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Retail Industry Outlook Survey: Modest Gains Keep Cautious Optimism in Style kpmg.com
Retail Industry Outlook Survey: Modest Gains Keep Cautious Optimism in Style kpmg.com

Retail Industry Outlook Survey:

Modest Gains Keep Cautious Optimism in Style

kpmg.com

KPMG’s Industry Outlook Survey

KPMG LLP, the audit, tax and advisory firm, surveyed C-suite and other top-level executives in the retail industry during the second quarter of 2012.

Participants were asked about business conditions in their sector, the most significant revenue growth opportunities, and any barriers to growth that may exist. They were also asked a variety of questions about the economy, including factors they perceive might impede or support their sector’s recovery, and to assess the impact advancing technologies may have on their business models.

These responses were compared to the findings of a similar survey conducted among retail executives in the second quarter of 2011.

were compared to the findings of a similar survey conducted among retail executives in the second
were compared to the findings of a similar survey conducted among retail executives in the second
Foreword 2 Key Findings from KPMG’s Retail Industry Survey 4 Business Conditions 5 Revenue 6
Foreword 2 Key Findings from KPMG’s Retail Industry Survey 4 Business Conditions 5 Revenue 6

Foreword

2

Key Findings from KPMG’s Retail Industry Survey

4

Business Conditions

5

Revenue

6

Headcount

7

Hope for Recovery Remains on the Horizon

8

A Closer Look at Growth and Profits

8

Capital Spending and Investing

10

Realizing the Value of Data Analytics

11

Exploring Digital Marketing Channels

12

Risk and Regulatory Challenges

13

Conclusion

14

KPMG: A Leader in Serving the Retail Industry

15

Contents

2 | Retail Industry Outlook Survey

Foreword

Retail Industry Outlook Survey | 3

Retail Industry Outlook Survey | 3 I am pleased to present KPMG LLP’s 2012 Retail Industry
Retail Industry Outlook Survey | 3 I am pleased to present KPMG LLP’s 2012 Retail Industry
Retail Industry Outlook Survey | 3 I am pleased to present KPMG LLP’s 2012 Retail Industry

I am pleased to present KPMG LLP’s 2012 Retail Industry Outlook Survey,

which provides perspectives and insights of 100 CEOs and other C-level executives in the retail sector. Taking the past year into account, participants were asked to assess business conditions, identify areas of growth and investment, estimate a time line for a full economic recovery, and identify factors that may help or hinder the economy moving forward.

Based on the survey results, it’s clear that executives believe the sector continues to move in the right direction. Survey respondents reported both revenue gains and headcount increases as evidence of the positive sector momentum of the last year. However, their outlook for the economy to fully recover remains guarded, and they have pushed back their expectations for a complete U.S. economic recovery until 2014–2015 or beyond.

Most of the executives surveyed report having significant cash on their balance sheets and are ready to increase spending in areas such as technology, citing data analytics as playing a greater role in their strategic decision making. They also note that digital marketing technologies such as online shopping, social media platforms, and e-mail campaigns continue to have a significant impact on their businesses. Additionally, they point out that the utilization of mobile technology for shopping, promotions, and payments is increasingly making its mark on the sector.

Moving forward with cautious optimism, the majority of survey respondents foresee continued sector growth over the next year, with revenue increases being driven largely by the ability to add and retain customers. Meanwhile, they acknowledge pricing pressures and lower consumer demand as potential growth barriers and point to discounting prices, volatile input costs, and decreased sales volumes as the most significant threat to profit margins.

On behalf of KPMG, I would like to thank those who participated in this survey.

I hope the findings are useful to you in addressing market challenges and

opportunities. I also welcome the chance to discuss this study and its implications for your business in the year ahead.

Mark Larson Global Sector Leader, Retail KPMG LLP

4 | Retail Industry Outlook Survey

Key Findings from KPMG’s Retail Industry Survey

Moving Forward in Measured Fashion

According to this year’s survey, retail executives are cautiously optimistic about the future business outlook, expecting continued modest improvements in revenue and hiring over the next year. However, they remain quite guarded for the longer term, not anticipating a substantial U.S. economic recovery until 2014 or beyond. While positive momentum continues to slowly build in the sector, executives plan to increase spending in areas of priority such as information technology, including data analytics and digital marketing channels. Online shopping, social media platforms, e-mail campaigns, and mobile technologies are clearly on their radar due to the significant impact each is having on their businesses. Looking ahead, the vast majority of survey respondents foresee continued sector growth over the next year, with revenue increases being largely driven by the ability to add and retain customers.

Retail Industry Outlook Survey | 5

KPMG’s survey reflects the responses of 100 retail sector executives from large ($100 million+ annual revenue), U.S.-based companies. Thirty-five percent of respondents work for companies with annual revenue of more than $10 billion, while 41 percent represent companies with annual revenue between $1 billion and $10 billion, and 24 percent with revenue in the $100 million to $1 billion range. Seventy-four percent of these companies are publicly held, and 26 percent are privately held.

Key findings from the retail sector included:

• Sixty-five percent of retail executives surveyed said their company’s revenue has increased over the last year, while 77 percent predict continued revenue growth a year from now.

• Fifty-four percent of survey respondents reported adding U.S. employees in 2011 and expect to add more over the next year. Meanwhile, 22 percent noted that their company’s U.S. headcount has returned to pre-recession levels.

• While over 50 percent of the executives plan to add headcount in the next year, the increases are planned to be modest, and consistent with last year’s survey, one in five do not expect their company’s headcount to ever return to pre-recession levels.

• When asked about their expectations for the U.S. economy

a year from now, 65 percent of sector executives expect

some improvement while 30 percent believe it will essentially remain the same. However, 61 percent believe

a substantial economic recovery will not occur until 2014–2015 or later.

Business Conditions

Sixty-five percent of retail executives surveyed believe that the economy will improve over the next year, representing a slight increase in enthusiasm from the 2011 survey, when 59 percent anticipated the economy to improve in a year’s time. Meanwhile, 30 percent of respondents expect the economy to remain flat over the next year, compared to 33 percent the previous year.

• Seventy-seven percent of survey respondents report having significant cash on their balance sheet, and 34 percent acknowledge investment is already significantly underway.

• Survey respondents believe adding customers (46 percent), market expansion (32 percent), and retaining customers (29 percent) will serve as the top drivers of revenue growth over the next three years.

• More than half (51 percent) of survey respondents cited information technology, including data analytics and digital marketing channels, as a top investment priority over the next year.

• Retail executives surveyed indicate that online shopping (59 percent), social media platforms (58 percent), and e-mail campaigns (49 percent) are having the most significant impact on their businesses.

100 5% 8% 80 30% 33% 60 40 65% 59% 20 0 2012 (Q2) 2011
100
5%
8%
80
30%
33%
60
40
65%
59%
20
0
2012 (Q2)
2011 (Q2)
Key
 Better next year
 About the same
 Worse next year

6 | Retail Industry Outlook Survey

Revenue

Revenue continues on an upward climb, according to retail sector executives. Nearly two-thirds (65 percent) of respondents reported an increase in revenue over the last year, up from 47 percent the previous year.

100

12%

17%

80

23%

36%

60

 

40

 

20

65%

47%

0

   

Key

2012 (Q2)

Increase in revenue

About the same

Does not add to 100% due to rounding

2011 (Q2)

Decrease in revenue

When asked to describe their revenue expectations a year from now, 77 percent of executives predict that revenue will increase, while 16 percent believe revenue will stay flat. This mirrors the expectations of the prior year, when 72 percent and 24 percent, respectively, answered the same question.

