There are several 2019 reports and in Contents to discuss. Select 1 of the reports to discuss here. Consider any strategic topic and discuss how you view these retail strategies. Do NOT just answer th

2019 Retail Outlook Transition ahead 2 With consumers holding the power and with retail experiencing a year of transition, what will retailers need to do to position themselves on the right side of the tipping point?

The market: At an inflection point 3 Navigating disruption in retail 4 New challenges on the horizon 5 Economic forecast: Healthy today, headwinds tomorrow 6 Investing in growth 7 Synchronizing your bets for a year of transition 8 Transactional loyalty vs. emotional loyalty 8 Making sense of the startup and VC scene 9 Fulfilling the brand promise with emerging technology 10 The digital consumer: Leadership lessons from China 12 Privacy by design: A proactive approach 14 Supply chain as a differentiator—and a profit driver 15 Ending up on the right side of the retail tipping point 17 Contacts 18 Table of contents 2019 Retail Outlook | Transition ahead 3 The market: At an inflection point As retail collides with adjacent consumer-focused sectors, it continues to undergo constant disruption. And amid the disruption, one thing remains consistent: Consumers are becoming more powerful, with expectations of “having it all.” What lies ahead? Yet another wave of changes that may challenge the ability of retailers to thrive in the new digital era. The next 12 to 18 months will likely see an industry in transition—an industry managing through uncer tain times and placing bets on what will separate the winners from the losers. Those who can synchronize their investments to profitably empower the consumer will likely find themselves on the right side of the tipping point.

The year ahead is poised to be a major inflection point for the retail industry. 2018 left the industry with a lot to digest—a strong US economy, a record-breaking holiday season, mixed retail earnings, some high-profile bankruptcies, along with global trade and economic tensions. Bolstered by a strong labor market, growth in disposable personal income, and elevated consumer confidence, 2018 experienced strong retail sales—projected by the National Retail Federation to exceed 2017 sales by at least 4.5 percent. 1 For 2019, however, the economy may face some headwinds—making the year one of transition for retailers, who may need to make bold moves if they want to set themselves up for success in the future.

2019 Retail Outlook | Transition ahead 4 Navigating disruption in retail The nonstop disruption taking place in the retail environment is challenging many of the norms of retailing, creating oppor tunities for new entrants, and making transformation an imperative for incumbents.

Retailers should stay ahead of the changes driving the marketplace in 2019.

Consumer. Consumers realize they can have it all.

Today ’s digital consumer is increasingly connected, has more access to information, and expects businesses to react to all their needs and wants instantly. Many shoppers have an increased desire for personalized ser vices, and they are star ting to think more about privac y in the wake of high-profile corporate and social data breaches.

Competition. The retail market is negotiating a change in the competitive structure of the industr y. A myriad of newer, smaller, and tech-enabled competitors are stealing share while players from other sectors are developing their own retail platforms. The result? A marketplace in which more brands have exposure.

Climate. The 2018 economy of strong grow th, high consumer confidence, and low unemployment may be showing some cracks in the foundation. The United States is facing a flattening yield cur ve, rising asset prices (and possible market corrections), and tightening monetar y polic y—all common indicators prior to a recession. 2 Combined with geopolitical uncertainty, 3 the changing business and economic climate means retailers should plan for a variet y of scenarios. Configuration.

The value chain across retail is becoming increasingly compressed. Many companies are accelerating their merchandise cycles, moving supply chains closer to the consumer, and deploying advanced technologies that can better connect them with consumers.

Convergence. The lines demarcating industries and sectors have of ten blurred or disappeared. Retailers are increasingly bleeding into other consumer sectors, while those offering retail experiences are growing.

It is becoming difficult to tell retail and technolog y companies apar t. Media and adver tising are no longer a one-way street. 4 And, like retail, health care is becoming more consumer-facing.

To stay competitive, many retailers have shif ted their investment strateg y over the last 10 to 20 years. They have moved from grow th via new stores to grow th via big investments in all areas of the business—for example, launching new digital sales models, acquiring other businesses, or transforming their fulfillment processes. A s a result, the cost to increase market share continues to grow, and many retailers find themselves in a precarious position.

2019 Retail Outlook | Transition ahead 5 New challenges on the horizon Figure 1. Return on assets (median value of more than 100 US retailers) “After all, you only find out who is swimming naked when the tide goes out.” —Warren Buffett 5% 6% 7% 8% 9% 10 % 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Grey shade den otes reces sion Increase during business expansion Increase during business expansion Increase during business expansion Decrease during business expansion Capital IQ, Deloit te analysis of more than 100 US retailers using retailer fiscal year per formance Look at return on assets (ROA) —a common view of profitabilit y and efficienc y of retailers—and you will see a striking pattern that began in 2012. During a grow th period in the economy, retailers star ted seeing drastic reductions in their ROA. In fact, as of 2017, median ROA in retail is at a point lower than the dips that took place during the Great Recession in 2008 and 2009 (see figure 1).

