UK Christmas 2016 Retail Outlook October 5 2016 · to benefit from a fragmentation of grocery shopping (and related gift purchases) away from large superstores. Clothing specialists:

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OCTOBER5,2016

DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

UK Christmas 2016 Retail Outlook:

A Bumper Brexit Holiday Expected

D E B O R A H W EI N S W I G M a n a g i n g D i r e c t o r ,

F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m

U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9

C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

1) UK retailers will enjoy a bounce in sales of around 3.5%yearoveryearthisholidayseason,andpossiblyashighas4.0%, we estimate. A 3.5% increase equates to a £2.5-billionupliftinsales,andwouldtaketotalholidayspendingto£73billion.

2) Not all sectors will enjoy a bumper Christmas: apparelspecialists and department stores are expected tocontinue to see muted demand for clothing, with theirbesthopeof clawingback sales restingona cold snap inNovemberorDecember.

3) Theimprovinggrocerysectorwillprovidesomeuplift,andInternetpureplaysaresetforstronggrowth—evenintheapparelcategory.

4) Animprovedperformancewillcomeasarelieftoretailersfollowinglastyear’sChristmasretailseason,whichwastheweakestin25years.

5) Retail salesgrowthhas strengthened in themonths sincetheUK voted to leave the EuropeanUnion (EU), and weanticipatenonegativeimpactonretailfromthatvote.Anypotential hit to retail will come from shoppers opting tospendonservicesinsteadofproducts.

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RETAILSALESEXPECTEDTOBOUNCETO£73BILLIONWeestimatethatUKretailwillseeahealthy,3.5%year-over-yearbounceinsalesacrossNovemberandDecemberthisyear.Butgrowthmayreach4%ifthestrongersectorperformancewehaveseeninrecentmonthscontinuesthroughDecember.

A 3.5% increase is equivalent to an extra £2.5 billion in retail sales, andwouldtakeholidaysalestoexactly£73billion.A4%increaseequatestoanadditional£2.8billioninsales.

Basedonouranalysisofmajorretailsectors,weprovideourcoreandbull-scenario estimates forUKholiday retail in the tablebelow.Our estimatesareinformedbythelatestavailablesalesdata,whichrunthroughAugustasofthetimeofwriting.

Figure1.UK:EstimatedRetailSales,Nov–Dec2016(YoY%Change)

CoreEstimate BullEstimateAllRetailexFuel 3.5 4.0

FoodRetailers 2.0 2.5

NonfoodRetailers 3.0 4.0

NonstoreRetailers 13.0 14.0

Source:ONS/FungGlobalRetail&Technology

Here are three reasons why we expect this year’s holiday season to bemuchstrongerthanlastyear’s:

1) Thehard-hitfoodretailsectorhaspostedfiveconsecutivemonthsofpositive growth as of the time of writing, and growth hasstrengthenedsequentiallyoverthemostrecentthreemonths.

2) Despitesignificantdeclinesintheapparelsector,growthatnonfoodretailersintotalandatInternetpureplayshastendedtostrengtheninrecentmonths.

3) Thecomparativesareespeciallyundemanding:totalretailsaleswerevirtually flat year over year in aggregate last November andDecember,andDecemberwastheworstChristmasmonthrecordedbytheONSin25years.

WeestimatethatUKretailwillseeahealthy,3.5%increaseinsalesinaggregateacrossNovemberandDecember.

Source:ShutterStock

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Inaweakapparelmarket,Internetpureplaysareexpectedtobetheonlyconsistentlybrightchannel.

WINNERSANDLOSERS:SECTORSANDCATEGORIESBelow,we showour anticipated holiday 2016winners and losers, first byretail sector and then by product category. By sector,we expect InternetpureplaystostealtheshowthisChristmas,forseveralreasons:

1) Pure plays are outperforming. Recent results show that e-commerce retailers such as boohoo.com, ASOS, AO World andOcado are continuing to comfortably outpace their multi-channelpeersintermsofonlinegrowth.

2) Online growth is accelerating. So far in 2016, growth has beenstrongerforbothtotale-commerceandInternetpureplaysthan inthecomparableperiodof2015.

