June 25, 2013 SCOTT GALLOWAY NYU Stern Specialty Retail

Excerpt from the Digital IQ Index®: Specialty Retail To access the full report, contact [email protected]

© L2 2013 L2ThinkTank.com Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail Opportunity Watch the Specialty Retail Video & THREAT Click to Play E-Influence While e-commerce sales take center stage in earnings calls and management Specialty retail and digital has been a recipe for growth. meetings, the real payoff of deft digital investments may be realized in-store. An early innovator, the sector has used digital to grow Although online sales (PC and mobile) are expected to reach $262 billion this on- and off-line sales, while leveraging new technologies year,3 the Internet will influence $1.2 trillion of sales, or 43 percent of retail sales.4 to facilitate multichannel strategy and employing CRM as Furthermore, by 2016, mobile will influence $689 billion in sales, which is more than 20 times the estimated m-commerce dollars. The most successful specialty the connective tissue between bricks and clicks. retailers are prioritizing technology investments, organizational incentives, and The growth of e-commerce, already eight percent of total retail sales in the attribution metrics to drive online and in-store growth; however, most still have a U.S., will outpace sales growth at brick-and-mortar stores over the next five long way to go. While 69 percent of retailers in the study support online purchase years to reach $370 billion in sales by 2017.1 Although specialty retail has with in-store return, just 14 percent have made the requisite investments at point ridden this wave of growth, there is one player that looms larger and larger of sale to support in-store pickup—and only a handful have the capability to ship on the horizon—Amazon. While e-commerce grew 13 percent YOY in Q1 from the store, a service that provides for more flexible inventory management. 2013, Amazon’s revenues were up 22 percent on $16 billion in revenue.2 There is also substantial opportunity for retailers to make more tactical The nemesis of big box retail is pursuing share across all sectors of retail. In investments, including store locator optimization, use of email marketing to drive addition to better merchandise and a reputation for great service, the great customers in-store, and robust local search engine marketing. white shark of retail is redefining consumer expectations via massive CapEx in fulfillment and technology and creeping further and further into specialty U.S. Cross-Channel Retail retail’s turf. Specialty retailers are responding. Specfically: 2011–2016 Non-Web Influenced Offline Retail Sales Web-Influenced Offline Spending Online Retail Sales • Twenty-eight percent of specialty retailers now provide 24/7 customer service, up from just 18 percent a year ago. Live chat is also on the rise, with $1,780 $1,812 10 percent more retailers offering the feature this year than last year. $1,741 $1,771 $1,723 • To ease the checkout experience for mobile and tablet users, 46 $1,672 percent of retailers now offer PayPal, up threefold from 2012. • Four retailers (American Eagle Outfitters, Brooks Brothers, Tommy Hilfiger, $1,552 $1,660 $1,429 and Nine West) have partnered with ShopRunner on free two-day shipping $1,206 $1,320 $1,103 to match two-day shipping provided through Amazon Prime.

• Competitive search purchasing on YouTube rose from just four Research Forrester Source: $202 $226 $252 $278 $304 $327 percent in 2012 to 11 percent in 2013. 2011 2012 2013 2014 2015 2016

1. Forrester: U.S. Online Retail Sales to Hit $370 Billion by 2017, Mashable, March 12, 2013 3. "Forrester Research Online Retail Forecast, 2012 to 2017 (US)”, Forrester Research, Inc., March 12, 2013. 2. "Amazon.com Announces First Quarter Sales up 22% to %16.97 Billion,” BusinessWire, April 25, 2013. 4. “Web-Influenced Retail Sales Forecast”, Forrester Research Inc., July, 2011. © L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 2 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail

The Next Generation Merchant 2012 Net Sales vs. Digital IQ n=36 Specialty retail is the house built on a foundation of great 140 merchandising—products that share a voice, edited to give Overachiever American Eagle Outﬁtters the customer confidence in their purchase decision. New Williams–Sonoma 130 technologies will enhance this even more with behavioral-based Pottery Barn consumer targeting that further edits merchandise to the most White House | Black Market 120 relevant products at the right moment and place. Nearly a third West Elm (31 percent) of specialty retailers send a follow-up email when a consumer abandons his or her cart. More than half have 110 invested in personalization technology on their sites to curate

selection based on browsing behavior, and 20 percent provide 100 Regression Line opportunities for shoppers to customize products. Facebook’s Digital IQ product evolution is a testament to the power of these tactics: in Bath & Body Works 90 June, Facebook reduced socially-targeted sponsored story ads Ann Taylor in favor of continued development of the Facebook ad exchange 80 (FBX), a behaviorally based ad platform that targets ads based Zales on consumers’ browsing history. Less than a year later, FBX Restoration Hardware Ethan Allen accounts for 45 percent of all retargeted ads on the web. Of 70 the more than half of specialty retailers in the Index engaged in Underachiever Facebook advertising, two-thirds now experiment with FBX ads. 60 300 3,000 Net Sales (USD Millions) Digital IQ = Shareholder Value Logarithmic Scale This study attempts to quantify the digital competence of 71 U.S. specialty retailers. Our aim is to provide a robust tool to diagnose digital strengths and weaknesses and help brands Related L2 Research: achieve greater return on incremental investment. Like the medium we are assessing, our methodology is dynamic and we hope you will reach out to us with comments that improve our methodology, investigation, and findings. You can reach me at [email protected].

Multichannel Retail 2013 Tablets: Retail 2013 Specialty Retail Studies

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Scott Galloway Professor of Marketing, NYU Stern Founder, L2

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 3 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail About the Ranking The Methodology 40% 30% 20% 10% Site Digital Marketing Mobile Social Media

Effectiveness of Brand Site and E-Commerce Operations Search, Display, and Email Marketing Efforts Compatibility, Optimization, and Marketing Brand Presence, Community Size, Functionality and Content: Search: on Smartphones and Tablets Content, and Engagement Technology Traffic, SEM, SEO, Web Authority Mobile Site: Facebook: Navigation and Product/Site Search Compatibility, Functionality, Transaction Likes, Growth, Tabs and Applications, Advertising and Innovation: Customer Service and Store Locator Capability Responsiveness, Interaction Rate Display, Retargeting, Cross-Platform Initiatives Product Page iOS Applications (both iPhone & iPad): Twitter: Checkout and Multichannel Efforts Blog and Other User-Generated Content: Availability, Popularity, Functionality, iPad Followers, Growth, Frequency, Account/Registry Mentions, Sentiment Differentiation Online Voice, User Retweet Rate Email: Android: YouTube: Frequency, Content, Promotions, Opt-Down, Availability, Popularity, Functionality Views, Number of Uploads, Subscriber Trigger Emails Growth, Viral Videos, YouTube Search Innovation: SMS, Geolocal, Recent Brand Initiatives Emerging Social Media: Instagram, Google+, Pinterest, Tablet Site: Tumblr, Vine Cart Continuity/Saved Items, Menu Optimization, Express Checkout

Digital IQ Classes

Genius 140+ Gifted 110–139 Average 90–109 Challenged 70–89 Feeble <70 Digital competence is a point of competitive Experimenting and innovating Digital presence is functional Digital investment is limited or Investment does not differentiation. Online programming drives across site, mobile, and social yet predictable. Efforts are inconsistent across platforms. The match opportunity. marketing, e-commerce, and in store success. media platforms. often siloed across platforms. whole is less than sum of parts.

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 4 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail

GENIUS Sephora Digital IQ Ranking GIFTED American Eagle Outfitters Victoria’s Secret Pottery Barn Genius, Gifted Williams-Sonoma Crate & Barrel Coach Rank BRAND DIGITAL IQ Rank BRAND DIGITAL IQ Rank BRAND DIGITAL IQ Urban Outfitters West Elm White House | Black Market Genius Gifted Anthropologie Gap J.Crew 1 140 2 133 8 119 Pier 1 Imports Express Talbots LVMH American Eagle Outfitters Williams-Sonoma Tiffany & Co. Topshop Steve Madden Chico’s Tory Burch ULTA 3 131 8 119 Brooks Brothers Kate Spade New York L’OCCITANE en Provence Limited Brands Chico’s FAS AVERAGE lululemon athletica Ralph Lauren Banana Republic Guess 7 For All Mankind 4 128 11 115 Juicy Couture Swarovski Abercrombie & Fitch Williams-Sonoma Urban Outfitters Nine West Tommy Hilfiger Fossil Aéropostale H&M 128 115 ALDO 4 11 Free People Swatch Williams-Sonoma Gap The Body Shop UNIQLO A|X Armani Exchange Kay Jewelers Michael Kors Tumi 127 114 Lacoste 6 13 Bath & Body Works Lucky Brand Otto GmbH J.Crew Group Cole Haan Diesel Gymboree LUSH CHALLENGED Cartier 125 114 American Apparel 7 13 Ann Taylor Zara Coach Pier 1 Imports Godiva Chocolatier French Connection J Brand Stuart Weitzman Zales BCBG 8 119 15 113 Ethan Allen Restoration Hardware Club Monaco Urban Outfitters Express FEEBLE Intermix Massimo Dutti Vince Camuto Joe Fresh