But why has this change happened? Unfortunately, for many mainline retailers, the ROA decline represents a confluence of competitive factors that place significant pressure on the profit model. Retail is at an all-time high in total sales, but it of ten costs more to execute and deliver than it has in the past. Retailers of ten need to compete with:

• Digitally native businesses offering advanced product features that are more expensive to develop • Online-only retailers and marketplaces that offer advanced and more consumer-friendly fulfillment options • Discount players and off-price companies with vastly different business models that allow for market-leading prices • Business models that are not as profitable from retail operations alone but are suppor ted by ancillar y ser vices, subscriptions, memberships, and external funding ROA is declining because profitabilit y is being compressed across the entire value chain, as many retailers tr y to figure out how to win battles on multiple fronts.

Winning in this new environment will likely require understanding how these industr y wide forces are going to play out. This environment might even force retailers to make some tough strategic decisions or risk their futures by sticking to old ones. Over the past decade, retailers that were able to focus their value propositions in a way that resonated most for consumers experienced higher levels of sales grow th, probabilit y, and store grow th. 5 2019 will likely require the same clear value propositions aligned to the disruptive, economic, and structural changes taking place in the market. In the upcoming 12 to 24 months, retailers should prioritize a series of investments that they should integrate into their execution.

2 0 17 Return on assets (median %) 2019 Retail Outlook | Transition ahead 6 Economic forecast: Healthy today, headwinds tomorrow The economy appears to be on a healthy footing at the end of 2018. Deloitte’s economists forecast GDP to grow by approximately 3 percent in 2018, but to slow to 1.9– 2.6 percent in 2019 as interest rate hikes by the Federal Reser ve (Fed) and the ending of fiscal stimulus measures next year weigh on economic activit y. Also, higher tariffs are likely to shave off a bit less than half a percentage point from GDP grow th in 2019. 6 Personal consumption expenditure and nonresidential fixed investment have experienced steady grow th this year, although they may face challenges from uncer tain US trade polic y.

Consumer spending faces a mix of headwinds and tailwinds going into 2019. Consumers have benefited from a strong labor market and rising incomes. The economy added 212,500 nonfarm jobs per month, on average, from Januar y to October 2018, and unemployment is at a 49-year low.

7 Tax cuts have propped up disposable personal income this year, and nominal wage grow th has also been rising. Consumers, however, may face some economics and polic y headwinds. The cost of borrowing is likely to go up as the Fed increases rates, the impact of tax cuts on income will likely fizzle out in 2020, and tariff impacts are still uncer tain but could add to price pressures.

Additionally, gains in equities have been low in 2018 compared to 2017, 8 which will weigh on consumer wealth for cer tain por tions of the population. Deloitte forecasts slowing retail sales next year as the economy slows.

Retail sales will decelerate from a year-over-year grow th rate of 5.5 percent in Q4 2018 to 3.4–4.1 percent in Q4 2019. 9 2019 Retail Outlook | Transition ahead 7 Investing in growth Oppor tunit y abounds for retailers and entrants to capture share in the upcoming year. 2019 will likely require retailers to differentiate themselves in their investment strateg y; the upcoming one to two years are unlikely to be a tide that lif ts all boats. Historically, retailers with higher reinvestment rates are the ones that capitalize on grow th. 10 Investing in overarching grow th strategies may be paramount for the upcoming year, to help retailers prepare for uncer tain times ahead.

Moreover, retailers should look for oppor tunities to integrate their investments.

• Determine why you matter. How indispensable are you to your customers? Be crystal clear on whom you ser ve, how you ser ve them, and why the customer should care.

• Win with convenience. The top reason consumers shop online: convenience. Alternative fulfillment- driven offerings that are more expensive to execute can improve experience. Invest in consumer-facing convenience that moves the needle, and look for oppor tunities to make up margin elsewhere.

• Understand the utility of data. Generate value from the information you collect, and help the consumer understand what he or she gets in return. Leverage data to create more personalized experiences, give consumers a reason to purchase, drive replenishment, and increase retention. Regulation is likely to bring data privac y more to the forefront, and consumers may star t to question what they are sharing and why. • Attack adjacencies. Many companies, while growing on a comparable basis, are losing share to the market. 11 Retailers can look to adjacent sectors to increase value to their loyal customers. Moving beyond the core business can be challenging, but it may be necessar y to continue to grow relationships with consumers.

• Look outside your four walls. Embrace partnerships and joint business planning to eliminate duplication and unlock profits that sit in the markup between companies and the consumer. Such an approach can make doing business easier, more affordable, and more effective. Technologies such as blockchain can provide this transparenc y and foster par tnership in ways that can provide value today.

Focusing on these grow th objectives can set retailers on the right path. With the industr y experiencing a transition year, managing challenges to profitabilit y, and preparing for uncer taint y, retailers will likely need to invest in dynamic trends of 2019. Those who can synchronize their bets to create harmony across the organization may be best prepared for what is to come.

2019 Retail Outlook | Transition ahead 8 Synchronizing your bets for a year of transition Transactional loyalty vs. emotional loyalty The retail industr y accounts for a majorit y (42 percent) of loyalt y memberships in the United States, 12 yet many retailers face challenges capitalizing on these programs.

A s customers continue to flir t with multiple retailers, driving true loyalt y likely will become more difficult. The average consumer repor ts being a member of more than six loyalty programs, 13 and 65 percent are engaged with fewer than half of them.14 If things are to change, retailers should look beyond tiered programs built around traditional loyalty benefits―points, dollars off, gif ts, mailers―that at best elicit “transactional” loyalt y. In an industr y shif ting toward experience-based business models, retailers should not keep their loyalt y programs hinged to just “transactional” elements. Retailers should ask the following questions to identif y the missing emotional elements: Are loyalt y programs offering any differentiated experiences? Are these experiences memorable enough to reinforce or alter the shopping habits to foster loyalt y?

