1

DEBORAH WEINSWIGMANAGING DIRECTOR

FUNG GLOBAL RETAIL & TECHNOLOGYOctober 18, 2016

Do or Die: Retail Imperatives for Globalization, Personalization and

Localization

2

Today, We’ll Talk About:

ConsumersRetailers Technology The economy

3

FUNG GROUP

TRADING

LOGISTICS

DISTRIBUTION

RETAILING

Li & Fung LimitedListed on SEHK

Global Brands Group

Listed on SEHK

Fung Retailing Limited

Privately Held Entity

Convenience Retail

Asia LimitedListed on SEHKTrinity LimitedListed on SEHK

Branded Lifestyle Holdings Limited

LiFung Kids (Holdings) LimitedToys “R” Us (Asia)Suhyang Networks

UCCAL Fashion GroupPrivately Held Entities

Fung Holdings (1937) Ltd. A privately held entity and major shareholder of the Fung Group

4

• Fung Global Retail & Technology publishes research that is available at www.FungGlobalRetailTech.com

• We advise retailers, real estate developers and tech companies on projects situated at the intersection of retail, tech and/or fashion

• Our team possesses deep knowledge of and significant experience in the retail, fashion and tech fields

A UNIQUE COMBINATION OF RETAIL, FASHION AND TECH

RETAIL FASHION TECH

5

• The knowledge bank for the Fung Group

• Consultancy for clients within and outside the Fung Group

• Focuses on emerging retail and technology trends

• Established in 2014

• Based in New York, with research teams in London and Hong Kong

• 20+ analysts specializing in retail and technology

• Publishes thematic and global market research on topics such as the Internet of Things (IoT), digital payments, omni-channel retail, fashion retail trends and disruptive technologies

FUNG GLOBAL RETAIL & TECHNOLOGY

HONG KONG NEW YORK LONDON

RETAILTECH

MICRO MACRO

RETAIL REAL

ESTATE

THEMATIC RESEARCHVR

AI

IOT

DIGITALDIGITALDIGITALDIGITAL

6

1. Macro Environment

7

• The US GDP annualized growth rate was 1.4% in 2Q16, following lackluster growth of 0.8% in 1Q16 and 0.9% in 4Q15.

• Downward revisions to growth in prior periods were in government spending, inventories and net exports.

US GDP GREW BY 1.4% IN 2Q16, BELOW EXPECTATIONS

Source: US Bureau of Economic Analysis/Fung Global Retail & Technology

US GDP Growth Rate

4Q153Q152Q151Q154Q143Q142Q14

4%

0.9% 0.8%

1Q16 2Q16

2.6%

2%2.3%

2%

5%

1.4%

8

Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15 Feb 16 Aug 16(0.5%)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

CPI-U CPI-U Less Food and Energy

Oct 15 Apr 16 Oct 161.50

1.75

2.00

2.25

2.50

US INFLATION PACE STILL MODEST

US Gasoline PriceUS CPI: YoY % Change

Source: US Bureau of Labor Statistics/Energy Information Administration

$2.272

1.1%

2.3%

9

US FOOD-PRICE DEFLATION IMPACTING GROCERY RETAIL

Consumer Prices: Selected Food Categories YoY % Change in Six Months Ended July 2016

Source: US Bureau of Labor Statistics

Food at Home Total Bakery Products Dairy Products Fruits and Vegetables Meat, Poultry, Fish and Eggs

(2.1)% (2.0)%

(2.6)%

(4.4)%(4.6)%

• US food prices have fallen, impacting revenues in all grocery channels.

• Declining US exports have pushed down domestic prices of fresh-food categories such as beef and poultry, while a surplus has depressed dairy prices.

10

RESTAURANTS VS. GROCERY: A WIDENING GAP

• US restaurant sales weakened in the second quarter, and many restaurant operators posted disappointing earnings results.

• During the first seven months of 2016, the cost of eating at home declined, but restaurant operators raised their menu prices consistently, increasing the price gap between buying groceries and dining out.

Monthly Retail Sales, YoY % Change

Source: US Census Bureau

Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2.2%

7.5%

Grocery Stores Restaurants

11

2. Increased Price Competition; Online Grocery Set to Boom

12

• Across mature grocery markets, we see two growth areas:

• E-commerce

• Discounters

• There is little overlap between the two segments: hard discounters avoid e-commerce.

