Q&A With Adrianne Shapira, Managing Director and Senior Retail Analyst at Goldman Sachs

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\"RRWe talked with Adrianne, one of whose many areas of expertise includes online retailing, about the meteoric growth of online shopping, how it’s changing the retail landscape, and what it says about how consumers will spend in the future.

Q: There have been many different growth figures cited for e-commerce lately. How rapidly do you feel it is growing, and how big a part of retail sales will it become in the next 3-5 years?

A: Online’s growth has been a powerful phenomenon since 2000; today online sales are approximately $134 billion per year, or 4.4% of core retail sales. Since 2000, e-commerce sales have more than tripled, reflecting a CAGR of 19%. We believe that over the next decade, the number of internet buyers and spending per buyer will grow at CAGRs of 7% and 8%, respectively. This should power online revenue’s CAGR to 15% over the next decade, or five times that of traditional retailing, which we expect to grow at a more modest 3%.

Q: Aren’t the lines between bricks-and-mortar and e-commerce beginning to blur, with consumers able to place an e-order in a store for an out-of-stock size or color, etc.? How blurred will they become ultimately, and why?

A: We are definitely seeing the lines blurring. In fact, many retailers are thinking about their businesses holistically by encouraging their sales associates to tap its online inventory to service its store customers. Kohl’s has rolled out kiosks chainwide to enable shoppers to fulfill their shopping online if they are unable to do so in store. Nordstrom is not only encouraging their shoppers and associates to think this way, but is planning to report sales on a multi-channel basis starting next year, aggregating full line, direct, and online. This is the ultimate blurring of the lines.

Q: Will e-commerce growth vary by market segment – i.e., specialty vs. big box vs. department store vs. discount? Which retail and/or product categories are particularly suited to the e-commerce channel, and which present more challenges to merchants?

A: There are clear differences in terms of online penetration. On one end of the spectrum, commoditized categories such as books, music, video, consumer electronics and toys, where price is the ultimate determinant, have seen a steep ramp to double-digit online penetration. On the other end of the spectrum, where apparel sits, trend, fashion and fit weigh into the equation, and ramps have been flatter. However, as the population grows increasingly comfortable shopping online and websites make this transition easier, we would expect even the less-obvious online categories to see increased penetration as well over time.

Q: What are the benefits to retailers – and downsides – of rapid e-commerce growth? What are the gross margin, SG&A and earnings implications of this trend?

A: Dot-commerce yields pricing transparency and requires an incremental SG&A spend, but we see potential for greater profitability, as share gains are levered across a higher margin contribution rate to power higher incremental earnings growth. If harnessed and executed well, we believe online’s growth and profit potential will further widen the competitive moats of leaders. On the flip side, those who underfocus, underspend and underappreciate this potential will likely underperform in a retail world where future growth is tied to mounting online penetration.

Q: How will the consumer be impacted?

A: We believe the consumer wins. Increased competition and pricing transparency should yield lower prices. Free shipping drives convenience as well.

Q: Among the companies that exist today, who will be the big winners? The losers?

A: To evaluate who is most aggressively embracing the long-term online opportunity, we looked beyond the current economics and sought to identify which retailers were making specific and successful investments in the customer experience to drive growth and capture loyalty – in our view, the truest test of their online commitment.

Q: What will happen to total retail square footage over the next 5-10 years, and what types of marketing strategies will mall developers have to implement to generate foot traffic and maximize sales for physical stores?

A: The two forces driving changes to retailers’ real estate decisions are increasing online penetration and the increase in number of categories digitized. As these changes take hold, we expect smaller and fewer retail stores to be built. We would expect a widening gap of productivity between A and C malls as retailers focus on better locations to drive marketing, and reevaluate the need for stores in marginal centers. We believe retailers need to weigh the returns of opening stores against capitalizing on the incremental sale online.

Q: How will technology continue to change the shopping experience?

A: Mobile and social media could revolutionize the shopping experience. Today, consumers are using their mobile devices as a shopping tool to research and compare prices. Going forward, we could see mobile replace point of sale terminals. Social media could increasingly impact consumer preferences.

Q: Many industry-watchers have opined that the recession has changed the consumer, and made him/her more cautious, value-conscious, and fiscally responsible. Do you agree with this? If so, is it a “permanent” change, or will consumers go back to their spendthrifty ways once employment improves?

A: Value is in vogue. We have seen clear sales outperformance across dollar stores, auto parts retailers, and off-pricers. While discretionary sales have recovered, consumers are focused on the price/value equation. Across all demographics, consumers are striking the balance between frivolity and frugality.



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