Retail Industry Outlook Survey:

Retail Industry Outlook Survey: Modest Gains Keep Cautious Optimism in Style kpmg.com

KPMG s Industry Outlook Survey KPMG LLP, the audit, tax and advisory firm, surveyed C-suite and other top-level executives in the retail industry during the second quarter of 212. Participants were asked about business conditions in their sector, the most significant revenue growth opportunities, and any barriers to growth that may exist. They were also asked a variety of questions about the economy, including factors they perceive might impede or support their sector s recovery, and to assess the impact advancing technologies may have on their business models. These responses were compared to the findings of a similar survey conducted among retail executives in the second quarter of 211.

Foreword 2 Findings from KPMG s Retail Industry Survey 4 Business Conditions 5 Revenue 6 Headcount 7 Hope for Recovery Remains on the Horizon 8 A Closer Look at Growth and Profits 8 Capital Spending and Investing 1 Realizing the Value of Data Analytics 11 Exploring Digital Marketing Channels 12 Risk and Regulatory Challenges 13 Conclusion 14 KPMG: A Leader in Serving the Retail Industry 15 Contents

2 Retail Industry Outlook Survey Foreword

Retail Industry Outlook Survey 3 I am pleased to present KPMG LLP s 212 Retail Industry Outlook Survey, which provides perspectives and insights of 1 CEOs and other C-level executives in the retail sector. Taking the past year into account, participants were asked to assess business conditions, identify areas of growth and investment, estimate a time line for a full economic recovery, and identify factors that may help or hinder the economy moving forward. Based on the survey results, it s clear that executives believe the sector continues to move in the right direction. Survey respondents reported both revenue gains and headcount increases as evidence of the positive sector momentum of the last year. However, their outlook for the economy to fully recover remains guarded, and they have pushed back their expectations for a complete U.S. economic recovery until 214 215 or beyond. Most of the executives surveyed report having significant cash on their balance sheets and are ready to increase spending in areas such as technology, citing data analytics as playing a greater role in their strategic decision making. They also note that digital marketing technologies such as online shopping, social media platforms, and e-mail campaigns continue to have a significant impact on their businesses. Additionally, they point out that the utilization of mobile technology for shopping, promotions, and payments is increasingly making its mark on the sector. Moving forward with cautious optimism, the majority of survey respondents foresee continued sector growth over the next year, with revenue increases being driven largely by the ability to add and retain customers. Meanwhile, they acknowledge pricing pressures and lower consumer demand as potential growth barriers and point to discounting prices, volatile input costs, and decreased sales volumes as the most significant threat to profit margins. On behalf of KPMG, I would like to thank those who participated in this survey. I hope the findings are useful to you in addressing market challenges and opportunities. I also welcome the chance to discuss this study and its implications for your business in the year ahead. Mark Larson Global Sector Leader, Retail KPMG LLP

4 Retail Industry Outlook Survey Findings from KPMG s Retail Industry Survey Moving Forward in Measured Fashion According to this year s survey, retail executives are cautiously optimistic about the future business outlook, expecting continued modest improvements in revenue and hiring over the next year. However, they remain quite guarded for the longer term, not anticipating a substantial U.S. economic recovery until 214 or beyond. While positive momentum continues to slowly build in the sector, executives plan to increase spending in areas of priority such as information technology, including data analytics and digital marketing channels. Online shopping, social media platforms, e-mail campaigns, and mobile technologies are clearly on their radar due to the significant impact each is having on their businesses. Looking ahead, the vast majority of survey respondents foresee continued sector growth over the next year, with revenue increases being largely driven by the ability to add and retain customers.

