The Future of Retail Is Now TODAY, SUCCESS MEANS MIXING ‘PHYGITAL’ with ‘RETAILTAINMENT’

The Future of Retail is Now TODAY, SUCCESS MEANS MIXING ‘PHYGITAL’ WITH ‘RETAILTAINMENT’

CONSUMER, BRANDS & RETAIL WHITE PAPER NOVEMBER 2017 Society is increasingly connected – through smartphones, social media and technologies such as the Internet of Things and artificial Intelligence. In retail, as in other disrupted industries, Contents incumbents were caught out by online players who were better at collecting, analyzing and using customer data to target marketing and enhance customer experience. Now the initial “shock and awe” has passed, some traditional retailers have started to react promptly by digitalizing themselves.

In the connected society, consumers don’t want to choose between the offline and online worlds: they want a seamless, frictionless shopping experience. This convergence of the 1: THE “AMAZON DISRUPTION” 2 physical and the digital has moved the battlefield towards the real-world store, which is still seen as the primary retail touchpoint by consumers, offline and online players. -- Amazon, a seamless consumer-centric economy In this white paper, we first look at how the online retailing giant Amazon has crystallized -- Truly integrated “Amazonian” governance the fears of traditional players as well as innovative start-ups. With the acquisition of -- Whole Foods Market: physical retail is dead, Whole Foods Market in June 2017, for example, Amazon will be able to reduce delivery long live physical retail costs by using in-store pickup points and build credibility as a grocer.

2: THE “NEW RETAIL” MODEL... This is the reason why we go on to analyze the importance of physical stores within the OR WHEN PHYSICAL STORES ARE FAR FROM DEAD 6 value chain, as exemplified by “online first” players opening stores. We examine why these stores have had to become experiential destinations, not just places consumers -- The death of the store is exaggerated... Even for specialty go to buy products. apparel retailers Traditional players are also sitting on an extraordinary amount of data, but have not -- One interesting mega-trend: “online first” players opening fully understood how to convert it into personalized experiences. To do this, they are physical stores becoming increasingly dependent on tech companies and IT start-ups in fields such as AI, algorithms for predictive modelling, and payment solutions. We expect to see -- Why China is leading O2O (Online to Offline) commerce partnerships and M&A transactions to secure this crucial access to technology, and we explore the latest developments in this paper. 3: EXPERIENTIAL RETAIL 11

-- Why are “big boxes” such as Costco and IKEA successful in France? FIG. 1: RETAIL IS AT THE CORE OF THE DIGITAL VORTEX SWEEPING THROUGH MANY INDUSTRIES -- Experiential retail, or the art of combining the useful with the pleasant Hospitality and -- Shift in reward criteria: from channel-centric to customer-centric KPIs Tourism 9 Professional Services 8 4: RETAILERS ARE INCREASINGLY TECH COMPANIES 15 10 Manufacturing Financial Services -- Technology to serve customers better 4

-- Artificial intelligence at the center of the game Media and 1 Entertainment 3 Retail 7 Education -- In the tech race, M&Ais the retailers’ fuel Telecoms 5 2 Tech Products Transportation SUMMARY 21 and Services and Logistics 11 6 Consumer Packaged Goods

Real Estate Healthcare and 14 12 Pharmaceuticals Energy and Utilities

Source: Global Center for Digital Business Transformation, IMD Lausanne

ANTOINE PARISON CEDRIC ROSSI CLEMENT GENELOT Equity Research Analyst Equity Research Analyst Equity Research Associate Retail & Ecommerce Consumer Goods & Ecommerce Consumer, Brands & Retail 1: The “Amazon disruption” Amazon, a seamless consumer-centric economy

Amazon offers a logistic solution that FIG 2: IS THERE ANYTHING AMAZON DOESN’T PROVIDE? dilutes capital intensity for the sellers who use it, especially since its platform ENTRY DATE “Your margin is my opportunity” sometimes acts as a fulfillment center. In return, it receives a commission on 1995 --BOOKS Jeff Bezos every transaction. All this happens in MUSIC 1997 -- an ecosystem where the customer --DVD/VIDEO

experience, and therefore the brand’s CONSUMER ELECTRONICS, TOYS & GAMES 1999 -- credibility, becomes addictive for --DIY (“DO-IT-YOURSELF”) anyone who encounters it. Amazon --HOME APPLIANCES AND FURNITURE does not create products: it makes 2000

life easier for people, whether they are CLOUD SERVICES 2002 -- third-party sellers or end customers. --APPAREL AND ACCESSORIES