• Both fuel the trend for little-and-often shopping in smaller stores.

• E-commerce and discounters both generate a need for top-up shops from other channels.

Channel Fragmentation

E-Commerce

Grocery Discounters

Dollar Stores/Pound

Shops

Little-and-Often

Shopping

Convenience Stores

Food-Service Opportunities

COMMON GLOBAL THEMES IN GROCERY

13

US GROCERY SEGMENT OVERVIEWSALES FORECAST (USD Mil.)

Hypermarkets: >25,000 sq. ft.; supermarkets: <25,000 sq. ft. Discounters: Aldi and LidlAll values are in current pricesSource: Euromonitor International

Discounters

Convenience Stores

Warehouse Clubs

Traditional Grocery Retailers

Drugstores/Parapharmacies

Home Improvement Stores

Hypermarkets

Supermarkets

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000

17,194

26,967

133,162

147,009

226,905

254,297

318,082

372,465

22%

16.4%

9.9%

0.5%

13.9%

8.3%

10.8%

13.4%

Sales (2016) Sales Growth (2016-2020F)

14

PRICE INVESTMENTS RAMP UP

• Walmart is providing stronger competition on price.

• The retailer is continuing to implement a multiyear strategy of incremental price investment in the US business (estimated at $4 billion).

• Kroger has responded aggressively: the retailer lowered the cost of 1,000 popular grocery items in 120 of its stores in 2016.

Increasing competition has put pricing at the forefront of growth strategies.

15

DOLLAR-STORE OUTPERFORMANCE HAS DRIVEN COMPETITION…

FY17 estimates are based on consensus estimates for Dollar General, Dollar Tree, Family Dollar and Fred’s, and on trailing-12-months data for 99 Cents Only (no consensus available).Source: S&P Capital IQ/Fung Global Retail & Technology

• Dollar-store sector grew sales by 31% between fiscal years 2012 and 2016, from $34 billion to $45 billion.

• Sector growth has been slowing, however, from 11.2% in fiscal 2012 to an estimated 5.0% in fiscal 2017.

• Dollar General entered the price wars in August with an average price reduction of 10% across key categories.

FY12 FY13 FY14 FY15 FY16 FY17E0

5

10

15

20

25

30

35

40

45

50

0

2

4

6

8

10

12

34.237.4 39.6 42.1 44.8

47.0

11.2

9.5

5.86.3 6.3

5.0

Sales YoY % Change

Top Dollar Stores: Sales (USD Bil., Left Axis) and YoY % Change (Right Axis)

16

…AND DOLLAR STORES HAVE CARVED SHARE IN THE GROCERY MARKET…

Source: Company reports/S&P Capital IQ/US Bureau of Economic Analysis/Fung Global Retail & Technology

Top Dollar Stores: Estimated Grocery Sales (USD Bil., Left Axis) and Grocery Sales as % of Total Spending on Core Grocery Categories (Right Axis) • We estimate that US shoppers spent

some $31.1 billion, or 2.5% of total grocery spend, on grocery categories at the major dollar-store chains in fiscal 2017.

• The dollar stores’ share of total grocery spend has been creeping up, but the sector remains niche.

FY12 FY13 FY14 FY15 FY16 FY17E0

5

10

15

20

25

30

35

0.0

0.5

1.0

1.5

2.0

2.5

3.0

22.3 24.8 26.6 28.3 29.4 31.1

2.02.2

2.3 2.4 2.4 2.5

Grocery Sales Share of Core Grocery Spend

17

• US grocery retail is a story of low and generally depleting margins.

• Perennially low—and declining—margins have not prevented Amazon from pushing into grocery.

• The scale of the market balances the low margins.

• The costs of e-commerce are likely to exert further downward pressure.

2010 2011 2012 2013 2014 20154.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

5.5

5.3

5.4

5.25.1

4.7

Aggregate Operating Margin of the Top Four Public Grocery Retailers with Operations in the US (%)

Based on total company revenues and operating profits, including any non-US activities, forAhold-Delhaize, Publix, Kroger, Walmart Source: S&P Capital IQ/Fung Global Retail & Technology

…CONTRIBUTING TO MARGIN DEPLETION

18

INTERNATIONAL DISCOUNTERS ARE ALSO TAKING SHARE…

Share of grocery retailers sector as defined by US Census Bureau.Source: Company reports/Euromonitor International/National Retail Federation/US Census Bureau/Fung Global Retail & Technology

• Aldi is expanding its store base and Lidl plans to enter the US market by 2018.

