Holiday Shoppers Expected to Remain on the Sidelines Until After US Election NOVEMBER 1, 2016

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1 Holiday Shoppers Expected to Remain on the Sidelines Until After US Election 1) Until the 2016 US presidential election, voters are both energized and relieved that the hotly contested race is coming to an end. 2) Spending has historically slowed in the weeks prior to presidential elections, when shoppers are distracted and it is more expensive for retailers to push foot traffic with advertising. 3) While the uncertainty of the upcoming election will likely cause slight degrees of variability in store visits and retail performance early in November, once the election has passed, that dynamic could shift. 4) Retailers should prepare for a bounce back in the weeks following the election, when shoppers are likely to focus on taking advantage of promotions and release pent-up demand. DEBORAH WEINSWIG Managing Director, Fung Global Retail & Technology deborahweinswig@fung1937.com US: HK: C N:

2 Until the 2016 US presidential election, voters are both energized and relieved that the hotly contested race is coming to an end. Regardless of one s political affiliation, there is no denying that this presidential election year is unlike any in recent history. Spending has historically slowed in the weeks prior to presidential elections, because shoppers are distracted and the volume of political advertising makes it more expensive for retailers to push foot traffic via ads. We that believe sales leading up to Election Day have been somewhat inhibited by consumers uncertainty, just as they have been in previous election years. However, positive economic indicators show that consumers generally feeling good, and retailers should expect a post-election bounceback effect as shoppers release pent-up demand and focus on the holidays. Election Has Short-Term Negative Impact on Consumer Confidence Distraction and anxiety surrounding the presidential election will likely keep consumer spending in check as Election Day approaches and could hurt retailers in the short term as the holiday shopping season gets under way. Consumer confidence fell by more than expected in October and hit the lowest level seen in two years, which may reflect a temporary bout of uncertainty and the unprecedented level of media buzz surrounding this year s election. The University of Michigan Index of Consumer Sentiment dropped to 87.2 in October, down 4.4% from September s 91.2 reading and down 3.1% from October s reading of 90. Market research company The NPD Group expects the anxiety weighing on the consumer psyche to hurt retailers in the short run. The National Retail Federation (NRF) said last Thursday that the divisive presidential campaign between Donald Trump and Hillary Clinton is causing consumers to plan their holiday budgets more conservatively than they did last year. It s annual survey of consumer holiday spending, conducted by Prosper Insights & Analytics, showed that consumers plan to spend an average of $ this year, compared with a 12-year record $ last year. In a different NRF poll, conducted last week, 43% of 2

3 respondents said they were being more cautious with their spending due to the uncertainty of the election season. Election Uncertainty Weighs on Store Traffic Historically, US presidential elections tend to negatively impact retail store foot traffic in the weeks leading up to Election Day. ShopperTrak, a provider of retail intelligence, conducted analyses of enclosed mall shopper traffic patterns over the last three national election cycles, and found that: In 2004, mall traffic during election week declined by 2.4% from the same week in In 2008, traffic dropped by 3.7% in the week before the election and by 6.3% during the week of the election. In 2012, ShopperTrak expanded its study to include traffic data from the top retailers nationally instead of just from malls. The data showed that two weeks ahead of Election Day, traffic decreased by 6.1%; one week ahead, it decreased by 12.9%. During election week, traffic declined by 12.4%, compared with the same week in 2011, ShopperTrak found. This year, September in-store traffic was down 9.0% year over year, the largest decline since May. Retailers could continue to face this general downward trend of sales and traffic from the last week of October through mid-november. The heightened consumer interest in the election, along with the increase in political ad budgets, could present challenges for retailers as they seek to grasp consumers attention. Source: Shutterstock 3

4 Postelection Bounce Back Expected; Positive Holiday Forecast While the uncertainty of the presidential election will likely cause some variability in store visits and retail performance early in November, once the election has passed, that dynamic could shift. Retailers should prepare for a bounce back in the weeks following the election, when shoppers are likely to focus on taking advantage of promotions and release pent-up demand. According to AlixPartners, in the 2004 and 2012 presidential election years, year-over-year sales growth slowed by an average of 22% in September and October compared with the prior eight months. It then bounced back by an average of 16% in November and December. The firm excluded 2008 from its analysis because of the financial crisis that occurred that year. We anticipate an uptick in holiday sales compared with last year, as economic fundamentals that boost spending have continued to improve. We estimate that holiday spending in the US will increase by 3% 4% this year. Consumer spending has been strong this year on the back of a tightening labor market (higher wages and low unemployment), an increase in median household income, low oil prices and rising home values. In addition, the favorable holiday calendar with two extra shopping days compared with last year bodes well for overall spending. Election Winner Likely to Have Little Impact on Holiday Spending The outcome of the presidential election is unlikely to affect consumers holiday shopping plans. In a recent Harris Poll survey of more than 2,000 Americans ages 18 and over, 90% of all respondents said that they plan to buy at least one gift this year, and 70% of that group said that if Donald Trump is elected, it will not affect their spending. Meanwhile, 68% of that group said that if Hillary Clinton is elected, it will not affect their spending. Among those who plan to buy gifts, 23% said they will spend less on holiday shopping if Donald Trump is elected, and 21% said they will spend less if Hillary Clinton is elected. Source: Shutterstock 4

