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From Wall Street to Main Street Deborah Weinswig Managing Director Fung Global Retail & Technology

April 14, 2016

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FROM WALL STREET

TO MAIN STREET:

My Personal Journey

TOP RETAIL TRENDS

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Wall Street Career: The Changing Landscape

In 17 years on Wall Street (1997–2013):

•  Career began in the go-go years of the tech bubble

–  Research directors were saying, “Multiples don’t matter…”

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Wall Street Regulation Timeline

2000 2002 2003 2008–2009 2010 2016

Dodd-Frank Regulation FD Sarbanes-Oxley Global

Financial Crisis

Regulation FD:

•  Response to companies unfairly giving guidance to favorite analysts

•  Leveled the playing field, giving retail investors the same info as the pros

•  But it changed the research process…

•  … and made the analyst job less attractive

Sarbanes-Oxley Act:

•  Response to WorldCom and Enron frauds

•  To protect investors from fraudulent corporate accounting activities

•  Management and financial internal controls

Dodd-Frank Act:

•  Response to US government bailouts during global financial crisis

•  Volcker Rule: restrictions on proprietary trading

•  Financial Stability Oversight Council

•  Macroprudential regulations

Today

Compliance today:

•  Response to global financial crisis, LIBOR scandal, rogue traders (Barings, UBS)

•  Now, 1/3 of sales floor staff are compliance officers

Global Analyst Research Settlement

Global Analyst Research Settlement:

•  Response to banking-research conflicts

•  10 firms (including Citi) paid total fines of $1.4 billion; support for independent research

•  Completely separated research and investment banking (physical, reporting lines, staff, budget, etc.)

•  Analyst compensation no longer tied to banking revenue

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MBAs Migrate Away from Wall Street

•  New talent is gravitating toward tech and entrepreneurial pursuits, avoiding the financial-services industry

•  MBA graduates from Booth pursuing careers in investment banking:

–  33% in early 2000s

–  16% in 2015

24%  

45%  

8%  

24%  

32%  35%  

15%  18%  

0%  

8%  

15%  

23%  

30%  

38%  

45%  

Consul0ng   Financial  Services   Technology   Other  

University  of  Chicago  Booth  Full-­‐Time  Hires  by  Industry,  2015  vs.  2010  

2010   2015  

Source:  University  of  Chicago  

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Global Financial Crisis

•  The last four years on Wall Street have been dramatically altered by the global financial crisis of 2008–2009

•  Global financial crisis

–  Market crash

–  Analyst job less attractive

–  The power of compliance departments was expanded even further

•  Personal crisis …

•  … offering a start toward my next career …

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The Start of My Retail Tech Journey…

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The Start of My Retail Tech Journey…

•  Met ProfitLogic in 2001:

–  Science-based solution for analyzing demand patterns for markdowns in order to optimize price and profit in real time

–  Huge supporter, but could not legally join at the time

•  Acquired by Oracle for almost $200 million in 2005

JULY 2005

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The Intersection of Retail, Fashion and Technology

FASHION TECH RETAIL

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Joined Fung Group to Lead New Global Research Effort in April 2014

•  Head of Fung Global Retail & Technology

•  The knowledge bank and think tank for the Fung Group; focused on analyzing retail and technology trends

•  Differentiate ourselves from sell-side research by focusing on deep dive reports as well as on the intersection of retail, fashion and technology

FUNG THINK TANK

RETAIL TECH

MICRO MACRO

RETAIL REAL

ESTATE

THEMATIC RESEARCH VR

AI

IOT

DIGITAL DIGITAL DIGITAL DIGITAL

HONG KONG NEW YORK LONDON

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Top 25 Retail Trends

1.  Store Traffic

2.  Experiential Retail

3.  Smart Malls

4.  Retail Store Closings and Openings

5.  Owning Grocery

6.  Moving to Omni

7.  Evolving Pure Plays

8.  Winner-Take-All E-Commerce

9.  Loyalty Programs

10.  Social Media

11.  Mobile Payments

12.  Influencers

13.  Social shopping

14. Buy Buttons

15. Consignment

16. Subscription Economy

17. Sharing Economy

18. Rental Economy

19. Caring Economy

20. Silver Economy

21. Internet of Things

22. Artificial Intelligence

23. 3D Printing

24. Jewelry/Art

25. Israel-China Silk Road

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With Store Traffic Down, In-Store Experience Is Key

