THE FUTURE IS HERE, SAYS LI & FUNG

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1 DAY 3 The third and final day of World Retail Congress 2016 featured a number of presentations on the theme of disruptors and disruption. The pace of change in the retail industry is accelerating, said Spencer Fung of Li & Fung; he is seeing changes in consumer expectations, challenges in physical retail and disruption in supply chains. Although China s economic growth has slowed, the country s services sector offers the promise of booming growth, said Dr. Victor Fung of the Fung Group. Sooner or later, most retail will migrate to the Internet, Dr. Eyad Alkassar from Rocket Internet argued in a debate over the future prospects of Internet pure plays versus stores. The Fung Global Retail & Technology team attended the World Retail Congress 2016 event in Dubai this week. Here are our key takeaways from the third and final day of the conference DISRUPTORS The rapid pace of change in retail was a theme running through the first two days of the conference, and the conversation continued on day three, with a particular focus on disruptors. THE FUTURE IS HERE, SAYS LI & FUNG Spencer Fung, Group CEO of Li & Fung, continued the discussion theme of rapid change in the industry, arguing that the future is like a car in the rearview mirror: it is closer than you think. 1

2 APRIL 14, 2016 Spencer Fung noted three key changes impacting the retail industry: Consumers, and especially millennials, are looking for greater excitement in products boosting categories such as wearable technology. The retail sector is highly promotional, while brick- and- mortar stores are also feeling pain from declining store traffic and having too many shops. The pace of change is accelerating within supply chains; for instance, the recent past saw an inflationary wage environment in China. The pace of change, rather than change itself, was the focus of Spencer Fung s presentation. Today, he said, it can take just a few thousand dollars to start a company that can disrupt an industry. For industry incumbents, this injects a great deal of uncertainty, making it tougher to establish plans for the medium to long term. How are Li & Fung and its parent company, the Fung Group, reacting to this pace of change? Spencer Fung noted several innovations and investments: Li & Fung is deploying rapid prototyping, whereby ideas are trialed swiftly rather than perfectly. The Fung Group s Explorium retail lab, which opened in Shanghai in September 2015, allows retailers to test new store formats and new technologies. The Fung Business Intelligence Centre provides research on sourcing and retail across Asia. And Fung Global Retail & Technology is the Fung Group s eyes and ears on the ground across the world, covering retailing, technology and the intersection of the two. Spencer Fung concluded by arguing that successful retail groups must rebuild to thrive in such a fast- changing world. You must break your piece of LEGO once in a while, he said. DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & T ECHNOLOGY DEBORAHWEINSWIG@FUNG1937.COM US: H K: CN: Copyright 2016 The Fung Group. All rights reserved. 2

3 REVIEWING CHINA Economies, as well as companies and sectors, are facing disruption: one such economy is China s, which has seen a significant slowdown in growth. The current and future performance of its economy and retail sector was the subject of a panel session chaired by Dr. Victor Fung, Group Chairman of the Fung Group and Honorary Chairman of Li & Fung. Here are some key takeaways from the panel s participants: Retail vacancy rates have been increasing in China, yet new retail space continues to be added: more than half of all new shopping centers globally are being opened in China, said Victor Chi, Founder and CEO of retail firm Global Rich. New Chinese brands enjoy an advantage in their proximity to the supply chain: this enables product- focused Chinese startups to learn and fail more quickly than their Western counterparts, said Yan Zhang, Co- Founder and CEO of Yetang, a fashion website. The generation gap between millennials and older age groups is greater in China than in many other countries due to three factors, Zhang said. First, millennials are less likely to watch state TV channels, resulting in a rise in niche subcultures. Second, the trend of livecasting people s often- mundane activities online is turning ordinary people into online influencers. And third, mobile connectivity is fueling the expectation of immediate gratification among millennials. Even as China s economic growth has slowed, the services sector offers the promise of booming growth, said Dr. Fung. Moreover, the Chinese government expects average annual economic growth of 6.5% across the next five- year period and 6.5% annual growth in a $10 billion economy creates sizeable opportunities. 3

4 INTERNET PURE PLAYS VS. STORES In recent years, it has become popular to argue that retail will become dominated by multi- channel retailers with a strong brick- and- mortar presence, and that Internet pure plays will suffer as consumers look for a cross- channel experience. This was a view we heard expressed several times at this conference, and it was discussed in a panel session at which Dr. Eyad Alkassar, Managing Director of the Middle East Internet Group at online startup Rocket Internet, made a series of rebuttals. Dr. Alkassar raised a number of points that challenged the notion that brick- and- mortar retailers will dominate retail in the future. He argued that: We are seeing a revolution in retail of the scale seen only once every generation or every second generation. Sooner or later, most of retail will move online, because it is more convenient. In particular, the product choice that a physical store can offer is highly limited when compared to the range a website can offer. A good retail experience which many have argued will help stores thrive will not be enough if purchasing migrates online; if the core business of selling goes away, stores are unlikely to survive. Moreover, if physical stores become principally about leisure activities, consumers can go elsewhere to more obvious leisure destinations to have fun. Dr. Alkassar argued that brick- and- mortar retailers would do better by investing in new digital technologies and fulfillment capabilities, rather than investing in physical stores: in the pure plays versus stores debate, cars are better than horses, he concluded. While it looks highly unlikely that pure plays will gain a majority share of total retail anytime soon, we think Dr. Alkassar raised valid points. In particular, we think these ideas should help shake the near- complacency that appears to have gripped a number of brick- and- mortar retailers in recent years. Many companies have insisted that the future will belong to omni- channel retailers and that, accordingly, things will turn out fine for them in the long term. 4

5 MOBILE TIPS With 64% of in- store purchases now said to be digitally influenced, Google s Product Management Director, Eric Tholomé, offered the following action points for retailers: 1. Be there. At the three key stages interest, consideration/research and decision/purchase retailers must be there on mobile, be there for customers all the time and be there internationally. 2. Be useful. Retailers must offer the right content, fast, and in a way that consumers can easily access it. Retailers should show local inventory on their mobile sites, and they must make mobile shopping as simple as possible for instance, by offering guest checkouts rather than requiring registration/sign- in. 3. Be accountable. Retailers should measure digital s impact on store visits and store sales, to move beyond a simple view of the last click. Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: Hong Kong: China: deborahweinswig@fung1937.com John Mercer Analyst HONG KONG: 10th 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: FBICGROUP.COM 5