2015 Key Takeaways. September 22, 2015

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1 2015 Key Takeaways New meta technologies such as the tactile Internet and cognitive computing will trickle down to retail. Friction- free payments are essential in a mobile- first world. We could see a baby boomer boom in connected devices, as seniors adopt wearables and connected home technology to support them in old age. The store is the black hole in omnichannel data, but new technologies such as sensor fusion technology could fix this. Longstanding retailers should work with startups or work like startups but this can require big changes in working practices and principles. DEBORAH WEINSWIG Executive Director Head of Global Retail & Technology Fung Business Intelligence Centre deborahweinswig@fung1937.com US: HK: CHN:

2 New Meta Technologies Will Trickle Down to Retail The multifaceted challenges and opportunities of new technologies and channels in retailing were addressed across the two days of the Retail Week Tech & Ecomm Conference Here are some of our takeaways from the conference: Two new technologies jumped out at us from different conference sessions. One is the tactile Internet, which is the next stage in the connectivity evolution, according to Mischa Dohler of King s College London. Coming after the mobile internet and the Internet of Things, the touchable Internet will allow users to interact with events, activities and people remotely. For retail, the most obvious application is bridging the tangibility barrier in online shopping: allowing shoppers in the future to touch the clothes they want to buy online. The second emerging technology is cognitive computing. Dale Lane, a developer at IBM Watson, outlined how computers will be able to think more like humans meaning they will interact with us in our own language, take context into account rather than being purely logical and learn how to apply knowledge. The shift to cognitive computing is a major change that will represent a third era of computing, Lane said. And the application to retail? Seamless interaction with humans will allow computing to play a bigger role in brick and mortar by working and interacting with humans through tablets, earpieces and smartwatches. Friction- Free Payments in a Mobile- First World The impact of e- commerce and new technologies on payments was a prominent theme at the conference. We heard from retailers such as Subway and GAME Digital as well as from conference sponsor PayPal on how they are adopting or pioneering new technologies to cater to shopper demand or simply save time and make more money. Independent consultant Geoffrey Barraclough outlined the cost of, and changes in, payments in retail. Payment transactions cost major UK retailers 1 billion per year, but that is not the only challenge: the shift to mobile e- commerce comes with a lower conversion rate, and there are just three types of payments in the UK cash, cards and PayPal. Barraclough noted that payment is a habitual activity and that any payment provider hoping to gain share faces the challenge of trying to break consumers ingrained behaviors. Stuart Rowe, Business Development Director for UK computer games retailer GAME Digital, talked through the experience of introducing a retailer- specific wallet app. Rowe noted that GAME Wallet, which allows shoppers to load up cash and gift cards, benefits the retailer by tying in shoppers to GAME and by allowing young consumers, who do not have debit or credit cards, to shop online. With scale, Rowe said, the app could prove attractive to third- party retailers. For now, it is squarely focused on committed gamers and GAME customers. 2

3 Ben Fricke, from the world s biggest sandwich chain, Subway, spoke about some of the realities of adopting new payment systems in companies where the bottom line, rather than being on the cutting edge of innovation, is the most important thing. Subway is under constant pressure from its franchisees to invest only in technologies that can deliver a clear boost to profits, Fricke said. And given the nature of the company s made- to- order proposition, Subway has focused on rolling out payments that speed up the in- store process. Each change to payments may shave just a few seconds off average transaction times, but, in aggregate, that is enough for both customers and Subway to make gains. Fricke concluded that each retailer is unique and that best in class may not be relevant to all ignore it until it is, he recommended. PayPal s Rob Harper outlined two key forces in payment changes: mobility and connectivity. Mobile payments in the UK are growing at 36% year over year, Harper said. But the switch to mobile comes with challenges: fully 47% of shoppers abandon mobile transactions due to friction when paying. It is a reminder that payment is an activity that works best when shoppers barely notice it but one that requires great attention to detail by retailers and payment providers. Connected Devices: A Baby Boomer Boom? In a data- packed presentation, Mintel s Richard Cope presented a compelling argument that seniors will be key users of connected devices, including wearable technology and connected- home products, in the coming years. It is not just that the West has an aging population, that more older consumers are remaining in the workplace or that they control a disproportionate amount of wealth; it is that connected devices have real resonance and applicability for older consumers. Seniors will use wearables, for instance, to keep fit, stay competitive, remain independent and get a fair price when shopping. We are already seeing some signs of adoption, or at least interest, among older age groups. In China, Cope noted, ownership of wearables is higher among people in their 40s (not old, per se, but older) than among people in their 20s. And senior smartwatches are being offered by brands such as Lively and UnaliWear. Other devices that could serve older consumers well 3

