Chris Hodson, Cleveland Research Digital Migration Slide Deck

Report
DIGITAL MIGRATION
2
$40 Billion of Retail Sales
Moved Online in 2014
eCommerce Share of US Retail Sales
7%
6.5%
5.8%
6%
5.2%
5%
4%
3.4%
4.0%
4.7%
3.0%
3%
2%
1%
3.6%
4.4%
0.9%
1.1%
1.4%
1.8%
2.1%
2.5%
2014E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0%
Source: U.S. Census
3
eCommerce Outperformance
Gap Widening vs. B&M Retail
eCommerce Growth vs. Total Retail
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
3Q11
Source: U.S. Census
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
eCommerce
3Q13
4Q13
1Q14
2Q14
Total Retail
4
Harsh weather?
Consumer shops – just not in stores
1Q eCommerce Made up ~40% of Retail Growth
45%
40%
40%
35%
30%
27%
24%
25%
20%
20%
23%
23%
17%
15%
10%
22%
24%
10%
12%
7%
5%
0%
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
Source: U.S. Census
5
Amazon Gaining Scale/Muscle
Full 100 bps share gain since 2007 (~$50b)
Amazon Share of Total U.S. Retail
1.4%
1.2%
1.2%
1.0%
1.0%
0.8%
0.8%
0.6%
0.6%
0.5%
0.4%
0.4%
0.2%
0.1% 0.2%
0.1% 0.1% 0.1% 0.1% 0.1%
0.2%
0.3%
2014E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.0%
Source: CRC estimates
6
Walmart Share Slipping
Walmart Share of Total U.S. Retail
2007
6.8%
6.4%
6.3%
6.2%
6.1%
2014E
5.5%
2006
5.0%
5%
5.3%
5.7%
2005
6%
5.8%
6.0%
2004
6.5%
2013
7%
2012
7.1%
2011
8%
4.5%
4.1%
4%
3%
2%
1%
2010
2009
2008
2003
2002
2001
2000
0%
Source: CRC estimates
7
Amazon Share – Digging Deeper
• Revenue effects of 3P sales actually understate
Amazon’s size.
– ~40% of unit sales on Amazon are third party
– Amazon only recognizes 8-15% of revenue from these sales
• Amazon 2013 reported revenue - $74.5B ($60.9B of
product revenue)
– ~$10.8B of Retail Service Revenue likely touched another ~$86B
of product revenue
Source: Company Reports; CRC Estimates
8
Amazon Share – Digging Deeper
What it means:
• 2013 – Amazon directly involved in ~$150B
of purchases globally
• 2014 – That number likely around ~$180B
~60% of Amazon revenues come from North America
Source: Company Reports; CRC Estimates
9
Other eCommerce Factors
Credit Cards on file:
• Apple leads the way at ~800-900 million
• Amazon ~250 million
• PayPal ~150 million
Source: Company Reports; BI Intelligence
10
2014 .COM BENCHMARK
11
Key Conclusions
•
•
•
•
•
•
•
•
eCommerce mix up 1 point vs. LY (from 6% to 7%)
3-year target expected to move 10 points higher (17%)
Long-term ceiling potential now 25% (vs. 21% LY)
Total 2014 eCommerce growth = +28% (6 categories)
Total 2014 Amazon growth = +51% (6 categories)
Amazon Net Sales vs. Plan = +22% above plan
Amazon current eCommerce share = 32%
Digital Marketing = 17% of spend today vs. 8% in 2011
– Moving 10 points higher to 27% over next 3 years (CPG 40%)
Source: CRC Supplier Survey
12
Average Online Growth
Core 6 categories +28% vs. 18% industry-wide
Total eCommerce Sales Growth
All Categories
29%
28.5%
29%
27.8%
28%
28%
27%
26.6%
27%
26%
26%
2013
2014E
2015E
Source: CRC 2014 eCommerce
Benchmarking Study
13
Average Online Growth
Auto/Home Improvement +40%
2014 eCommerce Growth
Ranked by Category
60%
55%
50%
43%
40%
30%
26%
20%
20%
19%
16%
10%
0%
Auto
Building Products
Discretionary
Office
Food & Consumables Consumer Electronics
Source: CRC 2014 eCommerce
Benchmarking Study
14
eCommerce Penetration
7% today to 17% in 3 years to 25% LT
eCommerce as % of Total Sales
All Categories
30%
25%
25%
20%
17%
15%
10%
7%
5%
0%
Today
In 3 Years
Long Term
Source: CRC 2014 eCommerce
Benchmarking Study
15
