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Retail Industry Monitor May 2012

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THE SAMPLE CONTAINS EXCERPTS FROM A STUDY CONDUCTED BY SUTHERLAND GLOBAL SERVICES FOR ITS CLIENT. THE SAMPLE MAY NOT CONTAIN ALL THE PAGES OF THE ORIGINAL DOCUMENT THIS SAMPLE HAS BEEN PREPARED BY SUTHERLAND GLOBAL SERVICES INC. OR ITS ASSOCIATES OR AFFILIATES (“SUTHERLAND GLOBAL SERVICES”) EXCLUSIVELY AS AN ILLUSTRATIVE SAMPLE ONLY AND IS SENT TO AUTHORISED RECIPIENTS SOLELY FOR THE PURPOSE OF EVALUATING SUTHERLAND GLOBAL SERVICES’S SUPPORT SERVICE CAPABILITIES. THIS SAMPLE SHOULD NOT BE CONSIDERED AS AN OFFER TO SELL, A SOLICITATION TO BUY, OR AN ENDORSEMENT OR RECOMMENDATION OF ANY COMPANY. SUTHERLAND GLOBAL SERVICES DOES NOT GUARANTY THE ACCURACY, COMPLETENESS OR OTHER CHARACTERISTICS OF THE DATA / INFORMATION OF THE REPORT. This Sample may not be reproduced or distributed (in whole or in part) to any third party without the express prior permission of Sutherland Global Services. Sutherland Global Services may also have (or have had) arrangements with entities whereby Sutherland Global Services receives or is in receipt of information relating to the subject matter of this Sample that is confidential or proprietary to a third party, and thus may not be utilized. Accordingly, Sutherland Global Services may be in receipt of relevant information that is not reflected in this Sample.

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Retail Market Monitor Client • The client is a leading retailer based out of US, and wished to be updated with “current happenings” in the US retail industry on quarterly basis

Project Scope • Key objectives of the study were to highlight macroeconomic factors which impact US retail industry, identify key trends in the US retail industry and gather thoughts of the retail industry CEO

Sutherland’s Solution • SGS conducted secondary research to understand the impact of macroeconomic factors on US retail industry; SGS further deep dived to identify key trends in US retail industry • Thoughts of the retail industry CEO regarding industry growth and strategy were also captured for the report • Brief overview on Big data analytics in the retail industry was also provided as a part of key theme in the retail industry for the quarter

• Benefits to the Client • The project provides significant and exclusive intelligence to the client with regards to the “current happenings” in the retail industry each quarter – in turn enabling the client to align its own strategy and take corrective action

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U.S. Retail Sales Performance U.S. Retail Sales #($B) CAGR 2009-2011

Total Retail Sales

$3,028

$3,155

$3,337

5.0%

Total Retail Sales

5.8%

2009

2010

$209

Others

$493

Food services and drinking places

$397

Non-store retailers

3.2%

$631

General merchandise stores

4.9%

$226 $275

Clothing and clothing access. stores Health and personal care stores

$615

Food and beverage stores

$300 $101 $90

Building mat. & supplies dealers Electronics and appliance stores Furniture and home furnishings stores

4.2%

12.9%

4.2% 3.8% 5.8% 1.2%

1.7%

2011

Furniture and electronic retail sales have remained sluggish over the last three year period as consumers lowered discretionary spending Growth of food and beverage and food services segment sales has primarily been due to the rising food costs and not necessarily due to increase in overall demand At 12.9%, Non-store retail has been the fastest growing segment driven by strong growth of ecommerce. However, at an overall level, in 2011 non-store retail accounts only c. 11.9% of the total retail industry, and ecommerce only c. 5.8% Industry analysts expect growth in 2012 to be in the range of 4% -5%, similar to the growth in 2011

Macro Economic Factors Impacting U.S. Retail Unemployment Rate (%)

Consumer Confidence Index

10.5

80.0

70.8

10.0 60.0

9.5 9.0

40.0

8.5 20.0 8.0

8.2

7.5

0.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010

2011

Although unemployment in March 2012 dropped to a three-year low of 8.2%, the overall level remains elevated, well above the pre-recession (2006-08) levels of 4%-5% Recent drop in unemployment rate is also attributed to reduced labor force participation in the job market due to existing weak job prospects Over the last few months, the consumer confidence index is seen to regain momentum, reaching close to the highest levels seen during the last three year period

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2012

Source: US Census Bureau , Colliers International, Great American Group

2010

2011

2012 # Retail

Sales considered excludes Auto and Gasoline Sales

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Key Trends in the U.S. Retail Industry

• According to Forrester Research, revenues from U.S. m-commerce is expected to hit $11B by the end of 2012 and will be growing at CAGR of 39% over the next five years. M-commerce currently contributes only 2% of e-commerce sales

Increasing focus on m-commerce

• Retailers view m-commerce as a sales channel as well as a sales driver: either to sell via m-commerce directly, or to engage with customers who may eventually translate into sales via other channels (like brick and mortar) • Retailers also identify m-commerce as one of the top strategic initiative. As per a survey conducted by National Retail Federation (NRF), 4 out of 10 retailers mentioned that building their mobile shopping and payments capabilities will be one of the key priorities and 2 out of 3 retailers expect to increase their m-commerce budgets in 2012

• Several big-box retailers have started rolling out smaller store formats or subleasing excess space to local businesses to improve efficiency

Retailers move towards smaller store formats

• For example, in May 2011, Wal-Mart announced its plans of opening smaller store formats (~15,000 sq.ft) called Wal-Mart Express which would be one-tenth the size of standard Wal-Mart Superstore • Best Buy has also announced to shift its focus on increasing its smaller store format by opening 100 new ‘Mobile Stores’ and decrease its big box square footage by 20% through store downsizing and closures. The ‘Mobile Store’ format has an average store space of ~1,420 sq.ft compared to Best Buy’s standard format that has an average space of ~38,570 sq.ft.