5 In 2000, when President George W. Bush was elected, negative sentiment ensued, but had no effect on consumers self-reported spending plans or on their subsequent purchases. Political Ads Crowding Out Retailers Everywhere we turn whether on the web or on TV political advertisements are taking up ad space that retailers typically use to get consumers excited about holiday shopping. Borrell Associates, an advisory firm that tracks media trends, forecasts that political advertising will hit a record $11.4 billion this year, a figure that is 20% higher than in the last presidential election year of The US federal government guarantees candidates airtime within election windows for the lowest unit rates available and that time cannot be preempted. Unfortunately for retailers, this makes it very difficult and costly to continue advertising as usual in the run-up to elections. During election years, and particularly in the two to three weeks prior to an election, political advertising takes over the majority of available airtime. Regional and local vendors across the nation reported 50% 90% saturation rates in The cost to run a branded spot during those slots can jump by 10% 200%, according to Adweek. One retailer, Target, is modifying its media strategy to compete with the media maelstrom surrounding the upcoming election. So, the discount retailer is adjusting its media mix this year, to prevent ads from getting lost in the political conversation. The company plans to lean more on social media sites such as Pinterest and on cable television channels such as the Food Network and the HGTV home improvement channel. 5

6 Figure 1. US Spending on Digital Political Ads, E (USD Mil.) 3,500 $3, ,000 2,500 2,000 $1, ,500 1, $22.3 $5.4 $14.1 $2.7 $159.2 $18.0 $71.2 $11.9 $1,076.7 $480.0 $ * 2016* 2017* 2018* 2019* 2020* *Estimated Source: Borrell Associates According to a recent Triton Digital survey, voters are increasingly using social media to follow political news or candidates; 78% of interviewees said they currently use social media, compared with 53% in 2012 and just 24% in Retailers are dependent on social media for holiday advertising, but social platforms have become popular as political marketing tools as well. Social and digital political advertising is expected to reach $1.1 billion in the 2016 presidential election, up almost 700% from $159 million in the 2012 election, according to Borrell Associates. Retailers are likely holding back on their usual digital ad blitz prior to the holiday season because of the flood of political ads leading up to the November 8 election. American Eagle Outfitters Rock the Vote campaign Source: Investors.ae.com Retailers Tweaking Ad Mix for Presidential Election Season Despite the challenges presented by the election, certain retailers are leveraging it to establish a bond with their target demographic. Earlier this month, American Eagle Outfitters partnered with Rock the Vote, a nonprofit organization working to build the political strength of young people, to promote a new line of products that encourage young shoppers to vote: 100% of the sales from the men s and women s Rock the Vote collection are donated to the nonprofit s efforts to register and turn out young voters. The retailer is aligning itself with its core millennial demographic through the partnership. So far this year, we have seen retailers, especially restaurant operators, point to the election to justify lackluster sales. A growing number of restaurant chain executives have cited uncertainty surrounding the upcoming election as a reason for their companies sales declines. In Yum! Brands third-quarter 2016 earnings call on September 29, CEO Greg Creed said that people are focusing on the election and what the impact will be on the economy. Earlier this summer, Wendy s CEO Todd Penegor also noted that the rather unusual election was causing some uncertainty among consumers. Gap CEO Art Peck has also said that the election is causing a 6

7 level of uncertainty that is unsettling consumers right now. Executives from Barnes & Noble, Signet Jewelers, McDonald s, Caleres and Popeyes have all specifically mentioned how the election is affecting consumer sentiment this year. Election Weighs on Both Impulse and Luxury Spending Political debates alone tend to cause a disruption in spending, as people tune in to watch them and shift from their usual behavior. And this year, people are perhaps more preoccupied with the election than they have been in any previous election year. The first presidential debate this year was watched by 84 million viewers, making it the most-watched debate since the Carter-Reagan debate in While some of the sales lost due to the election will be made up, it will be difficult for retailers to recover valuable impulse purchases that have been lost. The loss of impulse spending during a presidential election is especially significant for the US apparel industry, since unplanned purchases account for 29% of annual apparel sales, according to The NPD Group. Political events and monetary policy also tend to exert greater influence on luxury spending patterns. During times of uncertainty, shoppers tend to curtail their spending on big-ticket items such as consumer electronics, automobiles, high-end fashion and furniture. In fact, global luxury purchases in 2016 thus far are flat, at $272 million, according to the Altagamma association of Italian high-end luxury producers. Source: Shutterstock 7

8 Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: Hong Kong: China: Steven Winnick Research Associate HONG KONG: 8 th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: LONDON: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) NEW YORK: 1359 Broadway, 9 th Floor New York, NY Tel: FungGlobalRetailTech.com 8