Retail USA: What’s In Store for 2016? Todd Hale, Senior Vice President, Retail USA: What’s In Store for 2016? Consumer & Shopper Insights, Nielsen

Overview What’s in store, in-store for U.S. retail in 2016? By integrating research across its proprietary products, Nielsen developed a forward-looking view of the retail environment encompassing trends in channels and formats, media and communication methods, as well as the impact of consumer trends such as an increasingly aging and ethnic population, the changing definition of convenience, and the continuing focus on health and wellness.

• What’s in a [brand] name? Enough to see store brands Methodology mushroom to include super premium offerings joined by an Forecasts are based on historic annual dollar sales trends in the increasing number of restaurant and celebrity-chef brands, Nielsen Trade Dimensions database. Estimates include selected while a few consumer packaged goods brands transitioned relevant factors such as channel square footage and population onto restaurant menus. growth trends. Share calculations use a bottom-up summation • Expect the Big 4 technology companies [Amazon, Apple, of channel forecasts. Brick-and-mortar channel numbers do not Facebook, Google] to establish beachheads outside the tech account for potential shifts in consumer channel preference world, challenging conventional players to re-think their due to future changes in channel or retailer price, promotion business models and forge new alliances or chance seeing or product assortment strategies. The e-commerce forecast themselves become less relevant. assumes a moderate growth scenario. • Deep discounters continue to keep the cap on operating costs in order to maintain their price edge, but low prices alone have Highlights not been enough to guarantee sales success. Traditional mass merchants and supermarkets have yielded share to value channels (club, dollar, and supercenter) and drug stores, prompting a series of changes running the gamut from format blurring to new marketing outreach techniques to shopper- tainment. • Go micro or macro. Store footprints either get supersized for one-stop-shop convenience or downsized into smaller stores for quick grab-and-go trips. • That’s shopper-tainment! For people who view shopping as entertainment that engages all the senses, lifestyle outlets blur the line of demarcation between traditional formats, merging restaurants with food markets, serving up food and wine tastings, providing live music and movies, and creating places for friends and co-workers to gather and socialize. • Technology brings consumers into the shopping experience via options such as touch screen ordering, QR code advertising, mobile coupons and shopping lists.

2 Copyright © 2012 The Nielsen Company. Copyright © 2012 The Nielsen Company. 3 It should come as no surprise that e-commerce tops the list Discussion of growth channels. During the 2011 holiday season, retailers Retailers will be challenged as never before in the next five years across different channels touted free shipping and big discounts, to differentiate from an ever-expanding competitive set that attracting consumers eager to save time and gas money by brings novel ideas and fresh perspective to the marketplace. shopping at their fixed and mobile keyboards. Using historical trends in retail channel sales and store counts, Responding to sales gains made by online competitors, brick- along with a select number of macroeconomic variables, Nielsen and-mortar retailers are evolving their business models to add predicts above average compounded annual dollar sales growth more choices for online and offline ordering as well as delivery (CAGR) for the e-commerce, club, dollar, pet store, supercenter and pick-up options. Black Monday (the big day for online holiday and drug channels ranging from 8.5 to 2.7 percent. shopping) appears to be garnering media coverage equal to the historical coverage of Black Friday (the day after Thanksgiving).

2 Copyright © 2012 The Nielsen Company. Copyright © 2012 The Nielsen Company. 3 Throughout the recession and economic recovery, the club The American love for pets triggered a 40 percent increase in chains appealed to shoppers seeking value and addicted to the chain pet store numbers between 2005 and 2010. With pet seasonal treasure hunt merchandise that distinguishes club ownership reaching all time highs, the pet channel will deliver retailers. Club store growth reflected a unique connection with a strong CAGR through 2016. affluent consumers, the 21 percent of households that exited Thanks to an aging population with strong demand for the recession early, as evidenced by their increased all-outlet prescription drugs, the drug channel will maintain fiscal health, shopping trips and overall spending. outpacing the average channel growth rate. All other channels A major impetus behind dollar store growth was a brilliant will lose ground, even if they continue to grow on a nominal recession-fighting strategy featuring an expanded offering of dollar basis. Specialty retailers such as auto, sporting goods, consumables to attract price-conscious shoppers across all electronics, books, toys and home/bed/bath stores will face income strata. Additionally, dollars stores kept their foot on the biggest challenge. the gas with respect to store expansion in existing and new Some specialty retailers (e.g. toy, book and electronics geographic areas. As a result, the 21,500 site store count for stores) have experienced significant erosion in store count the three leading dollar store chains [Dollar General, Dollar as big retailers in each sector closed their doors for good. Tree and Family Dollar] now exceeds that of the three largest Either declining store counts or lower shopper demand has national drug store chains [Walgreens, CVS and Rite Aid].i led to decay in shopper penetration for many specialty retail Over the past decade, supercenter format expansion had the channels. Pressure from offline and online big box competitors greatest overall impact on U.S. retail sales. While industry and pure play online retailers will likely lead to further declines. pundits discuss the future of these and other big box formats, future supercenter expansion from the big players in the channel will continue to foster sales growth over the next five years.