Loyalt y programs are hitting a tipping point. With a genuine approach to driving consumer loyalt y, a retailer can optimize a loyalt y program and make it even more valuable. Aligning the program with the values and the consumer conversation is imperative. Recently, loyalty programs have been expanding to focus on convenience (with home deliver y or issue resolution) and experience (with exclusive events and limited-edition products). In 2019, companies should look to:

• Tailor loyalty rewards individually. Retailers work hard to provide curated assor tments, but are they curating their rewards, too? We expect to see a disruption in personalization driven by ar tificial intelligence (AI) tools spilling over to rewards and loyalt y programs—in the form of content, games, and experiences. • Provide exclusivity to stand out. For aspirational shoppers, exclusivit y is the new currenc y. Limited offerings such as VIP fashion-show access, desirable branded products as rewards, and the abilit y to “unlock ” physical and digital experiences can help car ve out a niche. More retailers may tap into the larger ecosystem to allow consumers to earn loyalt y rewards in the form of stock equit y, with platforms such as Bumped.com. 15 • Make rewards easy to redeem. The crypto- ecosystem, mostly managed by third-par t y companies such as Sydney-based Incent, 16 provides shoppers an open marketplace to use or exchange their loyalt y points without worrying about expiration dates. Why does it matter to retailers? The ease of redemption can influence shoppers to use their loyalt y points at avenues beyond the store. While consumers may stray from the brand, retailers can still gain a deeper understanding of what consumers are doing.

Beyond loyalty programs Outside of adapting and refreshing the loyalt y program, driving consumer loyalt y can require a focus on integrit y and identit y to create an emotional connection. Retailers should ask themselves challenging questions. In our target consumers’ eyes, do we:

• Offer genuine brand promise with follow- through—every day? Don’t trick your customers into buying a product. Consumers are frustrated with a bait and switch on qualit y, price, and perceived discount. You might succeed in making a sale but could lose trust.

• Draw connections between people based on their values? Consumers are spending their money in ways that align with their values and identit y. Look for oppor tunities to unite consumers through a loyalt y program by connecting on values.

2019 Retail Outlook | Transition ahead 9 • Move the entire retail organization in unison? All your business functions should deliver on the brand promise together. If your marketing speaks to in-store complimentary services, the operations function needs to be able to deliver. Loyalt y is more than marketing and strateg y. It relies on effective execution through digital, IT, supply chain, and store operations.

• Craft a sense of community to sustain loyalty? By fostering a sense of communit y, consumers and retailers can exemplif y the brand. One example: what Monica + Andy has done with new mothers, bringing communit y to the baby-and-child categor y. 17 Making sense of the startup and VC scene Digital star tups are no longer playing in the shadows.

They are addressing chronic issues faced by the retail industr y through innovative offerings, personalization, authentic engagement, differentiated fulfillment, and more.

In 2017, digitally native ver tical brands grew nearly three times faster (4 4 percent) than the broader US e-commerce market (16 percent). 18 Compared to broader e-commerce, digitally native organizations are striving to craf t brand value by positioning themselves as “maniacally ” focused on consumer experience. 19 With a deluge of first-par t y data, digitally native brands are formulating their experience factor around ultimate convenience—of allowing the shopper to get what he or she wants in a tailored manner. Impressively, many of these companies are pricing right in line with the market, while not charging the customer for the value-adds that they profess as their secret sauce. Fund flow This growing allure of digitally native brands within the broader e-commerce market has steadily attracted venture capital ( VC) firms to the space. Most of these VC firms and funds are not backed by individual retailers as investors. 20 A closer look, however, shows traditional retailers are making direct investments rather than taking the external VC route. 21 We expect this to change soon, with retailers developing symbiotic relationships with VC firms to tap in to their exper tise in star tup scouting and investment management.

Capital flowing to retail tech star tups is allowing these companies to realistically compete with established players. They are given the chance to invest, refine, and grow before needing to be self-sustaining. We expect this proliferation of star tups to continue, with star tups taking advantage of a variet y of funding sources to chip away at overlooked categories and underser ved customers.

Their quest to refine the value proposition and grow the customer base is moving the digitally native brands to physical locations. In testing out “experience hubs,” some are even attracting shopping centers and mall owners as potential venture capitalists. 22 Interestingly, star tups and traditional players in the market tend to be evaluated differently, with star tups of ten focused on consumer acquisition, engagement, and growth while larger players are t ypically more focused on traditional retail metrics such as same-store sales and sales per square foot. The bifurcation in valuation is something that should be addressed by the industr y in the coming years.

2019 Retail Outlook | Transition ahead 10 To help offset the early gains made by these star tups, traditional retailers will have to push ahead, blurring the lines between business development and corporate strateg y. To acquire the next big idea, they might have to seek out guidance from specialists (e.g., Deloitte’s Innovation Tech Terminal ) or through a scouting approach. Retailers should invest to put themselves in a better place by 2020. In the next 12 to 18 months, traditional retailers should:

• Bet on what you believe. Retailers should explore coordination with advisor y firms and venture capitalists to “seek out and lock down” star tups offering innovative solutions.