Retail Industry Outlook Survey 5 KPMG s survey reflects the responses of 1 retail sector executives from large ($1 million+ annual revenue), U.S.-based companies. Thirty-five percent of respondents work for companies with annual revenue of more than $1 billion, while 41 percent represent companies with annual revenue between $1 billion and $1 billion, and 24 percent with revenue in the $1 million to $1 billion range. Seventy-four percent of these companies are publicly held, and 26 percent are privately held. findings from the retail sector included: Sixty-five percent of retail executives surveyed said their company s revenue has increased over the last year, while 77 percent predict continued revenue growth a year from now. Fifty-four percent of survey respondents reported adding U.S. employees in 211 and expect to add more over the next year. Meanwhile, 22 percent noted that their company s U.S. headcount has returned to pre-recession levels. While over 5 percent of the executives plan to add headcount in the next year, the increases are planned to be modest, and consistent with last year s survey, one in five do not expect their company s headcount to ever return to pre-recession levels. When asked about their expectations for the U.S. economy a year from now, 65 percent of sector executives expect some improvement while 3 percent believe it will essentially remain the same. However, 61 percent believe a substantial economic recovery will not occur until 214 215 or later. Seventy-seven percent of survey respondents report having significant cash on their balance sheet, and 34 percent acknowledge investment is already significantly underway. Survey respondents believe adding customers (46 percent), market expansion (32 percent), and retaining customers (29 percent) will serve as the top drivers of revenue growth over the next three years. More than half (51 percent) of survey respondents cited information technology, including data analytics and digital marketing channels, as a top investment priority over the next year. Retail executives surveyed indicate that online shopping (59 percent), social media platforms (58 percent), and e-mail campaigns (49 percent) are having the most significant impact on their businesses. Business Conditions Sixty-five percent of retail executives surveyed believe that the economy will improve over the next year, representing a slight increase in enthusiasm from the 211 survey, when 59 percent anticipated the economy to improve in a year s time. Meanwhile, 3 percent of respondents expect the economy to remain flat over the next year, compared to 33 percent the previous year. 1 8 6 5% 3% 8% 33% 4 65% 59% 2 Better next year 212 (Q2) 211 (Q2) About the same Worse next year

6 Retail Industry Outlook Survey Revenue Revenue continues on an upward climb, according to retail sector executives. Nearly two-thirds (65 percent) of respondents reported an increase in revenue over the last year, up from 47 percent the previous year. 1 8 6 12% 23% 17% 36% 4 2 65% 47% 212 (Q2) 211 (Q2) Increase in revenue About the same Decrease in revenue Does not add to 1% due to rounding When asked to describe their revenue expectations a year from now, 77 percent of executives predict that revenue will increase, while 16 percent believe revenue will stay flat. This mirrors the expectations of the prior year, when 72 percent and 24 percent, respectively, answered the same question. Revenue Growth Focused on Customers Customers are at the heart of driving revenue growth in the retail sector. Survey respondents cited adding customers (46 percent) and retaining customers (29 percent) as top revenue growth drivers during the next three years, along with market expansion. Biggest Drivers of Company s Revenue Growth: Next 1-3 years 5 46% 1 8 6 7% 16% 4% 24% 4 3 32% 29% 26% 23% 21% 18% 2 4 2 77% 72% 1 15% 14% 1% 6% 212 (Q2) 211 (Q2) Better next year Same Worse next year Adding customers Retaining customers Increasing consumer spending Changed pricing strategies Merger and acquisition activity Growth of green 1 products/services Expansion in core/new markets Improving economic conditions Focus on emerging markets Innovative merchandising strategies Product innovations 1 Environmentally friendly

Retail Industry Outlook Survey 7 Headcount Retail executives added more U.S. employees over the last year, with 54 percent of respondents reporting an increase in headcount, up from 4 percent the previous year. Current headcount 1 Headcount: Return to pre-recession levels 3 22% 22% 2 21% 8 24% 31% 14% 16% 6 4 2 22% 54% 29% 4% 212 (Q2) 211 (Q2) Increase About the same Decrease Retailers expect the hiring momentum to continue with 53 percent of sector executives expecting to add employees over the next year and only 1 percent anticipating a decline during this time. These results are in line with the previous year. Future headcount expected 1 5% Already at, or greater than, pre-recession level Second half of 212 213 214 215 or later Never Interestingly, 22 percent of survey respondents said that their U.S. headcount has already reached or is greater than pre-recession levels, but 21 percent believe it will never return to those levels. 1 2% % 1% 15% 8 6 35% 33% 4 2 53% 52% 212 (Q2) 211 (Q2) Increase About the same Decrease Unsure/don t know

8 Retail Industry Outlook Survey Hope for Recovery Remains on the Horizon Hopes for a full U.S. economic recovery seem to have been pushed back a few years, according to the retail executives surveyed. The majority (61 percent) believe that it will not actually occur until 214 or beyond. Notably, last year s results revealed that 36 percent of respondents expected a full recovery in 212, while 62 percent anticipated it would happen in 213 or later. 1 Retail executives cite pricing pressures and a lack of consumer demand as the most significant barriers to growth over the next year. Barriers to growth 3 3% 2 2% 19% 18% 16% 15% 15% 13% 12% 12% 8 1 8% 7% 7% 7% 5% 6 3% 4 2 2% 37% 32% 29% Pricing pressures Lack of customer demand U.S. dollar strength Energy prices Lack of qualified workforce Regulatory and legislative pressures Staying on top of emerging technologies Increased taxation Labor costs Volatile commodity/input prices Inflation Risk management issues Access to and managing capital Foreign competition Exchange rate fluctuations Other 212 213 or later 214 215 or later A Closer Look at Growth and Profits Eighty-eight percent of survey respondents expect the retail industry to continue to experience growth increases over the next year. Of that amount, 63 percent predict only modest gains of about 5 percent or less. Retail industry growth rate 9 88% 8 7 6 5 4 3 2 1 6% 6% Increase over next year No change Decrease over next year