So, rather than using the pricing 2003 --MARKETPLACE power intrinsic to any brand, Amazon --GROCERY capitalizes more on the customer’s 2006 --AUDIOVISUAL CONTENT BROADCASTING – VOD PLATFORM addiction to its ecosystem, on the --VEHICLE COMPONENTS (AMAZON AUTOMOTIVE PARTS & ACCESSORIES) back of a constantly expanding offer 2007 --FOOD RETAILING --EBOOKS READING (KINDLE) and seamless experience. This way, it multiplies contact points and ultimately 2008 --OFFICE SUPPLIES maximizes its asset turnover. Via third- party sellers, and without taking any 2010 --AMAZON STUDIOS experimental risk, it uses its “millions of groupies” and customer reviews to test 2011 --FINANCING SERVICES (SMALL BUSINESSES LENDING) the attractiveness of a new product, as well as the profit that it will draw when 2012 --WINE it decides to launch it under its own --WORK OF ART brand. As CEO Jeff Bezos says: “your 2013 --HPC & OTC DRUGS margin is my opportunity”. 2015 --BOOKS (BRICK & MORTAR STORES)

2016 --VEHICLES

2017 --FINANCING SERVICES (CREDIT CARDS)

Source: Amazon

2 | CONSUMER, BRANDS & RETAIL WHITE PAPER 3 Whole Foods Market: physical retail is dead, Truly integrated “Amazonian” governance long live physical retail

According to Steven Lowy, Co- FIG 3: AMAZON IS SPEEDING UP WITH INNOVATION Current retail battlegrounds include goodwill. To grab further ground, it delivery service in nine US States CEO, Westfield, “Amazon is truly disruption in US fast fashion and in needs to achieve critical mass and by the end of the year. The online integrated; it is fast, it is innovative and Amazon 17.4 food retail, where Amazon is fighting build up its purchasing power to giant said these closures were it is speeding up with innovation”1. It Volkswagen 15.1 head-to-head with Walmart. Amazon’s confront FMCG producers in price unrelated to the WFM deal but some has come from nowhere and today Alphabet 14.5 move into FMCG was natural, since the negotiations. The tactical way to do experts had viewed this deal as a – unlike physical retailers that are Intel 12.8 potential for multiplying contact points this is around national brands, which consequence of the Fresh’s difficulties often a patchwork of companies put Samsung 12.8 with consumers is very high in this it needs to build (or acquire) to obtain in expanding its grocery business together over time through M&A – it Microsoft 12.7 segment. Whole Foods Market (WFM) credibility. Amazon is not a food retail without the backing of a physical is perfectly integrated. This is one of Roche 11.7 was the first move in what looks like brand, hence its acquisition of Whole store network. Undoubtedly, Amazon its main unfair advantages. It’s why Apple 10.8 a strategy to win global market share Foods Market, a well-respected brand will reshuffle its supply chain to place every decision is managerially and Merck 10.3 gains in brick-and-mortar retailing. in the USA. these WFM stores at the heart of the technically executed faster than it will Toyota 9.6 delivery process. So shoppers who To compete in B2C rather than just It is worth noting that early November ever be at any physical retailer. 0 2 4 6 8 10 12 14 16 18 order online could either pick their 2016 R&D spending (USDbn) Trailing twelve months R&D spending (USDbn) acting as a distribution channel, 2017, Amazon announced it would purchases up a store, or have them Like a government, Amazon creates Amazon needs to build brand stop its Amazon Fresh grocery delivered at home. the institutions and infrastructure Source: Bloomberg, 2016 Global Innovation 1000 study that preside over every commercial interaction within its social and FIG 4: THE AMAZON EFFECT SPREADS ACROSS THE SECTORS commercial ecosystem. And just Whole Foods Amazon cuts Media report Amazon as a government collects taxes, WholMe aFrokoedt s- Amazon’s Amazon filed Amazonprices at cuts Mediagets approval report Amazon to sell Every decision is AmazMoanr kdeeta -l Amazon’swardrobe Amazona meal kit filed pricesWhole atFoods prescriptiongets approval drugs to sell in Amazon levies a commission on anAnmoauznocne mdenatl wardrobeannouncement atrademark meal kit WholeMarket Foods prescriptionseveral US drugsstates in managerially and each transaction, proportional to the 1a1n0nouncement announcement trademark Market several US states technically executed faster 110 material and services made available to than it will ever be at any counterparties2. This metaphor leads us 100 100 physical retailer. to talk about “Amazonian governance”, whose disruptive impact goes well 90 beyond retail, judging by how the 90 market reacts to the slightest initiative 80 by Amazon on any segment. 80 70 70