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 5 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail

GENIUS Sephora Digital IQ Ranking GIFTED American Eagle Outfitters Victoria’s Secret Pottery Barn Gifted, Average Williams-Sonoma Crate & Barrel Coach Rank BRAND DIGITAL IQ Rank BRAND DIGITAL IQ Rank BRAND DIGITAL IQ Urban Outfitters West Elm White House | Black Market Anthropologie Gap J.Crew 15 113 23 110 30 105 Pier 1 Imports Express Talbots Talbots Retail Brand Alliance VF Corporation Tiffany & Co. Topshop Steve Madden Chico’s Tory Burch ULTA 15 113 23 110 31 104 Brooks Brothers Kate Spade New York L’OCCITANE en Provence Tiffany & Co. Fifth & Pacific Companies Fifth & Pacific Companies AVERAGE lululemon athletica Ralph Lauren Banana Republic Guess 7 For All Mankind 15 113 23 110 31 104 Juicy Couture Swarovski Abercrombie & Fitch Arcadia Group L’OCCITANE Group Swarovski Group Nine West Tommy Hilfiger Fossil Average Aéropostale H&M 112 109 103 ALDO 19 26 33 Free People Swatch Steve Madden lululemon athletica Abercrombie & Fitch Co. The Body Shop UNIQLO A|X Armani Exchange Kay Jewelers Michael Kors Tumi 111 108 103 Lacoste 20 27 33 Bath & Body Works Lucky Brand Chico’s FAS Ralph Lauren Corporation The Jones Group Cole Haan Diesel Gymboree LUSH CHALLENGED Cartier 111 107 103 American Apparel 20 28 33 Ann Taylor Zara Tory Burch Gap PVH Corp. Godiva Chocolatier French Connection J Brand Stuart Weitzman Zales BCBG 20 111 29 106 36 101 Ethan Allen Restoration Hardware Club Monaco ULTA Guess Fossil FEEBLE Intermix Massimo Dutti Vince Camuto Joe Fresh

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 6 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail

GENIUS Sephora Digital IQ Ranking GIFTED American Eagle Outfitters Victoria’s Secret Pottery Barn Average, Challenged Williams-Sonoma Crate & Barrel Coach Rank BRAND DIGITAL IQ Rank BRAND DIGITAL IQ Rank BRAND DIGITAL IQ Urban Outfitters West Elm White House | Black Market Anthropologie Gap J.Crew 37 100 44 97 51 91 Pier 1 Imports Express Talbots Aéropostale Giorgio Armani Apax Partners Tiffany & Co. Topshop Steve Madden Chico’s Tory Burch ULTA 37 100 44 97 51 91 Brooks Brothers Kate Spade New York L’OCCITANE en Provence H & M Hennes & Mauritz Sterling Jewelers Diesel AVERAGE lululemon athletica Ralph Lauren Banana Republic Guess 7 For All Mankind 39 99 46 96 51 91 Juicy Couture Swarovski Abercrombie & Fitch The ALDO Group Michael Kors The Gymboree Corporation Nine West Tommy Hilfiger Fossil Aéropostale H&M 99 96 91 ALDO 39 46 51 Free People Swatch Urban Outfitters Tumi Holdings LUSH The Body Shop UNIQLO A|X Armani Exchange Challenged Kay Jewelers Michael Kors Tumi 99 95 89 Lacoste 39 48 55 Bath & Body Works Lucky Brand The Swatch Group Lacoste Richemont Cole Haan Diesel Gymboree LUSH CHALLENGED Cartier 99 92 87 American Apparel 39 49 56 Ann Taylor Zara L’Oréal Limited Brands American Apparel Godiva Chocolatier French Connection J Brand Stuart Weitzman Zales BCBG 43 98 49 92 57 84 Ethan Allen Restoration Hardware Club Monaco Fast Retailing Co. Fifth & Pacific Companies ANN FEEBLE Intermix Massimo Dutti Vince Camuto Joe Fresh