• Blend with what you like. Rather than spending their limited budget on hiring talent and buying unproven assets, retailers should par tner with the early-stage star tups to “test fast, fail fast ” without affecting their existing business operations, with exclusive access and the need to pay only for successful ideas.

• Buy what you cannot make. When in-house development effor ts or par tnerships for new capabilities become time-consuming, bolt-on acquisitions are another option—keeping the acquired entit y ’s goodwill intact by not fully absorbing it.

• Borrow what inspires you. Drawing inspiration from the emerging retailers, incumbent retailers should become “leaner, meaner, and more agile”— experimenting with limited inventor y, curated collections, smaller formats, blended food-shopping outlets, and experiential gamification. Fulfilling the brand promise with emerging technology Gone are the days when IT strateg y was limited to architecture, modernization, and ERP systems.

Investment options, technologies, and vendors number in the thousands, making it challenging to navigate and home in on the next big thing. This environment makes it even more impor tant to look at issues through a practical lens: (1) look at the main challenges to solve, (2) look at what drives adoption, and (3) look at how you can make things work in real life. Retailers should integrate their investments so that they act as a living organism, capable of reinforcing and engaging.

Challenges to solve By skipping to the end solution, enterprise leaders can end up focusing on innovation for innovation’s sake.

A s a result, they can wind up dissatisfied with results, missing the mark entirely. Retailers should star t with the job to be done and understand the true values expected from the solutions. 23 With this foundation, retailers can determine what internal and external technologies they need to fulfill their brand promise.

• Ultra-personalization. Retailers should leapfrog their current approach to personalization, offering more than mass customization, which involves bucketing your consumers into a limited number of segments. The next phase becomes an exercise in data aggregation and activation, reducing each segment to a single individual. Retailers should refine each consumer profile based on data from all t ypes of sources—social media, transactions, and reviews— to achieve ultra-personalization. 24, 25 This vision is aspirational for many, but it can quickly become the new norm. Automation and machine learning are providing the much-needed scale to enable ultra- personalization, as current approaches are too manual and not adaptable enough.

2019 Retail Outlook | Transition ahead 11 • Interconnectedness. Digital interconnectedness is here, driven by sensing device networks, high-speed (LTE/5G) communication, and computing algorithms.

This news is a breath of fresh air, providing the foundation for the likes of self-replenishing supply chains and frictionless stores. Some newer grocer y stores in China, for example, provide a blueprint for how integrating digital and physical operations, inventor y visibilit y, and loyalt y information can create a frictionless consumer experience.

• Hyper- efficiency and transparency. There is no question that consumers are expecting more and want it “yesterday.” They are demanding that retailers move faster, go fur ther, and make shopping easier. For retailers, that demand should be a mantra for both internal and external activities.

Driving adoption During the 2018 holiday season, only one in five shoppers was planning to use innovative technology offerings such as seamless checkout, voice-assisted shopping, or AR/ VR. 26 Rather than a cause for concern, this news should be a call to action for retailers, forcing them to figure out how to make technologies add value to the experience.

• Convenience. As new technologies take friction out of the shopping journey, consumers are quick to adapt and reset expectations. In the last five years, mobile has grown because it made the processes easier. 27 Retailers can do the same with other technologies, focusing on tearing down barriers. • Privac y. Retailers should respect the extent to which consumers want to protect their identit y. For instance, facial-recognition sof tware holds immense potential and is being rolled out successfully around the globe— for example, in Bestseller A /S cashier-free, smar t fashion stores in China. 28 Retailers should play a proactive role in explaining the value and the safeguards.

• Content. Whether online or offline, content is king— but only if it is real time and relevant. Simply having a cool technolog y is little more than a marketing ploy if it doesn’t connect the consumer to useful information.

Making it work Ultimately, retailers should figure out how to scale these solutions and embed them into their way of doing business. To leverage the true power of next- generation technologies, retailers should make some significant changes. They should be able to consistently mine the data they collect, transform their operations to deliver on the brand promise, and adapt to the future of work. At the corporate, back-office, and storefront levels, required skill sets are changing as the work force becomes more knowledge-centric than ever.

Retailers should ensure harmony between teams and technologies. We are in an age of living and breathing organizations—businesses that will have to constantly regenerate as work evolves. Companies should be on the lookout for changes—so they can deconstruct and reconstruct the work that should be done on a regular basis. 29 2019 Retail Outlook | Transition ahead 1212 The digital consumer:

Leadership lessons from China To build a competitive advantage, retailers should consider looking at global cross-industr y trends and build capabilities that can shape consumer experience.

In China, consumers and the retail market have skipped a generation of technology. With less established public infrastructure as recent as 5 to 10 years ago, Chinese companies such as Alibaba, JD.com, and Tencent have invested on their own, helping Chinese retail consumers leapfrog their peers in the United States. The current generation of Millennials has grown up digitally native, and many are willing to bypass traditional consumerism for a more connected approach.

Much has been written about China’s growing economy—and more than one dimension of grow th is helping to drive innovation:

• Internet scope: China has 700 million Internet users—about the same as the number of Internet users in Europe. 30 • E-commerce growth: By 2019, China’s e-commerce sales are estimated to be 55 percent of the global e-commerce market. 31 • Demographics: China’s Millennial population (415 million) is larger than the combined population of the United States and Canada; 57 percent have bachelor ’s degrees; and more than 90 percent own smartphones. 32 • Mobile payment adoption: In 2017, China’s total mobile payment transaction volume reached $13 trillion, compared to $50 billion in the United States. 33 Chinese consumers’ use of WeChat and similar programs means that almost the entire shopping journey becomes integrated within a single platform.