60 60

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Kroger Zalando CVS Blue Apron Kroger Zalando CVS Blue Apron Source: Datastream, Bryan, Garnier & Co

1. Shoptalk Europe 2017, Copenhagen October 2017 2. This Is Exactly Why You Should Be Terrified About Amazon | Jon Bond and Ben Clarke (Co Chairman and Co Founder & President of The Shipyard) | October 2017

4 | CONSUMER, BRANDS & RETAIL WHITE PAPER 5 2: The “New Retail” model... or when physical stores are The death of the store is exaggerated... far from dead Even for specialty apparel retailers

The “retail apocalypse” has been a FIG 5: % NET OPENING STORES VERSUS. NET CLOSING (US RETAIL, IN 2017): much-discussed topic in the media, Physical stores still account highlighting the severe oversupply of Superstores/WH Clubs retail stores in a context of fast-growing for 92% of total sales. Convenience Stores online sales. Even if online grew at a

faster pace (2Q 17: +16.3% versus. Mass Merchandisers +4.4% for total US retail sales), it is worth noting out that physical stores Speciality Softgoods

still account for 92% of total sales. Speciality Hardgoods

Moreover, IHL Group published a report Drug Stores in August that contradicts the general Food/Grocery feeling of a retail apocalypse: showing

a net increase of 4,000 store openings Fast Food expected across the US in 2017. Even for specialty apparel retailers, which are Bar/Restaurants

hardest hit by the retail turmoil (with a net Department Stores loss of over 3,100 stores), approx. 1.3 chains are opening new stores for every 0 20 40 60 80 100 % Banners Gaining Stores % Banners Closing Stores chain closing stores. Source: NRF, IHL Group

Despite predictions, the retail apocalypse has not happened, bricks-and- mortar still stand strong.

6 | CONSUMER, BRANDS & RETAIL WHITE PAPER 7 ONE INTERESTING MEGA- FIG 6: AVERAGE NUMBER OF TOUCHPOINTS USED WHEN SHOPPING: WHY CHINA IS LEADING FIG 7: ALIBABA’S KEY STEPS IN ONLINE TO OFFLINE (O2O) TREND: “ONLINE FIRST” O2O (ONLINE TO OFFLINE) PLAYERS OPENING 66 COMMERCE Date Event Strategic rationale PHYSICAL STORES January 2016 First own brick-and-mortar Alibaba’s first entry in the offline Chinese Millennials, numbering store in Tianjin world During Shoptalk Europe in 2017, all between 350 and 400 million, are June 2016 Alibaba increases its stake This was considered as a test speakers, particularly managers from 39 amongst the world’s most connected to 28% from 10% in Chinese project to combine in-store 38 38 department store operator shopping with its online payment the online world, agreed on the fact 33 and sophisticated consumers and 31 Intime service AliPay that brick-and-mortar stores remain a 27 foreshadow future global consumer key link within the value chain: we have 23 trends and digital strategies. Secondly, October 2016 Partnership with electronics Build an “O2O” model (Online to retailer Suning Offline) by combining Alibaba’s 16 15 15 seen many examples of online players Alibaba already accounts for circa online assets and Suning’s physical 10 12 opening physical stores, leading to the 9 7 8 75% of online sales and more than store network (1,600 stores) 4 6 2 adoption of omnichannel strategies. 0 one-tenth of China’s total retail sales. October 2016 Jack Ma reaffirms the “New "Pure eCommerce will vanish soon