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 7 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail

GENIUS Sephora Digital IQ Ranking GIFTED American Eagle Outfitters Victoria’s Secret Pottery Barn Challenged, Feeble Williams-Sonoma Crate & Barrel Coach Rank BRAND DIGITAL IQ Rank BRAND DIGITAL IQ Urban Outfitters West Elm White House | Black Market Anthropologie Gap J.Crew 57 84 64 75 Pier 1 Imports Express Talbots INDITEX Group Ethan Allen Global Tiffany & Co. Topshop Steve Madden Chico’s Tory Burch ULTA 59 81 66 74 Brooks Brothers Kate Spade New York L’OCCITANE en Provence Yildiz Holding Restoration Hardware Holdings AVERAGE lululemon athletica Ralph Lauren Banana Republic Guess 7 For All Mankind 60 78 67 72 Juicy Couture Swarovski Abercrombie & Fitch French Connection Group Ralph Lauren Corporation Nine West Tommy Hilfiger Fossil Feeble Aéropostale H&M 78 64 ALDO 60 68 Free People Swatch Fast Retailing Co. Gap The Body Shop UNIQLO A|X Armani Exchange Kay Jewelers Michael Kors Tumi 78 63 Lacoste 60 69 Bath & Body Works Lucky Brand Stuart Weitzman Holdings The INDITEX Group Cole Haan Diesel Gymboree LUSH CHALLENGED Cartier 78 59 American Apparel 60 70 Ann Taylor Zara Zale Corporation Camuto Group Godiva Chocolatier French Connection J Brand Stuart Weitzman Zales BCBG 64 75 71 54 Ethan Allen Restoration Hardware Club Monaco BCBG Max Azria Group Loblaw Companies FEEBLE Intermix Massimo Dutti Vince Camuto Joe Fresh

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 8 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail Key Findings Digital Marketing

Email Despite the proliferation of new tactics and tools, email Retailers Employing Email Opt-Down Features remains an effective call-to-action marketing vehicle. May 2013, n=71 Two-thirds of in-house marketers rate email as having an “excellent” or “good” ROI.5 Retailers in the Index drive, 86% on average, 8.7 percent of traffic to their sites from email marketing activities. Email frequency varies dramatically by product category. Beauty & Skincare retailers send 2.5 emails per week, using the medium as a driver to promote sampling initiatives and gift-with- 27% purchase offers. They garner an average 14 percent share of 15% 15% their traffic from email. Given that “frequency” and “relevance” are the primary reasons that email users unsubscribe from email marketing,6 Requires Unsubscribe Prompts User to Prompts User to Modify Collects Data on email opt-down offerings remains a missed opportunity for Conﬁrmation Modify Email Frequency Content Preferences Reasons for Unsubscribe specialty retailers. Although 86 percent of brands request an email unsubscribe confirmation, most have yet to embrace opt-down options such as reduced frequency or content modification. Furthermore, just 15 percent are collecting data on the reasons users unsubscribe. Average Weekly Email Frequency March–April 2013, n=71 3.30 3.05

2.92 2.49 2.49 14%

10% 11% 8%

Percent of Trafﬁc 5% 0.57 from Email 4%

E-Tailer Apparel Home & Gift Beauty & Skincare Accessories & Shoes Watches & Jewelry

5. “Email Marketing Industry Census 2013,” eConsultancy, 2013. Source: SimilarWeb 6. “2013 Consumer Views of Email Marketing,” BlueHornet, March 14, 2013.

