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Digital retail Analyzing the effect on retailers






Foreword Dan Valerio Partner, Americas Director, Retail & Wholesale Sector Ernst & Young LLP

The retail industry is not one unfamiliar with change. New products, new formats and new technologies have always been elements any progressive retailer has had to embrace and successfully integrate into its core strategies. This is done not only to stay current, but to provide customers with the opportunity to rediscover its brands and enjoy an even greater shopping experience. However, it is hard to imagine a time when technology has changed so radically and rapidly as it does today, and where such change has had such an immediate effect on the consumer and retailer alike. In this report, we explore how the internet and mobile technology are reshaping consumer behavior, behavior that leading retailers will undoubtedly need to make the foundation for their strategies for the future. A future that likely will change faster than the hot fashion trend for spring, or the latest cool toy for the holidays.

Š 2012 Ernst & Young LLP. All Rights Reserved.




Introduction Ten years ago, the internet was barely on anyone’s radar. Fast forward to today, and it’s the third-mostshopped channel each week, after supermarkets and mass merchandisers, according to WSL Strategic Retail’s How America Shops® MegaTrends 2012 report. Technology is reshaping the retail environment faster than ever, causing retailers and brands to rethink how they currently do business. Shoppers are doing more research before they buy by using the internet to pre-shop, price compare, read reviews, browse and purchase at any time, day or night. Online access and usage has increased significantly, even in the past year. The number of hours spent online is 23 hours a week, up 7 hours from one year ago. Mobile technology has taken this even further, giving shoppers access to the internet and the ability to shop from anywhere. This has changed shoppers’ “path to purchase,” impacting the way they come to, and ultimately buy, products and brands. Today’s retail world is virtually unrecognizable from the one a decade ago. Commensurate with the tremendous rate of change, the next five years is expected to look very different from the last five. With this comes significant implications for retailers and brands.

It began with the internet Internet shopping has evolved far beyond travel, books and music downloads. Shoppers are buying more categories online, including fashion, health, beauty and groceries. Once shoppers buy a category online, they become comfortable and start doing it more frequently. Research has shown that half of shoppers now buy electronic goods online, up 20 percentage points from 2009. Of those, 45% buy the category online two to three times a year. These statistics help explain a large electronics retailer’s announcement that it will reduce its overall store square footage, even subleasing store space to smaller retailers. Large stores carrying many different product lines are no longer required as customers turn to online sales channels. Internet shopping has had a significant impact on many categories in bricks-and-mortar stores, with shoppers showing a preference for internet ordering and re-ordering of bulkier items (electronics, baby goods, wine, hair care) to be delivered direct to their door, often at better prices.

Online purchasing Incidence Base: Total women

Clothing Books Travel Fashion accessories Electronics Skin care Cosmetics Office supplies Fragrance Hair care Rx medication OTC medication Groceries

Buy online 2011 % 72 65 60 55 50 39 37 35 34 31 23 20 17

Change vs. 2009 ppts. 3 -5 -9 7 20 4 3 -20 4 10 5 13 1

Frequency Buy online 2-3 times/year % 73 46 41 58 45 57 58 41 50 61 78 62 62

Source: “How America Shops® From Buzz to Buy 2.0,” WSL Strategic Retail, September 2011

© 2012 Ernst & Young LLP. All Rights Reserved.

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Information and the rise of social retailing The internet has not only enabled e-commerce sales, it has completely transformed the way we shop. Pricesavvy consumers have become smarter than ever, using the internet to research goods and products before they buy. Price comparison websites and consumer forums are frequently browsed during shoppers’ “path to purchase.” When shoppers decide what to buy, manufacturer and retailer websites were in the top three most popular sources of information, compared with sales associates in stores and television and magazine advertising. Social networking has affected the way shoppers come to brands and products. Various demographics are accessing sites telling them what to buy and where. Exchanging opinions with others before purchasing goods is a frequent event. Shopper reviews have gained tremendous influence; many shoppers consider them more trustworthy than retail sales associates. Social media is more than an information source, however — it’s a key selling tool. Retailers and brands have realized the importance of social media in shopping decisions and are reallocating resources to support social media efforts. One large retailer has developed an app that uses information available on a social media site to help shoppers find gifts for their friends. Any user who “likes” the app can browse through all of their online friends and view their friends’ interests with a customized list of recommended gifts available to purchase on the retailer’s website.

Online research drives the buy … for many categories We looked at categories researched by shoppers online and those they ultimately bought online, to assess conversion rates. The highest conversion rates, those in which online research drives the buy, are in categories such as baby products, books, pet products, clothing and groceries. Cars have the lowest conversion rate at 35%, suggesting that it is a category shoppers look for information online, but few actually buy online. The same is true for sports equipment as many consumers like to try before they buy. For the majority of categories, however, the narrow range around most of the conversion rates suggest that when people do go online to research, they intend to buy.