•  US mall traffic has decreased for 37 consecutive months and continues to be challenging

•  Malls have seen an average 9.1% YoY decrease in traffic since January 2015

–  High-end malls appear less affected

–  General Growth Properties: traffic up 2% in 2015

–  Simon Malls: traffic up 1.5% in 2015

–  Taubman Centers: traffic up in 2015

Source:  RetailNext  

Monthly  US  Store  Traffic:  YoY%  Change  

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Experiential Retail: A Way to Bring Shoppers Back to Stores

•  Urban Outfitters acquired the Vetri Family group of restaurants in 2015

•  Club Monaco collaborated Café Myriade to open an in-store coffee shop in Montreal

Food & Beverage

In-Store Technology

•  Rebecca Minkoff offers interactive mirrors as well as virtual reality headsets in stores

•  Tommy Hilfiger stores have virtual reality headsets that allow visitors to experience runway shows

Custom- ization

•  In March of 2016, Nike revealed its app, Nike+, that gives shoppers the ultimate customized experience

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Experiential Retail: Making the Experience Engaging

•  Urban Outfitters acquired the Vetri Family group of restaurants in 2015

•  Club Monaco collaborated Café Myriade to open an in-store coffee shop in Montreal

Food & Beverage

In-Store Technology

•  Rebecca Minkoff offers interactive mirrors as well as virtual reality headsets in stores

•  Tommy Hilfiger stores have virtual reality headsets that allow visitors to experience runway shows

Custom- ization

•  In March of 2016, Nike revealed its app, Nike+, that gives shoppers the ultimate customized experience

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Experiential Retail: Customization and Personalization

•  Urban Outfitters acquired the Vetri Family group of restaurants in 2015

•  Club Monaco collaborated Café Myriade to open an in-store coffee shop in Montreal

Food & Beverage

In-Store Technology

•  Rebecca Minkoff offers interactive mirrors as well as virtual reality headsets in stores

•  Tommy Hilfiger stores have virtual reality headsets that allow visitors to experience runway shows

2

Custom- ization

•  In March of 2016, Nike revealed its new app, Nike+, that gives shoppers the ultimate customized experience

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Rebecca Minkoff Connected Store Demo

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Data-­‐enabled  personalized  and  Lmely  promoLons  

Track  movement,  behavior  and  preferences  

Beacon-­‐enabled  locaLon-­‐based  adverLsing  

Smart Malls: Reshaping the Physical Shopping Experience 3

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Partnered with HGTV to launch virtual and hands-on technology-based experiences

Formed strategic alliance with StepsAway, an in-mall mobile retail solutions provider offering shoppers smartphone access to hyperlocal in-store deals

Silicon Valley–based unit that designs and develops innovations to improve the retail experience

Smart Malls: Reshaping the Physical Shopping Experience 3

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Retail Store Closings and Openings Continue

2015

•  There was a 7% year-over-year increase in store closure announcements

•  There was 29% less square footage associated with announced store closures in 2015 than in 2014

•  16 retailers closed at least 10% of their stores between 2010 and 2015

–  Teen retailers appear consistently on this list

-70% -60% -50% -40% -30% -20% -10% 0%

Sears aerie Christopher and Banks Abercrombie & Fitch Pacific Sunwear Kmart Restoration Hardware Office Max/Office Depot Aéropostale Saks Fifth Avenue Bebe Stores Hollister US Lands' End Staples Barnes & Noble New York & Company Williams-Sonoma JCPenney Dillard's Rite Aid Corp Gap

