Viewpoint on Retail Performance

RETAIL PREDICTIONS 2013

As sales are tallied and the books closed on 2012, it is quite clear that 2012 was not the breakout year that retailers were looking for. Retailers went into the final holiday push with a hope that improving economic and employment numbers would mean fewer discounts for holiday shoppers, and many retailers announced record hiring in anticipation of demand that never materialized. As it turned out, retailers were forced to layer discounts on top of promotions in order to drive even the tepid same-store increases the season brought. This will absolutely have a negative impact on profitability, and we have already seen some retailers guiding down. This likely means that we will re-enter the "bust" part of the boom and bust cycle, which also has implications for downstream partners in wholesale and manufacturing in the upcoming months ahead. We will be keeping a close eye on the final numbers and, as always, will bring you our monthly commentary. Now it's time to turn away from the rearview mirror and look around the corner. It's time for our annual predictions for the coming year. And now, on behalf of the AlixPartners Retail Team, we offer our Top 10 Retail Predictions for 2013:

#1 The Need for Speed

The invasion of sophisticated global retailers who are fast fashion and fast to market, like H&M, Zara and Uniqlo, will continue to challenge and take market share from slower U.S. vertically integrated specialty retailers and department stores. Organizations that cannot build speed and flexibility into their supply chains will continue to be left behind as consumer expectations for freshness and speed increase. Proper product stratification, with flexible supply chains to support different product types, will help create a successful route to faster product.

#2 There's No Place Like Home

With the housing market finally stabilizing and in many cases improving, people will really unleash spending on renovations and updates to their existing homes. Not everyone can just move, after all. This will be a boon for home improvement retailers as well as for home dcor and furnishings retailers. Electronics retailers will also benefit from the purchase of home entertainment systems and components. Non-traditional retailers should think creatively about how they can tap into this likely trend.

#3 Big Data is a Big Deal

Big Data has been a buzzword, but it will break into the mainstream in 2013, and retailers that learn to fully leverage its power in assortment, pricing, and inventory decisions will enjoy a massive competitive advantage. The ability to sift through huge volumes of data to spot trends and use that information to quickly adapt product, stores, services, offerings, etc. will drive superior performance. Big Data will never replace that pure retail instinct, but even the most instinct-driven retailers can benefit if they embrace it.

#4 Internet Taxes Get Tougher

Internet tax advantages over brick and mortar disappear almost entirely. Ten states already require collection regardless of local origin and this number is set to explode as governments look to fill depleted coffers and put local merchants back on equal footing. Federal law may be amended as well. We will finally find out how much the sales tax advantage (or disadvantage) matters. Our suspicion is not very much, by the way, as pure- play retailers will always be able

to undercut traditional retailers on price. We think this is a tempest in a teapot, but one thing is for sure state governments are the certain winners.

#5 The Demise of the Daily Deal

The retail industry will continue to stray away from Daily Deal promotions, particularly among best-in-class retailers and restaurants, where their existing customer base, marketing methods, and margins prove to be more attractive. However, in the luxury segment, a small group of dominant daily-deal players will emerge. Two years ago we predicted that the Daily Deal love affair would cool off and it has. Now it's going to fade away completely, except for the smallest retailers, and even they would be wise to stay away.

#6 More Droughts in the Food Deserts

Regional grocers will continue to succumb to the bifurcation of traditional food shopping channels and changing baby-boomer and millennial-consumer shopping patterns, driving further consolidation and closures. Value-based retailers, such as dollar stores and food discounters, will continue to pull market share among mid- to high-income customers who were previously off their radar. On the plus side, we do see a "filling in" of urban centers with innovative food-based concepts on the horizon, but critical mass is still years away as few have cracked the code yet.

#7 Just for Show Where is Service Merchandise When We Need It?

Product manufacturers will look to connect more directly with customers to highlight product offerings and drive interest, as channels blur even further. We will see even more retail "stores" that are for demonstration only and do not sell products. These display stores drive traffic to online e-commerce sites for fulfillment, much like the furniture model of today. Limited sales will take place for close-out floor and sample items. Anyone remember Service Merchandise? We expect to see that model make a showing as well as see distribution centers become "stores."

#8 The Rise of the Omni-Channel Retailer

We will start to see dividends from what has been a long and drawn-out split into two groups: The first group (which bemoans online competitors who do not pay sales tax, benefit from showrooming, and maintain lower cost structures) will decline into bankruptcy slowly and painfully. The second group will exploit the differentiated value of physical stores with a complementary online experience. This omni-channel value proposition will emerge as the real competitive advantage vs. pure-play online retailers and will help to regain market share. To be sure, margins will be tighter for everyone. But the second group, after figuring out the importance of omni-channel, will now turn to getting their cost structures more competitive to be able to deliver higher profitability in the future.

