June 2014

Global TrendsLuxuryConsumerFund

NEWSLETTER

Luxury Shopping Goes DigitalOnline strategies are now crucial to luxury retail successDominion has added “having a viable online strategy” as a critical factor to its investment criteria for CHIC as online distribution has moved from “nice to have” to “must have” in most consumer product categories. Recent results of consumer groups around the globe confirm that online distribution has moved on from an incremental sales channel to a crucial business practice that increasingly determines companies’ abilities to grow or even survive. At the same time early eCommerce “disruptors” have matured and are widening their product offerings and adding services; not all dedicated eCommerce businesses are winners and not all legacy consumer groups are losers. Rather the sector is adapting and maturing whilst competition remains fierce against a low inflationary economic backdrop.

Initially the eCommerce retailing sector was defined by the early disruptors. Amazon, as one of the very early disruptors, represents an obvious benchmark when assessing online retail. Amazon founder and CEO Jeff Bezos created a company with an innovative business model that focused as much on market leading fulfilment/logistics as it did on online retail and sales. As a result, the company created its own competitive advantages and is still considered to have one of the most compelling exposures to the structural growth trends of eCommerce. Founded in 1994, the company initially rose to prominence as the “world wide web’s” foremost online book retailer.

Since the 1990s Amazon has expanded both in reach and product range. Currently the revenue composition is much wider than its legacy suggests. Today, less than 1/3 of sales are generated from Amazon’s media segment which includes books, films and other digital content (streamed or downloaded). Conversely the Electronic and General segment – some 63% of sales – represents the fastest growing piece covering proprietary products, such as the Kindle, in addition to any other physical products sold by Amazon or third party retailers through Amazon’s site and logistics chain. Additionally, Amazon provides insourcing

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The early eCommerce disruptors have had a major effect on a number of traditional retailers including book shops and department stores, particularly in the USA. Some of the best known department stores, such as Sears and JCPenny, have struggled in recent years battling falling footfall as sales increasingly move online. However, nearly twenty years after the emergence of eCommerce, some businesses are evolving towards hybrid business models. The “bricks and clicks” hybrid approach seems to have provided some traditional retail companies with an answer to the onslaught of early disruptors.

The best example of a successful implementation to this innovative approach is Macy’s, who identified the importance of the eCommerce trend early on and decided to participate in its rise rather than be killed by it. Central to Macy’s strategy is the so-called Omnichannel focus, essentially adding a “click” element to the traditional department store, believing each business provided reinforcing services to one another. Customers can now buy either online or in store with no differentiation of products or price. “My Macy’s” online service and the Omnichannel strategy should continue to benefit from investments in increased interaction between local store demand-trends and the online business. The connection of brick-and-click took another step forward over the last 12

Amazon share price versus Barnes and Noble (USD$)

services to third parties through Amazon Web Services and other business-to-business offerings. While Amazon has successfully applied its formidable logistics platform to a range of products there is some debate amongst commentators regarding the effectiveness of Amazons capital expenditure requirements going forward – such as when fresh products are added to their offerings – which could be considered a sign of a mature company.

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months with the roll-out of online purchasing and in-store pickup. The company is testing several other initiatives to adjust the business model further, including same-day delivery, and integrating inventory management of offline and online stores. If this proves effective and expanded to other products, it should materially benefit inventory management and decrease working capital requirements. The company has been methodical in any Omnichannel project implementation, allowing the commercial data to decide what goes forward. Macy’s adaptive approach to online sales and innovative strategies have made it a stand-out performer in the otherwise cruel trading environment for US department stores.

Macy’s Inc share price versus Sears (USD$)

Inditex fashion retail group - known for its flagship brand Zara as well as Massimo Dutti, Bershka and Pull & Bear amongst others - is another company that has been developing an effective online strategy. Since launching its online business, the company has been able to roll out services to 25 countries in a relatively short time period. The group does not split eCommerce and store sales numbers, but has indicated its online site receives north of 5mn visitors per day globally. Interestingly, it also allows for a few of its brands to be sold through third-party websites - a practice that is limited within its traditional business model – illustrating how eCommerce can change a company’s modus operandi. This practice is limited to a few smaller regions as the company intends for the vast majority of the eCommerce business to go through its own websites. Inditex has always been characterised by investments in its systems and this year it projects capital expenditures of some €1.35 billion aimed at space growth as well as a new logistics centre in Spain to support the company’s “proximity-of-product” sourcing concept and to aid eCommerce. The group remains the best in class, even when navigating through strong headwinds, due to its solid business model and growth prospects from the “multi-channel/multi-concept” approach.

Consumer goods producers without a legacy of traditional generalist store formats that are in a direct sales growth phase appear to be in a favourable position to expand into online distribution. For instance VF Corporation - owner of some 25 brands including The North Face, Nautica, Wrangler and Timberland - sees Direct-to-Consumer as a key growth engine. While traditional “bricks and mortar” sales still account for roughly 89% of sales - 53% full price stores and 38% outlets – eCommerce is already accounting for 11% of sales and growing at a rate nearly four-times that of total growth (35% Vs 8%).