Change in Store Base: 2010–2015

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Retail Store Closings and Openings Continue 2016

•  Off-price/discount retailers are expected to see major growth in 2016 as well as fast fashion brands

•  Foreign discount grocers Aldi and Lidl plan to push US expansion

•  E-commerce pure plays are opening stores

Retailer Number of Announced Store Closings

Walmart 269

Men’s Wearhouse 250

Sports Authority 140

Sears 50

Macy’s 40

Kohl’s 18

Retailer Number of Announced Store Openings

Dollar General 1,000*

Forever 21 600

H&M 425

Amazon 400

Under Armour 200

Dick’s Sporting Goods 135–150

Ulta 100

Lidl 50

Aldi 45

Costco 32

Dollar Tree 13

Stein Mart 12

Target 11 *In 2017 Source: ICSC Research/PNC Research

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Owning Grocery as a Pipe into the Home

Grocery Retail:

•  Large customer base + frequency of touchpoints = big opportunity to leverage nonfood offering.

•  In Europe, Tesco led the way in the 1990s –2000s

•  Tesco has expanded beyond its grocery base by cross-selling to its banking and mobile telecom customers

Global Scale

Online Capabilities

Bigger Stores

Brand Building

£~10 billion in group general

merchandise sales.

7.4 million Tesco Bank customers.

4 million Tesco Mobile cellphone customers

Tesco’s Diversification from Grocery

Source:  Company  reports/Fung  Global  Retail  &  Technology  

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Owning Grocery as a Pipe into the Home

Similar opportunities today for grocery discounters Aldi and Lidl:

•  Aldi and Lidl launching non-foods online in selected markets (UK, Germany, Belgium)

•  Discounter store sizes have been increasing

•  Weekly nonfood special deals are already footfall drivers

•  Average discounter basket size in the UK up by 47% in five years—suggests growing shopper trust (source: Kantar Worldpanel)

•  Frequency of visits increasing in the UK (source: Kantar Worldpanel)

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Moving to Omni: Tech Investments Help Feed the Digital Shopping Habit

•  Retailers are raising capital-spending budget for technology projects

•  There is a 75% correlation between capex/sales and e-commerce sales/total sales for selected retailers:

“You have to spend money to make money”

Retailer Capex and Capex/Sales (2015)

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Source:  eRetailer/company  reports/Fung  Global  Retail  &  Technology  

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Moving to Omni: Operations and Channels

•  L Brands moved to integrate its Victoria’s Secret direct-sales business — online — into the store businesses

•  Victoria’s Secret discontinued catalogs in 2016, saving $100 million annually

•  Aim to offer a seamless shopping across mobile, online and in stores

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The Seamless Experience

Same-day Delivery

•  From test phase to full-scale operations:

–  Kohl’s expands same-day delivery to 7 new markets with Deliv (April 2016)

–  Best Buy expands same-day delivery to 13 new markets with Deliv (April 2016)

–  Macy’s already in 17 markets with Deliv

Click & Collect

•  Amazon UK has partnered with Barclays to use its outlets as collection points for deliveries

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Evolving Pure Plays (Number of Actual/Planned Physical Stores)

AMAZON

ATHLETA

CASPER

AYR

YOGIBO

HARRY’S

1 400 120 1 3 2

3 21 1 1 7

4 27 25 12 2

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Evolving Pure Plays

•  Millennials prefer mono-brand brick-and-mortar stores, and they shift between online and offline along the shopping journey

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(10%)

5%

20%

35%

50%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Amazon Sales Growth US Total Retail Sales Growth

Amazon Annual Sales Growth

Winner-Take-All E-Commerce: Amazon Sales Growth Far Outpaces US Retail Sales Growth

•  Amazon accounted for $0.51 of every $1.00 of growth in US e-commerce in 2015

•  The company generated 24% of total US retail growth

•  Amazon’s apparel business is expected to grow from 5% of the total US apparel market in 2015 to 14% by 2020 (Cowen & Co.)