That level of integration ser ves as a foil to the United States, where consumers of ten must jump between endless social media, search, and retailer apps for inspiration and research (see figure 2). 2019 Retail Outlook | Transition ahead 2019 Retail Outlook | Transition ahead 13 Next-generation technologies in the United States are yesterday ’s technologies in China. Retailers should be looking at the leaders in China to better understand the ar t of the possible in emergent areas such as online-to-offline, last-mile deliver y, supply chain as a ser vice, social commerce, and the implications of advanced public and private infrastructure. For retailers and brands looking to expand, the advances in China can set the expectation for what is mandator y to compete in this market. It also ser ves as a global trend poised to enter all markets and define consumer expectations. Many innovative companies in China have found ways to remove friction across the shopping journey, which all retailers should strive to do.

Figure 2 . Comparison of illustrative, consumer tech- driven journey in United States and China 13 2019 Retail Outlook | Transition ahead Illustrative consumer-shopping journey (China) She click s one of the link s that leads to a fashion blog post by a KOL ; one produc t look s promising, so she click s the image to see more options Li Min scrolls through the WeChat group where her friends share photos and link s of interesting products W hile watching the video that features her favorite T V star, she sees something she likes even more; she clicks right in the video to the produc t page The link launches her personalized landing page in the brand’s WeChat mini-program , which notifies her of the next live streaming event Using the camera and AR function of her phone, she vir tually tries on the different produc ts and shares screenshots with her WeChat group She ask s a question to the community and gets multiple responses within minutes, which helps her narrow down her choices A week later, she gets a WeChat message, which takes her to the brand’s H5 interactive game where she finds her next produc t Li Min finally makes up her mind and pays directly using WeChat Pay WeChat WeChat Anna browses for inspiration on her social media feeds Seeing something she likes, she screenshots it, and texts/snaps it to her friend group She then searches for the item on Google and clicks the first link (a blog post) She reads reviews of the item on the blog , then click s a photo of an item she likes The photo takes her to the brand site , where she views additional photos and a 360° video of the item She creates an account on the brand website, and then pays with PayPal Anna wants an accessor y to the item that wasn’t sold by the previous brand, so she searches on Amazon Af ter adding the highest-rated item to her car t (and another recommended item), she checks out with her credit card A week later, Amazon sends her an email with more suggested products based on her purchase Illustrative consumer-shopping journey (US) WeChat WeChat WeChat WeChat WeChat WeChat WeChat 2019 Retail Outlook | Transition ahead 14 Privacy by design: A proactive approach Traditional notions of privac y are of ten being dismantled in the new digital environment. Privac y today means safeguarding against unwarranted access to social media, online browsing histor y, customer ser vice chats, and biometric data. Technology advancements have transformed every digital and physical touchpoint into personal data. An intentional approach to data privac y matters more now than ever and applies across the board to consumers, employees, and contractors. Why?

1. Data is ubiquitous. Retailers’ use of advanced technologies necessitates significant data aggregation and purchase.

2 . Regulation floodgates are open. Regulators are reacting to a digital world. The General Data Protection Regulation 2016 (GDPR) set the stage in Europe, and the California Consumer Privac y Act (CCPA) is following quickly in the United States, where it is set to become law in 2020. These laws carr y significant punitive damages and oppor tunit y for class-action lawsuits. They seek to tackle transparenc y issues related to data governance, shedding light on what is being collected and how it is being used, and empowering consumers with the “right to be forgotten.” 3. Consumers are compromised. Public conversation will continue to evolve. Just in the last year, privac y issues have had a significant impact on social networking, banks, search engines, retailers, and other consumer-facing companies. 34 The retailer dilemma: No data, no story For retailers, consumer data is a must-have. For years, the industr y struggled with how to create and use data.

Now companies are on the hook for what data they have and what it says about individuals. Retailers should be awake at night thinking about protecting consumers and driving regulator y compliance. It can take six weeks to remediate each affected system, and it is not uncommon for retailers to have more than 100 systems in scope. 35 With personal data so broadly defined, companies should be proactive in understanding how they should act on and respond to data subject rights (DSR) requests. All consumer companies will face challenges in preparing for CCPA and other regulations. Here is a look at some potential scenarios:

• Data oblivion: A lack of knowledge of what data exists and where it is located.

• Far-flung compliance: Complex demands from having a global consumer base, meaning you must comply with regulations in multiple geographies— even in places where you do not have an office.

• Retrieval incapacity: An inabilit y to remove specific shopper data once you get deletion requests.

Compliance can be a catalyst for reinventing personalization and having honest conversations with consumers. Integrit y matters in creating loyalt y, especially when it comes to dealing with personal identity.