Conversion: Research to Buy Base: varies by buyers of categories Consumer products Baby products Books Pet products Clothing/fashion accessories Men’s personal care/grooming Household groceries Women’s beauty products Foods/beverages Health (Rx, OTC, vitamins) Home (fragrance, décor) Electronics Computers/software Sports and fitness equipment Cars Services, experiences and entertainment Restaurants/clubs Entertainment Vacations and lodging Cable TV/cell phone service Financial services

Research online %

Conversion %

16 31 28 30 13 15 36 27 34 20 48 37 15 23

80 78 76 76 76 76 75 75 70 68 67 61 52 35

32 39 32 20 15

74 70 63 59 43

Source: “How America Shops® From Buzz to Buy 2.0,” WSL Strategic Retail, September 2011

© 2012 Ernst & Young LLP. All Rights Reserved.

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Mobile muscles in Mobile commerce is perhaps the biggest game changer of all. With the growing accessibility of smartphones and faster technology, suddenly people have access to the internet – and internet shopping – at their fingertips. Shopping has truly become anywhere, anyplace, anytime. Ten percent of the population has used shopping apps on their mobile devices, be it to secure discounts, find stores or compare prices. Retailers also realize that mobile technology has transformed the in-store experience. IPads are available in several retailers’ stores for shoppers to view catwalk shows, browse product specifications and to enter their information for customer relationship management purposes and marketing lists. Apps allow shoppers to scan QR (quick response) codes to redeem coupons at store checkouts and collect or use frequent shopper reward points.

Incidence of mobile use

2011 2010 Change (ppts.)

Regularly use a mobile

Have a mobile with internet access

Used a mobile for internet access

Used mobile in stores

Downloaded an app

88% 87%

57% 44% 13

48% 27% 21

41% N/A

1

49% 33% 16

N/A

Source: “How America Shops® From Buzz to Buy 2.0,” WSL Strategic Retail , September 2011

Mobile shopping has enabled retailers to find new places to sell beyond stores. One UK-based retailer has commenced virtual grocery stores in subway stations and airports, where shoppers can view images of products, scan a QR code to add items to their baskets and buy through their phone. The product is delivered to their home, with no need to go to a physical store. By eliminating the need for shoppers to enter a bricksand-mortar environment, or to be at a computer, digital technology appears to have truly extended this retailer’s reach.

Implications for retailers and brands The rise of a new digital shopping world creates many retail implications. Some immediate foreseeable impacts that can have both operational and financial implications are:

1. Physical (bricks and mortar) stores won’t be going away entirely, but they will change. Store closures are expected as chains no longer need as many physical stores. Store size will also change, as categories go online (e.g., smaller footprints, retailers leasing out space). This will drive leasing decisions, physical layout and merchandising plans.

2. Retailers will find ways to rethink shopper loyalty to create reasons for shoppers to come to their stores. This will include differentiated in-store experiences, enhanced service models and new loyalty program benefits. Exclusive brands and products will also become important to retailers, as a way to differentiate from the competition. These changes can affect the accounting for many pre-existing loyalty plans, or create newer and more complex structures.

3. Transactions will occur more in the digital space, which means retailers will turn to multi-channel models including online, mobile and social commerce, and virtual stores, in addition to physical stores. As these virtual transactions occur, retailers will need to ensure that their revenue recognition policies and practices are appropriate and supportable.

© 2012 Ernst & Young LLP. All Rights Reserved.

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4. Multi-channel retailing will provide a strategic advantage to companies by virtue of the transactional and behavioral shopper data gained, but with that will come a greater need to mine and leverage this data more effectively. Additional stress may be put on existing systems and the people that operate them. Ability to manage and utilize larger data warehouses of critical information will be imperative.

5. All of the impacts above create massive supply chain implications. The most obvious – the inventory implications of fewer physical stores, less inventory in stores and a multi-channel model. There are also significant organizational implications. Leading retailers will be out in front of the competition utilizing these new technologies to enhance their supply chains, while identifying efficiencies and cost effectiveness as critical components to competitive advantages.

The future is now Technologically enabled change to our retail world is happening faster than we can write about it or study it. Mobile devices are already changing consumer experiences in many shopping venues, and several retailers are testing new concepts from enhanced self-scanning to mobile scanning and checkout and beyond. The reality is that the future is here. Consumers are becoming increasingly comfortable with using digital technology in the shopping environment and presumably will more frequently measure a retailer on how well it supports this change. The challenge for retail companies is how well they can adapt, how wisely they can make spending decisions on new technology, and how best they can use technology to continuously connect with their greatest asset — the consumer.

Š 2012 Ernst & Young LLP. All Rights Reserved.

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