Retail Industry Outlook Survey 9 Retail factors hindering recovery More than half of survey respondents view decreased consumer confidence (57 percent) and the continued high national unemployment rate (55 percent) as the two top factors hindering the retail sector s recovery. Other top factors cited include limited access to credit for consumers (23 percent) and the distressed real estate market (22 percent). Greatest threats to profits Merchandise costs (39 percent), discounting and other sales incentives (36 percent), and decreasing sales volumes (32 percent) were widely seen by sector executives as posing the greatest threats to profit margins over the next 12 months. 5 6 5 4 57% 55% 4 3 39% 36% 32% 3 2 1 23% 22% 16% 16% 13% 13% 8% 7% 2 1 2% 15% 14% 14% 12% 6% Decreased consumer confidence Limited access to credit for consumers Distressed real estate market Decreased investor confidence Threats to U.S. business from Asia and abroad Turmoil in the Middle East/North Africa Continued high national unemployment Increased government regulation Uncertainty in the credit markets Limited access to credit for businesses Costs of inputs or merchandise Decreased sales volumes Regulatory compliance Marketing costs Other Discounting and other sales incentives Administrative costs Foreign exchange variability Inventory carrying costs Strategies to combat costs Volatile input costs continue to challenge retailers. To help combat these costs, 62 percent of executives report optimizing sales, general and administrative (SG&A), and supply chain costs, and 52 percent are implementing customer-centric pricing strategies. 7 6 5 62% 52% 4 3 29% 2 21% 1 Optimizing SG&A and supply chain costs Revisiting service delivery models (offshoring/shared services) Customer-centric pricing strategies Hedging strategies for commodities

8% 7% 7% 4% 1 Retail Industry Outlook Survey Capital Spending and Investing Retailers have significant cash on their balance sheets and are ready to invest. In fact, 77 percent of survey respondents report that their company has significant cash on its balance sheet, of which 34 percent acknowledge that investment is already significantly underway. Investment timeframe 4 When asked about the top initiatives on the mind of management, more than a quarter (28 percent) of survey respondents cited the need to improve operational processes and related technology. Top initiatives on the mind of management 3 28% 34% 3 2 19% 2 1 19% 21% 13% Investment is significantly under way Second half of 212 First half of 213 Second half 213 214 and beyond 12% Ready to spend Moreover, 58 percent of survey respondents expect their company s capital spending will increase over the next year, while 34 percent anticipate that it will stay the same. Much of this spending will be in the areas of information technology, (51 percent) new products and services (43 percent), and geographic expansion (33 percent). 5 51% 1 14% 12% 11% Significant improvement of operational processes and related technology Significant investment in organic growth 2 Significant cost reduction initiatives Significant changes in business model Merger/acquisition Strategic divestiture of current assets Navigating significant changes in the regulatory environment Significant changes to financial processes and related technology Improve enterprise risk management programs/processes 2 i.e., new product development, pricing strategies, geographic expansion 6% 5% 3% 1% 4 43% 3 33% 24% 23% 2 18% 18% 1 Information technology Geographic expansion Expanding facilities Acquisition of a business Regulation/control environment Green/sustainability initiatives New products or services Advertising and marketing Business model transformation Employee compensation and training Research and development

Retail Industry Outlook Survey 11 Realizing the Value of Data Analytics For retailers, data analytic capabilities are becoming increasingly important in helping support strategic decision making throughout the organization. In fact, more than two-thirds (68 percent) of survey respondents say that data analytics plays a key role in helping provide customer insight as well as in the areas of brand and product management (64 percent) and in pricing decisions (5 percent). areas using data analytics to support strategic decisions 7 6 5 4 3 2 68% 64% 5% 45% 37% 23% When asked to describe the organizational maturity regarding usage of data analytics, forty percent of executives rate their company s data analytics literacy as average. Data analytics maturity of company 4 3 2 1 4% 24% 22% Average when it comes to utilizing analytics 3 Rapidly moving toward high analytical literacy High data analytics literacy Average to low analytical literacy 4 No formal data analytics capabilities 5 Don t know 7% 5% 2% 1 Customer insight Pricing decisions Operating model optimization Brand and product management Market expansion Portfolio rationalization 3 Our management team and workforce have an average analytical literacy. 4 At the moment we are behind our competitors when it comes to utilizing analytics, and our management team and workforce have average to low analytical literacy. 5 Our management team and workforce have low analytical literacy.