2019 Retail Outlook | Transition ahead 15 Start acting strategically Building a robust compliance plan takes time and should be done strategically, as it can provide a backbone for marketing, merchandising, supply chain management, and grow th activities. With regulation af ter regulation hitting the market, and more likely to come, 36 it is high time retailers had their privac y compliance road maps in place. Essentials activities can include:

• A ssessing and appraising what personal data (consumer, employee, and contractor) you are holding and how you are using it • Tracing and tracking the data pipelines and systems in your backyard • Structuring and isolating the data so you can act when needed Most impor tantly, though, data privac y is a reason to connect across the organization. Retailers’ IT, security, marketing, HR, supply chain, merchandising, and innovation arms should be unified in how you engage the consumer. Without an intentional approach, retailers might need to make trade-offs in customer experience to meet privac y needs. Supply chain as a differentiator—and a profit driver The adage that you can’t sell what ’s not on the floor is no longer accurate. Many companies are funneling money into supply chain design, transformation, and improvements. 37 The supply chain is quickly becoming a way to offer the consumer a differentiated ser vice.

Making the supply chain faster, more predictable, and cheaper is a difficult triad to manage simultaneously.

The profitability question It is a significant challenge to remain profitable offering endless fulfillment options with distributed inventor y that is simultaneously available for sale on the shelf. New consumer-focused offerings t ypically require duplicative labor and time-consuming shipping/deliver y processes, which are much more challenging to manage. For the supply chain to remain a differentiator, the industr y should reassess where profit is derived. Retailers should reset expectations for profit, require savings from forward-looking supply chain investments, and identif y other ways to offset increases in expenses.

2019 Retail Outlook | Transition ahead 16 Supply chain through the consumer lens There is no shor tage of investment oppor tunities in this area. While current capabilities dictate what is possible in the near term, the following pacesetting ideas also can help address the profitabilit y challenge:

• Automation beyond warehouses. Supply chain automation is not new, but it has not been as successfully delivered to stores. Increasing store fulfillment and shrinking physical footprints can foster opportunities to automate the backrooms.

Many retailers are exploring store redesign so that underper forming stores can be easily transformed to mini “dark stores” through automation, to save costs. 38 Retailers can store ver tically, pick and pack efficiently, and then ship quickly and cost-effectively.

• Autonomous delivery fleets. Seamless movement of freight is critical to the success of any supply chain. But increasing distribution costs and rising labor shor tages (i.e., trucker and deliver y executive shor tages) can put tremendous pressure on retail supply chains. The scenario will likely push retailers to increase investments in more reliable and autonomous solutions, such as self-driving vehicles.

• Reverse logistics. With e-commerce growing at a 15 percent compound annual grow th rate, and retail foot traffic slowing, returns will grow. It becomes critical, therefore, to have a reverse logistics strateg y—versus a reverse logistics process—to offset any impact on long-term profitabilit y. Allocating returns to the optimal channel can boost operational profitabilit y and improve customer experience.

• Smart packaging. Going beyond the intrinsic supply chain elements, retailers should investigate smart or active packaging—to bring in additional efficienc y improvements that can help bolster the bottom line.

Smar t packaging solutions such as RFID-powered product labels and computer-vision-friendly packaging design will be crucial to retailers seeking to enable frictionless, connected stores. • Inventory orchestration. Retailers should be more like conductors, with a unified vision of all inventor y across an orchestra of stakeholders—manufacturers, vendors, third-par t y logistics companies (3PLs), distribution/fulfillment centers, and stores—for order execution in the most profitable manner. Retailers should understand all demand streams and consolidate into a single approach to enable the best use of inventor y, powered by a digital core that can help them understand inventor y movement from a bird’s-eye view.

• On-demand supply chain. While 3PLs offer flexibilit y, retailers may consider investing in truly on-demand suppor t. This approach can allow for special or regional promotions and seasonal demand spikes. By flexing the supply chain as close to the customer as possible, retailers can speed fulfillment and remove some over- capacity and under-capacity concerns.

A s retailers buckle down and prepare for potentially challenging times ahead, supply chain improvements can be a significant grow th driver. Rather than just investing in these trends in reaction to competitors (like in a game of checkers), retailers also should think about accumulating long-term competitive advantages through wider supply chain strategies (more like a game of Go ). Without a supply chain that can deliver on the brand promise, even the leading and most innovative companies may find themselves quickly replaced. With median industr y ROA at a 20-year low, retailers should place additional weight on supply chain investments. Investing for grow th is a must. At the same time, profitabilit y should remain top of mind as margin compression can quickly hit dangerous levels.

2019 Retail Outlook | Transition ahead 17 Ending up on the right side of the retail tipping point 2019 is likely to bring increased disruption, competition, and economic uncertainty. The industry should view the upcoming year as a time of transition for moving to the right side of the tipping point. Retailers should make a series of investments, knowing that the industry is in a precarious place.

2019 will require synchronization of investments and synchronization of data. In the year ahead, are you ready for the clouds on the horizon? Where will you place your bets, and how will you ensure that they are integrated to maximize benefits for your organization?

Addressing these questions effectively will help separate tomorrow ’s winners from tomorrow ’s losers—and ultimately shape the future of retail.

Know who you are and what value you bring.

Supplement that knowledge by looking outside your organization to leverage the entire ecosystem across industries and borders.

Beware of the shiny new object. Take a functional lens and understand the challenges you must solve, what drives adoption, and how to make your vision work in real life. Create loyalty by investing with integrit y and with consumer identity in mind.

Align your loyalty programs with your brand promise— to make an emotional connection, not just a transactional one.