These can bring several benefits to 1 2 3 4 ≥ 5 Finally, Alibaba runs China’s dominant Retail” concept and will be replaced by New Retail” brands and groups: 2000 2010 2014 2015 mobile payment service with AliPay November 2016 Alibaba takes 32% stake in Alibaba has access to Sanjiang’s (450+ million users). supermarket chain Sanjiang stores to help drive the grocery Enhanced customer experience: Source: NRF, IHL Group business that pure online players struggle to develop Regardless of how convenient online Alibaba is therefore well placed to shopping is, a recent Capgemini study benefit from the explosion of O2O January 2017 Acquisition of Intime This deal is fully consistent with Alibaba’s strategy for omnichannel 3 of them only used one or two touch of 95% of its Prime members and found that 70% of consumers still commerce in China. Long before and and to further digitalize wanted to visualize, try on and feel points. This trend is consistent with the 80% of the US population. A physical Amazon acquired WMF, Alibaba physical retail products before purchasing them. progressive blurring of online and offline store is a “mini-warehouse”: shipping had been building up a brick-and- February 2017 Partnership with Chinese Bailian will leverage Alibaba’s big Showcasing products physically is a and explains why consumers ask for a from the store can speed delivery mortar store network, mostly through retail group Bailian data capabilities and integrate key customer experience enhancer, as seamless shopping experience across and reduce shipping costs, especially partnerships and acquisitions. In 2016, AliPay. The two partners will share merchandising capability, logistics all channels. In this connected world, in densely populated areas where Alibaba Founder Jack Ma advocated experimented with by online homeware and technology retailers Made.com and Home24. there is an obvious rule: the more large warehouses are impractical. the concept of “New Retail”, which November 2017 Partnership between Alibaba, Build another “O2O” alliance by contact points, the more opportunities Eyewear players such as Warby Many eCommerce companies means “the integration of online, offline, Auchan and Ruentex combining Alibaba’s online assets Parker, Mister Spex and Brillen.de brands have to engage their remain unprofitable because of a logistics and data across a single value (i.e. USD2.9bn investment by and physical store network (446 have either opened stores or partnered customers and the higher the chances high customer acquisition costs, chain”. With eCommerce accounting Alibaba to get a 36.2% EI in RT-Mart and Auchan hypermarkets) Sun Art Retail vs 36.2% for with traditional opticians because of conversion and retention are. plus fulfillment costs considering for 15% of China’s total retail market, Auchan and 4.7% for Ruentex) they know that the vast majority of According to Aberdeen, companies that more and more e-tailers are Alibaba said it was targeting digital consumers are still reluctant to buy with well-defined omnichannel offering free shipping and returns. transformation of the remaining 85% spectacles online (e.g. less than 5% of customer experience strategies in This initiative is particularly costly for rather than increasing the online share. Source: Alibaba, Bryan, Garnier & Co the US market). place achieve an average 91%4 higher online fashion retailers which cope YOY increase in customer retention with high return rates, like Zalando Higher customer retention: rate, compared to those without. (approx. 50% returns across Europe) The graph above shows that on or Matchesfashion.com (37% for average, 42% of customers use four A perfect logistics hub in densely women). Moreover, well-trained store or more “touchpoints” (i.e. mobile app, populated areas: With the acquisition associates are still the best way to website, store, social media, etc.) when of WFM, Amazon now counts 436 convert in-store returns into sales. buying an item, whereas in 2000, 83% refrigerated stores within approx. 15km

3. Making the Digital Connection: Why Physical Retail Stores Need a Reboot | CapGemini | January 2017 4. 25 Amazing Omnichannel Statistics every Marketer Should Know | V12 DATA | January 2017

8 | CONSUMER, BRANDS & RETAIL WHITE PAPER 9 3: Experiential Retail

Alibaba’s Hema supermarkets (13 FIG 8: “NEW RETAIL”, THE PIONEER CONCEPT OF ALIBABA stores at this stage) are a concrete application of its “New Retail” model, Stores must become which has incubated for the past two years and aims to reinvent traditional experiential destinations. A mobile app for a seamless supermarkets by marrying online and shopping experience: customers can offline experiences. Using the data scan the barcodes via Hema’s mobile collected from Hema’s mobile app, app, which is linked to its AliPay platform the chain can curate fresh food and products for Hema stores based on customers located around a specific store. Fresh food can be either delivered at home, or be directly prepared by Hema chefs to eat in the Food is the new entertainment: store, representing a unique in-store Shoppers choose live seafood, get it experience. Alibaba mentioned that cooked on site and eat in the spacious sales per store were three to five times seating area. As a result, sales per unit higher than traditional supermarkets area are 3x to 5x higher than traditional and conversation rates for Hema app supermarkets users making a purchase reached up to 35 percent.

With all this acquired knowledge in physical retailing, Alibaba feels confident enough to open its first Hema stores also serve as fulfilment own physical mall, expected for April sites for orders placed through the 2018 at its headquarters in Hangzhou. app. Each store serves a radius of 3km, This “More Mall” will feature many digital making deliveries within 30min technologies such as virtual fitting rooms, 3D makeup testing mirrors, and a tech-based grocery store that uses

Hema supermarkets’ feedback. Source: Alibaba

10 | CONSUMER, BRANDS & RETAIL WHITE PAPER 11 Why are “big boxes” such as Costco Experiential retail, or the art of combining and IKEA successful in France? the useful with the pleasant

KEY FACTS Millennials around the world are all their consumers to an entertainment- Beauty is arguably one of the most prioritizing experiences over ownership, based model. Experiential retail is active segments on the internet and as evidenced by the booming sharing about combining the useful with the social media, with countless blogs 1 2 3 economy and the global success of pleasant and is part of non-price and how-to videos on Youtube Airbnb, Netflix and Spotify. competitiveness. and Instagram that are increasingly France is among the countries in France is one of the most The hypermarket, often located on In a recent survey, Eventbrite pointed influencing consumer purchase Europe with the highest penetration fragmented markets in Europe, the outskirts of cities, accounts for out that 78% of millennials would Hudson Bay and Westfield CEOs, decisions. It is no accident that beauty rate of modern retail (>90%). with omnipresent independent ~50% of the French FMCG market choose to spend money on a desirable and the Managing Director of Harrod’s retailers were amongst the first to carry operators, in particular Leclerc, and is perceived as an outdated experience or event over buying all agree that stores must now be more out a digital transformation of their which has been agitating the big-box format (>2,500 sqm) with something desirable, and 55% say they than just places to buy products: they stores, and Sephora (LVMH) has been market for half a century. an uncertain future. are spending more on events and live must become experiential destinations. a trailblazer in going “phygital” (online experiences than ever before. Harrods focuses on food halls, hard sales: 15% of total revenue), with its luxury and beauty, with the latter Against this backdrop, how can we looking for treasure hunts. So even if new “New Sephora Experience” store Retailers must obviously adapt their giving many opportunities to engage explain the success of IKEA stores in Costco spends nothing on advertising concept: customers are encouraged stores to this affinity for individualized with customers (videos and tutorials, France (>20,000 sqm) and why the and requires a paid membership card to discover new products, learn, play experiences. So brands are switching teaching customers how to use first Costco store in France (13,750 to access entry, the retailer achieves and share their beauty with a plenty of from a transactional relationship with products and the use of VR). sqm) which has opened in June, got an impressive comparable store sales in-store digital tools. off to such a strong start? Indeed, the performance on its domestic market US retail brand has always focused on (see graph below), fueled by a high “RTR” (“Reasons to Return”) based on retention rate: in 2016, its 48m members Sephora’s connected store concept: features a range of seamless retail technology, from the lowest prices combined with high in the US and Canada renewed at a digital discovery tables and virtual shopping baskets to a selfie 3D-mirror that enables quality (Costco is not a discounter), 90% annual rate. Both Costco and IKEA customers to interact with their friends and Sephora’s ambassadors. Touchscreens give which creates a sense of excitement are trivial but true examples of what, instant access to a digital catalogue of 14,000 items, which can be collected from the store and urgency amongst consumers today, retail is about: “Retailtainment”. or delivered at home.

FIG 9: COSTCO AND WALMART US COMPARABLE STORE SALES EXCLUDING FUEL (FX-N, %): Beauty hub: Group courses on specific themes can also be run at the Beauty Hub.

5 Virtual artist: consumers can test thousands of different looks on an iPad or a 3D mirror. 3.7 The app also includes step-by-step virtual tutorials using augmented reality technology. 3

1.3 1.0 0.5 In the end, when leaving a store, shoppers have to get not only products but also memories back to home. Retailers switch from a channel-centric to a customer-centric experience, creating a sense of delight for shoppers. In that respect, we must mention Apple, which is ahead of the curve. Apple stores are now rebranded “Town Squares” to foster a strong sense of -0.4 community. This new retail concept includes a “Forum” (where artists and experts interact with audiences), a “Plaza” (where 2013 2014 2015 2016 people meet up to listen to concerts and events) and “Avenues” with boutique-like windows to touch and try on products. Costco US (%) Walmart total US incl. Sams Club (%) Apple wants you to think of its stores as gathering places. Source: Costco, Walmart

12 | CONSUMER, BRANDS & RETAIL WHITE PAPER 13 Shift in reward criteria: from channel-centric 4: Retailers are to customer-centric KPIs increasingly tech companies

Since consumers and omnichannel Many groups within our coverage The Net Promoter Score (NPS), for strategies are blurring the lines have therefore modified and added example, is calculated from a simple between offline and online, their KPIs to measure and reward the question: “How likely are you to A technological age traditional approaches to evaluating performance of levers that lead to a recommend this product/service to channels are becoming increasingly purchase, and not just value the final a friend or family member?” Tracking make retailers more irrelevant. Classic indicators based transaction (e.g. reputation rate, loyalty, this customer’s satisfaction implies customer-centric. on transactions (e.g. impressive traffic on social networks etc.) and that retailers are increasingly using comparable store sales, sales per make sure that store KPIs factor in the technology and data analytics to track square foot, etc.) must be enriched customer experience (conversion rate, how and why customers shop. This new with new KPIs that take into account satisfaction index). management tool illustrates that retailers criteria such as customer acquisition/ are increasingly tech companies. retention, loyalty and satisfaction.

