KPMG’sIndustry Outlook SurveyKPMG LLP the audit, tax and advisory firm, surveyed C-suite and ,other top-level executives in the retail industry during the secondquarter of 2012.Participants were asked about business conditions in their sector,the most significant revenue growth opportunities, and anybarriers to growth that may exist. They were also asked a variety ofquestions about the economy, including factors they perceive mightimpede or support their sector’s recovery, and to assess the impactadvancing technologies may have on their business models.These responses were compared to the findings of a similar surveyconducted among retail executives in the second quarter of 2011.
Foreword 2 Key Findings from KPMG’s Retail Industry Survey 4 Business Conditions 5 Revenue 6 Headcount 7 Hope for Recovery Remains on the Horizon 8 A Closer Look at Growth and Profits 8 Capital Spending and Investing 10 Realizing the Value of Data Analytics 11 Exploring Digital Marketing Channels 12 Risk and Regulatory Challenges 13 Conclusion 14 KPMG: A Leader in Serving the Retail Industry 15Contents
2 | Retail Industry Outlook SurveyForeword
Retail Industry Outlook Survey | 3I am pleased to present KPMG LLP’s 2012 Retail Industry Outlook Survey,which provides perspectives and insights of 100 CEOs and other C-level executivesin the retail sector. Taking the past year into account, participants were asked toassess business conditions, identify areas of growth and investment, estimate atime line for a full economic recovery, and identify factors that may help or hinderthe economy moving forward.Based on the survey results, it’s clear that executives believe the sector continuesto move in the right direction. Survey respondents reported both revenue gains andheadcount increases as evidence of the positive sector momentum of the last year.However, their outlook for the economy to fully recover remains guarded, and theyhave pushed back their expectations for a complete U.S. economic recovery until2014–2015 or beyond.Most of the executives surveyed report having significant cash on their balancesheets and are ready to increase spending in areas such as technology, citing dataanalytics as playing a greater role in their strategic decision making. They alsonote that digital marketing technologies such as online shopping, social mediaplatforms, and e-mail campaigns continue to have a significant impact on theirbusinesses. Additionally, they point out that the utilization of mobile technology forshopping, promotions, and payments is increasingly making its mark on the sector.Moving forward with cautious optimism, the majority of survey respondentsforesee continued sector growth over the next year, with revenue increasesbeing driven largely by the ability to add and retain customers. Meanwhile, theyacknowledge pricing pressures and lower consumer demand as potential growthbarriers and point to discounting prices, volatile input costs, and decreased salesvolumes as the most significant threat to profit margins.On behalf of KPMG, I would like to thank those who participated in this survey.I hope the findings are useful to you in addressing market challenges andopportunities. I also welcome the chance to discuss this study and its implicationsfor your business in the year ahead.Mark LarsonGlobal Sector Leader, RetailKPMG LLP
4 | Retail Industry Outlook SurveyKey Findings from KPMG’sRetail Industry SurveyMoving Forward in Measured FashionAccording to this year’s survey, retail executives are cautiously optimisticabout the future business outlook, expecting continued modestimprovements in revenue and hiring over the next year. However,they remain quite guarded for the longer term, not anticipating a substantialU.S. economic recovery until 2014 or beyond. While positive momentumcontinues to slowly build in the sector, executives plan to increasespending in areas of priority such as information technology, includingdata analytics and digital marketing channels. Online shopping,social media platforms, e-mail campaigns, and mobile technologiesare clearly on their radar due to the significant impact each is havingon their businesses. Looking ahead, the vast majority of surveyrespondents foresee continued sector growth over the next year,with revenue increases being largely driven by the ability to add andretain customers.
