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THE FUTURE OF DIGITAL RETAIL

Deborah WeinswigFung Business Intelligence Centre Global Retail & Technology

deborahweinswig@fung1937.comCell: 917-655-6790

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AGENDA

• About FBIC (Fung Business Intelligent Centre)

• Holiday 2015 Wrap-Up

• Top 16 Disruptors for 2016

• Top Five Retail Technology Trends in Asia

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Fung Business Intelligence Centre (FBIC)

• Established in 2000 and headquartered in Hong Kong

• FBIC serves as the knowledge bank and think tank for the Fung Group

– Collects and analyzes market data on sourcing, supply chains, distribution and retail

– Provides thought leadership on technology and other key issues

• New York–based Global Retail & Technology team

– Follows broader retail and technology trends

– Provides advice and consultancy services to colleagues and business partners of the Fung Group

– Builds collaborative knowledge communities

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Futureproofing

• Anticipating future trends and developments

• Plan for future value and avoid obsolescence

– What problem are you trying to solve?

– How will the solution be used?

– How robust does it need to be?

• Ensure flexibility to manage changing formats and deployment patterns

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OUR PARTNERSHIP WITH ACCELERATORSThe New York Fashion Tech Lab is an accelerator that is a result of a collaboration between the Partnership Fund for New York City, Springboard Enterprises and major fashion retailers. It focuses on early- and growth-stage companies.

Entrepreneurs Roundtable Accelerator (ERA) provides participant companies with an intensive four-month program, with the goal of helping early-stage companies progress rapidly into exciting, viable businesses.

Alchemist Accelerator is an accelerator exclusively for startups whose revenue comes from enterprises, not consumers.

Plug and Play is a global innovation platform. It connects startups to corporations, and invests in over 100 companies every year. Its 360° ecosystem allows for remarkable innovation to take shape on an international scale.

Techstars is a global ecosystem that empowers entrepreneurs to bring new technologies to market wherever they choose to build their business.

CoCoon is a coworking space where entrepreneurs, creative talent, successful leaders and investors meet, collaborate and deliver results together. Member companies get access to networking opportunities, work space, a photography studio and mentors.

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Fung Capital/FBIC Commerce Technology Landscape

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HOLIDAY 2015 WRAP-UP

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HOLIDAY THEMES

• Highly promotional holiday was expected– Women’s apparel bounced back, up 10%+, while men’s lagged

– Double-digit growth in furniture sales suggests consumers are willing to spend on big-ticket items (MasterCard Advisors)

• Earlier and later shopping– In 2015, 1 in 4 shoppers bought a Christmas gift before Halloween

– Almost half did the majority of their shopping before Cyber Monday

– There was a surge in foot traffic in the final week of 2015

• Bifurcation of spending– Luxury slowed with the strong US dollar and fewer tourists

spending

Neiman MarcusSaks

NordstromBloomingdale’s

Ann TaylorCostcoMacy’sDillard’s

SupervaluJCPenney

Kohl’sKroger

SafewayDrugstores

(CVS/Walgreens)BJ’s/Sam’s Club

TargetKmart/Sears

WalmartPrimark

Dollar Stores Aldi/Lidl

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Mixed Holiday Results Despite Healthy Consumers

2010 2011 2012 2013 2014 2015E$440

$480

$520

$560

$600

$640

$680

0%

2%

4%

6%

8%

10%

$529

$554$569

$584

$608

$626–$633

5.2%

4.6%

2.7% 2.7%

4.1%

3%–4%

Holiday Retail Sales Growth Rate

Holid

ay R

etai

l Sal

es (U

SD B

il.)