2014 eCommerce Mix
By Category
eCommerce as % of Total Sales
Today
In 3 Years
Long Term
60%
50%
50%
43%
40%
34%
33%
30%
20%
25%
26%
20%
16%
25%
18%
12%
10%
7%
18%
16%
17%
7%
4%
2%
0%
Office
Discretionary
Consumer Electronics
Auto
Building Product
Food & Consumables
Source: CRC 2014 eCommerce
Benchmarking Study
16
eCommerce Mix by Category
TODAY
Current eCommerce as % of Total Sales
By Category
25%
20%
20%
16%
15%
12%
10%
7%
5%
4%
2%
0%
Office
Discretionary
Consumer Electronics
Auto
Building Products
Food & Consumables
Source: CRC 2014 eCommerce
Benchmarking Study
17
eCommerce Mix by Category
IN 3 YEARS
2017E eCommerce as % of Total Sales
By Category
35%
33%
30%
26%
25%
25%
20%
18%
16%
15%
10%
7%
5%
0%
Office
Consumer Electronics
Discretionary
Auto
Building Products
Food & Consumables
Source: CRC 2014 eCommerce
Benchmarking Study
18
eCommerce Mix by Category
LONG-TERM POTENTIAL
Long-Term eCommerce Potential as % of Total Sales
By Category
60%
50%
50%
43%
40%
34%
30%
25%
20%
18%
17%
Building Products
Food & Consumables
10%
0%
Office
Consumer Electronics
Discretionary
Auto
Source: CRC 2014 eCommerce
Benchmarking Study
19
BROADER IMPACTS
20
Amazon Supplier Survey
Average Investment Levels/Growth
• “All-in” average trade funding = 10.5%
– Largest suppliers nearly 13%
• 2014 trade spend up 1.7 points from 2013
– 2013 also increased 1.5 points vs. 2012
• Average Amazon Media Group spend = $330k
– Translates into average 2-3% of Amazon sales
– More companies reaching into 5-10% range
21
Wide Range for Supplier Funding
Weighted Average = 10.5%
35%
What is your total “all-in” trade funding at Amazon this year
(co-op +freight + damages, etc)?
32%
30%
25%
20%
20%
15%
18%
19%
13-16%
16%+
12%
10%
5%
0%
7% or under
7-10%
10-13%
Source: CRC Amazon Survey
22
Supplier Funding Up Significantly
Weighted Average = 1.7 point increase vs. LY
How much incremental funding does this represent vs. 2013?
45%
42%
40%
35%
30%
26%
24%
25%
20%
15%
10%
5%
4%
4%
4-6% higher
6%+ higher
0%
None
0-2% higher
2-4% higher
Source: CRC Amazon Survey
23
2014 Amazon Growth
Core 6 categories +50% vs. 25% Total Amazon NA
2014 Amazon Growth
Ranked by Category
70%
60%
58%
57%
56%
51%
50%
40%
35%
30%
23%
20%
10%
0%
Office
Building Products
Food & Consumables
Auto
Discretionary
Consumer Electronics
Source: CRC 2014 eCommerce
Benchmarking Study
24
2014 Amazon Sales vs. Plan
Net 22% above plan across all categories
Amazon Net Sales vs. Plan
Percentage of Companies Above Plan Minus Below Plan
50%
45%
45%
40%
35%
32%
29%
30%
25%
25%
20%
18%
15%
11%
10%
5%
0%
Office
Auto
Consumer Electronics Food & Consumables
Building Products
Discretionary
Source: CRC 2014 eCommerce
Benchmarking Study
25
Amazon eCommerce Share
Amazon Share of eCommerce
Ranked by Category
60%
50%
40%
48%
39%
30%
30%
29%
28%
19%
20%
10%
0%
Consumer Electronics Food & Consumables
Building Products
Discretionary
Office
Auto
Source: CRC 2014 eCommerce
Benchmarking Study
26
AMAZON – NEW INSIGHTS
27
More Customized Marketing Vehicles
28
Higher Ticket on AMG (Amazon Media Group)
What are you spending with AMG?
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
None
$0-$250k
$250K-$1M
$1M-$5M
$5M+
Source: CRC Amazon Survey
29
More Customized Marketing Vehicles
Tailored investment; Higher cost better return.
• Coupons to Amazon Mom customer (higher
cost-per-click, better target)
• Pushing people away from Daily Deals and
into Vendor Powered Coupons (VPC)
30
Holiday Promos/Inventory
Earlier and more aggressive – How will Amazon
react?