• The UK grocery sector shows that German hard discounters can break out rapidly and gain share, hitting nondiscount grocers.

• In the US, Aldi and Trader Joe’s have each been growing market share steadily.

US: Share of US Grocery Sector for Aldi, Trader Joe’s and Lidl (%)

2010 2011 2012 2013 2014 2015E 2020E0

1

2

3

4

5

6

1.6 1.7 1.8 1.9 2.0 2.12.6

1.3 1.3 1.4 1.4 1.6 1.7

2.2

0.4

Aldi Trader Joe's Lidl

19

…AND LIDL IS AN EMERGING COMPETITOR

• Lidl planning to open 150 stores by 2018.

• Store size is planned to be 36,170 sq. ft., competing with Walmart’s Neighborhood Market format.

• Lidl offers a broader product portfolio and more brand names than Aldi does: it is a cross between Walmart and Trader Joe’s.

• Lidl has expanded its fresh range over the last two years and is expected to compete in that category in the US.

20

E-COMMERCE IS MAINTAINING GROWTH IN THE US…

8.1%

US E-Commerce Retail Sales as % of Total Sales 2Q16

Online

Offline

Offline sales comprise more than 90% of total sales, but e-commerce accounts for most of the growth.

US E-Commerce Retail Sales as % of Total Retail Sales 2Q10–2Q16

Source: US Census Bureau

2Q 2010 2Q 2011 2Q 2012 2Q 2013 2Q 2014 2Q 2015 2Q 2016

4.4%4.8%

5.3%5.8%

6.3%7.1%

8.1%

21

…AND IS THE NEXT GROCERY BATTLEGROUND

Walmart and Kroger piling in will spark accelerating growth in online grocery

Source: Kantar Worldpanel/IRI/Fung Global Retail & Technology

US: E-Commerce’s Share of FMCG Sales2014–2017E

Selected Countries: E-Commerce’s Share of FMCG SalesJune 2016

Italy Germany US Spain Netherlands France UK South Korea

0.4%1.2% 1.4% 1.7% 1.7%

5.3%

6.9%

16.6%

2014 2015E 2016 2017E

0.8%

1.1%

1.4%

2%+

E

22

DRIVING UP BASKET SIZES WILL BOOST US ONLINE GROCERY

Most US online grocery shoppers are not doing a major shop online…yet.

Source: Mintel/Brick Meets Click/Fung Global Retail & Technology

US: Percentage of Online Shoppers Who Describe This as Their Most Recent Online Grocery Trip (4Q15)

US: Percentage of Shoppers Who Bought Groceries Online in the Past Year

Specific Product Major Grocery Shop

Subscription-Based

61%

15% 12%

2014 2015

19%

31%

+63%

23

WALMART, KROGER AND OTHERS WILL DRIVE UP BASKET SIZES

US online grocery will move from small orders to regular, big-basket purchases• 2016:

­ Publix partners with Instacart

• 2015:

­ Kroger rolls out ClickList

­ Target partners with Instacart

• 2014:

­ Walmart rolls out Grocery Pickup

­ Whole Foods Market partners with Instacart

24

WALMART IS PUSHING INTO E-GROCERY

Source: Company reports

April 2011Launched Walmart To Go, a grocery home delivery service in San Jose

October 2013Launched Walmart To Go in Denver

January 2014Grocery pickup live in 11 stores in Denver

September 2014Walmart Grocery Pickup launched in Northwest Arkansas

June 2016Announced partnerships for same-day delivery of groceries with Uber, Lyft following partnership with Deliv.

October 2016Announced grocery pick-up will be in 100 markets, or approximately 600 stores, by the end of this year.

2015Grocery pickup is in 23 markets by ear-end

2016Grocery pickup

expanded to 60 markets by 2Q FY2017

25

AMAZONFRESH IS LIKELY TO HIT BACK…

Amazon is the most popular site for grocery…but it is not AmazonFresh.

Amazon plans to fight back against Walmart’s and Kroger’s encroachment by expanding AmazonFresh:

• Curbside pickup has been recently rumored.

• Using third-party couriers, as it does in the UK.

• Cutting charges: in October 2016, it cut the fee from $299 per year to $14.99 per month.