Source:  Bloomberg/US  Census  Bureau    

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Winner-Take-All: Amazon Leads Fashion Apparel Market

•  Winner: Amazon led the group of the top 19 apparel companies with growth of 26% in 2015

•  Runners-up: Fast fashion top 5 included Inditex and H&M

•  Declining players: Walmart’s apparel division and Gap and Macy’s all posted sales declines for the year

•  Key Brand Partnerships: Amazon has recently partnered with Kate Spade, Calvin Klein, Lacoste, and Nicole Miller

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2015 Annual Sales Growth by Company

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•  Smartphone based

•  Integration of tracking status, payment, gift cards, etc.

Loyalty Programs: Apps Will Dominate

•  Cards with bar codes, reward programs

•  Use of gamification (membership levels, points, leaderboards)

Last-generation

Loyalty

Tomorrow’s Loyalty

Today’s Loyalty

•  Coupons, membership cards

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•  Integration with credit cards, gift cards, etc.

•  Round-up on purchases + 15% savings bonus

•  180+ redemption options

Loyalty Programs: Case Studies

•  Re-launched in February 2016

•  Game allows users to win free dessert, drink, or GrubHub credit after placing five unique orders

Partnerships

Mobile

Gamification

•  Launched in May 2015

•  Retailers: Macy's, AT&T, Rite Aid, Enterprise Rent-A-Car, Hulu

•  Links existing store loyalty cards to their Plenti account

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App   2016/2015    AcLve  Users  (Mil.)  

Approx.  YoY  Change  

WhatsApp   1,000   37%  

QQ  Mobile   860   5%  

Facebook  Messenger   800   53%  

WeChat   650   37%  

Skype   300   27%  

Viber   249   29%  

LINE   212   57%  

Snapchat   100   45%  

Social Media: Occupies Consumers’ Leisure Time

•  Adults spent an average of 109 mins. per day in 2015 on social media sites such as Facebook, Twitter and Instagram

•  Consumers spend 84% of their time in only five apps each month: One or two are likely social media, instant messaging, etc.

Source:  Company  Reports,  Quartz,  TechinAsia  

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Social Media: Snapchat Reaches Millennials

•  Snapchat users view 7 billion videos per day and address a young audience

Source:  CivicScience,  “Insight  Report:  Who  is  the  Snapchat  User?  Profiling  the  Snapchat  Fan”  

Snapchat Users’ Demographic Profile

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Social Media: Burberry Snapchat Campaign

•  Burberry becomes the 1st luxury brand to run a Snapchat Discover channel native ad

•  Printing codes on products to encourage customers to use Snapchat in-store

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Mobile Payments: Samsung Pay Changes Landscape

•  Apple and Android pay require near-filed communications (NFC) chips for payment

–  Negative: Require retailers to install new equipment

•  Samsung uses magnetic stripe capability (MST) chips for payment

–  MST compatible with new and older credit card terminals – no additional invest required

–  Most-widely accepted mobile wallet in the US

–  Consumers can enlist loyalty cards into Samsung Pay

–  Receive coupons and discounts directly to Samsung account

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

•  Customer adoption remains hurdle, shoppers need incentive

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Mobile Payments: Samsung Pay Changes Landscape

# of Accepted Locations

700,000 > 30 million > 700,000

+

•  Apple Watch is compatible

•  Secure – Unique security code for each transaction

•  Compatibility with existing terminals

•  No additional investment for retailers

•  Works any Android device

•  Support from major retailers: Staples, Walgreens, Wholegoods

–

•  Only works with NFC-enabled registers

•  NFC terminal cost retailer $500 or more

•  Not accepted by major retailers: Walmart, Target, Best Buy

•  Limited device options - Samsung Galaxy S6

•  Magnetic strip reader requires tricky position for phone

•  Uses NFC technology

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Mobile Payments: Peer-to-peer payments explode on WeChat