3) Shoppersnaturallyturntoe-commerceatChristmas.Eachyear,theonline channel grows share at Christmas as shoppers turn to theInternetfor“shopping-listshopping.”

WeexpectInternetpureplaystobuckthetrendofaweakapparelmarket:ASOS and boohoo.com are likely to maintain their very strong growth,while Amazon is set to benefit from its ongoing march into the apparelcategory. Meanwhile, Zalando should receive a boost from its current,majoradvertisingcampaign.Store-basedrivalsarelikelytocontinuetoloseout.

Figure2.UKHolidayRetail:AnticipatedWinnersandLosers,bySector

Internet pure plays:We expect online-only retailers to stealtheshowthisChristmas,outperforminginapparelandtappingdemandfortech.

Food retailers: These retailers look set for a better holidayperiod, with weak comparatives and recent sequentialimprovementinsectorgrowthbodingwell.

Beauty retailers: Health and beauty stores have recordedstronggrowthsofarin2016,andbeautyspecialiststoresstandto benefit from a fragmentation of grocery shopping (andrelatedgiftpurchases)awayfromlargesuperstores.

Clothingspecialists:Duetodwindlingappareldemand,theseretailersarelikelytocontinuetobehitthisholidayseason.

Departmentstores:Thissectorislikelytofeeltheimpactofthe decline in apparel, too. Supporting this view, House ofFraser recently noted an “extremely volatile tradingenvironment”andJohnLewishasreporteddecliningfashionsalesinsomeofitsweeklyupdates.

Source:Companyreports/FungGlobalRetail&Technology

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Bycategory,weseethefollowingthemesdrivingsalesthisChristmas:

• Experiences are chipping away at retail. Shoppers are opting tospendmoreonleisureservices,suchasticketstoeventsanddiningout, than at retail—and data on consumer spending clearly showsthis. Over the coming holiday season, we expect this trend to bemanifested in strong sales of gift cards and subscriptions fornonphysicalproductsandservices,aswellasinspendingonservicesin lieu of goods. Services are not considered part of retail and theeffectofspendingonservicesisthereforenegativeforretailers.

• Lifestyle brands are in demand. Focusing on retail products, wethink itwillbeallaboutdesirablebrandsthisChristmas. Innovativeand aspirational lifestyle brands will drive sales growth. Athleisurebrands such as LululemonAthletica and tech names such as Applewillretaintheirstrongappeal.

• Manywillput the IoTunder the tree.NewInternetofThings(IoT)productsare set toexcite consumers thisholiday season, includingthe Amazon Echo and the Oculus Rift. These will join moreestablished products such as smartwatches and fitness trackers tobolsterchoiceinIoTproducts.

•

Source:ShutterStock

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Figure3.UKHolidayRetail:AnticipatedWinnersandLosers,byCategory

Electronics, ledbyIoTproducts:Thecategorywillbeboostedby the Apple iPhone 7, virtual reality products such as theOculusRift,wirelessheadphonesandtheAmazonEcho.

Small electrical products: TheDysonSupersonicHairDryer isexpectedtobeawinner.

Experientialgifts:Giftcards,subscriptionsandservices(whichdonot registeron theUK’sRetail Sales Index) should seebiggains.

Drones: These may prove popular once again, thoughconsumer uptake is constrained by highly restrictiveregulationsonwheretheycanbeused.

Clothing: Apparel looks likely to remain out of fashion.Desirable athleisure and lifestyle brands will be theexceptions.

Source:FungGlobalRetail&Technology

INCONTEXT:APOSTREFERENDUMRECOVERY—THOUGHNOTFORAPPARELANDBIG-TICKETITEMSBelow, we put our estimates in context. Retailers started to see demandsoftenacross2015,leadingtotheabovementionedslumplastDecember.In2016,saleshavetendedtotrendupward,andthisstrengtheninggatheredpacefollowingtheUK’sJune23votetoleavetheEU.