FIG 10: NET PROMOTER SCORE:

DETRACTORS PASSIVES PROMOTERS

0 1 2 3 4 5 6 7 8 9 10

NPS % of Promoters % of Detractors (9s and 10s) - (0s through 6s)

Source: Bain & Co

14 | CONSUMER, BRANDS & RETAIL WHITE PAPER 15 Technology to serve customers better

Nearly half of the American population FIG 11: THE MIXING MACHINE along the giant Amazon, because and customer experience firm InReality, frequently shop at Walmart’s stores “We are a service company personalization coupled with curation 75% of customers say digital options and Amazon’s websites, while Alibaba that just happens to sell shoes” (thanks to algorithms) are their best that help compare products or get serves a third of Chinese people. IN-STORE VIDEO TRACKING competitive edge to serve customers in price comparisons would encourage Global retailers are sitting on vast pools MOBILE PHONE TRACKING Tony Hsieh, Zappos CEO need of advice and customization. them to buy in-store, and 78% want of customer data, which is collected from digital technologies to help them find GEOLOCATION DATA numerous sources: social networks like So far, their technological edge makes Technology is also favoring a seamless a particular product. This is why so Pinterest, Facebook, and Instagram, TRANSACTION DATA online players seem more customer- experience that engages customers many brands and groups have been in-store video tracking, mobile phone SOCIAL NETWORK centric. As shown by the chart below, across all channels, which has a direct embarking on a digitalization of their tracking, loyalty card data, and LOYALTY CARDS online fashion companies Asos and impact on engagement and conversion physical stores, with the introduction of geolocation data from mobiles. However, Zalando have more than tripled their rates. According to the “Reality of in-store digital tools such as interactive, 5 there is a key difference: online players tech teams over the last five years, Retail” report from in-store analytics 3D augmented-reality mirrors. already know how to leverage this confirming that they are central to their resource to improve customer service, retail business strategies. In marketing FIG 12: TECH EMPLOYEES WORKING FOR ZALANDO AND ASOS whereas traditional retailers barely know Source: Bryan Garnier & Co functions, their main tasks are data (AS A % OF TOTAL HEADCOUNT): to use it. collection, analytics and algorithms to personalize customer experience. 16% The more curated the offering, the higher the customer retention and 14% repeat orders. Amazon claims to have the world’s biggest selection of products 12% available on its website, creating an “agony of choice” and confusion 10% amongst consumers who do not know precisely what to buy. For example, a 8% shopper looking for “a plain blue shirt for men” has to navigate 10,776 results. 6% FY2013 FY2014 FY2015 FY2016 FY2017 This is why we believe that personal styling services such as Stitch Fix (US) Asos Zalando

or Outfittery (Germany) can coexist Source: Companies Data

Physical stores are becoming digitalized.

5. Reality of Retail | InReality | April 2015

16 | CONSUMER, BRANDS & RETAIL WHITE PAPER 17 Artificial intelligence at the center of the game