Retail Industry Outlook Survey | 5KPMG’s survey reflects the responses of 100 retail sector executivesfrom large ($100 million+ annual revenue), U.S.-based companies.Thirty-five percent of respondents work for companies with annualrevenue of more than $10 billion, while 41 percent representcompanies with annual revenue between $1 billion and $10 billion,and 24 percent with revenue in the $100 million to $1 billion range.Seventy-four percent of these companies are publicly held, and 26percent are privately held.Key findings from the retail sector included:• Sixty-five percent of retail executives surveyed said • Seventy-seven percent of survey respondents report their company’s revenue has increased over the last year, having significant cash on their balance sheet, and while 77 percent predict continued revenue growth a 34 percent acknowledge investment is already significantly year from now. underway.• Fifty-four percent of survey respondents reported adding • Survey respondents believe adding customers U.S. employees in 2011 and expect to add more over the (46 percent), market expansion (32 percent), and retaining next year. Meanwhile, 22 percent noted that their company’s customers (29 percent) will serve as the top drivers of U.S. headcount has returned to pre-recession levels. revenue growth over the next three years.• While over 50 percent of the executives plan to add • More than half (51 percent) of survey respondents cited headcount in the next year, the increases are planned to information technology, including data analytics and digital be modest, and consistent with last year’s survey, one in marketing channels, as a top investment priority over the five do not expect their company’s headcount to ever next year. return to pre-recession levels. • Retail executives surveyed indicate that online shopping • When asked about their expectations for the U.S. economy (59 percent), social media platforms (58 percent), a year from now, 65 percent of sector executives expect and e-mail campaigns (49 percent) are having the most some improvement while 30 percent believe it will significant impact on their businesses. essentially remain the same. However, 61 percent believe a substantial economic recovery will not occur until 2014–2015 or later.Business ConditionsSixty-five percent of retail executives surveyed believe that the 100 5% 8%economy will improve over the next year, representing a slightincrease in enthusiasm from the 2011 survey, when 59 percent 80 30%anticipated the economy to improve in a year’s time. 33%Meanwhile, 30 percent of respondents expect the economyto remain flat over the next year, compared to 33 percent the 60previous year. 40 65% 59% 20 0 2012 (Q2) 2011 (Q2) Key Better next year About the same Worse next year
6 | Retail Industry Outlook SurveyRevenueRevenue continues on an upward climb, according toretail sector executives. Nearly two-thirds (65 percent) ofrespondents reported an increase in revenue over the last year,up from 47 percent the previous year.100 12% 17% 80 23% 36% 60 40 65% 47% 20 0 Revenue Growth Focused on Customers 2012 (Q2) 2011 (Q2) Customers are at the heart of driving revenue growth inKey the retail sector. Survey respondents cited adding customers Increase in revenue About the same Decrease in revenue (46 percent) and retaining customers (29 percent) as topDoes not add to 100% due to rounding revenue growth drivers during the next three years, along with market expansion.When asked to describe their revenue expectations a yearfrom now, 77 percent of executives predict that revenue Biggest Drivers of Company’s Revenue Growth:will increase, while 16 percent believe revenue will stay Next 1-3 yearsflat. This mirrors the expectations of the prior year, when 5072 percent and 24 percent, respectively, answered the 46%same question. 40100 7% 4% 32% 16% 30 29% 80 24% 26% 23% 21% 20 18% 60 15% 14% 10% 10 40 77% 6% 72% 0 20 Key Adding customers Expansion in core/new markets 0 Retaining customers Improving economic conditions 2012 (Q2) 2011 (Q2) Increasing consumer spending Focus on emerging marketsKey Changed pricing strategies Innovative merchandising strategies Better next year Same Worse next year Merger and acquisition activity Product innovations Growth of “green”1 products/services Multiple responses allowed. 1 Environmentally friendly
Retail Industry Outlook Survey | 7HeadcountRetail executives added more U.S. employees over Headcount: Return to pre-recession levelsthe last year, with 54 percent of respondents reporting an 30increase in headcount, up from 40 percent the previous year.Current headcount 22% 22%100 21% 20 24% 31% 16% 80 14% 22% 10 60 29% 5% 40 0 54% 20 40% Key Already at, or greater than, pre-recession level Second half of 2012 0 2013 2014 2015 or later Never 2012 (Q2) 2011 (Q2)Key Increase About the same Decrease Interestingly, 22 percent of survey respondents said that their Multiple responses allowed. U.S. headcount has already reached or is greater thanRetailers expect the hiring momentum to continue with pre-recession levels, but 21 percent believe it will never return53 percent of sector executives expecting to add employees to those levels.over the next year and only 10 percent anticipating a declineduring this time. These results are in line with the previous year.Future headcount expected 2% 0%100 10% 15% 80 35% 33% 60 40 53% 52% 20 0 2012 (Q2) 2011 (Q2)Key Increase About the same Decrease Unsure/don’t know