The depreciation of the British pound is likely providing a boost to thesesector figures, for tworeasons: first, ithasattractedtouristskeentosnapup gifts andpersonal purchases at bargain prices; second, it has flatteredthe reported international salesmadebyBritish retailers such as Internetpureplays.

In2016,retailsaleshavetendedtotrendupward,andthisstrengtheninggatheredpacefollowingtheJune23votetoleavetheEU.

Source:ShutterStock

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Figure4.UK:TotalRetailSalesexFuel,YoY%Change


Food retailers have been a driver of this strengthening: the sector hasmoved from negative to solidly positive territory, according to ONS data.(Andthissuggeststousthattherecentretailrecoveryisnotprincipallydueto tourists flocking to theUKtobuycheapgoods: thesekindsof travelersaremorelikelytoshopatSelfridgesthanatSainsbury’s.)

Nonfoodretail remainsweakoverall,withasofteningathouseholdgoodsstoresandfallingsalesatclothingstoresdrivingthetrend.

Figure5.UK:RetailSales,YoY%Change


(2)

(1)

0

1

2

3

4

5

2015 2016

(6)

(4)

(2)

0

2

4

6

2015 2016

Food Nonfood

Foodretailershavebeenadriverofthestrengtheningtrendinretailsales:thesectorhasmovedfromnegativetosolidlypositiveterritory.

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Apartfromundemandingcomparativesfromlastyear,thereisnoreasontothink that apparel stores will have a good holiday season this year. Thesector will struggle to grow sales year over year—unless a cold snap inNovember or December prompts shoppers to flock to stores for wintercoatsandwoollysweaters.

Figure6.UK:RetailSales,SelectedSectors(YoY%Change)

*Includesfurniturespecialists,electricalgoodsretailers,DIYandhardwarestores,andmusicandvideoretailersSource:ONS/FungGlobalRetail&Technology

2016VERSUS2015The start of a downturn in apparel demand appears to have been asignificant factor in the exceptionally weak retail performance lastChristmas.Ourtwo-year-stackfiguresbelowarethereforedrivenprincipallybyexpectedgrowththisholidayseason.

Figure7.UK:EstimatedRetailSales,Nov–Dec2016Evs.Nov–Dec2015(YoY%Change)

2015 2016E Two-YearStack

AllRetailexFuel 0.2 3.5 3.7

FoodRetailers 0.0 2.0 2.0

NonfoodRetailers (0.8) 3.0 2.2

NonstoreRetailers 6.1 13.0 19.1


(10)

(5)

0

5

10

2015 2016

ApparelStores HouseholdGoodsStores*

Apparelstoreswillstruggletogrowsalesyearoveryear.

Ourtwo-year-stackfiguresaredrivenprincipallybyexpectedgrowththisholidayseason.

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NONEGATIVEBREXITEFFECTWeanticipatenodragonretailsalesthisChristmasfromtheBrexitvoteinJune. Brits have demonstrated resilience following the EU referendum,confidenceisonanupwardpathandretailsaleshavestrengthenedinthemonths since the vote. Some commentators have speculated that touristshoppersaredrivingthisgrowth,duetothedevaluedpound.However, inthe ONS retail data for August (latest available), two sectors that sawsubstantialimprovementsinsalesgrowthweregrocerystoresandInternetpure plays—and neither of these is a significant destination for touristspending.

The depreciation of the British pound may be boosting the ONS’s RetailSales Index (againstwhichwearebenchmarkingour estimates) a littlebyflattering international salesbyUKretailers that sell tocustomersabroad,suchasASOS.

ABOUTOURESTIMATESOur estimates are rounded, weighted averages for the nine-week periodcovering November and December in the ONS Retail Sales Index. Webenchmarkourestimates to theONS’snonseasonallyadjustedvalue salesdata(“Table4M”).

ConsumerconfidenceisonanupwardpathandretailsaleshavestrengthenedinthemonthssincetheBrexitvote.

Source:ShutterStock

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

HONGKONG:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406LONDON:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com

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UK Christmas 2016 Retail Outlook October 5 2016 · to benefit from a fragmentation of grocery shopping (and related gift purchases) away from large superstores. Clothing specialists: