Middle Aged but Still Looking Good

Middle Aged but Still Looking Good October Amazon.com, the pioneer in online retailing, celebrated its 20th anniversary this past July, and such a momentous occasion merits some reflection. When it opened its virtual doors in 1995, Amazon called itself the Earth s Biggest Bookstore. Internet usage among U.S. adults back then was 14% compared with 87% currently according to the Pew Research Center. Today, Amazon s domestic sales are $51 billion, making it the ninth largest U.S. retailer. Its success is an ever-present reminder that the online channel has revolutionized retailing. But this anniversary also reminds us that despite its spry appearance, online shopping has hit middle age not in the sense of longevity but in its potential to capture market share at extraordinary rates. Overall, online sales growth remains strong but is decelerating [Exhibit 1] as are market share gains. Both are evidence of a slowing, which invariably accompanies middle age and which will become more apparent over the next few years. We expect U.S. online sales to hit $340 billion this year and $380 billion in (compared with $300 billion last year) and eventually reach $550 billion in a compound annual growth rate of 10.6% with online market share of retail sales approaching 17% by the end of the decade compared with in. Make no mistake about it; These are impressive growth figures considering how large the online retail channel already has become, but these numbers also reflect the realities of a medium that is maturing. The majority of large, store-based retailers have demonstrated they can build a thriving online business. In reality, most of these sales are coming at the expense of their own stores, and the incremental impact of the online channel on total sales and profitability is much less clear. The challenge ahead for retailers is to move beyond the single-minded purpose of generating online traffic and sales at any cost and to ensure that their online business is improving the return on investment of the entire enterprise. If not, then these sizable investments and efforts are arguably just an additional cost of doing business rather than a veritable growth strategy. Exhibit 1 U.S. Online Retail Sales in millions $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Online Retail Sales [LHS] Online Growth (YOY) [RHS] Online Market Share [RHS] Source: - Online Retail Sales [LHS]: U.S. Census Bureau - Online Retail Sales [LHS]: FTI Consulting, Inc. Online Growth & Online Market Share: FTI Consulting, Inc. 3 2 The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates or its other professionals. FTI Consulting, Inc. 1

Where Is U.S. Online Retailing Today? For whatever challenges U.S. retailers may face in driving online profitability, overall sales growth via the channel remains very robust. U.S. online sales of goods hit $300 billion in, according to U.S. Census Bureau data, a 14.3% increase from a year earlier. It took just three years for online sales to reach $300 billion from $200 billion in. But year-over-year ( YOY ) online sales growth has slowed gradually since from a high-teen rate to a low-teen rate a normal slowing considering how large the channel has become. There s no need for concern; online retail sales of goods are consistently growing at nearly five times the rate of store-based sales. [Exhibit 2] Exhibit 2 U.S. Online Retail Sales Growth YOY% change 3 2 - - 1Q 1Q Source: U.S. Census Bureau 1Q 1Q 1Q Online Sales Growth Store-Based Sales Growth As for market share, overall U.S. online sales hit the mark of relevant retail sales (excluding auto, gas and restaurants) in and now hover just above 10. [Exhibit 3]. Online market share gains currently are running just above one percentage point annually, though this will gradually slow over the next few years. However, we emphasize that online market share varies significantly by product category, with several leading categories at 2 or more [Exhibit 4], while lagging categories are in the low-to-mid single digits. Apparel remains the largest online product category with nearly $50 billion of sales last year, accounting for a 17. market share of apparel sales and nearly 17% of all online sales of goods, much to the surprise of early skeptics who doubted the category s potential for online success. Consumers have shown few qualms about buying apparel online despite the gamble on proper fit and the frequency of returns and exchanges. Online market share in some other product categories is larger than apparel s market share, but apparel still is the most important category due to its sheer size with approximately $300 billion in total retail sales. However, apparel s most impressive growth years likely have 1Q 1Q 1Q 1Q 1Q 1Q passed, and its online growth rate will be tailing off over the next few years, while other product categories will be doing the heavy lifting in driving sales gains. The other end of the online spectrum is food and grocery, which, despite being one of the first product categories to be offered online way back in the 90 s, barely has cracked a 1% market share. (You may recall that Peapod, one of the earliest e-commerce startups, launched its website in 1996.) Grocery continues to be the category that consumers have not embraced for online purchases, though it is not for lack of trying on the part of retailers. Amazon and others recently have stepped up efforts to win over grocery shoppers, but it is too soon to know how successful these programs will be and whether they can move the needle with respect to online market share for the category. Exhibit 3 U.S. Online Retail Sales and Market Share in billions Source: U.S. Census Bureau Note: Market share estimate excludes automobile and gasoline retail sales. Exhibit 4 Online Market Share of Select Product Categories 5 4 4 3 3 2 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 1Q 1Q 1Q Quarterly Online Sales Online Market Share 1Q Music & Videos Toy & Hobby 1Q Sporting Goods Home Furnishings 1Q 1Q 1Q 1Q 1Q 1Q 1Q Books & Magazines Consumer Electronics Apparel Grocery 1Q 1Q 1Q 1Q 12% 8% 6% 4% 2% FTI Consulting, Inc. 2

