E-COMMERCE AND THE FUTURE OF RETAIL: 2015

A Research Service By Business Insider

THE FUTURE OF RETAIL: 2015

Retail is changing.

Source: Flickr / Joseph Brent

Digital is changing the way people shop.

Source: Flickr / Joseph Brent

We define “digital commerce” as purchases that are made on desktop and mobile computers.

Source: US Economic Census

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q10%

2%

4%

6%

8%Share Of US Retail Sales From DigitalQuarterly

Nearly all growth in retail now comes from this segment.

Source: US Economic Census

Q1 20

10

Q2 20

10

Q3 20

10

Q4 20

10

Q1 20

11

Q2 20

11

Q3 20

11

Q4 20

11

Q1 20

12

Q2 20

12

Q3 20

12

Q4 20

12

Q1 20

13

Q2 20

13

Q3 20

13

Q4 20

13

Q1 20

14

Q2 20

14

Q3 20

14

Q4 20

14

Q1 20

150%

5%

10%

15%

20%

25%US Retail Sales, Year-Over-Year Growth

Overall Retail Digital Commerce

So what’s driving digital commerce growth?

Source: US Census, BI Intelligence

Overall Retail Digital Commerce

3.5%

14.8%

Annual Growth In 2015US

Consumers are using smartphones and tablets more as purchasing devices.

Source: US Economic Census, comScore

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

$0

$20,000

$40,000

$60,000

$80,000

$100,000Overall US Digital Sales

Mobile Desktop

Social networks are now driving more e-commerce than email.

Source: AddShoppers, Internet Retailer, BI Intelligence Estimates

Facebook Twitter Pinterest E-mail Google+ Other

$1,461,350,000

$651,530,000

$422,620,000 $421,850,000 $421,850,000

$58,630,000

E-Commerce Revenue Generated From Social Media

Top 500 Retailers, Global, 2014Estimates in millions

And shopping sites have gone global, allowing people to shop wares from all around the world.

Source: Company Filings, BI Intelligence Estimates

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

0

50

100

150

200

250

300

350

400

Active Buyers On Top E-Commerce MarketplacesTrailing 12 months; Global

Alibaba (Includes Tmall and Taobao)

Amazon

eBay

Groupon

Etsy

Zalando

Millions

From a macro perspective, digital commerce may not seem like much compared to in-store retail.

Source: US Economic Census, comScore

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000Overall US Retail Sales

In-store

Digital (mobile + desktop)

But look closer, by product category...

Source: US Economic Census, BI Intelligence

2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E20150%

10%

20%

30%

40%

50%

60%Digital's Share Of US Retail Sales

Media, Sporting, and Hobby Goods Electronics, Appliances, Com-putersClothing and Accessories Furniture and Home Furnishings Health and Personal Care Food and Beverage

And you’ll see that e-commerce is booming.


2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E2015$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000US Digital Retail Sales, By CategoryClothing and Accessories Media, Sporting, and Hobby Goods Furniture and Home Furnishings Electronics, Appliances, Com-putersHealth and Personal Care Food and Beverage

2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E20150%

10%

20%

30%

40%

50%


Media, Sporting, and Hobby Goods Electronics, Appliances, ComputersClothing and Accessories Furniture and Home Furnishings Health and Personal Care Food and Beverage

The “Media, Sporting, and Hobby Goods” Categoryis leading the way.


Over 50% of these sales in the US now occur online.


2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E2015$0

$20,000

$40,000

$60,000

$80,000

$100,000

Digital Digital Digital Digital Digital Digital Digital Digital Digital Digital Digital

In-store In-store In-store In-store In-store In-storeIn-store

In-storeIn-store

In-storeIn-store

US Sales Of Media, Sporting, and Hobby Goods

And digital media has become the fastest growing e-commerce category in the US.

Source: ComScore 2015

Jewelry and Watches

Books and Magazines

Flowers and Gifts

Music, Movies, Videos

Video Games and Consoles

Event Tickets

Consumer Electronics

Toys and Hobby Goods

Home and Garden

Furniture and Appliances

Office Supplies

Sport and Fitness

Apparel and Accessories

Consumer Packaged Goods

Digital Content

-1%

2%

6%

6%

7%

8%

14%

14%

14%

15%

15%

17%

20%

21%

27%

YoY Growth of E-Commerce Sales, By Category US 2014/2013

2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E20150%

10%

20%

30%

40%

50%



The “Electronics” category isn’t far behind.


Over 50% of these sales in the US now occur online.


