Retail Insight Fulfilling Consumer Expectations

2

Paula Rosenblum Managing Partner

Retail Systems Research (RSR)

Peter Zaballos Vice President, Marketing & Product SPS Commerce

speaker Speakers

agenda Agenda The State of Omnichannel Retail Retail Insight Report Findings Recommendations Q&A

What is the Retail Insight report?

Survey 100s of retailers, distributors, suppliers and logistics 3

Years of history

Key Findings: consumer expectations

75% Retailers see rising consumer expectations for rapid fulfillment in 2015

44% Suppliers see rising consumer expectations on item information

Everyone needs help keeping pace with the consumer

94% Haven’t executed an omnichannel strategy; 37% have no long-term strategy

The perfect order ‒ then

retailer vendor

On time

Complete

Damage-free

Complete & accurate documentation

Consumer

The omnichannel perfect order

Product Information Social validation

Inventory information Competitive pricing

Convenient fulfillment Convenient returns

retailer

vendor

3PL

SPS Commerce Network for Omnichannel Retail

1 55K trading partners

Membership

1.3M products

Sourcing

7K companies 35M

UPCs

Item Management

4,000 models supported

Fulfillment

360K retail locations

Analysis

$1+T orders annually

Volume

Paula Rosenblum Managing Partner, Retail Systems Research (RSR)

Retail Insight: Fulfilling Consumer Expectations SPS Commerce 2014 Industry Benchmark

PAULA ROSENBLUM, MANAGING PARTNER

OCTOBER 2014

Agenda About RSR & our BOOT Methodology© Survey Respondents

Findings

•  Overview

•  Business Challenges

•  Opportunities

•  Organizational Inhibitors

•  Technology Enablers

Recommendations

What is RSR? •  Market Intelligence, focused on retail

•  Context: the business challenges & opportunities that drive technology investments

•  Pragmatic insights

•  Powered by extensive retail experience

•  Fueled by a deep bed of research data

•  We help retailers keep their IT strategies aligned with corporate objectives

•  We help solution providers align their products and messages with retailers’ needs

RSR’s BOOT Methodology©

Winners sell more “stuff” but… they also think and act differently than their competitors.

Business Challenges Opportunities Organizational

Inhibitors

Technology Enablers

•  Third consecutive year •  Survey fielded in early September 2014 •  Respondents: SPS Commerce ecosystem (N=214)

•  Retailers & Distributors (28%) •  Merchandise Vendors & Suppliers (65%) •  Logistics Providers (LSPs) (7%)

•  More details on respondent profiles available in the report

About the SPS Benchmark Survey

Research Overview

Key Takeaways •  Expectations for sales growth dampen slightly

•  Budgets either increasing or remaining the same

•  Omni-channel supply chain harder than we thought! •  Respondents rated their execution a bit more poorly than they did last year

Sales Growth Slowing….

Source: RSR Research, October 2014

23%

60%

14% 3%

30%

55%

12% 4%

Much better than 2014 Somewhat better than 2014

The same as 2014 Somewhat worse than 2014

Expectations for Sales Growth in 2015

2014 2013

…but still headed in the right direction

Budgets Generally Stable

Source: RSR Research, October 2014

44% 47%

10%

46% 44%

10%

increased Stayed the Same Decreased

How has the Budget for 2015 Changed Compared to 2014?

2014 2013

Retailers least likely to report an increase (38% vs. 45%) Most likely to report a decrease (13% vs. 7%)

It’s a good thing there is budget available because…..

The More We Learn, The Less We Know…

Source: RSR Research, October 2014

5%

26% 32%

37%

6%

26%

38%

29%

Advanced: We are ahead of most of our

peers and have executed on most of

our strategy.

Moderate: We have identified our strategy

and are executing on it.

In Process: We are developing our strategy

and beginning to execute the plan.

Lagging: We are exploring our omni-channel options and haven’t yet set our long-term strategy.

How Do You Rate Your Omnichannel Strategy and Execution Today?

2014 2013

•  General concurrence across the ecosystem •  Retailers more apt to have identified strategy (32% vs.22% of all others)

What makes it so hard?

Revenue

€ $ £

Sell More Stuff

The Retail Ecosystem Is As Old As “Forever” And Based On These Assumptions…

€ $ £ Expense

Run Better

€ $ £

Margin & Profitability

Buy Better, Turn It Faster

New Selling Channels Didn’t Change The Model… But Did Add Inefficiencies

Cross-channel: “One Brand Across All Selling Channels” Doesn’t Address Inefficiencies

Omni-Channel: One Brand Across All Selling Channels: Requires Aligning Supply To Demand Differently

And that’s where we want to be now…

The picture looks simpler, but turns out to be very disruptive and hard to achieve

Business Challenges THE CUSTOMER REALLY IS KING

Business Challenges Themes •  Concerns over the economy remain constant

•  Continued increase in customer-themed challenges •  Customer expectations driving change •  Retailers pressuring vendors to help solve the problem •  Another reflection of ‘omni-channel’ challenges

•  Long-term, fear of new consumer technologies and the omni-channel phenomenon on the rise

•  Half of surveyed vendors going direct-to-consumers in some way (the ‘frenemy’ effect)

•  The Amazon Effect

Consumers Stressing the System

Source: RSR Research, October 2014

10%

16%

34%

65%

60%

64%

16%

35%

44%

63%

68%

75%

Natural disasters/wars

Omnichannel strategy

Rising consumer expectations on item information

State of the global economy

Rising consumer expectations on inventory availability

Rising consumer expectations for rapid fulfillment

Top Three Business Forces Impacting the Supply Chain in the Past Year

2014 2013

32%

23%

23%

19%

16%

29%

69%

77%

19%

20%

24%

30%

31%

38%

66%

67%

Politics/regulations

Globalization

Social media

Mobile commerce

Omnichannel retailing

New consumer technology

Consumer buying preferences

Economy

Top Three External Forces that Will Affect Your Business in the Next Five Years

2014 2013

Source: RSR Research, October 2014

Retailers more concerned about the consumer (42% vs. 36% all others) Less concerned about globalization and politics (12% vs. 25% all others)

Long-term: Mostly More of the Same

The World of Frenemies

Source: RSR Research, October 2014

16%

1%

47%

8%

50%

Our own stores

Our own kiosks

Our own e-commerce

site(s)

Our own mobile apps

We do not sell direct to

consumers

Vendors Selling Direct to Consumers Through...

The term “channel conflict” leaves our vocabulary

More of The Amazon Effect

Source: RSR Research, October 2014

42%

21% 19% 17%

1%

Rapid fulfillment Comprehensive item information

Drop ship capabilities

Accurate visibility to

inventory levels/locations

Streamlined returns

Biggest Challenge Retailers Asking Merchandise Vendors to Solve

Opportunities

THE CONSUMER DEFINES THEM

Opportunities Across the Ecosystem •  “What Has Impacted Consumer Buying Decisions?”

•  Price •  Availability •  User reviews

•  Continued rise in digital selling channels •  Retailer expectation to reduce “ship-from-store”

•  Manufacturers/vendors re-focus on their own brands

•  LSP’s focus on service

•  What’s most important in the retailer/vendor relationship?

Continued Hammering on Price…

Source: RSR Research, October 2014

NA

NA

5%

24%

20%

29%

29%

44%

27%

68%

78%

13%

23%

28%

31%

34%

38%

41%

52%

53%

62%

85%

Digital experience within the store

Promotions (proximity-based)

Visibility in social media conversations

Breadth of product assortment

Images/video

Access to helpful employees (in store, call center, etc.)

Promotions (general)

Product information

User ratings/reviews

Product availability

Pricing

All Factors that Have Impacted Consumer Buying Decisions in the Past Year

2014 2013

..with new tidbits

Retailers Disrupted: A Mélange of Selling Channels

Source: RSR Research, October 2014

74%

16% 2% 2% 7%

19%

67%

12% 2%

7%

47%

40% 7%

3%

12% 52%

33%

7% 7% 28%

5%

53%

1 (drives the most revenue)

2 3 4 5 (drives the least revenue)

Rank Selling Channels Based on Their Revenue

Stores E-Commerce site(s) Mobile sites Mobile apps Catalogs

Shifting the Mix of “Ship from Stores”

Source: RSR Research, October 2014

18%

25%

21%

16%

18%

11%

9%

9%

34%

40%

In 3 Years

Today

What Percent of Online Orders Are Fulfilled From Stores? (Retailers Only)

More than 75% 26%-75% 11-25% 5-10% <5%

The mix will shift, but the activity will continue. Major considerations beyond the scope of this study.

Vendors…Distracted

Source: RSR Research, October 2014

23%

24%

24%

24%

27%

31%

32%

41%

42%

42%

Provide flexibility to the consumer to buy, take delivery and return items through any channel

Deliver a single branded entity across all channels

Deliver a broader product assortment, the “infinite aisle,” to our retail customers

Deliver a broader product assortment, the “infinite aisle,” to consumers

Deliver a consistent cross­channel experience to consumers

Support new order management models for retail customers, especially drop ship

Increase direct sales from our company’s e­commerce site

Drive increased traffic to retail stores

Provide more detailed item information

Build a social community around our company/brand

Top Three Omnichannel Opportunities for Vendors

Logistics Providers…Waiting

7%

7%

7%

7%

13%

13%

20%

27%

Suite of offerings

Scalability

Pricing

Warehouse capacity

Reliability

Warehouse locations

Technology

Reputation

Which Attribute is Most Important to Your Customer's Buying Decision? (LSP Responses)

Source: RSR Research, October 2014

The Dating Game

14%

18%

29%

34%

27%

49%

40%

63%

74%

66%

20%

27%

27%

33%

38%

47%

49%

53%

75%

78%

Digital assets

Size of company

Drop ship experience

Visibility to sales and order status

Years of business

Merchandising programs

Compliance with trading requirements

Item assortment

Product Pricing

Item availability

Most Important Capabilities in Establishing New Retailer/Vendor Trading Relationships? (all that apply)

Retailer/ Distributor Merchandise Vendor

Source: RSR Research, October 2014

These may sound like “thin” opportunities, but omni-channel

IS the opportunity

Organizational Inhibitors

WHAT COULD GO WRONG?

A Mind-blowing Answer….

14%

20%

23%

28%

31%

34%

35%

52%

Misaligned metrics and incentives

Silos of information/operations

Lack of executive direction

Company politics/structure

Cultural resistance to change

Legacy systems

Insufficient budget

Other priorities

What Factors are Hindering Your Omnichannel Strategy and Execution?

Consistent across the ecosystem

The Legacy of Retailing Being “As Old As Forever”….

Source: RSR Research, October 2014

25%

16%

26%

30%

18%

28%

33%

43%

Lack of executive direction

Silos of information/operations

Company politics/structure

Legacy systems

Selected Differences: Factors Hindering Omni-channel Strategy

and Execution Retailers/Distributors All Others

Consumers and Competitors Drag the Ecosystem Along

Source: RSR Research, October 2014

12%

14%

19%

21%

36%

44%

53%

Increased budgets

Cloud technologies

Industry expert advice and recommendations

Flexible workforce

Executive mandate

Competitors are already advancing

Consumer pressure to advance

What Factors are Expediting Your Omnichannel Strategy and Execution?

The CEO as Hercules

Source: RSR Research, October 2014

NA

13%

27%

31%

52%

62%

91%

13%

20%

29%

33%

47%

73%

87%

Switching to cloud computing

Utilization of a mobile workforce

Mergers or acquisitions

Employees’ interpersonal skills

Employees’ technical skills

New technology adoption

Management’s vision/strategic planning

Top Three Internal Forces That Will Impact Your Business in the Next Five Years

2014 2013

The Bottom Line

•  “Other priorities” is another word for inertia •  Retailers particularly hampered by technology

•  Customers are the strongest external forces against inertia

•  Management vision is the primary external force against it

•  Technology, the great enabler

Technology Enablers

WHAT DOES IT TAKE TO ENABLE OMNI-CHANNEL?

Tech Enablers, An Overview •  Omni-channel capabilities dominate investment

opportunities

•  Retailers get [some] religion around drop ship capabilities

•  Product Information Management (PIM) still dominated by the spreadsheet

E-Commerce, Expanded Assortment and Warehouse Improvements Dominate

Source: RSR Research, October 2014

7%

9%

10%

10%

10%

12%

14%

16%

16%

19%

21%

34%

44%

25%

41%

14%

43%

36%

44%

33%

40%

40%

25%

26%

23%

26%

10%

29%

28%

26%

26%

26%

26%

26%

17%

29%

20%

28%

13%

18%

11%

20%

11%

10%

8%

4%

13%

2%

38%

3%

3%

4%

5%

5%

3%

Mobile commerce

Social media outreach

Expanded drop ship vendor network

Customer intelligence

New stores/locations

Supply chain collaboration

Supply chain visibility

Inventory management

Warehouse improvements

Expanded product assortment

E­-Commerce advancements

2015 Investment Priorities

Major Investment Some Investment Minor Investment No Plans Not Applicable

Notable Differences •  Retailers and vendors much more invested in social media

outreach than LSP's.

•  LSP's planning major investments in warehouse improvements.

•  Retailers planning major investments in e-commerce: 40% vs. 14% of vendors. Vendors plan "some investments", but not at the level of their retail peers.

•  Retailers also lead in m-commerce investments: 59% planning at least some investment vs. 35% of vendors.

•  Inventory management getting some kind of upgrade: 60% of retailers, 62% of vendors, and 54% of LSPs all plan investment in the capability.

Ready for Drop Ship….

Source: RSR Research, October 2014

32%

11%

11%

27%

21%

21%

1%

5%

5%

14%

20%

19%

26%

42%

44%

Drop ship

Mobile commerce

Cross-channel fulfillment

Deployment Status of Omni-Channel Capabilities

Fully Optimized In process Budgeted Planned activity No plans

…Vendors more ready than retailers, but everyone’s working at it.

…Which is Apparently Coming

Source: RSR Research, October 2014

14%

8%

13% 12%

8%

22% 22%

12%

7%

12%

6% 9%

38%

16%

76-100% 51-75% 26-50% 11-25% 6-10% 0-5% Don't know

Percentage of E-Commerce Sales That Are Drop Ship (Retailers)

In 3 Years Today

So Where Do We Go From Here?

Recommendations

STEPS TO SUCCESS

Foundational capabilities critical:

Think Visibility!

Data Sharing

Move beyond spreadsheets

Retailers:

Break the shackles of legacy systems

Manufacturers / Vendors:

Curate Assortments

LSP’s:

LSP’s

Don’t be Afraid to Lead

Thank You!

www.rsrresearch.com

Paula Rosenblum prosenblum@rsrresearch.com +1 305.757.1357

Questions

© 2014 SPS Commerce