Luxury groups have been relatively slow to implement online strategies, possibly wary of cannibalisation of their high margins in traditional sales channels. A major exception to the sector’s relative complacency is Burberry, which has consistently been pursuing a digitalization strategy for a number of years. The key challenge and theme in the evolution of the company’s strategy is the monetization of the digital channel. However, the positioning and the investments made in digital media (such as the Burberry 360 platform) are already delivering impressive results with the online channel generating eight times the sales of its largest flagship store (Regent Street), with 30% of online sales completed using an iPad

(indicating a viable m-commerce platform). Given the success of its online channel it is hardly surprising that Burberry is growing in many regions (including China) where peers are struggling and is a clear indication that online sales have become crucial to drive growth in the luxury sector as well. Burberry’s achievements are starting to have an effect at other luxury groups and eCommerce systems are improving across the sector.

Tiffany’s is a good example as online business has recently blossomed; now representing some 8% of sales in markets where Tiffany’s are present. A redesigned website was launched in October 2013 providing eCommerce services across 13 markets, enhanced marketing features and a greater product range, which now includes the Blue Book collection featuring pieces over $1m.

For luxury groups with limited IT budgets or tech know-how that understand the need to catch-up in digital systems, there is Yoox – a specialised eCommerce service/outsourcing company. Yoox consists of two business areas: multi-brand and mono-brand services. The multi-brand business (around 70% of sales) manages three online stores: yoox.com (started in 2000, offers off-season premium apparel and accessories at attractive prices), thecorner.com (since 2008, runs a “shop-in-shop” model specializing in niche and emerging designers’ apparel and accessories) and shoescribe.com (started in 2012, offers female in-season shoes). The mono-brand business (current portfolio: 35 online shops) covers planning, set-up and exclusive management of online shops of fashion brands for in-season apparel and accessories. In the mono-brand business, luxury groups have full control over key retailing decisions such as product assortment, pricing, logos, marketing and communication.

Yoox acts as an out-sourcing partner with the responsibility of online store development and digital production (pictures and videos on website), customer care, web marketing, handling, fraud check, shipping & returns, credit collection & invoicing, localisation and e-store management. The strength of the business model is the capacity to share a single operating platform of technology and logistics across business lines (multi and mono), channels (e-commerce and m-commerce) and markets (Europe, North America and Asia Pacific). In addition to the Italian worldwide hub, the group operates logistics centres in US, Mainland China, Japan and Hong Kong. All the centres operate as sourcing and distribution entities, however the majority of assortment is “broadcast” globally from Italy. Kering, owner of Gucci, established a JV with Yoox for six of its brands expanding Kering’s online presence from 15 to more than 100 countries in a period of less than two months at no additional cost other than Yoox’s fees. Yoox provides a similar service to numerous players within the industry such as Moncler, while Richemont operates its own in house online retailer in the form of Net-a-Porter.

Inditex share prive versus H&M (EUR€)

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INTERNET SALES PROPORTION % OF ALL UK SALES

UK Internet Sales as percentage of total

It is evident that a polished and complete “online” offering that fits seamlessly with a company’s brand, image and physical stores will be – if not already - a prerequisite to ongoing success within the consumer sector. Companies that fail to adopt new retail methods and to not adapt to the eCommerce revolution will not just see growth stagnate, and even turn negative, but will find themselves fighting for survival. Early adopters and trailblazers - such as the companies discussed above – will set the bar for years to come and benefit from strong incremental growth from their online operations. However, they will not be alone as the consumer sector is rapidly adopting many of the best practices and utilizing the readily available services of companies such as Yoox or Net-a-Porter.

Source: All figures quoted are derived directly from Companies Reports and/or Dominion in-house research.“Global Trends Luxury Consumer Fund” or “Luxury Consumer Fund” or “Fund” or “CHIC” refers to the Dominion Global Trends - Consumer Fund a sub fund of Dominion Global Trends SICAV p.l.c., regulated by the Malta Financial Services Authority, the Fund is recognised by MAS in Singapore and in the UK with Financial Conduct Authority reference number 532412 (for GBP share classes only).

© 2014 Dominion Fund Management Limited (“DFML”). All rights reserved. DFML is licensed by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended. DFML is a member of the DominionGroup of companies. Registered Office: Ground Floor, Tudor House, Le Bordage, St Peter Port, Guernsey, GY1 1DB. Company no. 42592

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Almost regardless of a company’s position in relation to internally managed or outsourced eCommerce platforms, there seems little doubt that having a viable and efficient digital strategy is already fundamental to the success of all consumer brands. This is even more true for the ultra competitive luxury sector where, as evidenced by Burberry and the like, customer behaviour is changing rapidly and, which is perhaps the most important element of all, new potential customers from emerging markets rely heavily on the digital offering as an education process prior to spending.

As Angela Ahrendts, former CEO of Burberry and new Head of Retail for Apple said “If you don’t have a digital strategy today, I don’t know what your business model is 5 years from now”.

Conclusion