32.1 billion red envelopes

516 million Users *

Chinese  Lunar  New  Year  2016  

~74% of all WeChat users

903% Y-o-Y growth since introduction of

red envelopes

* Over 92% of those senders were reportedly between the ages of 20 and 29

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Snapchat Cash

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Influencer Word-of-Mouth Marketing Gains Momentum 12 •  Brand influencers: advocates on social media platforms

and review sites to support brands they love

•  Influencer marketing:

-  81% of marketers found IM effective in 2015

-  59% of marketers will increase IM budgets in 2016

•  Influencer marketing agency is now a booming industry

•  Each month over 50 million people watch over 1.6 billion minutes of fashion and beauty videos in more than 45,000 YouTube channels

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12

Target collaborates with Joy Cho, a popular designer and

blogger. They also launched Oh Joy for Target collection, an exclusive

party-inspired Home line

Emily Schuman a much-followed fashion blogger, author and

designer launched her Cupcakes and Cashmere collection in

collaboration with Nordstrom

Blogger star and entrepreneur Michelle Phan launched her own makeup

line, Em, with L’Oreal

Influencer Word-of-Mouth Marketing Gains Momentum

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Harnessing Social Media Influencers with MuseFind

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Social Shopping is Made Simpler 13 •  Buy on social media platforms without switch

apps or websites

•  WeChat is a pioneer in social shopping

45%

44%

30%

25%

22%

20%

16%

Reading reviews, comments and feedback

Receiving promotional offerings

Viewing advertisements

Staying on top of current fashion and product trends

Writing reviews, comments and feedback

Associating with particular brands and retailers

Purchasing products directly via a social media channel

How Social Media Influences Shopping Behavior

Source:  PWC  

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NICE: Brands Campaign Aggressively on China’s Instagram

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More Social Shopping Enhanced by Buy Buttons 14 •  In 2015 Pinterest introduced “Buy it” button, and

Instagram expanded its ad program.

•  Twitter, Facebook and YouTube also becoming more commerce-friendly and are experiment with buy buttons

Source:  Pinterest  

Pinterest users’ average order value is $123.50, which is about 126% higher than Facebook users’ average of $54.64 (source: Javelin Strategy & Research)

Oct 2015: Facebook Tests Buy Buttons

May 2015: Google Search Buy Button

Sep 2015: Twitter Buy Button

Sep 2015: YouTube Buy Button

June 2015: Pinterest Buy Button

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Consignment: 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 $300 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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Poshmark and the Consignment Economy

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Subscription Economy: Beauty and Fashion Are Growing

•  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

•  Office supplies present an opportunity

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Sharing Economy: “Uberifying” Virtually Every Industry

Disruptors: Uber, Airbnb, Lending Club, WeWork

•  Valuations of sharing-economy companies have skyrocketed

•  Revenues are projected to catch up to aggressive valuations

•  Sharing-economy market:

$15 Billion 2013

$335 Billion 2025

CAGR: 29.5%

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Sharing Economy: Millennials Like Sharing Plans, but Want to Own a Car

•  20% of millennials take public transit once a week or more, compared with just 7% of Gen Xers and 10% of baby boomers

•  35% of millennials indicated that they plan to purchase a vehicle in the next 12 months, compared to 25% of all US adults surveyed

•  Millennials lease cars more than any other generation, and are leasing 50% more often today than they were five years ago

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Rental Economy: Fashion Rental Leading

Following Rent the Runway, a new generation of fashion-rental companies has emerged

Disruptors: Style Lend, VillageLuxe, Le Tote, Lena the Fashion Library and Borrow For Your Bump (maternity)

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Caring Economy Promotes Startups for Social Good

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

•  Promotes social activism over self-indulgence

–  Consumers, especially Gen Z, demand integrity from brands and retailers

•  Startups with social missions 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; sources sustainable fabrics and vintage garments