Mobile commerce has helped propel online sales in the last few years, with 24% of U.S. e-commerce orders last holiday season being transacted via a mobile device vs. 19% in and 7% in, according to Custora. emarketer reported generally similar findings and expects U.S. mobile sales to reach $77 billion in, accounting for 22% of online sales. Visits to e-commerce-enabled websites continue to move away from desktop to mobile devices, with nearly 4 of such website visits occurring via a mobile device last year vs. just 12% in, according to Custora. These findings suggest that consumers love to browse and research products on mobile devices but still prefer to make their online purchases via a desktop, especially for bigger ticket items. Fewer security concerns, fuller and richer on-screen product displays, and ease of transacting likely are contributing factors to consumers preference for desktop when making purchases online. However, these concerns are receding, mobile-enabled sites are improving and mobile s share of e-commerce transactions undoubtedly will continue to increase. Where to from Here? The trajectory and ultimate potential of the online channel with respect to its market share of U.S. retail sales have been widely debated since the medium became viable for commerce. Some forecasts from respected sources that date back a decade or more are downright embarrassing in retrospect. There were many elegant forecast models whose accuracy was highly dependent on a few critical assumptions that were unknowable at the time. Fifteen years later, there is an accumulation of historical statistics for online sales and market share not just overall but within product categories that informs us about the specific contours of these growth trajectories. We know what consumer adoption of online shopping has looked like across many product categories. Moreover, given the inherent nature of this adoption model, we know to some degree how it will progress from here. Our forecast model fits a logistic growth curve (also known as an S-curve) to online sales and market share since for each major product category. (A logistic curve is the appropriate curve for modeling the mass adoption of products or technologies.) These curves are quantified and rolled up, ultimately becoming the basis of our forecast. growth (YOY) will be slowing over the next five years. Overall, we show that online market share of relevant retail sales will approach 17% by and ultimately level off at 2 by 2025. Last, let s consider where online sales growth will be coming from over the next few years, as this, too, represents a change from the recent past. Several standout product categories in the online channel will be experiencing steadily slower growth and market share gain as they reach saturation. This particularly is true of categories like apparel, consumer electronics, and toy and hobby which already have realized a large portion of their online potential. As these categories continue to mature and approach their market share limit, other large product categories with less online market share potential but more room to grow will account for much of the online channel s sales growth. Some of these categories include home improvement, health and personal care, and general merchandisers. We expect that more consumers will move online in these categories but not to the extent that they embrace the channel for other products. As online shopping continues to evolve, it inevitably will become more predictable in the aggregate. But for retailers competing to succeed in this channel, it will be anything but business as usual. Retailers that have achieved meaningful online market share will need to shift their focus from online sales to profitability a topic we ll explore further later this year. Exhibit 5 U.S. Online Retail Sales Forecast in millions $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Online Retail Sales [LHS] Online Market Share [RHS] Source: U.S. Census Bureau & FTI Consulting, Inc. 2021 2022 2023 2024 2025 2 More about our forecast model can be found in the Appendix. Our model projects U.S. online sales of $340 billion in, a 13.2% YOY increase, rising to $380 billion in and $550 billion in [Exhibit 5], representing a 10. compound annual growth rate between now and then. Clearly, online sales FTI Consulting, Inc. 3

