Store-Based Retailers In a Digital World: Conference Highlights

Following are highlights from RetailNet Group’s conference in Dallas, TX on Feb 16 & 17.

Who is RNG? – RNG is an advisory firm that works with both retailers and brands on 4 continents: North America, Latin

America, Europe, and Asia. We have deep experience in retail, CPG strategy, and technology. Our goal is to help clients

out-earn and out-grow the markets in which they compete.

Future to the Present – Our approach is unique. When most companies plan, they extrapolate recent trends into the

future. RNG guides clients to “bring the future to the present,” starting from possible futures to identify and prioritize

the decisions, strategies, and capabilities to pursue today.

We Bring the Future to the Present

2

Today T + 5T - 5

Traditional planning process

RNG process

Major Inflection Points in Chain Retail

RNG believes the chain retail industry is at a critical inflection point—one of just 3 in our careers as analysts.

Phase 1 (Brands in Control)

The average retailer’s “heavy shopper” was a woman born between 1930 and 1960. Fewer women were employed.

Chain retailers, collectively, controlled around 25% all retail. Sears, Montgomery Ward, and a handful of others

aspired to “national” scale, but local and regional chains were more prevalent.

National media had massive reach and relevance, giving brands a powerful platform to communicate with shoppers.

In an unconsolidated industry, brands had a great deal of control over how their products were distributed,

marketed, and merchandised.

Phase 2 (Retailers in Control)

Supercenters, warehouse clubs, and specialty retailers drove most of the growth (the “alternative” channels).

Leading brands migrated to these new channels, innovating their business models & organizations along the way.

“Concentration & Consolidation” – as retailers’ buying power became more concentrated, the industry

consolidated. The first truly national retailers emerged.

There was a clear power shift to retailers; these “alternative channels” drove most of the growth during this phase,

and for some leading brands, formats like the Supercenter accounted for greater than 100% of growth. Category

management was the primary (if not only) way for brands to engage at the store level.

Phase 3 (Shoppers in Control?)

A new phase driven by technology; now retailers and brands are following the consumer. Transparent, Social,

Personalized, Targeted, Local, Contextual.

A New Industry Structure

Consumer Retailing 2015: The New Competitive Landscape

Pure

Play.

com

SBRBrand

.comSBR

.com

Brand

Stores

Baseline Growth

Social

Retail.

com

44Source: RNG analysis

RNG believes this latest inflection point will bring a new industry structure in consumer retailing. The way we’re

organized—and the strategies and capabilities that carried us through the last phase of growth—won’t carry us through

the next.

Of course we have stores. And stores remain at the core of the industry. But increasingly, growth is coming from new

places.

Store-based retail (SBR) – existing scale… key is to maintain existing relationships while finding funds to fuel

new growth

E-commerce – $ growth, marketing influence, and insights-generation

Brand.com – Direct connection to the consumer… R&D, CRM, user-led innovation

For retailers and brands to outpace the market, we have to start thinking differently. We have to segment the market

differently and develop different strategies and capabilities. And that’s why we’re here today.

How did we get to this conclusion?

RNG uses a model pioneered by the oil industry called STEIP—Society, Technology, Economy, Industry, and Politics. We

believe understanding the high-speed, high-impact drivers in each of these areas guides firms to better strategies.

Two quick points reinforce why we brought some of the industry’s best minds together now to take on these issues.

The first is societal: There are huge distinctions in how people consume goods and services over the courses of their

lives. The average American spends 2/3 of her total lifetime spend at retail between the ages of 25-55.

The next generation of heavy shoppers is very, very different from the generation that powered the last phase of retail

growth. They’re digital, not mechanical. Email is too slow for them. But maybe the simplest point is this: as an industry,

we target our messages via the media they are least engaged with.

The second point is technological: Each successive computing platform reaches more people more quickly than the last.

The iPad is now the fastest-selling mobile device in history; some retailers are reporting that half of their mobile traffic

comes from iPads. Technology is accelerating; it’s becoming not just ubiquitous, but much more embedded in the way

people live and shop.

Today, the shopper is more engaged with their own technology than retailers. Retailers are at a disadvantage. The

consumer (and brands) are disintermediating them.

Trip Type Transition

So we predict a major transition in terms of trip type. You can classify trips in three simple ways:

1. Purely analog— Trips that take place in stores and are unaided by consumer technologies

2. Digitally-influenced – Trips that originate or end in stores but are influenced by consumer technology

3. Purely digital - “E-commerce” as it is commonly known

63%

14%

30%

65%

7% 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2020

Analog Only

Analog Only

Digital Influenced

Digital Influenced

Digital Only

Digital Only

And as we’ll argue, the biggest transition isn’t that purely digital trips will grow. It’s that the store will have to evolve.