• Currently operates in 10 markets in the US, but is expanding to Seattle, Los Angeles, San Francisco, San Diego, New York, Philadelphia, Baltimore, Sacramento and Boston.

US: Proportion of Online Food and Beverage Shoppers Using Amazon Services for Food and Beverage Shopping

Feb/Mar 2016 (%)

Prime AmazonFresh Prime Now

49

18

11

Source: Cowen and Company

26

AMAZONFRESH EXANSION

Source: Company reports

2007AmazonFresh launched in Seattle

2013AmazonFresh launched in Los Angeles and San Francisco

2014AmazonFresh launched in San Diego, New York, and Philadelphia

2014Announced a $299 annual fee

October 2016AmazonFresh fee reduced to $14.99 per month

2015AmazonFresh launched in Baltimore and Sacrametno

2016AmazonFresh launcehd in Boston and London

27

1. Collection:

• Walmart and Kroger each now offer grocery collection at about 400 stores, and Walmart is ramping up to 600.

• Amazon is reportedly set to launch collection services via stand-alone brick-and-mortar stores and curbside pickup.

2. Instacart:

• Whole Foods Market, Publix and Target are using third-party delivery service Instacart, cutting out the need to invest in their own fulfillment operations.

…BUT US RETAILERS ARE LIMITING COSTS

Source: Company reports

28

AMAZON: TRYING TO OWN THE RETAIL ECOSYTEM

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

2017E

2018E

0%

2%

4%

6%

8%

10%

12%

Walmart’s and Amazon’s Sales as % of Total US Retail Sales

Walmart Amazon

Source: Company reports/US Census Bureau/Fung Global Retail & Technology

• In 2015, Amazon accounted for 24% of US retail growth and 60% of US e-commerce growth.

• The company is becoming ubiquitous, turning into its own retail ecosystem:

­ Leased 40 air cargo planes in 2016

­ Operating an airbase in Cincinnati and is reportedly considering buying an airport in Germany

­ Rumored to be planning to open convenience store locations

29

AMAZON: TRYING TO OWN THE RETAIL ECOSYTEM

Source: Company reports/Cowen Group/Business Insider

2015 2016 2017 2018 2019 2020 20210

5

10

15

20

25

6.16

8.69

11.52

14.51

17.52

20.37

23.26Amazon: Projected Food & Beverage GMV (USD Bil.)

2021

2016

33.3%

26.4%

Amazon: Projected % of Online Grocery GMV

30

3. Changing Consumer Behaviors

31

Grocery

Beauty

Health

Men's

Children's

Women's

Home

Automotive

Electronics

30%

34%

34%

35%

38%

38%

37%

36%

45%

46%

51%

52%

54%

56%

56%

58%

59%

69%

Share of Digitally Influenced In-Store Sales in the US, by Category (2016)

Digital

Mobile

CONSUMERS ARE CONNECTED AND INFORMED…Most offline sales are digitally influenced

Source: Statista/Deloitte

32

…AND THEY SHOP DIFFERENTLY FOR DIFFERENT PRODUCTS...

Source: Walker Sands

Online vs. In-Store Shopping Preferences of US Consumers, 2016

Books

Office supplies

Luxury items

Tools

Clothing and apparel

Food/grocery

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

32%

33%

49%

56%

65%

66%

67%

71%

76%

77%

92%

68%

67%

51%

44%

35%

34%

33%

29%

24%

23%

8%

Prefer to purchase in-person Prefer to purchase online

Share of respondents

33

…AND ACROSS GENERATIONS

• Large variability between generations when it comes to online shopping for groceries

Percentage of US Shoppers Who Have Used an Online Channel to Shop for Groceries (Aug 2016)

Source: Prosper Insights and Analytics

Millennials Gen X Boomers Mature Total

35.5%

28.1%

15.5%14.2%

24.9%

34

4. Retail Tech Strategies

35

RETAILERS ARE OPERATING IN AN ALL-CHANNEL UNIVERSE

Order From Fulfilled By Where Received

Home

Elsewhere

Your Store

Different Store

Mobile

Direct DC

Store DC

Your Store

Different Store

Vendor

Home

Elsewhere

Your Store

Different Store

Source: Hudson’s Bay Company

36

THE JET.COM ACQUISITION IN NUMBERS

Walmart’s major push into US e-commerce

Source: Walmart

37

THE JET.COM ACQUISITION: SMART CART TECHNOLOGY

Smart Cart technology:

­ Dynamically reprices products to reflect the true marginal cost of getting the product to the customer.