2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 P2015$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000


In-storeIn-store In-store In-store

In-store In-store In-store In-store In-store In-store In-store

US Sales Of Electronics And Appliances

Leading to the decline of some traditional retailers.

RadioShack filed for bankruptcy in early 2015 after 11 consecutive quarterly losses; the company has since been bailed out by Sprint.

2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E20150%

10%

20%

30%

40%

50%



The “Apparel” category is close behind.


Approximately one-fourth of apparel sales in the US now occur online.


2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E2015$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000


In-store In-store In-store In-store In-store In-storeIn-store

In-store In-storeIn-store

In-store

US Sales Of Apparel

But younger shoppers still prefer the flexibility of shopping for clothes at stores and online.

Source: Piper Jaffray

Fall 2013 Spring 2014 Fall 2014 Spring 2015

36%

19%

36%39%

64%

81%

64%61%

US Teens Preferences When Purchasing Clothing OnlineOnline-Only Retailers

Online Retailers With Stores

So while many traditional apparel retailers are holding on by a thread, the ones that survive will be those that diversify into e-commerce.

Source: Shutterstock

Let’s see how those traditional apparel retailers are faring...

Source: AP

JCPenney relies way too heavily on in-store sales, which account for 99% of its business.

Source: JCPenney, Internet Retailer, BI Intelligence Estimates

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20150

5000

10000

15000

20000

25000

Digital Online Online Online Online Online Online Online Online Online Online

In-store OfflineOffline Offline

Offline Offline Offline Offline

Offline Offline Offline

JCPenney Annual Retail SalesGlobal

And JCPenney’s growth has been inconsistent, trending downward overall.

Source: JCPenney, Internet Retailer, BI Intelligence Estimates

2006 2007 2008 2009 2010 2011 2012 2013 2014

-40%

-20%

0%

20%

40%JCPenney Sales GrowthGlobal, year-over-year

Digital Linear (Digital) In-store

Gap’s business is much more diversified than JC Penney’s; 15% of Gap sales come from digital.

Source: Gap, Internet Retailer, BI Intelligence

2007 2008 2009 2010 2011 2012 2013 2014$0

$4,000

$8,000

$12,000

$16,000

$20,000

Digital Digital Digital Digital Digital Digital Digital Digital

In-storeIn-store In-store In-store In-store

In-store In-store In-store

Gap Annual Retail Sales Global

And although Gap’s growth is decelerating, it’s still trending upwards overall.

Source: Gap, Internet Retailer, BI Intelligence

2008 2009 2010 2011 2012 2013 2014

-20%

-10%

0%

10%

20%

30%

Gap Sales GrowthGlobal, year-over-year

Digital Linear (Digital) In-store Linear (In-store)

Furniture has been steadily disrupted by shoppers going online to purchase home goods.


2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E20150%

10%

20%

30%

40%

50%



Digital now accounts for 28% of furniture sales in the US.

Source: Us Economic Census, BI Intelligence

2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 P2015$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000


In-store In-store In-storeIn-store

In-store In-store In-store In-store

In-store

In-storeIn-store

US Sales Of Furniture

Now the categories with the greatest potential for disruption…

Source: Flickr/Foad Hersi, Jamie

Health and Personal Care is on deck to be completely disrupted by e-commerce.


2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E20150%

10%

20%

30%

40%

50%



Americans today spend over $300 billion a year buying health and care products. Only 7% of that is done online.

Source: US Census, eMarketer, BI Intelligence

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

E201

5

E201

6

E201

7

E201

8

E201

9

E202

0$0

$100,000

$200,000

$300,000

$400,000

Online SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline SalesOnline Sales

Offline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline SalesOffline Sales

US Sales Of Health And Personal Care Products

But by 2020, digital will account for $1 in every $10 spent on health and care products.

Source: US Census, eMarketer, BI Intelligence Estimates

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

E201

5

E201

6

E201

7

E201

8

E201

9

E202

00%

4%

8%

12%

E-Commerce Share Of Health And Personal Care Retail Sales

US

That’s nearly $40 billion.

Source: US Census, eMarketer, BI Intelligence

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$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000US E-Commerce Sales Of

Health And Personal Care Products

Among health and beauty shoppers, Amazon is the most popular e-commerce destination.

Source: AT Kearney, 2014

Olay.

com

JCPe

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.com

Lore

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m

Beaut

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Drugs

tore

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Avon.

com

Ulta.co

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CVS.co

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Macys

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Targ

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Wal

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Seph

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Wal

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Amaz

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18% 18% 19% 20% 22% 23% 24% 25% 25% 27% 28%32%

35%

42%

73%

Where US Consumers Shop Online For Personal Care And Beauty Products

Four out of ten online health and beauty shoppers use subscription services to refill products they need.

Source: AT Kearney, May 2014

No62%

Tools, 2%Fragrances, 3%Nail Care, 4%

Color Cosmet-ics, 5%

Hair Care, 5%

Personal Care, 6%

Skin Care, 8%Other, 6%

Subscription E-Commerce Services: Health And Personal Care Products

US, 2014A) Do you use subscription services in order to receive health and personal care products on a recurring basis?

B) For which types of products?

Birchbox capitalizes on this and generates over a quarter-billion dollars every year from its beauty subscription business.

Source: News Announcements, BI Intelligence

2010 2011 2012 2013 2014 E2015$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

74,000 250,000

533,333

1,152,000

2,304,000

Birchbox Subscription Business Annual RevenueBI Intelligence Estimates

Subscribers (In Thousands) Subscription Revenue

But Amazon is the most popular e-commerce destination for everyday products.

Source: comScore

Amazon Walmart Target Kroger Safeway SuperValu Albertsons

175,094,000.00

81,919,000.00

50,843,000.00

7,844,000.003,377,000.002,982,000.00 910,000.00

Monthly Visitors To Online CPG Shopping Destina-tions

US, March 2015

In Millions

Groceries are the biggest opportunity in e-commerce.


2005 2006 2007 2008 2009 2010 2011 2012 2013 E2014 E20150%

10%

20%

30%

40%

50%



Americans spend $600 billion a year buying groceries, but less than 1% of that is online.

Source: BI Intelligence

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E201

4

E201

5

E201

6

E201

7

E201

8$0

$200,000

$400,000

$600,000

$800,000US Grocery Sales Forecast

Offline

On-line

Demand isn’t the issue. Consumers of all ages are willing to try grocery e-commerce services.

Source: Nielsen

Silent Generation (65+)

Baby Boomers (50-64)

Generation X (35-49)

Millennials (21-34)

Generation Z (15-20)

9%

17%

22%

30%

28%

35%

48%

57%

57%

55%

Consumers Ordering Groceries Online For Home Delivery, By Age (Global)

Already Using

Willing To Use

And cultural differences aren’t the issue either.Demand spans all geographic markets.

Source: Nielsen

Europe

North America

Latin America

Middle East-Africa

Asia-Pacific

13%

12%

13%

19%

37%

50%

55%

65%

58%

53%

Consumers Ordering Groceries Online For Home DeliveryBy Region

Already Using

Willing To Use

Source: Lonely Planet via Getty Images

So what is holding back digital from disrupting groceries?

The issue is that consumers don’t have the option.Only 5% of supermarkets offer mobile ordering.

Source: AppLovin, July 2014

Online Retail Department Store

Restaurant Chain

Pharmacy Supermarket

83%

75% 73%

50%

5%

Share Of Top US Retailers With An App That Has Purchasing Capabilities

Top 100 Retailers By Segment

And we know that consumers want to order groceries on mobile.

Source: PricerwaterhouseCoopers, October 2014

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63% 68% 73% 74% 80% 84% 86% 86% 89%

37% 32% 27% 26% 20% 16% 14% 14% 12%

Breakdown Of E-Commerce Sales By ChannelUS

PC Mobile

Consumers spend more money when buying groceries online than if they were in a supermarket.

Source: Greycroft Science, Earnest Research

Blue

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$61.20$71.07 $68.47

$79.70

$112.63

$166.83

$42.18 $49.38 $51.79 $52.32

Average Order Value, E-Commerce Grocery Services And Traditional Supermarkets

Repeat customers only; February 2015Fixed Subscription Subscription + Choice A la Carte Traditional Grocery

And online grocery shoppers make multiple orders per month.


Blue

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2.35 2.18 2.18

2.89 2.9

1.73 1.83

3.59

2.17

2.83

Transactions Per Month Per Customer,E-Commerce Grocers And Traditional Supermarkets

Repeat customers onlyFixed Subscription Subscription + Choice A La Carte Traditional Grocery

Especially those repeat customers.


Blue Apron Hello Fresh Plated Instacart

1.761.52

1.69 1.65

2.352.18 2.18

2.89

Transactions Per Month Per Customer, By E-Commerce Grocery Service

New customer Repeat customer

Online grocers, such as FreshDirect, are generating 2x more money per customer per month than traditional supermarkets.


