the retail revolution is now january 25 2017 · 1/25/2017  · measures to remain relevant in this...

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1 January 25, 2017 Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2017 The Fung Group. All rights reserved. Retailers today are confronted by a more complex and diverse business environment. With more information at the hands of consumers, new ways they engage with products and brands and a more dynamic competitive landscape, traditional retail is going through a period that is more akin to a revolution than an evolution. The old guard of retailers will need to take drastic measures to remain relevant in this new retail order that is defined by information and technology. In this report, we look at the value proposition of brick-and-mortar retailers from the perspective of convenience, how the old guard is changing as a result of the retail revolution and the drivers of the future retail landscape. The Retail Revolution is Now Deborah Weinswig Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016

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Page 1: The Retail Revolution is Now January 25 2017 · 1/25/2017  · measures to remain relevant in this new retail order that is defined by information and technology. In this report,

1

January25,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Retailerstodayareconfrontedbyamorecomplexanddiversebusinessenvironment.Withmoreinformationatthehandsofconsumers,newwaystheyengagewithproductsandbrandsandamoredynamiccompetitivelandscape,traditionalretailisgoingthroughaperiodthatismoreakintoarevolutionthananevolution.Theoldguardofretailerswillneedtotakedrasticmeasurestoremainrelevantinthisnewretailorderthatisdefinedbyinformationandtechnology.

Inthisreport,welookatthevaluepropositionofbrick-and-mortarretailersfromtheperspectiveofconvenience,howtheoldguardischangingasaresultoftheretailrevolutionandthedriversofthefutureretaillandscape.

The Retail Revolution

is Now

Deborah Weinswig

Managing Director,

Fung Global Retail & Technology

[email protected]

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

Page 2: The Retail Revolution is Now January 25 2017 · 1/25/2017  · measures to remain relevant in this new retail order that is defined by information and technology. In this report,

2

January25,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

ConvenienceNoLongerMeansBeingPhysicallyClosetotheConsumerAccordingtotheInternationalCouncilofShoppingCenters(ICSC),thenumberofmallsintheUSgrewbymorethan300%from1970to2016,reaching1,221shoppingcenters.ManyoftheseareB,CandDmallswhichusedtobenefitfromtheirproximitytosufficientlylarge-enoughpopulations,andprovidedago-toplaceforpeopletoshop,socializeandentertainthemselves.Withmuchofsocialinteractionhavingmovedonlineandwiththeubiquityofe-commerceandfreedeliveryoptionsthathaveproliferatedoverthepasttenyears,itiseasierthaneverforconsumerstoavoidgoingtolower-tiermallsaltogether.Infact,BandCmallsaccountforonly28%ofallmallsales,despiterepresenting45%ofallshoppingcentersofthistype.

Figure1.NumberofMallsintheUS,1970–2016

Source:ICSC

Mallsthatdonotoccupyprimelocationsandcannotoffercreativeentertainmentarenolongerattractivefromaconsumer’sviewpoint.Naturally,operatorshavealreadystartedrepurposingBmallsasAmalls,andclosingmanyCandDmallsaltogether.Itishighlylikelythatatleast30%ofUSmalls,ormorethan350ofthem,willgodownascasualtiesoftheretailrevolution,inouropinion.

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Page 3: The Retail Revolution is Now January 25 2017 · 1/25/2017  · measures to remain relevant in this new retail order that is defined by information and technology. In this report,

3

January25,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

DepartmentStoreshaveBecometheOldGuardDepartmentstoreshavetraditionallyservedasmallanchortenantsandhavebeenscalingdowntorepositionthemselvesinthenewmalllandscape.In2016,Macy’sannouncedthatitwouldclose100stores,or15%ofitsfleet.Searsannouncedthatitwouldclose50,or7%,ofitsstores,andJCPenneysaiditwouldclosesevenstores.

Figure2.NumberofDepartmentStoresintheUS,2015–2017E

Source:Companyreports/FungGlobalRetail&Technology

Somespecialtyretailershavealsoannouncedstoreclosuresoverthepastyear.Thewomen’sapparelandteencategorieshavebeenhithard.Themid-tierwomen’sapparelcategoryisstrugglingwithalackofdifferentiationinasaturatedmarket.BananaRepublicandGap—wherewomentraditionallyshoppedforwardrobestaples—haveallannouncedstoreclosures.TheLimitedfiledforbankruptcyafterannouncingitwillcloseallofits250stores.Theteencategoryhasalsostruggled,withfiveretailersdeclaringbankruptcyin2015and2016.Expressreduceditsstorecountby21%andAmericanEagleOutfittersreduceditsby10%from2015to2016.

Againstthisbackdrop,thewinningretailers,orthenewguard,arethosethatareextremelyconsumercentric,highlyintegratedandmakesmartuseoftechnologicalinnovation.

Amazon’sincreasedfocusontheapparelcategoryisaclearindicationofwhatistocome.EuromonitorInternationalandForresterResearchexpectAmazontotripleitsshareoftheUSapparelmarketoverthenextfiveyears.

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Kohl's JCPenney Macy's Sears Dillard's Nordstrom NeimanMarcus

SaksFifhAvenue

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Kohl’s Macy’s

Dillard’s

Page 4: The Retail Revolution is Now January 25 2017 · 1/25/2017  · measures to remain relevant in this new retail order that is defined by information and technology. In this report,

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January25,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Figure3.Amazon’sEstimatedShareoftheUSApparelMarket

Source:EuromonitorInternational/ForresterResearch

WebelieveAmazonwillcontinuetoincreaseitsapparelmarketshareattheexpenseofdepartmentstoresandtraditionalapparellabels,thankstoconsumers’increasingcomfortwithpurchasingonline,theconvenienceAmazonoffersandthevalueofitsprivate-labelofferings.

WillImprovingtheIn-StoreExperienceStifletheRevolution?Theconsensusthathasformedamongretailprofessionalsisthatthebiggestopportunityforbrick-and-mortarretailersisinimprovingthein-storeexperience,includingthroughtheuseofnewtechnologies.Weagreebetterserviceofferings,morein-storeeventsandimprovedstoreenvironmentsareallweaponsthatbrick-and-mortarretailerscanwieldinthebattleagainstthegrowingthreatofplayerssuchasAmazon.Andthereissignificantpotentialforsomeretailers—notably,someofAmerica’smajordepartment-storechains—toimprovetheirproposition.

Inaddition,brick-and-mortarretailersalsohaveanever-increasingarsenaloftechnologiesavailabletousetotheiradvantageincreatingbetterexperiencessuchasmobilepaymentsolutions,chatbots,robots,augmented-(AR)andvirtual-reality(VR)entertainment,andlocation-basedtechnologies,tonamejustafew.

Butwemustnotgetcarriedawaywithbelievingthatexperiencealonewillsavebrick-and-mortarstores.Ifaconsumerwantscheapelectronics,orurgentlyneedstobuygroceries,orsimplywantstocollectapurchasethatwasmadeonline,thenthestoreexperiencemaybecompletelyirrelevanttothatconsumer.Moreover,someretailersmayfinditdifficulttochangetheirfocustothequalityofthein-storeexperience,duetotheirtraditionalpositioningandcorporatecultures.

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2015 2016E 2017E 2018E 2019E 2020E

Page 5: The Retail Revolution is Now January 25 2017 · 1/25/2017  · measures to remain relevant in this new retail order that is defined by information and technology. In this report,

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January25,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

AftertheRevolution:Convenience,Collection,DestinationExperienceisnottheonlyopportunityforstores.Inourviewofthefutureofretail,threecorefunctionswilldriveshoppertrafficoncee-commercehasestablishedamajorshare:

1. Thenewconvenience:Shopperswillmakedistresspurchasesofgoodsneededquickly,oftenatstoresclosetohome.

2. Collection:Shopperswillgotoastoretopickuponlinepurchases.

3. Destination:Leisureshopperswillstillmaketripstothosestoresthattheyliketovisitratherthanhavetovisit.

Ourvisionofthefutureincludesamixofformats,storesizesandretailpropositions.Smaller,morelocalstoreswillservedemandforconvenience,andmaybecollection,too;wearealreadyseeingretailerssuchasTargetopenthesekindsofstores.Meanwhile,high-qualityflagshipstoreswillbetheonesthatfocusonthecustomerexperienceinordertoattractleisureshopperswhoarelookingtospendsomeenjoyabletimebrowsingandbuying.

Large-storeretailersthatofferrelativelyfewcompellingreasonsforshopperstovisitwillfacethemostdifficultyinthisretaillandscape.Theseincludethehard-hitdepartmentstoresandotherretailerswhosetraditionalUSPshavebeenbreadthofchoiceorlowprices.Thesekindsofretailersmustconsiderhowtheirstoreswillmeetshoppers’needsinthefuture:thismaymeannotonlyfewerstores,butalsostoresthatcatertohowconsumersshopinadigitalage.Byfocusingononeormoreofthethemesofconvenience,collectionanddestination,webelievesuchlarge-storeoperatorsmaybeabletosuccessfullyrepositionthemselvesforthefuture.

Page 6: The Retail Revolution is Now January 25 2017 · 1/25/2017  · measures to remain relevant in this new retail order that is defined by information and technology. In this report,

6

January25,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst

KirilPopovSeniorAnalyst

ShoshanaPollackSeniorResearchAssociate

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com