View privac y by design in par tnership with the rest of the organization. The confluence of data ubiquit y, consumer preferences, and regulation makes this more than a securit y issue. It makes it a strategic one. Make sense of where the funds are flowing in the industr y. Blur the lines of internal strategy, business development, and venture funds to gain access to funding, inspiration, and innovation.

A consumer-focused supply chain is an imperative for matching the many demand channels. A supply chain that can profitably deliver on the brand promise can be a key differentiator.

2019 Retail Outlook | Transition ahead 18 Contacts 2019 Retail Outlook | Transition ahead Authors Rod Sides Vice Chairman US Sector Leader, Retail, Wholesale & Distribution Deloitte LLP +1 704 887 1505 [email protected] Bryan Furman Retail Sector Specialist Deloit te Ser vices LP +1 703 345 8547 [email protected] Dr. Daniel Bachman US Economic Forecaster Deloit te Ser vices LP +1 202 220 2053 [email protected] Christina Bieniek US Consulting Leader, Retail and Consumer Products Deloitte Consulting LLP +1 678 612 6903 [email protected] Tracie Kambies Principal, Analytics and Cognitive Deloitte Consulting LLP +1 404 220 1495 [email protected] Bill Kammerer Principal, Retail and CP Consulting Supply Chain Leader Deloitte Consulting LLP +1 319 431 7948 [email protected] Stacy Kemp Principal, Marketing & Customer Strategy Deloitte Consulting LLP +1 312 486 2378 [email protected] Kasey Lobaugh Chief Innovation Officer Retail, Wholesale & Distribution Deloitte Consulting LLP +1 816 802 7463 [email protected] Matt Marsh US Risk & Financial Advisor y Leader Retail, Wholesale & Distribution Deloitte & Touche LLP +1 612 397 4575 [email protected] Clarke Norton US Tax Leader Retail, Wholesale & Distribution Deloit te Tax LLP +1 212 313 1756 [email protected] Pat Ogawa Managing Director, Deloitte Digital Deloitte Consulting LLP +1 206 716 7161 [email protected] Lokesh Ohri Principal, Advertising, Marketing, and Commerce Deloitte Consulting LLP +1 646 248 2704 [email protected] Jonathan Rothman US Audit & Assurance Leader, Retail, Wholesale & Distribution Deloitte & Touche LLP +1 212 436 6580 [email protected] Bobby Stephens Senior Manager, Deloit te Digital Deloitte Consulting LLP +1 312 486 2455 [email protected] Daniel Sutter Senior Manager, Cyber Risk Ser vices Deloitte & Touche LLP +1 203 905 2669 [email protected] Contributing authors and Retail leadership Rama Krishna V. Sangadi Executive Manager Retail, Wholesale & Distribution Deloit te Suppor t Ser vices India Pv t. Ltd.

+1 615 718 5029 [email protected] Arun Tom Assistant Manager, Retail, Wholesale & Distribution Deloit te Suppor t Ser vices India Pv t. Ltd.

+1 615 718 1074 [email protected] Deloitte Center for Industry Insights team 2019 Retail Outlook | Transition ahead 19 1.

National Retail Federation (NRF ), “NRF upgrades 2018 economic forecast but says tariffs remain a threat ” (press release), August 13, 2018, https://nrf.com/ media-center/press-releases/nrf-upgrades-2018-economic-forecast-says- tariffs-remain-threat .

2. Deloit te, “Boom, gloom, or doom? What the nex t recession might mean for consumer companies,” November 20, 2018, https://w w w2.deloitte.com/us/en/ pages/consumer-business/articles/retail-recession.html?nc=1 .

3. Economic Polic y Uncer taint y, US Monthly EPU Index, http://www.

policyuncertainty.com/us_monthly.html .

4. Tom Gallego, “Marketing is no longer a one-way street, Forbes , March 28, 2017, https://www.forbes.com/sites/forbesagencycouncil/2017/03/28/marketing-is- no-longer-a-one-way-street/#6efd9dc519c4 .

5. Deloit te Insights, “ The great retail bifurcation: Why the retail ‘apocalypse’ is really a renaissance” (infographic), March 14, 2018, https://www2.deloitte.

com/insights/us/en/multimedia/infographics/future-of-retail-renaissance- apocalypse.html .

6. Deloitte economic analysis; Deloitte, United States Economic Forecast 3rd Quar ter 2018, September 14, 2018, https://www2.deloitte.com/insights/us/en/economy/us-economic-forecast/ united-states-outlook-analysis.html .

7. All economic data were supplied by Haver Analy tics, which compiles statistics from the US Bureau of Labor Statistics, the Bureau of Economic Analysis, and other databases.

8. Ibid.

9. Ibid.

10. Deloit te, “Boom, gloom, or doom? What the nex t recession might mean for consumer companies.” 11. Deloitte analysis of consumer transaction data.

12 . LoyaltyOne, 2017 COLLOQUY loyalt y census , June 29, 2017, https://www.the- cma.org/Contents/Item/Display/327325 .

13 . Hawk Incentives Research, Long live the loyalt y program , 2018, ht t ps: // go.hawkincentives.com/Millennial-Loyalty.html?utm_source=release&utm_ campaign=hi_may_millennialloyalty&utm_medium=pr .

14 . CodeBroker, 2018 Loyalt y Program Consumer Sur vey , 2018, https://codebroker.

com/resources2/doc/CodeBroker_2018_Mobile_Loyalty_Survey_Results.pdf .