The Store-Based Retailer Paradox

1. Critical shoppers, trips, and categories are moving online at different speeds… some retailers at greater risk

than others

Shoppers, Categories, & Trips – What Will Move Online?

20

Shoppers

Brands &

Categories

Trips &

Occasions

•High $

•Low Cube

•Young

•Affluent

•Seniors

•Low

income

•Convenience

•Impulse

•Replenishment

•Stock up

•Gifting

•Low $

•Necessities

2. E-commerce isn’t optional—“cannibalize yourself or be cannibalized”

3. It also isn’t always incremental or accretive for store-based retailers – For most, it’s a defensive strategy—

protecting a shopper or trip

4. Some e-commerce growth will come at the expense of stores

5. Store-based retailers can’t “out-Amazon Amazon”; the multichannel competitive model is fundamentally

different and must leverage existing assets

6. Multichannel/omnichannel is hard—huge impacts on strategy, structure, systems (and vendor expectations)

E-Comm

Targeted

Apps

Social

Retailing

Stores

CRM

And Operating Systems

Leading Store-Based Retailers Shaping Models to the New World

Doing Business With Multichannel & Pureplay E-Commerce Retailers

Many RNG clients perceive opportunities for growth in online retailing but are struggling to build the case for

investment.

In RNG’s observation, most companies assess the opportunity from a conventional P&L point of view. But we believe

there are 3 important elements to a complete digital strategy:

1. E-Commerce – Incremental and profitable sales volume growth

2. Digital Marketing – Greater reach and relevance in influential digital media (including e-retailers)

3. Insights – Unique insights that can be reapplied in other channels

Insights

Digital

MarketingE-Commerce

Doing Business Online: Where is the ROI?

Getting to the Plan

RNG has developed a 5-step process to help clients develop their strategies:

1. Segment Potential Partners by Scale, Growth, and Business Model – RNG’s database contains historical and

forecasted volume data for the largest multichannel and pure play online retailers in the US. Understanding

share/growth dynamics is a critical first step in determining where to play.

2009 2014E 2009 2014E 06-09 10E-14 06-09 10E-14 06-09 10E-14

Multichannel Marketplace $16 $27 14% 15% 12.8% 11.2% $6 $11 22% 15%

Multichannel Vertical $47 $65 43% 34% 5.2% 6.3% $9 $17 31% 22%

Pure Play Marketplace $25 $61 22% 33% 13.4% 19.9% $10 $36 35% 47%

Pure Play Vertical $22 $34 20% 18% 4.1% 9.0% $3 $12 12% 16%

RNG USA Consumer Direct Total $110 $187 6% 9% 7.5% 11.1% $28 $77 16% 22%

RNG USA Store-Based Total $1,678 $1,946 94% 91% 2.4% 3.0% $149 $268 84% 78%

RNG USA Chain Total $1,788 $2,133 100% 100% 2.6% 3.6% $177 $345 100% 100%

Share of

Sales AddedConsumer Direct Segment

Sales

(USD bil)

Share of

SalesSales CAGR

Sales Added

(USD bil)

Pure Play Marketplaces (Amazon) Almost Double Consumer

Direct Total Growth Rate

28

Source: RNG Database; USD current

2. “Trait” Online Retailers for Strategic Alignment – Beyond scale and growth, evaluating potential partners on

criteria like category commitment, supply chain and distribution model, and shopper alignment brings clarity to

where to invest.

This step often involves detailed interviews with the retailers. RNG has developed an interview guide to

accelerate this step.

3. Tier Online Retailers – Most firms are unable to support every potential partner, so tiering customers

establishes essential guardrails and guidelines for investment.

4. Develop Engagement Model – Developing an engagement model for each tier is the next step. Resource and

capability planning generally includes brand, price, and non-price considerations.

Vendor Resource & Capabilities Planning

• Product

• Pack

• Launch/support

• List to Net

• Terms

• Meeting

Competition

• People

• JBP

• Demand Chain

• Supply Chain

• Analytics &

Insights

Policies

Brand PriceNon-

Price

5. Present the Plan – The final step is often to present a plan for management approval. RNG stewards the

development of a fact-based assessment of where to play and how to win.

Next Steps

Clients can engage RNG on these topics on several levels:

Briefing – RNG can condense its view and present to senior executives from 60 minutes to 4 hours

Rapid Alignment – RNG can facilitate a 1-day strategy development session, including custom analysis and

RNG’s recommendations

Peer Communities – Non-competitive brand owners can join RNG’s Innovation Communities focused on

continuous learning

Keith Anderson

Senior Analyst

RetailNet Group

keith@retailnetgroup.com | o: 781-522-6788 | m: 617-800-3514 | http://www.twitter.com/keith_rng/