As the saying goes, “50% of all The term artificial intelligence was first How can AI help retailers? First and eBay is not an obvious destination for fashionistas but the eCommerce company intends to make up for this with its smart marketing spend is wasted, I just coined by John McCarthy in 1956, foremost, retail AI can learn about personal shopping assistant ShopBot, powered by AI. Shopbot uses deep-learning algorithms combined with natural wish I knew which 50%.” Typically, two years after the death of computer customers, their preferences and their language understanding (NLU) and computer vision to help users express their shopping needs naturally. At Shoptalk Europe, standardized marketing campaigns pioneer and artificial intelligence (AI) behavior to get to know them better. Last eBay Chief Product Officer RJ Pittman presented concrete interactions between ShopBot and consumers based on the three always make it harder for companies theorist Alan Turing. AI, or machine year at the NRF Big Show, The North types of AI: to establish the first touch point with learning refers to the use of computer Face (VF Corp) presented a beta test the consumer. Today, customer data systems to perform tasks that normally of IBM Watson’s cognitive computing Artificial narrow intelligence: Artificial general intelligence: Artificial super intelligence: is becoming very valuable as new require human understanding. This technology, which helps consumers ShopBot simply passes keywords a personalized experience since ShopBot will be able to predict technologies provide tools to analyze is undoubtedly the most disruptive determine what jacket is best for them, from a user’s message as input ShopBot interacts with consumers. consumer behavior and this data and empower artificial technology over the next decade as based on variables like location and into a search engine, which Image recognition based on deep recommend products based on intelligence. Customer data is so it is (already) revolutionizing industries gender preference. For example, hiking then returns search results in a learning algorithms. previous purchases and searches. valuable that last month, Alibaba such as healthcare, automotive, in Iceland in October and commuting messaging window. announced a 3-year investment plan manufacturing (e.g. adidas’ automated in New York in January would create of USD15bn to develop quantum shoe factories), banks (e.g. blockchain) different results. Based on data collected AI assistants are certainly the future FIG 14: GAFA* IS ALWAYS ONE STEP AHEAD IN AI computing and artificial intelligence. and of course, the retailing industry. from 55,000 users, the technology of retailing and elevate customer resulted in a 60% click-through rate and experience to a new level, as 75% total sales conversions. AI Computer System Intelligent Personal Assistant evidenced by the AI assistant race IBM Watson amongst internet giants. Indeed, eBay eBay ShopBot FIG 13: DATA AT THE SERVICE OF CUSTOMIZATION there have been numerous major Amazon Amazon Echo, Amazon Alexa announcements about AI assistants and chatbots from digital and internet Facebook Messenger Flashchat giants. In 2016, Gartner estimated that Alibaba DT PAI COLOUR more than USD2bn in online shopping JD.com JD Smart Speaker RETAILER DATA had been performed exclusively by Google Deepmind Google Home mobile digital assistants and it also Microsoft DeepCoder Bot Tay, Microsoft Cortana predicted that by 2020, 85% of Apple Siri customer interactions will be managed * Google, Apple, Facebook, Amazon Source: Companies Data and press reports without human interaction. Extracting SHAPE fashion DNA via deep learning AI assistants elevate FEATURES customer experience to a new level.

PATTERN

Source: Zalando

18 | CONSUMER, BRANDS & RETAIL WHITE PAPER 19 In the tech race, M&A is the retailers’ fuel

Increasingly, fashion groups are particularly aggressive in M&A since its acquisitions of tech companies, while challenged to remain trend-focused acquisition of Jet.com (August 2016), others such as Dia or Morrisons have and competitive in volatile apparel with at least four takeovers of online preferred to partner with Amazon to market conditions, but internal efforts players (Hayneedle.com, Shoebuy. offer its Prime Now service. are often not enough to get ahead com, Modcloth.com and Bonobos) of the pack. At first, it could appear to accelerate in this channel. The In fashion, however, we have started to that this focus on technology mainly world’s largest retailer keeps up in the witness early signs of growing interest concerns traditional retailers. But at race to AI through its recent alliance in online players: Galeries Lafayette, Shoptalk, many start-up managers with Nvidia and the launch of its own whose online sales only represent admitted they were also increasingly innovation hub dedicated to robotics, 2% of total revenue, is carrying out relying on external expertise for virtual and augmented reality and AI. a proactive digitalization strategy to complex technology (e.g. predictive increase this share to 10% by 2020. analytics tools, AI-powered chatbots Technology can also be a speed- The department store has acquired and AR). In this field, Amazon looks for enhancer: the US retailer Target Bazarchic (September 2016) and bolt-on acquisitions with very specific acquired technology company Grand more recently, fashion and homeware technologies, covering interactive Junction in August of this year, in order eCommerce La Redoute (August data-driven infographics creation, 3D to move more quickly into the business 2017): the latter generates 85% of its body model creation, customer data of same-day delivery. The software sales online (total revenue of EUR750m protection and AI. helps to determine the most efficient, in 2016). The acquisition of a 17% fastest route for a local delivery, while stake in Showroomprivé by household Retailers are more and more motivated also tracking deliveries and giving goods retailer Conforama (Steinhoff) is to either partner with GAFA’s dedicated the retailer an overview of carrier another interesting example of strategic AI units, or acquire tech startups’ performance. partnership between a traditional technological know-how in order retailer and an eCommerce player. An to leverage it and roll it out across We have the feeling that most European omnichannel strategy is also front-of- their operations. Walmart has been retailers have been rather discreet about mind for all these companies.