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$144 $155 $149

$230

$327$289

$77

$177

$112$148

Average Spending Per Customer Per Month, E-Commerce Grocers And Traditional Supermarkets

Fixed Subscription Subscription + Choice A La Carte Traditional Grocery

We estimate that Instacart will handle $600 milliona year in online grocery orders by 2016.

Source: News Filings, BI Intelligence

2012 2013 2014 P2015 E2016$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

Instacart Annual Sales HandledBI Intelligence Estimates

Now let’s look at how the mass merchants are faring: the retailers that sell all of these products.

Amazon’s growth has decelerated; but it’s still outperforming competitors.

Source: Amazon

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

0%

20%

40%

60%

80%

$10,913

$7,975$8,161$8,558

$13,934

$10,214$10,415$11,048

$17,126

$13,017$13,278$13,953

$20,638

$15,628

Amazon Retail RevenueIn $ Billions; Global

YoY Growth

eBay is in a downward spiral.

Source: eBay

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

-6%

0%

6%

12%

18%

$16,490$16,206$16,171$16,281

$19,105$18,326$18,292$18,345

$21,518$20,545$20,485$20,075

$21,849$20,195$20,061

eBay Gross Merchandise VolumeIn $ Billions; Global; Ex-Auto

YoY Growth

Walmart still relies heavily on brick-and-mortar sales.

Source: Walmart, Internet Retailer, BI Intelligence

2010 2011 2012 2013 2014$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000Walmart Annual Sales

GlobalIn-store Digital

As does Target.

Source: Target, Internet Retailer, BI Intelligence

2011 2012 2013 2014$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000Target Annual Sales

Digital

In-store

But Target leads Walmart when it comes to e-commerce.

Source: Target, Walmart, BI Intelligence

2011 2012 2013 20140.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%E-Commerce Share Of Revenues

TargetWalmart

Conversion rates are rising on mass merchant e-commerce sites, which means that shoppers aren’t just browsing online, they are buying.

Source: Kantar Retail ShopperScape, December of each year

Target.com Kohls.com Walmart.com Amazon

31%

46% 46%

80%

36%

49%56%

86%

36%

54% 56%

82%

48%

58% 60%

85%

58%63% 66%

89%

Holiday E-Commerce Conversion Rate Shoppers who purchased on website as % of total website vis-

itors*Desktop-only, US-only

2010 2011 2012 2013 2014

And digital isn’t just disrupting how people shop, it’s also changing the way they receive their purchases.

Source: Flickr, US Department of Labor

Consumers are demanding faster delivery.

Source: Stony Brook University

Same or next day Two to three days Four to five days More than five days

Depends

4%

31%

35%

23%

7%

Delivery Speed Option Selected Most OftenAnswered by US e-commerce shoppers

Q1 2015

So retailers are getting competitive with lower thresholds for free shipping.

Source: Company info

JCPenney.com Macys.com Kohls.com Walmart.com Gap.com Amazon.com Target.com

$99 $99

$75

$50 $50

$35

$25

Minimum Order Value Required For Free Standard Shipping

US, February 2015

*Note: As of February 24, 2015

The demand for fast shipping has benefitted on-demand delivery startups like Postmates.

Source: Postmates, BI Intelligence Estimates

May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-150

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000Postmates Cumulative DeliveriesUS-only

Retailers and shippers will look to technology to lower the cost of delivery, which is why companies—from Google to Uber to Amazon—are interested in autonomous vehicles.

Source: ARK Research

$2.25$2.15

$0.76

$0.25

Estimated Cost Per Mile Of Vehicle Services For ConsumersUS

*Estimate for the year 2020

And they’ll also look to technology to help increase the speed of delivery.

Source: ARK Investment Management, Company info

$0

$2

$4

$6

$8

$10

$12

$14

USPS Priority 1-Day$5.25

FedEx Ground$8.32

UPS Ground$12.92

Google Shopping$4.99

Amazon Same-Day $8.99

Amazon Prime Air*$1.00

Delivery Fee That Consumers Pay For A Small Package2.2kg (5lb) package delivered within 16.1km (10 miles) in the

US

Delivery

Fee

30 MINUTES SAME-DAY NEXT-DAY

*Launch date unknown, and delivery fee is an estimate

It’s technology that is driving the digital disruption of retail.

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Henry BlodgetCEO & Editor-in-Chief

Emily AdlerManaging Editor

Barbara PengVice President,Research

Cooper Smith Senior Research Analyst

BI Intelligence

Nancee HalpinResearch Associate

BII E-COMMERCE