Growth Rate

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Early Holiday Data

• Holiday spending between Black Friday and Christmas Eve was up 7.9% year over year, according to MasterCard Advisors’ SpendingPulse

• Holiday online sales rose by 20% year over year

• Free shipping is the new normal—Demandware reported that 88% of US online retail purchases qualified for free shipping on Cyber Monday

• Amazon reported a massive 2015 holiday season; it added 3 million new Amazon Prime subscribers and shipped more than 200 million items for free to Prime members

• Almost 70% of Amazon customers shopped on a mobile device during the holiday period

• comScore reported that US retail e-commerce spending from desktop computers reached $35.4 billion during the first 36 days of the November–December 2015 holiday season, marking a 6% increase versus the same period in 2014

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MIXED DECEMBER COMPS

Macy’s: (4.7)% combined November–December comps, though digital sales rose by about 25%

“About 80% of our year-over-year declines in comparable sales can be attributed to shortfalls in cold-weather goods such as coats, sweaters, boots, hats, gloves and scarves.” – CEO Terry Lundgren

JCPenney: November–December comps +3.9%, lapping +3.7% last year “Despite unprecedented warm weather that significantly affected apparel sales, our focus of private brands, omni-channel execution and a compelling gift-giving selection resulted in strong holiday sales.” – CEO Marvin Ellison

L Brands: December comps +8%

“Best December ever.” – CEO Les Wexner

Ascena Retail Group: December comps (4)%

“The holiday period for specialty retail was marked by soft traffic and unseasonably warm conditions, and was highly competitive. Excluding the planned decline at Justice, consolidated comparable sales were flat to last year.” – CEO David Jaffe

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Holiday Comps

*Ascena purchased Ann Brands in the beginning of 2015

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Mixed Holiday Results—Final Tally Still to Come

• US retail sales were up 2.9% for the week ended January 2 and up 2.2% for December, according to Johnson Redbook

• RetailNext reported that December US traffic dropped by 5.8%, and that it dropped by 6.4% in the November–December holiday shopping period

Sales Traffic Conv. ATV SPS Tran. % Return

December -0.4% -5.8% 0.4% 3.6% 5.7% -3.8% -0.3%

Nov/Dec -2.0% -6.4% 0.3% 3.3% 4.8% -5.0% -0.2%

Thanksgiving -4.7% -5.1% -0.5% 3.1% 0.3% -7.0% -0.1%

November -5.6% -7.6% 0.0% 3.2% 2.3% -8.3% 0.1%

October -12.2% -10.7% -0.7% 3.8% -1.1% -15.1% 0.2%

September -8.7% -8.1% -0.1% 1.1% -0.5% -9.6% 0.1%

August -7.3% -9.9% 0.2% 1.6% 2.9% -8.7% 0.2%

Source: RetailNext

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Favorable Macro Backdrop

• Lower gas prices continue to provide a silver lining for US consumers

• Inflation/Deflation Apparel prices remain deflationary Food prices fell into deflationary

range in November

Indicator Period 2015 2014 YoY % Chg.

Gas Price (USD/Gallon) Avg. (Nov./Dec.) $2.10 $2.70 -22%

Per Capita Disposable Personal Income Nov. $42,274 $40,996 3.1%

Savings Rate Nov. 5.5% 4.6% 90 bps

S&P/Case-Shiller 20-City Composite Home Price Index

Oct. 182.8 173.2 5.6%

Unemployment Rate 4Q 5.0% 5.7% (70) bps

University of Michigan Consumer Sentiment

Avg. (Nov./Dec.) 92.0 91.2 0.8%

Source: Haver Analytics

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Warm Weather in Key US Markets Affects Sales of Winter Categories

• Warmest winter in over 55 years • Increased traffic to retailers and

restaurants• Left manufacturers with extra

inventory• Demand for winter goods

decreased, but consumers still spent on alternate goods over the holidays

• Unprecedented spending on springtime products Source: Planalytics

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E-Commerce Sales Delivered Strong Results

• First Data recorded a 9.4% total spending increase for Thanksgiving and Black Friday

• ShopperTrak reported a 10% decline in in-store sales during Thanksgiving weekend

• MasterCard SpendingPulse said e-commerce sales were up 20% this holiday

• RetailNext reported that US store sales were down 4.7% on a 5.1% decline in store traffic

Source: comScore and ShopperTrak

Brick and Mortar

Total Digital

Desktop

Mobile

% of Total Consumer

Discretionary

85%

15%

12.6%

2.4%

Growth Forecast

2.5%

14.3%

9.4%

47.2%

Growth Points

2.1%

2.2%

1.2%

1.1%

Holiday 2015 Sales Growth by Channel

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Sales and Traffic from Mobile Devices Showed Robust Growth This Holiday

• Mobile traffic grew by 40% year over year on Thanksgiving, Black Friday and Cyber Monday

• Sales from mobile devices grew by 47.2% and contributed to a quarter of total consumer discretionary spending growth for holiday 2015

Source: comScore

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Home and Apparel Were the Top-Performing E-Commerce Categories This Holiday

Absolute Dollar Rank Product Category

Season to Date*YoY Growth Rate

8

7

1

4

9

14

3

18

Home & Garden

Furniture, Appliances & Equipment

Apparel & Accessories

Consumer Packaged Goods

Event & Movie Tickets

Sports & Fitness

Consumer Electronics

Video Games

Very Strong

Strong

Strong

Strong

Strong

Moderate

Moderate

Moderate

*Based on corresponding shopping days in 2014

Source: comScore

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Top 16 DISRUPTORS in 2016

1. E-Commerce Players Go Offline

2. Ready-to-Cook/Eat Economy

3. Online Grocery Shopping

4. Online Fashion Resale Marketplaces Show Explosive Growth

5. Samsung Pay Accelerates Contactless Payment Adoption

6. Sharing Economy

7. A Subset of the Sharing Economy Is the Rental Economy

8. Subscription Economy Is Nibbling Away at Traditional Retailers’ Sales

9. Caring Economy Promotes Startups for Social Good

10. Experience Economy Is Taking Away Retail Spending

11. Home Furnishings Market Disrupted by E-Commerce Pure Plays

12. Jet.com

13. Athletic Brands Investing in Fitness Apps

14. Facial Recognition

15. Additive Technology: Intelligent Clothing

16. Lack of Disruptors: Victoria’s Secret

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1. E-Commerce Players Go Offline• Millennials prefer mono-brand brick-and-mortar stores, and they shift

between online and offline along the shopping journey

Retailer # of Stores

1

1

20

19

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1. E-Commerce Players Go OfflineCase Study: Warby Parker

– Targeting millennials

– Started exploring offline with pop-ups and a showroom in its NYC office; now expanding to over 20 cities in the US

– Warby Parker’s stores make more than $3,000 per sq. ft., putting the retailer in an elite category with companies such as Tiffany and Apple

– More than 85% of store shoppers will later visit the website, increasing the chances for further orders

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2. Ready-to-Cook/Eat EconomyDisruptors: Blue Apron, Munchery, Plated, HelloFresh • Blue Apron was the fastest-growing US e-tailer

in 2014, with sales growing 550%, to $65 million

• Healthier and cheaper than eating out and takeout

• Convenience: ready-to-cook boxes and curated grocery according to menus, delivered to your doorstep

• US food market– $1.2 trillion, with $600 billion

in restaurants

– Millennial focused

550% in 2014

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3. Online Grocery ShoppingDisruptors: Instacart, AmazonFresh • Walmart Grocery Pickup

– Order online– Pick up at the store

• Amazon Prime Pantry, $5.99 – Order everyday items online, filling the box– Ship to your home– Gamified promotion, slower shipping options in

exchange for free Pantry

• Instacart: Personal Grocery Shopper/Multiple Stores

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4. Online Fashion Resale Marketplaces Show Explosive GrowthDisruptors: thredUP, Tradesy, The RealReal, Poshmark, Vestiaire Collective

