptcies, e.g., Barnes & Noble, Linens and Things, Circuit City. Many others facing major challenges Channel shifts8
  • 26. CONFIDENTIAL DRAFT 26 The new face of retail Brands are increasingly going directly to the consumer Brands going direct to consumer 9  Forgoing the traditional wholesale route of selling through multi-brand retailers Many brands are… Source: L.E.K. analysis ©2014 L.E.K. Consulting  Increasingly making websites more commercial and marketing / selling directly to consumers  Relying on Amazon’s Marketplace to increase awareness and tap into Amazon’s ~85 million unique monthly visitors  Building direct consumer relationships and engagement via social media, community outreach, content, and value-add services  Opening outlet stores to convey full brand representation and drive incremental sales of full-price and liquidation goods Significant incentives for brands to go direct include: higher margin capture, controlling customer relationship, and compensating for weaker points of physical wholesale distribution
  • 27. CONFIDENTIAL DRAFT 27 The new face of retail Source: SEC filings, MarketWatch, Company websites, Forbes, Seattle Times, Reuters, Business Week, L.E.K. analysis ©2014 L.E.K. Consulting Brands across categories are pursuing global strategies to capitalize on macroeconomic tailwinds Geographic distribution of sales (Percent of 2012 sales) Retailer N. America Europe Asia ROW 68% 5% 8% 19% 48% 11% 38% 3% 64% 22% 14% - 42% 25% 16% 17% 70% 20% 10% 40% 13% 7% 40% 32% 39% 29% EXTRA! EXTRA! “Walmart to invest more in Mexico this year” “Tiffany & Co is embarking on major expansion plans, bringing its ubiquitous name to new areas, including India” “Ralph Lauren reaches worldwide audience with its Olympic made-in-America designs” “Going forward, market penetration in China and e-commerce growth look to be two of the biggest contributing growth factors for Nike” “This Bud’s for you, Brazil – AB InBev to introduce Budweiser as a premium brand in Latin America’s largest nation” International10
  • 28. CONFIDENTIAL DRAFT 28 Retailers are increasingly expanding to emerging economies in Asia, Africa and Latin America as the middle class in these geographies grows 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Size of worldwide middle class* population (2009-30F) Millions North America ~(2) Europe ~1 Middle East & N. Africa ~49 Sub-Saharan Africa ~83 Asia Pacific ~148 Central & S. America ~31 30F ~4,900 20F ~3,200 2009 ~1,800 CAGR% (2009-30F) The new face of retail Note: * Defined by Brookings Institution as households with daily expenditures between US$10-US$100 / person in purchasing power parity terms; North America includes U.S. and Canada only; Europe includes the EU5, Russia, Scandinavian countries as well as Eastern European countries; Asia Pacific includes China, India, other Asian countries as well as Oceania ; ** India 2012 data extrapolated Source: Brookings Institution, L.E.K. analysis ©2014 L.E.K. Consulting Europe & North America’s combined share falls from 54% to 20% of the total middle class population International10
  • 29. CONFIDENTIAL DRAFT 29 The new face of retail So, what are the implications? ©2014 L.E.K. Consulting
  • 30. CONFIDENTIAL DRAFT 30 In light of these trends, retailers and brands should consider the following:  Challenge the status quo and ask yourself, “Are we really delivering a compelling value proposition to the customer?”  Consider how you can position brands against distinct consumer segments and their needs to separate yourself from the competition  Embrace the hourglass economy and look to exploit opportunities at the top or bottom – don’t get caught in the middle  Find ways to activate key customer groups to take advantage of shifting income, age, and ethnicity demographics, as well as changing consumer expectations  Define what omni-channel means for you, and build a pragmatic plan to get there  Holistically embrace digital and rethink the go-to-market channel plan, including the role of stores, channel mix, links between digital and traditional stores, and the appropriate media mix to drive traffic and customer acquisition / loyalty  Build one-to-one relationships with your consumers and ‘own’ your brand engagement plan with them  Refine pricing and promotion frameworks to maximize total margin dollars and profitability  Evolve the organizational structure and capabilities to meet the realities of today’s business model  Determine whether international is an opportunity for you and, if so, start planning now The new face of retail 1 2 3 4 5 6 7 Potential keys for success 8 9 10 ©2014 L.E.K. Consulting
  • 31. CONFIDENTIAL DRAFT 31  Do we have the right brand / product mix to compete in today’s market?  Do we have a robust consumer segmentation that helps drive corporate strategy?  Are we micro-targeting consumers? Do we even have the capability to?  How does our loyalty program differentiate in an increasingly crowded space?  Does our channel plan embrace technological changes and the role of digital? Is our store strategy aligned to demand and role shifts?  Do we have the capabilities, org structure, infrastructure, and incentives in place to win and support growth objectives?  How can we preserve profitability without losing share in an increasingly price-transparent environment?  Are there activities 'on the edge' of our core business that could drive differentiation, revenue and / or customer satisfaction?  Do we have an actionable plan to grow international? Companies are asking themselves a number of key questions, and taking action to evolve their businesses to win in this new market landscape The new face of retail Key questions to ask Potential areas to focus  Strategic customer segmentation and prioritization  One-to-one customer relationship management  Next-generation loyalty program  Market-based store network, role and footprint plan  Pricing and promotion optimization by objective, market, brand, etc.  Omni-channel definition and plan with clear priorities and timeline  In-store customer service best practices and training to deliver value to customer and increase conversion  Org structure and capabilities evolution  “Edge” strategy (e.g., adjacent categories, services)  International expansion (e.g., market selection, go-to-market planning, business optimization / distributor management, implementation) ©2014 L.E.K. Consulting

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