• Inventory investment this year likely narrower and
deeper
• Pushing more warehousing/fulfillment onto
suppliers.
• Capacity issue likely mean more 3P and FBA
31
Holiday Promos/Inventory
Other incremental steps:
• Out-of-stocks an issue last year – Amazon wants
suppliers to hold ‘locker stock’ this year
• Bringing inventory in earlier (October vs. November)
– Want a 5-10% discount for doing so
• Pressure on suppliers to reduce case-packs
– Reduce shipping costs and burden on FC’s
32
Margin Emphasis
Areas of Most Significant Change
Zappo’s now entirely MSRP
• More selective on inventory
• Margin ‘matters now’
• All discounted items being moved to 6pm
The #1 headwind is growth of ‘CRAP’ items
• Incremental steps in last three months
• Punting entire lines to 3P
• All about Net PPM
33
Margin Emphasis
Areas of Most Significant Change
Growth categories
• Largest opportunities Amazon identifies are:
industrial, apparel/footwear, home improvement,
automotive, CPG, home.
For the first time hearing commentary from company
that profit > selection
34
Amazon Supply
• Hearing company will have Third Party (3P)
functionality in 2015
– Recruiting dealers to be 3P sellers more actively
• Likely bury AmazonSupply within Amazon.com
– Most of purchases not coming through supply
• Seeing a lift recently as company links
consumer SKU’s with B2B.
35
Amazon Supply
• Linking product ASIN’s (SKU’s) a critical step
• Example: 50-gallon Trash Drum = Consumer Purchase
– But 24 50-gallon trash drums = Commercial Purchase
• Linking those products increases the amount
of reviews on file
– Helps with search, glance views, and conversion
36
Why Amazon Fresh and Pantry Matter
Even if you don’t sell consumables
They are selling your product anyhow:
37
Why Amazon Fresh and Pantry Matter
Even if you don’t sell consumables
• Same day-delivery
• Rapid expansion plans (10-12 markets by 2015)
• Pantry more cost efficient
38
Why Amazon Fresh and Pantry Matter
Even if you don’t sell consumables
39
Why Amazon Fresh and Pantry Matter
Even if you don’t sell consumables
40
DIGITAL MARKETING
41
Sales are not the only thing
migrating to eCommerce
Consumer-centric elements of Amazon/eCommerce
have peripheral benefits
SALES  REVIEWS  DATA  EHANCED INSIGHTS
MORE EFFECTIVE MARKETING….And repeat
42
“EASY” Ways to Win
• Reviews - Don’t just be a bystander
• Search – Weigh the ‘intent to buy’ options and
investment
• Mobile Growth
• Amazon – AMG and AMS
43
Reviews
• Brand feedback helps….A LOT!
– 187% increase in sales when brands provided helpful
feedback on reviews (source: Bazaar Voice)
• Bad Reviews are an opportunity not a liability
– Provides opportunity for feedback
– No one trusts perfect reviews
44
Search
• Search with intent to buy
Source: ChannelAdvisor
45
Mobile Browsing
Nearly doubled in the past 12 mos.
US- Page Views from Mobile Devices (%)
20%
19%
18%
16%
14%
12%
10%
11%
8%
6%
4%
2%
0%
2013
2014
Source: StatCounter, 5/14.
46
Mobile Browsing
US actually lagging global rates
Global-Page Views from Mobile Devices (%)
30%
25%
25%
20%
15%
14%
10%
5%
0%
2013
2014
Source: StatCounter, 5/14.
47
Mobile Browsing
App vs. Browser
• Top online retailers (Amazon, eBay) generate
about 71% of mobile traffic from apps vs.
browser
• Traditional retailers (Macy’s, Home Depot,
Best Buy) closer to ~80% browser
Source: Comscore
48
Amazon Advantages
• Most searches start with non-branded terms
• Structural advantages for getting there early
– Algorithmic selling
– Subscribe and Save
49
Amazon Advantages
Source: StatCounter, 5/14.