• A 2011 Gartner survey found that social media ranked in the top four action points for mid-size retailers## in the next 18 months

Increasing use of social CRM for customer service

• Additionally, 81% of Fortune 500's 100 largest companies in retail are conducting customer service and support on social media. Of the 81%, 75% are using Twitter to provide customer service, 56% are on Facebook, 25% have communities, 25% have blogs and 6% use video. ‘Strengthening customer relationship’ and ‘enhancing brand awareness’ are the key objectives of retailers through their presence on social media • Customer interactions through social media are still mainly on mass scale rather than on a one-one basis and it is surprising that it is so, because of twitter’s capabilities to enable and foster one-one interactions (a case in point is Flipkart, India; Twitter handle: @Flipkart)

Source: Forester, NRF, Gartner, Jones Lang Lasalle, News Articles

## Retailers with revenue between $250M and $1B

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Industry Pulse – Views of Retail Industry Executives Retail CEOs’ Focus Areas for Growth

% respondents, with respondents being allowed to choose multiple options • Retail CEOs are wary about setting up overseas operations and are placing most of their bets on existing markets. CEOs are largely focusing on organic growth and those who are planning to grow by acquisition are doing the same opportunistically: by buying groups of stores out of bankruptcy or divestures • As most retailers are intending to focus on existing markets, emphasis on customer loyalty is expected to increase, that being one of the key levers to gain market share • ecommerce as a channel is expected to be the biggest priority for growth. About 90% of CEOs in North America are planning to increase their usage of e-commerce as a part of their overall growth strategy

Increased Share in Existing Markets New Products/Service Development New Geographic Markets Mergers and Acquisitions New Joint Ventures and/or Strategic Alliance 0%

10%

20%

30%

Factors influencing CEOs’ need to change strategy

40%

50%

% respondents, with respondents being allowed to choose multiple options •

Customer Demand Uncertain Economic Growth

Competitive Threats

Changes in Regulation

Industry Disruption 0%

20%

40%

60%

Customer expectations and attitudes are changing dramatically because of which staying abreast of changing customer behavior has become imperative CEOs are expected to increase investments in analytics to better understand their customers Two-thirds of North American retailers plan to increase their usage of social networks for customer interactions Building Omni-channel retailing would be a key priority for retailers as CEOs believe that crosschannel integration would be the ‘game-changer’ to fight competition over the next few years

80%

Source:PWC © 2012 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

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Key Theme – Leveraging Big Data Analytics in Retail (1/2) What is Big Data Analytics? •

Big Data is a term used to describe the voluminous amount of unstructured and semi-structured data a company creates

This type of data takes too much time and cost to load into a relational database for analysis. Although Big Data doesn't refer to any specific quantity, the term is often used when speaking about petabytes and exabytes of data

Big Data analytics involves use of advanced analytic techniques on big data sets. Big data analytics aims to derive business intelligence through blend of big data and advanced analytics

Adoption of Big Data by Retailers •

A survey conducted by The Data Warehousing Institute (TDWI) Research indicates that globally roughly three quarters (74%) of the organizations surveyed have adopted some form of analytics today, regardless of the analytical method or tool type, irrespective of being done on big data or not

Currently about 34% of the organizations apply advance analytics to big data. Adoption rate of big data analytics in retail stands at 31%, much below the average adoption rate of 34% and also below the adoption rates of others industries such as insurance (37%), telecom (37%), manufacturing (37%) and utilities (35%)

How can Big Data Analytics help Retailers ? •

The terabytes of data that retailers have amassed can be leveraged using big data analytics to understand evolving needs of customers, spot trends, and create new products and services. This would help retailers to better understand consumer preferences and manage merchandise more efficiently

Retailers can run instant alternate pricing scenarios using big data analytics, enabling inventories to be reduced and improving profit margins

Retailers can leverage big data analytics across various functions such as marketing, merchandising, supply chain and operations

Source: TDWI, CEBR © 2012 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

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Key Theme – Leveraging Big Data Analytics in Retail (2/2) Examples of Retailers Leveraging Big Data Analytics Retailer

Objective

Cross-Selling

Description •

Amazon.com employs collaborative filtering to generate “you might also want” prompts for each product bought or visited

At one point, Amazon reported that 30 percent of its sales were due to its recommendation engine

The company has developed a behavioral segmentation and a multi-tier membership reward program which has helped it substantially increase sales of higher margin products from its affluent customers

The company has integrated customer databases with information on some 60M households, tracking such things as their income, housing values, and number of children

Targeted e-mails based on this information obtained 10 to 18 times the response rate of e-mails that are not targeted, and the company is able to create different versions of its catalogs attuned to the behavior and preferences of different groups of customers

eBay has conducted thousands of experiments with different aspects of its Web site to determine optimal layout and other features from navigation to the size of its photos

Customer Micro Segmentation

Customer Acquisition

Placement and Design Optimization Source: McKinsey Global Institute

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End of Presentation

Š 2012 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

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