• Online resale industry is worth $34 billion in the US

• SnobSwap estimates the market is growing at a 10% compound annual rate

• Mobile is hot in resale; over 45% of thredUP’s sales come from mobile devices

• Patagonia, Eileen Fisher and H&M launched resale programs

2011 2012 2013

Source: thredUP

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4. Online Fashion Resale Marketplaces Show Explosive Growth

Disruptors: thredUP, Tradesy, The RealReal, Poshmark, Vestiaire Collective• Why Online Resale Marketplaces Took Off

– Heavy venture capital investment in online consignment industry (over $450 million)

– Retail brands’ resale programs encouraged consumers’ sustainable consumption habits

– Consumers are convinced by great quality of secondhand apparel bought via online platforms

– Societal shift toward less ownership—the art of decluttering

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5. Samsung Pay Accelerates Contactless Payment Adoption

Disruptor: Samsung Pay • Samsung Pay will accelerate the

current slow adoption of contactless payment because it uses magnetic stripe capability (MST) chips – MST works with new and older credit card

terminals—no additional investment required

– Most widely accepted mobile wallet in the US

– Consumers can incorporate loyalty cards into Samsung Pay

– In 2016: expanding to China, lower-priced handsets and online transactions

Digital Payment Method Acceptance by North American Retailers

As of July 2015 Source: Boston Retail Partners

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6. Sharing Economy

Disruptors: Uber, Airbnb, Lending Club, WeWork

• Valuations of sharing economy companies have skyrocketed

• Revenues are projected to catch up to aggressive valuations:

Startup Industry Valuation

Uber Car Sharing $50.0 B

Airbnb Peer-to-Peer Accommodation $25.0 B

Didi Kuaidi Car Sharing $16.5 B

WeWork Office Sharing $10.0 B

Lending Club Peer-to-Peer Lending $7.4 B

OLA Car Sharing $5.0 B

Etsy Maker Online Marketplace $3.5 B

HomeAway Peer-to-Peer Accommodation $3.0 B

Lyft Car Sharing $2.5 B

Instacart Logistics/Delivery $2.0 B

Prosper Peer-to-Peer Lending $1.9 B

TransferWise Finance $1.0 B

Funding Circle Finance $1.0 B

$15 Billion

2013

$335 Billion

2025

CAGR: 29.5%

Source: PwC

Source: Company reports/analysts’ estimates

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7. A Subset of the Sharing Economy Is the Rental Economy

Disruptors: Airbnb, Zipcar, Netflix

• Renting goods, services and space is becoming more popular than owning

• Renting saves consumers money and the hassle of maintenance

• Suitable for urban living and limited space

• More environmentally friendly

• Airbnb, Zipcar, Rent the Runway and Le Tote are major disruptors

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8. Subscription Economy Is Nibbling Away at Traditional Retailers’ Sales

Disruptors: Le Tote, Birchbox, BarkBox, Pijon, Stitch Fix • Convenience and curated products for

consumers• Recurring revenue model for retailers• Element of self-gifting • Beauty is the biggest category • Fashion styling subscriptions are

becoming popular

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9. Caring Economy Promotes Startups for Social Good

Disruptors: TOMS, Reformation, Warby Parker, NOURI, SoapBox Soaps, Zady, GoodXChange

• Social activism over self-indulgence– Consumers, especially Gen Z, are increasingly demanding

integrity from brands and retailers

• Startups for social good apply market-based strategies to achieve a social goal

– TOMS, the shoe company, has a “one for one” business model

– Reformation designs and manufactures sustainable apparel, sourcing sustainable fabrics and vintage garments

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10. Experience Economy Is Taking Away Retail Spending

Disruptors: Gigzolo, Zaptravel, OpenTable, Beautified• Consumers are spending less on apparel and more on

experiences • 78% of millennials prefer to spend money on an experience

rather than buying something desirable• Gigzolo: curated network of musicians and DJs available for hire

for events • Zaptravel:

– Digital travel agent– Uses a semantic search engine to scroll through its database

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11. Home Furnishings Market Disrupted by E-Commerce Pure Plays

Disruptors: Wayfair, Hayneedle, Art.com, Houzz • E-commerce pure plays are

gaining significant market share from omni-channel home retailers

• They offer more curated products and good customer service

• Houzz is an online home-remodeling community of 35 million users worldwide that connects homeowners with design inspirations and home professionals

Market Share of Leading Housewares and Home FurnishingsE-Retailers in the US in 2014

Source: Internet Retailer

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11. Home Furnishings Market Disruptor: Houzz

• Founded in 2009, Houzz is aiming to disrupt the home furnishings space

• Houzz is an online home-remodeling community that connects homeowners with design inspirations and home professionals

• Its business model is driven by community, content and commerce

• Houzz has already attracted 35 million users across 200 countries

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12. Jet.com (Pricing Model and Smart Cart Technology)

Disruptor: Jet.com

• Smart Cart technology: savings increase with each item added, based on the location of the sellers and the buyer

• Pulls costs out of the supply chain and bumps them back to customers

• A win-win situation for retailers and consumers

• On average, 9% cheaper than Amazon and 6% cheaper than Walmart (Profitero)

Baby Beauty Electronics Grocery Household Office Supplies

Pet Supplies

+10% +10%

+6%+7%

+11%

+7%

+12%

+8%+7%

+4%

-+2%

+7%+6%

+10%

Price Comparison of Jet, Amazon and Walmart

Amazon vs. Jet Walmart vs. JetMore

Expensive than Jet

Less Expensive than Jet

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12. Jet.com (Customers Can Feel Smart)

• Website offers constant comparison and savings versus Amazon.com

• Also tracks cumulative savings on Jet.com

• Customers can “see” savings by waiving return privileges or through shipping synergies (Smart Cart)

• Clean, simple website and mobile app

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13. Athletic Brands Investing in Fitness Apps

Disruptor: Under Armour Under Armour’s Connected Fitness Platform

– Company launched its own fitness app, UA Record

– Introduced UA HealthBox: set includes wristband, heart rate monitor and scale, priced at $400

– Under Armour owns the world’s largest digital health and fitness community, with 130 million users

– One of eight people purchasing a fitness device will be synced on UA’s platform—Apple Watch and Google are not competing

2013 20152015 2015

$475 million (cash)Feb. 2015

$85 million (cash) Jan. 2015

Jul. 2015(terms undisclosed)

$150 million (cash) Dec. 2013

UA HealthBox

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9. Facial Recognition

• Facial Recognition market expected growth: $1.3 billion in 2014 to $2.7 billion in 2022 (9.5% CAGR)

• 30% of retailers are using facial recognition technology to track customers in stores (CSC)• Applications are increasing: health, wellness, beauty and advertising

– Determine the thickness and application of makeup

– Analyze in-store shopper data

• In 2015, Walmart tested with FaceFirst: – Cameras check you in at location

– Smartphone receives customized deals based on demographic

• Intel released RealSense facial recognition technology in 2015– Consumer grade 3D cameras

– Home usage: camera recognizes face to unlock front door

• Challenges: Consumers are not especially comfortable with technology use in retail

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15. Additive Technology: Intelligent Clothing• Application of nanotechnology in smart fabrics

offers potential for development of new textile materials

– Kuraray has developed a way to harness attributes of liquid-crystalline polymers, resulting in extraordinarily strong fibers that can hold the weight of four SUVs

– Threadsmiths introduced the Cavalier T-shirt, which uses “hydrophobic” nanotech woven into the fabric to make it water and stain resistant

• Visijax embeds LEDs in both the front and rear of jackets

– Machine washable and powered by a USB-rechargeable battery that lasts up to 20 hours between charges 

– Commuter and City Ace models have motion-sensing, self-canceling turn signals embedded into the sleeves of the garment 