4 include smart cups and calorie- counting machines that track what people are consuming; smart beds that monitor sleeping habits; and autonomous desks and magic tables that could assist people with dementia. Even driverless cars could directly benefit seniors more than they might young and able consumers. Given older age groups higher levels of property ownership, greater interest in home improvements and demand for living in their own homes longer, these consumers are more likely to invest in connected- home devices that make their lives easier or more fulfilling. In targeting older consumers, Cope concluded, brands must position themselves as aspirational rather than patronizing. One opportunity to bring tech to older consumers lies in the growing trend of multigenerational households; in such homes, younger generations can introduce devices to older relatives, serving as the in- house tech guys and gals for their older family members. New and Old Communications The store is the black hole in omnichannel data, observed FootClicks CEO Chuck Krallman, kicking off his tour through the world of proximity marketing within physical stores. Krallman noted that there are many technologies that can be used to track or communicate with in- store shoppers from magnets to LED lighting to RFID to video. But right now, it is all about beacons. So why haven t beacons taken off in retailing? There have been many trials among retailers, Krallman said, but results have been mixed. A focus on proximity marketing instead of personalization, a shoehorning of concepts into retail and cautiousness on privacy issues have all contributed to low uptake rates. But there are other solutions emerging, with sensor fusion technology likely to benefit retailers that seek more localized store data. Using multiple sensors that are built into smartphones, this technology can more precisely target shoppers in- store. By mapping to locations within stores (accurate to within one meter), this technology allows retailers to send customers more relevant messages with greater confidence that those messages are going to interest shoppers. But this is not all about coupons or discounters, Krallman concluded it is also about recognizing customers as individuals and offering them personalized information. This kind of recognition could, we think, add value to a business, rather than encourage a race to the bottom through couponing and discounting. We also heard from Catherine Doran, Chief Information Office at Royal Mail Group, a more traditional communications firm, about driving change in a centuries- old brand through technology. Owned by the government until 2013, Royal Mail is 500- year- old startup, said Doran. And the organization s transition to the private sector has brought renewed urgency for change. The company now has a storefront on Tmall, has acquired software company StoreFeeder and has bought a stake in tech startup Market Engine. 4

5 Royal Mail remains the third- largest media company in the UK, by advertising value, after Google and ITV, Doran said, and it is now forging a business based on the connection between the digital and physical worlds. It is focused on a future that is digitally enabled, innovative and customer centric. Retailers: Work with Startups or Work Like Startups! Thinking like a startup was a theme of two sessions at the conclusion of the conference, including a panel session featuring representatives from Haatch, an incubator; Taggstar, a startup; Ariadne Capital, a venture capital firm; and Shop Direct, a major UK home- shopping retailer. Amit Pau from Ariadne Capital noted the cultural mismatch between large corporates and small startups, with the former tending to have more inflexible commercial frameworks. Yet, he noted, Entrepreneurs have an uncanny knack of building the future, suggesting that big companies should become more flexible to gain from startups. Scott Weavers- Wright of Haatch observed that retailers tend to be risk averse, which can prevent them from capturing some of the valuable thinking offered by startups. Shop Direct s Jonathan Wall took a slightly more hardheaded approach, noting that lots of accelerators have many startups that consist of little beyond a basic idea. But, if retailers accept that, he said, they can get the opportunity to work with talented people and shape their product. The big difference between the thinking of established corporations and startups was also noted in the final session of the conference. From British Gas, Kassir Hussain talked us through his company s move into connected homes under its Hive brand. Hive is currently expanding from smart thermostats to other devices such as smart boilers, plugs, door sensors and window sensors. But with this diversification has come challenges for an established firm, Hussain said. British Gas s traditional market is stable, with high awareness, recognized competitors and a slow pace of change. The connected homes market, by contrast, is a new model, with emerging competitors, low levels of awareness and a quick pace of change making it a riskier and much less certain market. That means British Gas has had to work differently. The company took on the lean principles of a startup, Hussain said, and moved beyond its established business structures to embrace tech- driven models. Its move into new markets meant a different game, different rules. 5

6 Deborah Weinswig, CPA Executive Director Head of Global Retail & Technology Fung Business Intelligence Centre New York: Hong Kong: Filippo Battaini Marie Driscoll, CFA John Harmon, CFA Aragorn Ho John Mercer Shoshana Pollack Kiril Popov Jing Wang Steven Winnick HONG KONG: 10th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: NEW YORK: 1359 Broadway, 9 th Floor New York, NY Tel: LONDON: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) FBICGROUP.COM 6