Mexican Retail Lags in Evolution to Omni-channel

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1 MEXICO RETAIL SURVEY EXECUTIVE SUMMARY Mexican Retail Lags in Evolution to Omni-channel Survey results show retailers in Mexico must invest in digital transformation to position themselves for future growth In collaboration with the Monterrey Institute of Technology and Higher Education

2 In May 2017, JDA and the Instituto Tecnológico y de Estudios Superiores de Monterrey (Monterrey Institute of Technology and Higher Education) surveyed a select group of top retailers in Mexico on the most pressing omni-channel retail topics. The results of the survey reveal a business sector that is lagging in almost every area of online commerce. Fewer than half of the respondents, for example, plan to offer buy online, pickup in store (BOPIS) within the next 12 months. Looking at the larger picture, these retailers lag in their plans for online commerce. When asked if they have plans for digital transformation, only a little more than a third, 37 percent, said their transformation is well-defined and is being implemented. About a quarter, 26 percent, say their digital transformation strategy is being developed but implementation has not yet started, and another 37 percent admit they are struggling to define a digital transformation strategy. On a more detailed level, only 48 percent reported having a digital strategy in place for customer experience, and only 44 percent reported having planned for business process improvement. INVESTMENT PRIORITIES Many retailers still struggle with digital transformation. 37 % 26 % 37 % Plan is well-defined/implemented Plan developed but not implemented No plan in place Finance

3 Inventory and the Supply Chain The importance of inventory visibility increases as the online channel grows due to the varied fulfillment options required by shoppers. When asked about real time inventory visibility, 81 percent reported having visibility from the distribution center to the store. This trended downward, however, with 70 percent saying they have visibility to the stockroom and 63 percent reporting visibility to the retail store floor. Further, the percentage of retailers reporting inventory visibility from the manufacturer to the distribution center was very low, at only 37 percent. With the supply chain evolving from a linear model to multi-faceted pathways, these retailers will need to work with their suppliers to increase inventory visibility throughout the supply chain to deliver on customer expectations. More than half of respondents, 52 percent, reported rising inventory levels. This is a typical pattern as retailers cope with the increase in fulfillment options. Stuffing the pipeline is a way to ensure that all points in the supply chain have inventory to meet fulfillment demands. It is not, however, sustainable and growing costs cut into profitability. Rising inventory costs was not much of an issue for retailers as responses were distributed evenly across the rankings. When asked to rank from 1 (highest) to 6 (lowest) their level of concern about the ability of their supply chain to support online growth, response was mixed. The combined upper rankings (1-3) was 41 percent. The lower rankings combined were 59 percent, indicating a general lack of concern. Given the experience of U.S. and European retailers, the Mexican retailers are likely unfamiliar with the challenges omni-channel present. AREAS OF CONCERN WITHIN THE SUPPLY CHAIN Respondents were asked to rank the importance of issues on a scale of 1 to 6. Rising Supply Chain Costs Capacity to Support Online Growth 1: 15% 2: 15% 3: 22% 4: 19% 5: 15% 6: 15% : 11% 2: 15% 3: 15% 4: 22% 5: 30% 6: 7%

4 Sales Performance: Brick and Mortar Stores vs. Online Only 59 percent of respondents could provide same store sales growth/decline year over year. Fifty-two percent reported growth, with 4 percent reporting a decline. Astonishingly, 44 percent of respondents could not provide an answer on store performance. Accurate numbers on store sales are crucial to the advancement to omnichannel retailing. Without this data, planning for online growth will not be possible. The reported percentage of total annual revenue that comes from online revenues exceptionally low; 18 percent of respondents reported 0 percent. These contributions are low by comparison to Europe and the U.S., indicating the move to online commerce falls behind the rest of the world. The respondents presented a rosy view of the effect of online sales, however, indicating 56 percent of online sales were complementary and 26 percent were net additional. There was no cannibalization reported. These numbers are not surprising given the fact that retailers in Mexico are in the early days of the move to omni-channel. Use of Customer Data Merchandising Most revealing is the use of customer data, and the picture presented is not encouraging. A healthy percentage of retailers are using customer data in the development of merchandising decisions, but the use ranges from only 41 percent to 52 percent for specific use cases. Notably in most cases, more than 50 percent are not currently using available customer data for merchandising decisions. The omni-channel market requires customer data in merchandising planning for both in-store and online. The evolution of retailing is clear, there will be a greater emphasis on localization and individualized promotional offers. This cannot be accomplished without the extensive and intensive use of customer data. USE OF CUSTOMER DATA TO INFLUENCE MERCHANDISING DECISIONS Localized in-store assortment Yes No Working Toward it 44 % 30 % 26 % Store layout Planogramming (product displays) 52 % 26 % 22 % 41 % 30 % 30 % Promotional offers 48 % 26 % 26 % Buying decisions 44 % 22 % 33 %

5 Single View of the Customer This picture gets murkier when looking at a retailer s view of its customers. When asked if they have a single view of the customer across all channels and touchpoints, 49 percent reported Not at all or Minimally. Remarkably, 66 percent reported Not at all or Minimally when asked if they captured unstructured data about their customer (social, reviews). Data Science An extremely low proportion, 15 percent, reported significant use of data science techniques to segment customers and gain insight into their preferences and shopping behaviors, and 51 percent answered Not at all or Minimally. The results were equally dismal for use of segmentation insights in planning and development of customer offers (products, pricing, service, channels, fulfillment) as well as for personalization of the customer experience in both the physical store and online. Overall, the results show that these Mexican retailers, leaders in their market, are only in the early stages of data use. We know that more and more shoppers are embracing the omni-channel model, demanding more localization in the physical store and more personalization overall, particularly in the digital realm. To satisfy these ever more demanding customers, retailers need to understand them. This is only possible with intensive use of data, data science and analytics. Digital Transformation: Essential for Growth Retailers must now manage the demands of always-on consumers, who can shop 24/7 and have come to expect a seamless blend between the store and digital experience. Findings from JDA s and the Instituto Tecnológico y de Estudios Superiores de Monterrey s recent Mexico Retailers Survey show that retailers are still struggling to meet customers omni-channel fulfilment demands. Thus, digital transformation must become the top investment priority for Mexican retailers in the coming year. Finance

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