­ Makes big baskets more efficient: works more like a trading platform than an e-commerce platform.

­ Empowers customers to forgo returns in exchange for optimizing basket cost.

38

MARKETPLACES COMPLEMENT THE E-COMMERCE OFFERING

Marketplace wars:

• Walmart is ramping up its marketplace seller numbers and is adding around 1 million SKUs per month, mainly through its marketplace (~20 million SKUs).

• This year, Amazon is set to become a majority marketplace, in terms of the share of units ordered from its site.

39

A HARDWARE PIPELINE INTO E-COMMERCE: AMAZONAmazon is extending services to homes with IoT products: Alexa• Amazon’s Alexa/Echo has become the central nerve

system of the connected home.

• Tie-ins with Amazon Prime Now and other Amazon retail services are natural extensions.

• Amazon Prime members now make up more than half the online retailer’s customer base.

• There were an estimated 63 million Prime members in June 2016.

Source: Consumer Intelligence Research Partners

40

A HARDWARE PIPELINE INTO E-COMMERCE: AMAZONAmazon is extending services to homes with IoT products:• One-click physical Dash button: seamlessly

restocks household essentials.

• Prime-eligible items only: Amazon is selective about which brands can participate.

• Takes a percentage of each order.

• Amazon is looking to tap into the $77 billion digital ad spend market with this service, especially with CPG brands.

• is creating similar buttons that are open to any retailer.

Source: Forrester Research

41

USING MOBILE: SCAN-AND-GO APPLICATIONS

• Kroger and Walmart have tested and deployed in-store scan-and-go technologies.

• The technology allows customers to use their smartphones as a scanning device or to scan items while shopping for faster checkout and to track what their purchase total will be.

• Incremental spend goes up by about 10% for Sam’s Club shoppers who use the service.

Source: Company reports

42

ELECTRONIC SHELF LABELS: FLEXIBILITY AND PRICE MATCHINGMarket for electronic shelf labels to reach $2 billion by 2019

• French retailers, including Carrefour, Casino and Leader Price, have deployed electronic shelf tags to boost productivity. Thanks to this labeling system, one person can change all the prices in a French supermarket with a few clicks.

• Some systems can handle up to 90,000 price updates an hour.

• Kroger is experimenting with smart shelves in the US.

Source: ABI Research

43

AUGMENTED REALITY: THE NEXT BIG THING IN IN-STORE TECH?

Pokémon Go: augmented reality combines physical and virtual experiences

Unlocks retail traffic from the increased footsteps of Pokémon players

Jawbone UP Users: Total Number of Steps Taken by Those Posting to Social Media with a Reference to Pokémon Go

Offers special coupons to gamers

Source: MarketsandMarkets

Combined AR and VR markets will reach $151 billion by 2022

44

LOOKING FOR INNOVATION EXTERNALLY: TARGETMore retailers are investing in technology partnerships to drive innovation. • Target is the latest retailer that is partnering with an

accelerator (Techstars) to invest in and develop innovative companies.

• The first demo day was held in September in Minneapolis.

Target CEO Brian Cornell:

One of the biggest lessons [the startups in the program] taught me was speed. The juxtaposition of our operation and theirs was stark.

45

DISRUPTOR: BYTE FOODS

• Fresh-food vending service in the Bay Area.

• The employer pays a small monthly fee for the service, and can choose to subsidize all, some or no employee food purchases.

• Byte stocks its 150-plus pantries daily with a rotating selection of salads, sandwiches, soups and other items.

• All food that goes uneaten is donated and redistributed to nonprofit groups.

46

DISRUPTOR: SHELFBUCKS

• Shelfbucks created a sensor-based platform that communicates with shoppers who have downloaded the store’s mobile app, which sends digital content about the product to the customer.

• Smart POP displays enable consumer engagement tracking and more informed merchandising decisions.

• Raised $6.5 million in 2015 to roll out platform and increase headcount.

47

Q & ADEBORAH WEINSWIG

MANAGING DIRECTORFUNG GLOBAL RETAIL & TECHNOLOGY

deborahweinswig@fung1937.comwww.FungGlobalRetailTech.com