–  Kohl’s Cares gives back to communities with Salina Yoon children’s books

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How an Aging Population Will Change the World

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Silver Economy: Demographics Create Opportunities

•  “The Grey Market” : older consumers may be an engine of growth in the sluggish global economy

•  Silvers are those aged 65–85 years old, while super silvers are 85+

•  The United Nations forecasts that the 60+ age group will grow from 12.3% of the global population in 2015 to 16.5% in 2030

•  In 2015, consumers aged 65+ accounted for around $7 trillion, or approximately 17%, of total worldwide consumer spending

•  Spending by silvers is expected to grow 114%, 2015 – 2030, outpacing population growth of 56%

Source:  UN  Department  of  Economic  and  Social  Affairs,  PopulaQon  Division,  World  Popula0on  Prospects:  The  2015  Revision/InternaQonal  Labour  OrganizaQon,  World  Social  Protec0on  Report  2014–15/Euromonitor  InternaQonal/Fung  Global  Retail  &  Technology  

56%

114%

Population Spending

Estimated Growth in Senior Population and Spending by Seniors, 2015–2030

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Silver Economy: Demographics Create Opportunities

•  In 2030, seniors are projected to account for around $15 trillion, or approximately 23.5%, of total spending

•  Products for silvers:

–  Health apps, cell phones and medical alert devices

–  Kanega smartwatch offers discreet support for falls and medication reminders, and guards against wandering

20

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Internet of Things: Direct-to-Consumer

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Internet Of Things: Overview

•  The global market size of the retail IoT is estimated increase from $14.28 billion in 2015 to $35.64 billion in 2020, representing a 20.07% CAGR.

•  It is estimated that in 2020, retailers worldwide will spend $2.5 billion per year on IoT-related hardware:

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Internet of Things: Wearables - Beyond Fitbit

•  Wearables are becoming increasingly smart

–  Altra IQ Smart Shoes use sensors to give feedback about running and walking habits, revealing why some muscles or joints hurt

–  Medical-grade Embrace watch alerts caregivers to any unusual physiological events of watch wearers,

Source:  EmpaQca  

Source:  BusinessWire  

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Artificial Intelligence and Machine Learning

•  Predictive analytics and machine learning used for generating recommendations; key driver across industries

35% of Amazon sales, 50% of LinkedIn connections and 75% of Netflix views are driven by recommendations

Stitch Fix

•  Subscription service that uses AI and human judgment to recommend apparel to shoppers

•  Subscribers receive a curated box with items

Lewk

•  An algorithmically curated monthly menswear box

22

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3D Printing: Clothes, Footwear, and Accessories

•  The 3D printing industry was valued at $11 billion in 2015, and is expected to grow to $26.7 billion by 2019, a CAGR of 27%.

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Jewelry/Art Taking Increasing Share of Consumers’ Wallet 24

•  High-end consignment jewelry platform

•  Merchandise, appraise, photograph and serve

•  Partnered with E-bay valet

•  Curates emerging artists

•  “Democratize" the process of selling artwork

•  Connecting artists directly with collectors

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Israel-China Silk Road

•  Are Israel and China creating a Silk Road for startups?

•  China is a “mobile first” country

•  Chinese companies are developing apps

•  In 2014, Chinese investors invested US$302 million in Israeli companies, and in 2015, that number rose to more than US$500 million, a significant increase.

25

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Bonus Trend: Beauty

•  Disruptors: Sephora, Lancôme, Mink, Cover Girl

•  Sephora implemented the Virtual Artist, allowing users to try makeup online which they can filter by color, brand, and price

•  Lancôme introduced Le Teint Particulier at select Nordstrom stores in which computers scan the users skin tone and customize the final blend using eight different hues.

•  Cover Girl’s beauty app, BeautyU, has profiling features to add personalization to recommendations

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Q & A Deborah Weinswig

Managing Director of Fung Global Retail & Technology

deborahweinswig@fung1937.com

US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016

April 14, 2016