Supercenter store count more than doubled to 3,468 stores and these mega one-stop-shop behemoths captured nine share points within consumer packaged retail formats between 2001 and 2010.

4 Copyright © 2012 The Nielsen Company. Copyright © 2012 The Nielsen Company. 5 The projected share decline for mass merchandisers reflects the How Share Will Fare historic Walmart effort to convert existing discount locations With the exception of an aggregate 6.1 share point gain for into supercenters and to a lesser extent from Kmart store e-commerce, supercenters and club stores, the Nielsen forecast closings. Specialty retailers are expected to suffer share declines suggests that share shifts between 2010 and 2016 will be across the board, ranging from a one percentage point fall for relatively minor for the other formats. Supermarket share will home improvement outlets to a marginal 0.2 percentage point decline at a diminishing rate relative to the past decade or more. drop for sporting goods stores. Surveying the smaller specialty The convenience/gas channel share will decline just slightly, retail channels, only pet stores will realize a share increase. while the mass merchandiser channel will experience a share loss of 1.7 points.

4 Copyright © 2012 The Nielsen Company. Copyright © 2012 The Nielsen Company. 5 Differentiating by Design In a considered move to remain competitive, stores have put Fearsome Foursome everything on the table—size, assortment, in-store activities, customer communication, design and branding—in the hope Ferocious competition has delivered a knockout blow to a host of finding an optimal mix that maximizes profits and customer of beloved and familiar banners. Some merely retired to their loyalty. corners as a result of acquisition, such as Longs Drugs via CVS. Others hit the mat and stayed down for the count as they Sizing for success worked for Walmart, which scaled down into lost shopper relevance: Borders Group, Circuit City, Filene’s Walmart Express, an urban solution roughly one-tenth the size Basement, K B Toys, Linens ‘n Things and Mervyn’s. of its typical store. The Fresh & Easy Express format from Tesco measures a slight 4,000 square feet merchandised exclusively Expect the retail herd to thin even more as online juggernauts to neighborhood tastes. S.A. Elite from Sports Authority Amazon, Apple, Facebook and Google draw a bead on highly selects only premium brand apparel, accessories and footwear profitable enterprises outside their current purview, including showcased in a compact storefront. retail. To quote an industry expert, “Amazon, Apple, Facebook, and Google don’t recognize any borders; they feel no qualms Wegman’s went big and bold, supersizing its standard layout about marching beyond the walls of tech into retailing…and even with a store featuring 70,000 products, 300 cheeses, 700 finance.”iii How will these four companies enhance or disrupt the varieties of fruits and vegetables, a 15,000 item liquor future of retail–either in how and where merchandise is sold or department and a 300 seat café. At the other extreme, micro how organizations communicate with shoppers and consumers? pop-up stores with seasonal merchandise helped H-E-B Holiday Toyland and Walmart.com bag additional holiday sales and put a stake in the ground for future sales opportunities. Each of the four [Amazon, Apple, Facebook and “ Google] has shown competitive excellence, strategic genius, and superb execution that have left the rest of the world in the dust. “ – Fast Company magazineii

6 Copyright © 2012 The Nielsen Company. Copyright © 2012 The Nielsen Company. 7 Singular Solutions Food as Theatre Another retail option gaining momentum was “solution Shopper-tainment, the idea of delivering a unique in-store selling” across departments. Retailers opted for designated shopper experience, is catching hold in exciting ways that stores-within-a store, pulling together related items that fulfill differentiate retail formats. Proven techniques for attracting a consumer need into a discrete space such as a cosmetics shoppers include product sampling, live musical performances department complete with expert consultant, occasion-based and how-to stations demonstrating everything from juicing to home meal solution centers or dedicated pet care areas. preparing sushi. Store locations now take an unconventional bent as well to reach Loblaws at Maple Leaf Gardens—an 85,000 square foot market busy or isolated shoppers. Procter & Gamble set up virtual stores with self-serve seafood, a grand wall of cheese and loads of in four high-traffic subway stations in Prague, while Nestle took prepared food stations—immerses shoppers in the sights, sounds a different tack, setting sail via a floating supermarket on the and scents of what the company calls the “theatre of food.” Amazon River designed to reach 800,000 consumers in just three H-E-B took the concept literally, cordoning off part of a Houston weeks. store’s parking lot to create an outdoor events plaza for weekend concerts, movies and artisan markets, with a food truck ready to serve gourmet food to the assembled crowds.