8 | Retail Industry Outlook SurveyHope for Recovery Remains Retail executives cite pricing pressures and a lack of consumer demand as the most significant barriers to growth overon the Horizon the next year. Barriers to growthHopes for a full U.S. economic recovery seem to have been 30%pushed back a few years, according to the retail executives 30surveyed. The majority (61 percent) believe that it will notactually occur until 2014 or beyond. Notably, last year’s resultsrevealed that 36 percent of respondents expected a full 20%recovery in 2012, while 62 percent anticipated it would happen 20 19% 18%in 2013 or later. 16% 15% 15%100 13% 12% 12% 10 8% 80 7% 7% 7% 5% 3% 60 0 37% Key 40 32% Pricing pressures Lack of customer demand 29% U.S. dollar strength Energy prices Lack of qualified workforce Regulatory and legislative pressures 20 Staying on top of emerging technologies Increased taxation Labor costs Volatile commodity/input prices 2% Inflation Risk management issues 0 Access to and managing capital Foreign competition Exchange rate fluctuations OtherKey 2012 2013 or later Multiple responses allowed. 2014 2015 or laterA Closer Look at Growthand ProfitsEighty-eight percent of survey respondents expect the retailindustry to continue to experience growth increases overthe next year. Of that amount, 63 percent predict only modestgains of about 5 percent or less.Retail industry growth rate 90 88% 80 70 60 50 40 30 20 10 6% 6% 0Key Increase over next year No change Decrease over next year
Retail Industry Outlook Survey | 9Retail factors hindering recovery Greatest threats to profitsMore than half of survey respondents view decreased Merchandise costs (39 percent), discounting and otherconsumer confidence (57 percent) and the continued high sales incentives (36 percent), and decreasing sales volumesnational unemployment rate (55 percent) as the two top factors (32 percent) were widely seen by sector executives as posinghindering the retail sector’s recovery. Other top factors cited the greatest threats to profit margins over the next 12 months.include limited access to credit for consumers (23 percent) andthe distressed real estate market (22 percent). 50 60 57% 55% 40 39% 36% 50 32% 30 40 20% 20 30 15% 14% 14% 23% 22% 12% 20 10 16% 16% 6% 13% 13% 10 8% 7% 0 0 Key Costs of inputs or merchandise Discounting and other sales incentivesKey Decreased sales volumes Administrative costs Decreased consumer confidence Continued high national Regulatory compliance Foreign exchange variability Limited access to credit for consumers unemployment Marketing costs Inventory carrying costs Distressed real estate market Increased government regulation Other Decreased investor confidence Uncertainty in the credit markets Multiple responses allowed. Threats to U.S. business from Limited access to credit for Asia and abroad businesses Strategies to combat costs Turmoil in the Middle East/North Africa Volatile input costs continue to challenge retailers. To helpMultiple responses allowed. combat these costs, 62 percent of executives report optimizing sales, general and administrative (SG&A), and supply chain costs, and 52 percent are implementing customer-centric pricing strategies. 70 62% 60 52% 50 40 30 29% 21% 20 10 0 Key Optimizing SG&A and supply chain costs Customer-centric pricing strategies Revisiting service delivery models Hedging strategies for commodities (offshoring/shared services) Multiple responses allowed.
10 | Retail Industry Outlook SurveyCapital Spending and InvestingRetailers have significant cash on their balance sheets and are When asked about the top initiatives on the mind ofready to invest. In fact, 77 percent of survey respondents report management, more than a quarter (28 percent) of surveythat their company has significant cash on its balance sheet, respondents cited the need to improve operational processesof which 34 percent acknowledge that investment is already and related technology.significantly underway. Top initiatives on the mind of managementInvestment timeframe 30 28% 40 34% 30 20 19% 14% 19% 12% 20 11% 21% 10 13% 6% 12% 5% 10 3% 1% 0 0 KeyKey Significant improvement of operational processes and related technology Significant investment in organic growth2 Investment is significantly under way Second half of 2012 Significant cost reduction initiatives First half of 2013 Second half 2013 Significant changes in business model 2014 and beyond Merger/acquisition Strategic divestiture of current assets Navigating significant changes in the regulatory environmentReady to spend Significant changes to financial processes and related technology Improve enterprise risk management programs/processesMoreover, 58 percent of survey respondents expect theircompany’s capital spending will increase over the next year,while 34 percent anticipate that it will stay the same. Much ofthis spending will be in the areas of information technology, 2 i.e., new product development, pricing strategies, geographic expansion(51 percent) new products and services (43 percent), andgeographic expansion (33 percent). 51% 50 43% 40 33% 30 24% 23% 20 18% 18% 10 8% 7% 7% 4% 0Key Information technology New products or services Geographic expansion Advertising and marketing Expanding facilities Business model transformation Acquisition of a business Employee compensation and training Regulation/control environment Research and development Green/sustainability initiativesMultiple responses allowed.