Since this tech race is far from over, we are convinced that acquisitions of tech Summary companies are more than likely in the coming months, either as traditional With its all-conquering, digital- of the online and physical worlds. stores to drive loyalty and sales. groups catch up with online-only first offer and the ability to make Other digital-first retailers are As traditional retailers rush to keep players, or from eCommerce players decisions and innovate faster making the online to offline move up with the revolution started by looking to gain expertise in a wide range than anyone else in the sector, in a trend that’s being led by Amazon, they are initiating a wave of fields such as AI, augmented reality, Amazon lit a fire underneath the sophisticated operations in China. of M&A activity that may see many data analytics, seamless payment retail industry. However even this All retail brands – established retailers transform themselves, in solutions, voice recognition and giant has realized that success in and online – are recognizing the effect, into technology companies. chatbots. Retailers’ M&A teams should retail depends on the coexistence potential of “experiential” physical continue to head along to e-commerce and tech summits, open-minded and looking for the next rare gem to acquire.

20 | CONSUMER, BRANDS & RETAIL WHITE PAPER The future of Think out retail is now. of the box. White Paper Contributors About Bryan, Garnier & Co

CHARLES TELLIER ANTOINE PARISON Bryan, Garnier & Co is a European, full service growth-focused independent investment banking partnership Managing Director, Investment Banking Equity Research Analyst founded in 1996. The firm provides equity research, sales and trading, private and public capital raising as well as M&A Consumer, Brands & Retail Retail & E-commerce services to growth companies and their investors. It focuses on key growth sectors of the economy including Technology, [email protected] [email protected] Media, Telecoms, Healthcare, Smart Industries and Energy, Consumer, Brands & Retail and Business Services. Bryan, Garnier & Co Ltd is a fully registered broker dealer authorized by the FCA in Europe and the FINRA JEAN CAILLIAU CEDRIC ROSSI in the U.S. Bryan, Garnier & Co is headquartered in London, with additional offices in Paris, Munich and New York. Executive Advisor, Investment Banking Equity Research Analyst The firm is a member of the London Stock Exchange and Euronext. Consumer, Brands & Retail Consumer Goods & E-commerce [email protected] [email protected]

CLEMENT GENELOT Equity Research Associate Bryan, Garnier & Co Equity Research Coverage Consumer, Brands & Retail [email protected] EUROPE

Investment Banking Team

Since 1996, more than 300 companies have trusted us to deliver more than €10 billion in investment banking transactions, raising private and public financing, as well as advising on mergers and acquisitions.

PARTNERS & MANAGING DIRECTORS ASSOCIATES & ANALYSTS Olivier Beaudouin | Consumer Electronics Priyanshu Bhattacharya Stanislas de Gmeline | Consumer Electronics Alexandre Brestin Guillaume Nathan | Media Entertainment Pierre Cuer Philippe Patricot | Technology Clement Decante Greg Revenu | Retail Technology Amina Sagou Thibaut De Smedt | Retail Technology Marc-Antoine Serfaty Jakub Simon DIRECTORS & VICE PRESIDENTS Awa Sow Jonathan Bohbot Lars Dürschlag Jonathan Foiret-Hurbin Marc-Antoine Janny Berk Kirca Pierre Lafitte Frans-Matthis Pleie

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With seasoned research methodology and fundamental bottom-up approach, Bryan, Garnier’s analysts provide opinionated investment insights with leading perspective across the most dynamic Technology sectors in Europe. Bryan Garnier & Co developed the most dedicated Technology research platform in Europe, with more than 150 stocks covered.

ANALYSTS & RESEARCH ASSOCIATES Loïc Morvan | Luxury & Cosmetics 6 Analysts | 40+ Stocks Covered Richard-Maxime Beaudoux | Video Games & Payments Antoine Parison | Retail & E-commerce Xavier Caroen | Automotive Technologies Gregory Ramirez | Software & IT Services With more than 150 professionals based in London, Paris, Munich and New York, Bryan, Garnier & Co Pierre Antoine Chazal | Smart Energy Cédric Rossi | Consumer Goods & E-commerce combines the services and expertise of a top-tier investment bank with client focus of a boutique. Thomas Coudry | Telecoms Virginie Roumage | Food & Beverages Nikolaas Faes | Beverages Dorian Terral | Semiconductors Clement Genelot | Consumer, Brands & Retail Fréderic Youboué | Technology, Media, Telecoms

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