6 Copyright © 2012 The Nielsen Company. Copyright © 2012 The Nielsen Company. 7 The Coca-Cola Freestyle vending machine amuses consumers by QR codes have migrated from product packages to billboards to allowing them to blend their own beverage, selecting from more newspapers, magazines and point-of-purchase displays. Toyota than 100 different brands of soft drinks, fruit flavored beverages, developed a branded QR code dubbed ToyoTag as part of a sparkling beverages and waters, many of which have never been promotion for the 2012 Toyota Corolla featuring a performance available before in the U.S. These vending machines do more than by computer-generated pop star Hatsune Miku. Viewable allow consumers to customize beverages to personal tastes; they through the Toyota Shopping Tool app,iv the augmented reality also can record and report back on all the flavor combinations, a campaign accelerated Corolla lead generation by 30 percent boon to brand managers seeking innovation. during the concert week, and Web traffic revved up by 165 percent. Social media, YouTube and digital circulars all joined the Format Blurring electronic media mix, introducing a fresh element to the retailer/ The trickle down from channel blurring brings us format blurring, shopper dialogue. Celeb chef Curtis Stone taped “how to” where grocers and restaurants invade each other’s kitchens, videos for YouTube with corresponding recipe and shopping list sometimes competing and sometimes collaborating to fulfill coverage in the HyVee circular and on the store’s website. As unmet shopper needs. Multi-station prepared food offerings now part of its outdoor media campaign, Houlihan’s scrolls customer popular in a number of grocers compete directly with carry-out Tweets on digital billboards throughout the day. and home delivery restaurants. But retailers like Target, Meijer In-store shelf talkers take on a new, interactive dimension with and Walmart also chose the cooperative route, striking deals QR codes that connect directly to robust websites offering with Starbucks, Quiznos and Subway, respectively, to staff in- discounts and cross merchandising suggestions such as wine store restaurants. pairings. Online avatars and in-store service agents assist Restaurateurs and television chefs crossed over into the world consumers with meal management, entertainment, health of consumer packaged goods, lending their names to a wide and wellness monitoring and fashion selections. range of products including White Castle sliders, Boston Market entrees, Dunkin’ Donuts coffee, Emeril LaGasse spices, Mario Batali spaghetti sauce, Giada DeLaurentiis balsamic vinegar, Conclusion Wolfgang Puck soup and Paula Deen knives and mixing bowls. Volatility in energy and commodity prices will become the norm, requiring retailers to hedge against commodity fluctuations and innovate to justify premium prices. A redefined competitive Personal Touch set will prompt former adversaries to forge marketing alliances It is ironic to note that completely impersonal customer in an attempt to fend off the relentless encroachment of well- interactions often yield the most personalized experiences. financed, disruptive competitors with global reach. Mobile and online technologies enable true one-to-one The yawning chasm between income and wealth strata will marketing, customizing shopping lists, menu plans, coupons and enable retailers at both the high and low ends of the price other content to reflect user interests and consumption patterns. spectrum to prosper by merchandising to niche audiences. Technology, particularly mobile applications, will open the door to innovative marketing approaches that re-ignite consumer loyalty. Stores will emerge as the social centers of communities, where neighbors can feed their bodies with nourishing food, their souls with good conversation and their wallets with great deals.

iDollar Stores Now Outnumber National Drug Store Chains, Colliers International, December 5, 2011 http://www.colliers.com/NewsDetail.aspx?nid=eb66030d-5175-4ae3-85d3- 794ebb4bdd22&nwslst=D:\\Inetpub\\wwwroot\\WEB\\Country\\UnitedStates\\xmldata\\listdata\\LocalNews.xml&title=Dollar%20Stores%20Outnumber%20Natl%20Drug%20 Stores&area=Country/UnitedStates iiThe Great Tech War of 2012: Apple, Facebook, Google, and Amazon Battle for the Future of the Innovation Economy, Farhad Manjoo, Fast Company, October 29, 2011. http://www.fastcompany.com/magazine/160/tech-wars-2012-amazon-apple-google-facebook iiiThe Great Tech War of 2012: Apple, Facebook, Google, and Amazon Battle for the Future of the Innovation Economy, Farhad Manjoo, Fast Company, October 29, 2011. http://www.fastcompany.com/magazine/160/tech-wars-2012-amazon-apple-google-facebook ivToyota Taps Into QR Codes and Augmented Reality, eMarketer, December 14, 2011. http://www.emarketer.com/Article.aspx?R=1008733&ecid=a6506033675d47f881651943c21c5ed4

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