15 . Tom Groenfeldt, “Earn stock in your favorite stores with ever y purchase,” Forbes, April 10, 2018, https://www.forbes.com/sites/ tomgroenfeldt/2018/04/10/earn-stock-in-your-favorite-stores-with-every- purchase/#6d46fe92a300 .

16 . Roger Aitken, “Incent blockchain platform launches ‘decentralized’ exchange- backed crowdfund ICO,” Forbes , Oc tober 1, 2016, https://www.forbes.

com/sites/rogeraitken/2016/10/01/incent-blockchain-platform-launches- decentralized-exchange-backed-crowdfund-ico/#6c3128182cb3 .

17. Rachel Strugatz, “Andy Dunn, sister Monica Royer grow children’s biz Monica + Andy,” Women’s Wear Daily , June 21, 2017, https://wwd.com/fashion-news/ fashion-scoops/bonobos-andy-dunn-sister-monica-royer-grow-childrens-biz- monica-and-andy-10920358/ .

18 . James Risley, “ What is a DNVB? These digitally native ver tical brands are pushing e-commerce innovation,” Internet Retailer , April 5, 2018, https://www.

digitalcommerce360.com/2018/04/05/what-is-a-dnvb .

19. Andy Dunn, “ The book of DNVB,” medium.com, May 9, 2016, https://medium.

com/@dunn/digitally-native-vertical-brands-b26a26f2cf83 .20.

Deloit te analysis of Bloomberg data on investors in General Par tner–run VC funds that are invested star tups named in Pixlee: The top 25 digitally native ver tical brands repor t 2017 .

21. Deloit te analysis of Crunchbase data on investor star tups named in Pixlee: The top 25 digitally native ver tical brands repor t 2017 .

22. Mat thew Townsend, “ Warby Parker is coming to a suburban mall near you,” Bloomberg Businessweek , Oc tober 22, 2018, ht tps://w w w.bloomberg.com/ news/articles/2018-10-22/warby-parker-and-casper-are-coming-to-a-strip- mall-near-you.

23. Clay ton M. Christensen, Taddy Hall, Karen Dillon, and David S. Duncan, “Know your customers’ ‘jobs to be done,’ ” Har vard Business Review, September 2016, https://hbr.org/2016/09/know-your-customers-jobs-to-be-done .

24. Algorithms Tour, “How data science is woven into the fabric of Stitch Fix,” https://algorithms-tour.stitchfix.com/ .

25. Benjamin Mokotoff, “ Welcome to the world of hyper-personalization,” Slalom, Januar y 20, 2016, https://www.slalom.com/thinking/hyper-personalization .

26. Deloit te, Deloit te 2018 holiday repor t , https://www2.deloitte.com/insights/ us/en/industr y/retail-distribution/holiday-retail-sales-consumer-sur vey.

html.?nc=1 .

2 7. Ibid.

28. Jiani Ma, “Fashion retailers in China go cashier-free using facial recognition,” Jing Daily , Januar y 12, 2018, https://jingdaily.com/fashion-retailers-in-china-go- cashier-free-using-facial-recognition/ .

29. Deloit te, The future of work for retail? , https://w w w2.deloitte.com/us/en/pages/ consulting/articles/future-of-work-for-retail.html .

30. Internet World Stats, China Academy of Information and Communications Technolog y, eMarketer April 2017, Deloit te analysis.

31. eMarketer, Retail e-commerce sales repor t .

32. Deloit te analysis of Goldman Sachs, The Asian consumer: Chinese Millennials ; Digital Marketing & Business, Chinese Millennials on their mobile ; Economist Intelligence Unit; eMarketer.

33. China Ministr y of Industr y and Information Technolog y; eMarketer; Deloit te analysis.

34. Deloit te, Deloit te 2018 holiday repor t .

35. Deloitte analysis based on global data privacy engagements.

36. Sen. Ron Wyden, “ Wyden releases discussion draf t of legislation to provide real protec tions for Americans’ privac y ” (press release), November 1, 2018, https://www.wyden.senate.gov/news/press-releases/wyden-releases- discussion-draft-of-legislation-to-provide-real-protections-for-americans- privacy .

3 7. RIL A and Auburn Universit y Center for Supply Chain Innovation, 2018 State of retail supply chain , http://harbertcenters.com/supplychain/files/2018_ StateofRetailSupplyChainReport.pdf .

38. Molly Johnson-Jones, “Ocado’s international uptake: What does this mean for the future of grocer y shopping? ” Egremont International, 2017, https://www.

egremontinternational.com/insight/article/ocados-international-uptake-what- does-this-mean-for-the-future-of-grocery-s . Endnotes 2019 Retail Outlook | Transition ahead About the Deloitte Center for Industry Insights The Deloitte Center for Industry Insights is the research division of De\ loitte LLP’s Consumer practice. Its goal is to inform stakeholders across the consume\ r business ecosystem of critical business issues including emerging trends, challen\ ges, and opportunities. Using primary research and rigorous analysis, the Deloitt\ e Center for Industry Insights provides unique perspectives and seeks to be a tru\ sted source for relevant, timely, and reliable consumer insights across four \ industry sectors: Automotive; Consumer Products; Retail, Wholesale, and Distribut\ ion; and Transportation, Hospitality, and Services.

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