50
Amazon Advantages
• More than just a website
– 40+ million connected devices (Tablets, eReaders,
Mobile Phones)
– Mobile apps (Amazon, IMDB)
– Estimates: 90 million total unique visitors, almost
30% incremental reach beyond standard
PC/desktop search
Source: comscore/Amazon
51
Ad Prices Moving Higher
Current Ad Price trends vs 6 Months Ago
Discretionary
80%
76%
70%
62%
60%
60%
48%
50%
43%
40%
33%
35%
30%
20%
19%
10%
10%
5%
5%
5%
0%
Higher Costs
No change in costs
Twitter
Facebook
Google
Lower costs
Amazon
52
Source: CRC 2014 eCommerce
Benchmarking Study
Digital Marketing Spend
Digital Marketing
All Categories
30%
27%
25%
20%
17%
15%
10%
8%
5%
0%
3 Years Ago
Today
3 Years
Source: CRC 2014 eCommerce
Benchmarking Study
53
Success Stories
• More measurable lift around key events
– holiday, back-to-school, mothers/fathers day)
• International use
– Helps brand awareness in under-penetrated
markets
54
Success Stories
• Flexibility
– Changing on the fly not typically an option in
other campaigns.
• Often counts towards Net PPM
– Helps brand relationship and level of
attractiveness for Amazon
55
AMAZON – TROUBLESHOOTING
56
Third Party (3P) Pricing is a mess
Amazon isn’t the problem they just expose the
problem
• Most manufacturers are running on dated
distribution models
• Inconsistencies/inefficiencies exposed on 3P
platform
57
Third Party (3P)
It’s not going anywhere
3P Penetration (% total mix)
40%
41%
40%
40%
40%
39% 40%
39%
39%
42%
38%
36%
37%
33%
34%
32%
32%
30%
36%
31% 32%
31%
30%
28%
27%
22%
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
Source: Company reports
58
3P – Best Practices
• Tightening distribution and limiting partners is
the best way to eliminate pricing issues
• Some have found success setting their own
company/brand up as a 3P or Fulfillment by
Amazon (FBA) provider.
• Partner with a trusted 3P; eliminate others
59
3P – Amazon Will Help With:
• Counterfeit product
– But supplier needs to the leg-work
• Anything that helps them increase the buy box
% (especially in a category of emphasis)
60
3P – Amazon Will NOT Help With:
• Policing irrational pricing from 3P’s
• Eliminating non-approved sellers (most of the
time)
61
3P – New Insights
Becoming mission critical for more suppliers:
• Alibaba entrance into US likely magnifies
lingering problems
• Counterfeit and 3P misrepresentation is on
the rise.
• Amazon will crack down on violators that
suppliers identify.
62
Amazon never orders enough new product
What to do?
• Always the case because so data-driven
• Set up 3P/FBA offer with amount of inventory
you think they will move
• When out of stock on Amazon site that
purchase will shift to your offering
63
Amazon doesn’t honor our MAP Policy
• This probably isn’t going to change
• If Amazon finds a lower price on your item
that invalidates your MAP policy in their eyes
64
KEY CONCLUSIONS
65
Our Actionable Conclusions
The migration of marketing muscle to
eCommerce is a larger secret than the shift of
sales
• High ROI vehicles still exist (not totally
efficient)
• Digital marketing dollars lagging consumption
of digital content
66
Our Actionable Conclusions
Amazon Media Group: Should not just be part of
the Amazon P&L
• Holistic benefits (6x effect); not just an
Amazon sales lift
• Only getting closer to the consumer
– Relevance as a search starting point
– FC network
– Mix of products
67
Our Actionable Conclusions
Holiday shaping up well to move inventory
through Amazon/eCommerce:
• 2013 – they paid freight to get product at the
11th hour
• Know they are running leaner on lower-turn
SKU’s this holiday
68
Our Actionable Conclusions
Amazon/eCommerce Share spikes:
Unfavorable Weather
1Q eCommerce Made up ~40% of Retail Growth
45%
40%
40%
35%
30%
25%
20%
27%
23%
17%
20%
15%
10%
22% 24% 23% 24%
7%
10% 12%
5%
0%
Source: U.S. Census
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
69
Our Actionable Conclusions
Amazon/eCommerce Share spikes:
The last several holidays
Amazon Share of Online Sales
25%
22.2%
20.4%
19.2%
20%
14.0%
15%
12.0% 11.4% 12.2%
15.2% 14.7% 15.4%
13.4%13.8%
10%
5%
Source: Census.gov, Company Reports
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0%
70
APPENDIX
Other Disclosures: I, Chris Hodson certify that the views expressed in the research report(s) accurately reflect my personal views
about the subject security(s). Further I certify that no part of my compensation was, is, or will be directly or indirectly related to the
specific recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have
no ownership stake in this company. Cleveland Research Company provides no investment banking services of any type on this or any
company.
Proprietary research and Information contained herein which forms the basis for findings or opinions expressed by Cleveland Research
Company may be used by Cleveland Research for other purposes in the course of compensated consulting and other services rendered
to third parties.
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Member FINRA/SIPC
71
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72

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