Retail Industry Outlook Survey | 11Realizing the Value of When asked to describe the organizational maturity regarding usage of data analytics, forty percent of executives rate theirData Analytics company’s data analytics literacy as average. Data analytics maturity of companyFor retailers, data analytic capabilities are becoming 40% 40increasingly important in helping support strategic decisionmaking throughout the organization. In fact, more thantwo-thirds (68 percent) of survey respondents say that data 30analytics plays a key role in helping provide customer insightas well as in the areas of brand and product management 24% 22%(64 percent) and in pricing decisions (50 percent). 20Key areas using data analytics to supportstrategic decisions 68% 10 70 7% 64% 5% 2% 60 0 50% 50 Key 45% Average when it comes to utilizing analytics3 40 37% Rapidly moving toward high analytical literacy High data analytics literacy 30 Average to low analytical literacy4 No formal data analytics capabilities5 23% Don’t know 20 10 0 3 Our management team and workforce have an average analytical literacy.Key 4 At the moment we are behind our competitors when it comes to utilizing Customer insight Brand and product management analytics, and our management team and workforce have average to low Pricing decisions Market expansion analytical literacy. Operating model optimization Portfolio rationalization 5 Our management team and workforce have low analytical literacy.Multiple responses allowed.
12 | Retail Industry Outlook SurveyExploring Digital Marketing ChannelsNot surprisingly, retailers are increasing their use of digital Retail executives plan to use digital, social, and mobilemarketing channels to explore new ways of doing business and technologies in a variety of ways over the next 12 months.reaching more customers. When asked which digital marketing In fact, 57 percent have plans to use social media for externalchannels are having the greatest impact on their businesses, brand promotion.online shopping (59 percent), social media (58 percent), and e-mail Digital marketing strategies planned for year aheadcampaigns (49 percent) rounded out the top three responses. 60 57%Digital marketing channels having greatest impact 51% 60 59% 58% 50 45% 44% 50 49% 40 36% 33% 40 30 28% 36% 25% 24% 22% 30 28% 20 19% 19% 18% 18% 17% 21% 20 10 9% 5% 0 10 Key 2% Social media for external brand promotion 0 Social media for customer insight Social media for two-way customer engagementKey Social media for recruiting Customer-facing mobile applications Online shopping Social media (Facebook, Twitter, etc.) Mobile-specific customer-facing websites E-mail campaigns Mobile shopping Social media for enterprise collaboration/knowledge sharing Mobile promotions Mobile payments Location-based marketing using mobile technology Other Social media for customer crowdsourcing Creation and distribution of digital media internal messages using videoMultiple responses allowed. Mobile-specific enterprise websites (i.e., mobile intranets) Enterprise mobile applications Creation and distribution of digital media marketing messages using video6 Social media for enterprise crowdsourcing Mobile-commerce technologies (NFC-enabled payments, mobile wallets, etc.) Social media for enterprise risk management Don’t know Multiple responses allowed. 6 including company-specific external video channels
Retail Industry Outlook Survey | 13Risk and Regulatory ChallengesEvolving regulation and changing marketplace dynamics have Despite obvious challenges, 76 percent of the retail executivesadded to the need for companies to implement a strong risk surveyed believe their company is at least somewhat prepared toframework within their organization. When asked to identify seize opportunities as a result of public policy and regulatory reform.any existing challenges preventing the adoption of a formal riskpolicy, nearly half (45 percent) of survey respondents believe Ability to seize opportunities from regulatory changeculture and behavior pose significant obstacles. 60Challenges preventing the adoption of a formal risk policy 54% 50 50 45% 40 40 30 30% 29% 22% 30 28% 20 16% 20 18% 10 8% 12% 0 10 Key 0 Somewhat prepared Very prepared Don’t know Not preparedKey Culture and behavior Shared resources across the organization Clearly defined roles and responsibilities Process integration/efficiency of operations Governance framework Don’t knowMultiple responses allowed.
14 | Retail Industry Outlook SurveyConclusionMaintaining cautious optimism, retail executives expect the industry to proceedon a path of gradual growth over the next year, supported by continued modestgains in revenue and hiring. Concerns over the U.S. economy are evident, as manyexecutives have pushed back their expectations for a substantial recovery until2014–2015 or later. While waiting for the recovery to take hold, sector executives arefocusing on spending the cash built up on their balance sheets by investing moreover the next year in information technology, including data analytics and digitalmarketing channels. They acknowledge the increasing importance of data analyticsin their strategic decision making and recognize the significant impact digitalmarketing channels such as online shopping, social media, and mobile technologiesare having on their businesses.
Retail Industry Outlook Survey | 15 The 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 firm—one with the industry depth, knowledge, and insight to help clients address their most pressing issues and achieve their goals—is critical. KPMG’s Retail practice includes professionals with the knowledge, experience, and skills to help our clients address their most pressing challenges, sort through today’s 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.KPMG: A Leader in Servingthe Retail Industry