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 9 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail Key Findings Social Media Average Referral Traffic from Social Media Platforms Social Media Percentage of Total Traffic from Social Media In 2013, Pinterest and Instagram join Facebook, YouTube and February–April 2013

Twitter as “must be there” platforms for retailers. Both register Facebook YouTube Pinterest Twitter Other 90 percent penetration across the category. In contrast, 1% 76% 9% 5% 9% Tumblr and Google+ adoption has been relatively static year Watches over year and much of the content on both platforms is either & Jewelry rarely updated or syndicated from other channels. Just 10 3%3% percent of retailers actively use Foursquare as a marketing tool, 66% 15% 13% Accessories suggesting the platform has lost relevance. & Shoes Facebook continues to be the leading source of social 2% media upstream traffic to retailers; however, some categories 59% 27% 4% 8% are starting to shift. Beauty & Skincare brands register a Beauty & Skincare disproportionate percentage of their traffic from YouTube as a result of the popularity of “how-to” videos in the space. Home 2% & Gift brands overindex on Pinterest which now drives larger 57% 13% 8% 20% Apparel cart sizes ($168.83 average order value compared with $94.70 for Facebook and $70.84 for Twitter).7 1% 49% 7% 31% 12% Home & Gift

Social Platform Adoption 2012 (n=57) 2013 (n=71)

98% 99% 98% 99% 99% 93% 90% 90% 81% 75%

51% 44% 40% 40% 38% 28%

10% N/A Twitter Facebook YouTube Pinterest Instagram Google+ Tumblr Vine Foursquare

7. “Who’s Driving Shipping Traffic for Retail Sites?” RichRelevance, Inc., 2012.

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 10 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail Key Findings Mobile

Mobile Site Adoption Forty-eight percent of the time spent browsing retail sites occurred on mobile devices in Q1 2013,8 and 77 percent of Mobile Site Adoption Index retailers now have mobile sites. 2011–2013 H&M and White House | Black Market are the only two brands to have optimized their site experience for tablets, while the majority (86 percent) still redirect tablet users to desktop sites. Furthermore, just 61 percent have incorporated cart continuity across the tablet and PC, catering to users who begin shopping on one device and 77% 72% 2013 elect to check out on another. 60% 2012 2011

n=42 n=57 n=71 Tablet: Site Features and Functionality April 2013 , n=71

Sign-In Saves Items in Cart 61%

Mobile Site: Store Locator Features April 2013, n=54 Optimized Filters/Sorts 45% 81% 78% 76%

35% 35% Single-Page Checkout 27% 22%

Store Click-to-Call Directions Autodetects Location Results Displayed Results In-Store Inventory on Map Sort/Filter

8. “comScore Reports $50.2 Billion in Q1 2013 Desktop-Based U.S. Retail E-Commerce Spending, Up 13 Percent vs. Year Ago,” comScore, May 10, 2013.

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 11 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail Table of Contents

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Click to jump to: 5 Methodology 12 Key Findings 32 Flash of Genius 12 Biggest Winners and Losers 32 Aéropostale, J.Crew, Nine West, Tory Burch, Tumi: iStores 6 Digital IQ Rankings 13 Competition 33 Williams-Sonoma, Pottery Barn, West Elm: Big Data 6 Genius Site 34 Zappos, Free People: Curation Communities 7 Gifted 14 E-Commerce Investments 35 Michael Kors, Pottery Barn, West Elm: Facebook Collections 8 Average 15 Click-and-Mortar 36 Diesel: Multiplatform Campaign 10 Challenged 16 E-Commerce Incentives 37 Urban Outfitters, Free People, Anthropologie: Store Fulfillment 11 Feeble Digital Marketing 38 Abercrombie & Fitch, Aéropostale, American Eagle Outfitters, 17 Search Nine West, The Body Shop: Mobile Payment 18 Email 39 Lululemon Athletica, Coach: The Model Is You Social Media 40 Topshop: Walk the Runway 20 Social Media 41 Tiffany & Co., Zales: Multichannel Is a Girl’s Best Friend 21 Pinterest 42 Lululemon Athletica, Ethan Allen, and Urban Outfitters: Stores 22 Facebook as Communities 24 Twitter 25 YouTube 43 L2 Team 27 Instagram 28 Vine 44 About L2 Mobile 29 Mobile 30 Mobile Apps 31 Mobile Site Adoption

© L2 2013 L2ThinkTank.com. Circulation of the report violates copyright, trademark and intellectual property laws. 12 Excerpt from the Digital IQ Index®: Specialty Retail Digital IQ Index®: To access the full report, contact [email protected] June 25, 2013 Specialty Retail About L2 ?

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