12 Retail Industry Outlook Survey Exploring Digital Marketing Channels Not surprisingly, retailers are increasing their use of digital marketing channels to explore new ways of doing business and reaching more customers. When asked which digital marketing channels are having the greatest impact on their businesses, online shopping (59 percent), social media (58 percent), and e-mail campaigns (49 percent) rounded out the top three responses. Digital marketing channels having greatest impact 6 59% 58% Retail executives plan to use digital, social, and mobile technologies in a variety of ways over the next 12 months. In fact, 57 percent have plans to use social media for external brand promotion. Digital marketing strategies planned for year ahead 6 57% 5 51% 45% 44% 5 4 49% 36% 4 3 36% 33% 28% 25% 24% 22% 3 28% 2 19% 19% 18% 18% 17% 2 1 Online shopping E-mail campaigns Mobile promotions Other 21% 2% Social media (Facebook, Twitter, etc.) Mobile shopping Mobile payments 1 Social media for external brand promotion Social media for customer insight Social media for two-way customer engagement Social media for recruiting Customer-facing mobile applications Mobile-specific customer-facing websites Social media for enterprise collaboration/knowledge sharing Location-based marketing using mobile technology Social media for customer crowdsourcing Creation and distribution of digital media internal messages using video Mobile-specific enterprise websites (i.e., mobile intranets) Enterprise mobile applications Creation and distribution of digital media marketing messages using video 6 Social media for enterprise crowdsourcing Mobile-commerce technologies (NFC-enabled payments, mobile wallets, etc.) Social media for enterprise risk management Don t know 9% 5% 6 including company-specific external video channels

Retail Industry Outlook Survey 13 Risk and Regulatory Challenges Evolving regulation and changing marketplace dynamics have added to the need for companies to implement a strong risk framework within their organization. When asked to identify any existing challenges preventing the adoption of a formal risk policy, nearly half (45 percent) of survey respondents believe culture and behavior pose significant obstacles. Challenges preventing the adoption of a formal risk policy 5 4 3 45% 3% 29% 28% Despite obvious challenges, 76 percent of the retail executives surveyed believe their company is at least somewhat prepared to seize opportunities as a result of public policy and regulatory reform. Ability to seize opportunities from regulatory change 6 5 4 3 2 54% 22% 16% 2 18% 1 8% 1 12% Culture and behavior Shared resources across the organization Clearly defined roles and responsibilities Process integration/efficiency of operations Governance framework Don t know Somewhat prepared Don t know Very prepared Not prepared

14 Retail Industry Outlook Survey Conclusion Maintaining cautious optimism, retail executives expect the industry to proceed on a path of gradual growth over the next year, supported by continued modest gains in revenue and hiring. Concerns over the U.S. economy are evident, as many executives have pushed back their expectations for a substantial recovery until 214 215 or later. While waiting for the recovery to take hold, sector executives are focusing on spending the cash built up on their balance sheets by investing more over the next year in information technology, including data analytics and digital marketing channels. They acknowledge the increasing importance of data analytics in their strategic decision making and recognize the significant impact digital marketing channels such as online shopping, social media, and mobile technologies are having on their businesses.

Retail Industry Outlook Survey 15 The retail sector continues to face a demanding market environment that requires companies to adjust and actively manage change that may impact sales and performance. Having the right professional services firm one with the industry depth, knowledge, and insight to help clients address their most pressing issues and achieve their goals is critical. KPMG s Retail practice includes professionals with the knowledge, experience, and skills to help our clients address their most pressing challenges, sort through today s complex business problems, and achieve their goals. Working with our international network of member firms, we serve clients worldwide, developing insights into major business trends and helping to enhance future plans. Our long-term experience in retail enables us to offer the company-specific guidance needed to help our clients become or remain market leaders. KPMG: A Leader in Serving the Retail Industry

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Contacts Mark Larson Global Sector Leader, Retail T: 52-562-568 E: mlarson@kpmg.com Patrick Dolan National Line of Business Leader Consumer Markets T: 312-665-2311 E: patrickdolan@kpmg.com John Atkinson National Audit Leader, Retail T: 612-35-5459 E: jwatkinson@kpmg.com Brian Campbell National Tax Leader, Retail T: 614-249-1879 E: bcampbell@kpmg.com Ray Kansal National Line of Business Director Consumer Markets T: 312-665-3623 E: rkansal@kpmg.com Anne Giometti National Marketing Director Consumer Markets T: 312-665-2922 E: agiometti@kpmg.com kpmg.com KPMG LLP, the audit, tax and advisory firm, is the U.S. member of KPMG International Cooperative ( KPMG International ), a Swiss entity, KPMG International s member firms have 138, professionals, including more than 7,9 partners, in 15 countries. 212 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 26285NSS