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16. Lack of Disruptors: Victoria’s Secret

Disruptor: Who will it be? • Victoria’s Secret’s Success

Formula – Marketing via $12 million annual fashion

show

– A brand that creates celebrities

– Benefits from athleisure/loungewear trend

– Close attention to in-store experience

– Wise international expansion strategy

– 20% e-commerce penetration

– L Brands reported 8% holiday comps

Victoria’s Secret Store and Beauty Comparable Store Sales

Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q4 2015

14%13%

6%

4%3%

4%

8%

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TOP FIVE RETAIL TECHNOLOGY TRENDS IN ASIA

• Uberification in Asia

• Streaming Media

• Fast Adoption of 3D Printing

• Inconsistent Mobile Payment Growth

• End of One-Child Policy in China Driving Retail

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1. Uberification in Asia

• On-demand services are available for everything from accommodation to personal chefs in Asia

• Home Cooked is the most successful uberified service in China

• Uberified services faced legal and regulatory challenges

• Not expected to replace established industries

Service Company (Location)

Accommodation Hanintel (S. Korea), Kozaza (S. Korea)

Babysitting Caregiver Asia (Singapore)

Food and Drink Delivery Grain (Singapore), Home Cooked (China)

Home Cleaning Whome365 (China)

Home Finder AnAnZu (China)

Logistics (Pickup and Delivery) GogoVan (Hong Kong), EasyVan (Hong Kong)

Taxi Service Kuaidi ONE (China), Ola (India)

Selected Asian Startups that Provide Uber-Like Services

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2. Streaming Media

• Netflix will expand into Hong Kong, Singapore, South Korea and Taiwan in early 2016

• HOOQ, a joint venture of Singtel, Sony Pictures and Warner Bros., is competing directly with Netflix

• Alibaba recently acquired streaming media company Youku Tudou for $4.4 billion

• Growth driven by the rising affluence of consumers, growing Internet penetration and increasing smartphone ownership

Rank Country Minutes per Day 2-Year Growth Rate

1 China 67 5%

2 Vietnam 61 84%

3 Thailand 60 14%

4 UAE 54 43%

5 Hong Kong 51 16%

6 Philippines 51 74%

Figure 2. Time Spent Watching Online VideoTop Six Countries (4Q 2014)

Source: GlobalWebIndex

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3. Fast Adoption of 3D Printing

• The Asia-Pacific region accounted for 27% of global 3D printer shipments in 2014

• Key region for fast adoption due to government support and extensive industrial funding in important markets

• China plans to invest $300 million in 3D printing over three years

3D Product Shipments: Market Share by Region, 2014

Source: Canalys/FBIC Global Retail & Technology

AMERICAS42%

ASIA-PACIFIC27%

ASIA-PACIFIC27%

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4. Inconsistent Mobile Payment Growth

• China is experiencing fast adoption of mobile payment via Alipay and WeChat Wallet

• South Korea, Japan, Hong Kong, Taiwan and Singapore have the infrastructure, but are not yet seeing substantial growth

• Several banks in Singapore have launched mobile payment services and new services using NFC on USIM cards

Mobile Payments Readiness Index: Selected Countries in Asia

Source: MasterCard

Global Ranking COUNTRY

1 Singapore

5 South Korea

6 Japan

10 China

11 Taiwan

12 Philippines

13 Malaysia

14 Hong Kong

20 Thailand

21 India

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5. End of One-Child Policy in China Driving Retail

• Starting in 2016, couples in China will be allowed to have two children without risk of fine

• Huatai Financial estimates that the relaxation of the one-child policy could create a $15 billion market

• The second-child boom will benefit several categories, including food and dairy, healthcare, garments, automotive and education

• The first wave of the second-child boom is expected in 2017

Source: MasterCard

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THANK YOU!deborahweinswig@fung1937.com

Cell: 917-655-6790HK: 852.6119.1779

CHN: 86.186.1420.3016@debweinswig