Appendix: Forecast Model of U.S. Online Market Share by Category Groups The general model that best describes consumer adoption of the Internet for shopping (or the adoption of any major technological innovation, for that matter) is the logistic growth curve, more commonly known as the S-curve due to its resemblance to the letter S. It is used to depict many natural phenomena such as the spread of epidemic diseases across a population. The S-curve, as applied to natural or social phenomena, recognizes that unbounded growth or an exceptionally high growth rate cannot persist indefinitely because resource limitations or other inhibiting factors inevitably will cause such growth to slow and eventually taper off. The S-curve precisely depicts this progression over time. It is a generalized model that can take on many forms and can be as varied as the shape of the letter S itself; stretched and elongated (slow adoption) or sharp and upright (fast adoption). Regardless of its particular shape, the S-curve has two noteworthy characteristics. It is a function that increases over the entirety of its curve, initially at an increasing amount (concave up) and then at a decreasing amount (concave down) until growth becomes negligible. Most notably, these two halves of the S are symmetrical about the curve s inflection point; that is, the middle of the S where concavity changes from upward to downward. This is a very convenient property as it allows us to know the entirety of the curve even if we have observed only one-half of it (or slightly less) which we certainly have. The U.S. Census Bureau has published online retail sales estimates in about a dozen product categories since 1999. From these time series data, we can estimate online market share for these categories since inception. We then can derive an appropriate S-curve equation for each market share and use these equations to project online sales and market share in the years ahead. The accumulation of online market share estimates for the past 15 years coupled with the suitability of the S-curve model to describe online market share give us confidence in the accuracy of the forecasts derived from these equations. historical data series, and these equations became the basis our forecast. The category Appendix Exhibit 1 includes books and music (among others), two of the earliest online categories to see widespread adoption by consumers. These product categories now are mature (i.e., high online market share) but relatively small in dollar amounts. The Lowest Penetration category is food and grocery, which despite being one of the first online categories back in the late 90s never has gained traction with shoppers. It is an enormous category ($600+ billion) that never will achieve sizable online market share based on the S-curve derived from our observed data. But the grocery category itself is so large that even small market share gains can translate into large sales volumes moving online. Despite the best efforts of Amazon and others to make inroads in grocery, we remain skeptical of aggressive forecasts for the category: Our derived S-curve for grocery has market share potential topping out at approximately 2. from about 1.2% currently. All other product categories fall within the middle three categories of and, and these categories are producing the lion s share of online sales growth. Appendix Exhibit 1 Historical Online Market Share of Product Category Groupings 4 4 3 3 2 We have taken the dozen or so specific product categories for which we have estimated historical market share and grouped them into broad categories based on their market share performance to date [Appendix Exhibit 1]. We then derived unique S-curve equations for each of these categories from the FTI Consulting, Inc. 4

Appendix Exhibit 2 Projected Online Market Share of Product Category Groupings 6 5 4 Lowest Penetration 3 2 Appendix Exhibit 3 Projected Online Market Share Growth Amount 3. 2. 2. Lowest Penetration 1. 1. 0. 0. Appendix Exhibit 4 Pct. of Online Market Share Potential Realized 10 9 8 7 Lowest Penetration 6 5 4 3 2 FTI Consulting, Inc. 5

Authors Robert J. Duffy Global Segment Leader Corporate Finance/Restructuring 1 617 897 1501 bob.duffy@fticonsulting.com Stephen L. Coulombe Senior Managing Director Retail and Consumer Products 1 617 897 1500 steve.coulombe@fticonsulting.com Christa Hart Senior Managing Director Retail and Consumer Products 1 212 247 1010 christa.hart@fticonsulting.com Keith Jelinek Senior Managing Director Retail and Consumer Products 1 617 897 1500 keith.jelinek@fticonsulting.com John Yozzo Managing Director Corporate Finance/Restructuring 1 212 499 3624 john.yozzo@fticonsulting.com About FTI Consulting FTI Consulting is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centres throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. 001235 www.fticonsulting.com FTI Consulting, Inc. All rights reserved.