#9 Online only? How anachronistic!

Look for the expansion of pure online retail concepts, including catalog DTC retailers, into traditional four-wall brick-and-mortar storefronts in regional malls and lifestyle centers. The battle for customers will intensify as the online and offline customers, and the products and services offered to them, become one and the same.

#10 A Single View of the Customer

Deep customer relationships, not transaction purchases, will win the day. Retailers that develop touch points to engage the customer across multiple platforms will create deeper customer relationships allowing them to outperform those who do not. An ability to correctly address customer demographics for individual brick and mortar stores will become a requirement in combating the impacts of show-rooming.

Check back with us every month for our analysis of the monthly numbers and insights into how these trends are unfolding. Of course, we not only help our clients understand the trends, but learn how to take advantage of them. We'd be happy to have the opportunity to do that with your organization; please contact us for more information. With some lessons learned and what appears to be a more positive start to January, here is a list of prediction for retail in 2013. Obviously it goes without saying that all things digital will be a major focus for the coming year. Social media, digital marketing, mobility and push customer specific promotions are probably already on our list of strategic considerations. These in many respects are at the core of the predictions. So that said; Here are 10 predictions that will change the face of retail for 2013;
1. Bricks and mortar stores will shrink: This is not a prediction that more retailers will close their doors in 2013, this is a premonition that retailers will start to downsize their physical locations in line with their on their omni-channel strategy. With rents only increasing and placing pressure on the cost of goods for B&M retailing, space efficiency will become paramount. Look for less clutter and more calculated space usage to include digital tools like kiosks for social convergence, augmented reality and even access to customer reviews based marketing in store.

2. Customers are the sales people: For decades retailers have been telling us how and what to buy. The shift (as with the previous point) will see customers selling to each other. As the number of shoppers researching products online increases retailers need to be more savvy and tuned in to what is happening via social media channels. Retailers are starting to embrace this in the US by providing customers a means to share their experiences via Facebook and Pinterest. Expect to see this conversation moving to digital access points in store.

3. Click to brick: A number of retailers are starting to incentive their clientele to purchase online and pick up in store. This fosters the physical relationship with the customer and enables upselling and crossing opportunities that may escape retailers with pure play online sales. Reference Best Buy in the US as they are already masters at this initiative.

4. Retail CRM solutions are the best salesperson you have: Expect to see less blanket marketing and more customer specific targeted correspondence. Analysing your customers purchasing behaviour and targeting their interest will see a major shift in 2013. When we speak directly to our customers they are more likely to listen and customer relationship management solutions are the key to unlocking this data. They should be adopted heavily in 2013 and considered as a core

competency

moving

forward.

5. Its a mobile world: If its available digitally it must be mobile compatible. Mobility is the future o f networking and commerce. Customers literally have the world at their fingertips and will be expecting to access information in a mobile friendly fashion. Expect to see more retailers adopting an M-commerce strategy as customer will be turned off by non-adopters.

6. Cutting out the middleman: To compete in an ever increasing online market and floor discounting environment expect retailers to cut out supply channel layers where possible. Look at Kmart who now go direct to the manufacture, bypassing the importer to achieve the best possible price point for the consumer. There will be more specialised brands like Zara entering the market where the retailer can control the price and protect their margin.

7. Social networking platforms: Joining the conversation is no longer for those people with too much time on their hands. Its now seen as the preferred method of communication of the last 2 generations. Smart retailers will embrace this in 2013 by listening, engaging, attracting and converting their customers into loyal followers. The goal is to look for advocates that speak your message to their friends.

8. Brand focused: Customers like to be part of a community, one that they can relate to and makes them feel included. Look for product branding to increase in 2013. The number of companies that now have branded stores is increasing. Retailers will be looking to create brand fans not just customers.

9. Omni-Channel supply chain alignment: For those retailers that have yet to streamline their supply chain touch points to be in line with their Omni-Channel strategy, 2013 will be remembered as that critical year. Customers are becoming increasingly impatient and unforgiving. They are looking for fast, efficient and confident purchasing, consistent promotions and hassle free exchanges and returns regardless of which channel they use.

10. Data is king: Forget about what you think you know, this will be the year to prove it. With larger enterprises spending heavily on capturing, analysing and making the most of their transactional data, 2013 will be a big year for Big Data. Regardless of the size of business or the number of transactions, look for retailers to be putting strategies in place around business intelligence (BI) systems. Look for BI to be a big buzz for middle tier retailers. So with a new year ahead, the challenge to improve sales, increase market share and better service our customers will be no different, but the customer is evolving and the landscape changing. 2013 is the year where its no longer an option to just sit on the sideline waiting to see what happens, its the year to adapt and join the conversation, no pun intended.