Direct-To-Consumer Insights

STRICTLY PRIVATE AND CONFIDENTIAL

State of payments: Direct-to-consumer insights

May 9, 2018 CONFIDENTIAL

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Agenda

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1 State of payments 1  Key trends in e-payments, digital wallets and mobile wallets 1  A day in the life of a digital consumer 5  The future of retail commerce 6 2 The rise of direct-to-consumer 11 CONFIDENTIAL

Electronification of payments

U.S. percent of dollars by payment instrument

DEBIT/PREPAID* 17% 18% 19% 22% 24% 22% 26% 26% 28% 28% 26% 30% 30% 31% 28% 26%

CREDIT 26% 27% 27% 24% 25% 26% 27% 28% 30% 31% 32% ACH** 10% 35% 36% 36% 39% 40% 11% 12% 13% 13% 13% 13% 15% 15% 10% CHECK*** 27% 24% 22% 21% 14% 19% 16% 14% 14% 13% 11% 19% 17% 13% 13% 13% 8% 8% 3% 5% 6% 4% CASH 20% 20% 20% 20% 19% 19% 20% 18% 17% 20% 16% 13% 10% 10% 12% 14%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Source: Nilson Annual US Consumer Payments System Report * Includes debit, EBT, and prepaid cards ** Includes preauthorized and remote payments *** Includes money orders, official checks, and travelers cheques

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Digital dominating key shopping days

 Cyber Monday hits $6 billion in total sales, nearly 30% more than Black Friday

 Thanksgiving weekend sales est. to reach $15 billion, 2x last year.

 Estimated sales share of 55% in store, 33% on mobile

Alibaba accounted for $25.4 billion in sales this year’s Singles’ Day

JPMorgan Funds, Market Insights here

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The road ahead

Digital wallets: Measures of consumer adoption

Despite the pause in October 2016 June 2017 adoption this year, 41% of Consumers who prefer to consumers are likely to pay with digital wallets 15% 14% try digital wallets in the next year, and merchants Consumers likely to use a digital are getting ready for wallet in the next 12 months* 39% 41% them. (74% in next year) Merchants who accept digital wallets* 36% 37%

Base: 1,500 US consumers ages 18-plus who go online at least weekly *Base: 800 professionals responsible for their organization’s payments strategy Source: Commissioned studies conducted by Forrester Consulting on behalf of JPMorgan Chase, October 2016 and June 2017

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Fraud shift

Rise in card-not-present fraud

Millions of U.S. fraud victims 15.4 16.7 12.6 13.1 12.7 13.1

2012 2013 2014 2015 2016 2017 Where EMV adoption is mature, online fraud rose as much as 81 percent. Fraud losses ($ billions)

$22.1 $19.3 $16.4 $15.5 $16.2 $16.8

2012 2013 2014 2015 2016 2017

Source: 2018 Javelin Identity Fraud Study

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Agenda

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Your consumers are “never…not shopping”

Retail channel strategy

Single Channel Multi-Channel Cross-Channel Omnichannel

Retailers have a single type of Retailers channel knowledge and Retailers have a "single view of Retailers are leveraging their “single touch-point operations exist in technical and the customer" but operate in view of the customer” in coordinated functional silos functional silos and strategic ways

Blending clicks and bricks

Buy Online, Pickup in Store (BOPIS) Buy In-store, Buy Online (BISBO) Order Ahead

Retailers are allowing customers to retrieve Brick-and-mortar retailers are incentivizing in-store purchases at stores most convenient to them while shoppers to order online for out-of-stocks or online-only Results in better engagement, higher conversion rates, saving on shipping costs products; ecommerce retailers are setting up operational efficiency, and ultimately customer delight showrooms for customers to shop online, in-store

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Agenda

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Retail redefined…

I don’t think retail is dead. I think mediocre retail experiences are dead. - WARBY PARKER

$5.4 trillion Over 90% 15 million 116,000 total retail sales in 2016, of transactions occur in the store employees U.S. shopping centers up 3% over 2015

Source: Plunkett Research, Ltd; excludes grocery and restaurants *Forbes, “Why retailers must restructure ”, http://www.forbes.com/sites/walterloeb/2016/01/04/every-sign-is-saying-retailers-must-restructure-in-2016/

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The future of retail commerce

Phase 1: Convergence

Right-sized physical footprint with optimized digital presence and distribution

Brick and mortar

Customer-centric

Augmenting digital storefronts with on-demand physical presences

Digital

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Know your customer

Your future depends on it

Discovery Purchase Ownership

Influenced by Bad experiences shared Traditional Strong preference for in- Wave 1 advertising and store with merchant employees store purchases Consumers employees and close acquaintances

Only exceptionally good Connected Dedicates time to conduct Purchases in-store, (nearly all bad experiences) Wave 2 online research online or in-app Consumers shared on social media

Opts-in to “invisible” Expects realtime feedback and Contextual Experience initiates recurring or subscription analytics to continuously improve Wave 3 commerce opportunity Consumers purchases experience

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The future of retail commerce

Phase 2: Context

Keystrokes and mouse clicks are giving way to taps, texts and voice commands as consumers’ preferred way to order and pay.

The evolution of interfaces Keyboard Mouse Touch

Contextual and multimodal commerce The evolution of commerce Stores aggregated Malls aggregated Technology products stores aggregates value

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Things buying things

The Internet of Things

1  28 billion devices by 2021 . Real-time diagnostics . In-car connectivity .  Growing at 27% CAGR2 Infotainment

 B2B now / B2C soon . Smart devices . Interactive gaming  Introduces new fraud risks

 Card-on-file enablement . Home automation . Energy management . Smart appliances  Could transform e-commerce

. Health tracking . Remote monitoring

1 Statista, “Internet of Things (IoT): Number of connected devices worldwide from 2012 to 2020 (in billions)” http://tinyurl.com/j3t9t2w 2 Cisco, Global IPv6-capable devices and connections forecast, 2016-2021, Figure 8 http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/vni-hyperconnectivity-wp.html

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Agenda

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1 State of payments 1 2 The rise of direct-to-consumer 11  Examples of industry shifts towards direct-to-consumer 11  Key considerations and implications 13 CONFIDENTIAL

The consumer industry is pivoting to direct-to-consumer

Corporations are expanding their direct-to-consumer footprint through strategic acquisitions, partnerships and leveraging their own brands

Unilever ventured into prestige personal care, acquiring Direct-to-consumer Murad, Dermalogica, Kate Sommerville and Ren; gaining strategic acquisitions direct market access to their online and direct-to- consumer channels. P&G acquired direct-to-consumer natural deodorant brand Native. The online brand acquired Merrick, an organic Nestle Purina gained success owing to its unique fragrances pet food company. Pet care is also the and transparency on ingredient disclosure. fastest growing consumer packaged goods segment in online sales in 20161.

Nestle acquired a 68% stake in Blue Bottle Coffee, a player in third wave coffee in the U.S. and Japan. They have brought customized subscriptions to multiple countries.

2015 2016 2017 Durex adopted an all-social and all-digital strategy in China, increasing its market share to Pampers and firstcry.com offer a 45 percent in four years. China has the most guaranteed savings and discount retail e-commerce sales as a percentage of total subscription program (U.S.) 1 Unilever joined new INS grocery retail sales globally services platform to sell direct-to- 1 Tide Wash Club – a direct-to- eMarketer, Worldwide retail ecommerce sales, 2015 consumer, cutting out grocery consumer online subscription retailers as the ‘middlemen’ (UK) service for dissolvable Tide Pods Nestle (Maggi brand) doubled subscriber base (U.S.) through personalized ad campaign (India) Axe grooming for men, tailored Direct-to-consumer specifically for direct-to-consumer Nestle Brazil – direct-to-consumer organic growth channels (China) makes up 40 percent of all sales in 1H 2017, comparable to Nespresso

Source: Click Z Marketing Technology Transformation, The three reasons CPG brands can’t ignore ecommerce, 2017

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Disruption of traditional business models by niche start-ups

Emerging brands are threatening global brands and addressing the needs of millennials

Home, personal care Food and beverage Apparel and luxury goods and beauty

Subscription-based business models are The food and beverage industry has high Online apparel retailers work to engage the highly conducive to the home, personal supply chain variances, making it difficult customer by providing interactive and care and beauty industries. for large manufacturers to innovate across integrated shopping platforms and distribution channels. convenient services.  P&G (Gillette) lost 12% share of men’s razors, while upstart Dollar Shave Club  Disruptors, like Gousto, in the food and  Zalon by Zalando provides an all-round claimed 5% of the market beverage space target consumers directly, carefree package with digitized styling bypassing large retail chains advice and ease of trial and returns  Harry’s share (a competitor to Dollar Shave Club) of the U.S. market rose to 12.2%, up  Hello Fresh’s successful IPO highlights the  Casper, the online bed-in-a-box maker, from 7.2% in 2015 shift in consumer preferences to addresses consumer’s needs for convenient subscription based services shopping  Birchbox, a personalized beauty box subscription service, addresses millennials’  Millennials’ preference for organics and  Net-a-Porter, an online luxury fashion need for variety while partnering with global naturals require local sourcing retailer, offers a website editorial and yearly beauty brands (example: Blue Bottle Coffee) subscriptions to big ticket items

Source: Wall Street Journal, Gillette, Bleeding Market Share, Cuts Prices on Razors, 2017

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Agenda

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1 State of payments 1 2 The rise of direct-to-consumer 11  Examples of industry shifts towards direct-to-consumer 11  Key considerations and implications 13 CONFIDENTIAL

Conversational commerce removes the visual aspect of consumer packaged goods

Voice search could help the biggest brands stay top of mind, entrenching existing preferences

The guy who will win is the guy who will have iconic brands and products. I believe voice [search] is as big as the internet—and Google—when it came.

- Lubomira Rochet L’Oréal SA’s Chief Digital Officer

Alexa’s influence If a voice shopper doesn’t specify a brand, Alexa is more likely to recommend an Amazon’s Choice product.

Type of product recommended by Alexa

Amazon's Choice Top result Sponsored No result

First recommendation 54% 41% 6%

Second recommendation 4% 91% 6%

Source: Wall Street Journal, Alexa’s Influence, February 2018

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Industry case study: Nike’s consumer direct offense

A faster pipeline to serve consumers personally, at scale

Nike will drive growth — by accelerating innovation and product creation, moving even closer to the consumer in twelve key cities, deepening one-to-one connections. The future of sport will be decided by the  Creating a local business, on a global scale – all key cities and company that obsesses over the needs countries are supported by a simplified geography structure of the evolving consumer. Through the  Fueled by Nike’s Triple Double strategy – 2X innovation, 2X speed Consumer Direct Offense, we’re getting and 2X direct connections with consumers even more aggressive in the digital  Accelerating impact and cadence of new innovations platforms marketplace, targeting key markets and  Cutting product creation cycle times in half delivering product faster than ever.”

 Creating a faster pipeline with end to end design to delivery – with - Mike Parker greater resources in the categories with the highest potential to fuel NIKE, Inc. Chairman, President and CEO growth

 Shaping the future of retail with the new Nike Direct organization – uniting Nike.com, direct-to-consumer retail, and Nike+ digital products to enhance and expand Nike’s membership experience on an increasingly global scale

Source: Nike News, Nike, Inc. Announces New Consumer Direct Offense: A Faster Pipeline to Serve Consumers Personally, At Scale, June 2017.

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Going forward

Keep your eyes on the road

 Next wave of commerce will be contextual

 Consumer expectations rapidly evolving

 Convergence is key in retail

 Disruptors becoming enablers

 AI + IOT + Blockchain + Identity

In every challenge lies opportunity