100 4% 7% 16% 24% 80 60 77% 40 72% 20 0 2012 (Q2) 2011
100
4%
7%
16%
24%
80
60
77%
40
72%
20
0
2012 (Q2)
2011 (Q2)
Key
 Better next year
 Same
 Worse next year
Key  Better next year  Same  Worse next year Revenue Growth Focused on Customers

Revenue Growth Focused on Customers Customers are at the heart of driving revenue growth in the retail sector. Survey respondents cited adding customers (46 percent) and retaining customers (29 percent) as top revenue growth drivers during the next three years, along with market expansion.

Biggest Drivers of Companys Revenue Growth:

Next 1-3 years

50

46%

40 32% 30 29% 26% 23% 21% 20 18% 15% 14% 10% 10 6% 0
40
32%
30
29%
26%
23%
21%
20
18%
15%
14%
10%
10
6%
0
Key
Adding customers
Expansion in core/new markets
Retaining customers
Increasing consumer spending
Changed pricing strategies
Merger and acquisition activity
 Improving economic conditions
 Focus on emerging markets
Innovative merchandising strategies
 Product innovations
Growth of “green” 1 products/services

Multiple responses allowed.

1 Environmentally friendly

Retail Industry Outlook Survey | 7

Headcount

Retail executives added more U.S. employees over the last year, with 54 percent of respondents reporting an increase in headcount, up from 40 percent the previous year.

Current headcount 100 24% 31% 80 22% 60 29% 40 54% 40% 20 0 2012
Current headcount
100
24%
31%
80
22%
60
29%
40
54%
40%
20
0
2012 (Q2)
2011 (Q2)
Key
 Increase
 About the same
 Decrease

Retailers expect the hiring momentum to continue with 53 percent of sector executives expecting to add employees over the next year and only 10 percent anticipating a decline during this time. These results are in line with the previous year.

Future headcount expected 2% 0% 100 10% 15% 80 35% 33% 60 40 53% 52%
Future headcount expected
2%
0%
100
10%
15%
80
35%
33%
60
40
53%
52%
20
0
2012 (Q2)
2011 (Q2)
Key
 Increase
About the same
Decrease
Unsure/don’t know

Headcount: Return to pre-recession levels

30 22% 22% 21% 20 16% 14% 10 5% 0 Key  Already at, or
30
22%
22%
21%
20
16%
14%
10
5%
0
Key
Already at, or greater than, pre-recession level
Second half of 2012
 2013
2014
2015 or later
Never

Interestingly, 22 percent of survey respondents said that their U.S. headcount has already reached or is greater than pre-recession levels, but 21 percent believe it will never return to those levels.

8 | Retail Industry Outlook Survey

Hope for Recovery Remains on the Horizon

Hopes for a full U.S. economic recovery seem to have been pushed back a few years, according to the retail executives surveyed. The majority (61 percent) believe that it will not actually occur until 2014 or beyond. Notably, last year’s results revealed that 36 percent of respondents expected a full recovery in 2012, while 62 percent anticipated it would happen in 2013 or later.

100

80

60

37%

40 32% 29% 20 2% 0 Key  2012  2013 or later  2014
40
32%
29%
20
2%
0
Key
 2012
 2013 or later
 2014
 2015 or later

A Closer Look at Growth and Profits

Eighty-eight percent of survey respondents expect the retail industry to continue to experience growth increases over the next year. Of that amount, 63 percent predict only modest gains of about 5 percent or less.

Retail industry growth rate

88% 90 80 70 60 50 40 30 20 10 6% 6% 0 Key 
88%
90
80
70
60
50
40
30
20
10
6%
6%
0
Key
 Increase over next year
 No change
 Decrease over next year

Retail executives cite pricing pressures and a lack of consumer demand as the most significant barriers to growth over the next year.

Barriers to growth

30% 30 20% 20 19% 18% 16% 15% 15% 13% 12% 12% 10 8% 7%
30%
30
20%
20
19% 18%
16% 15% 15%
13% 12% 12%
10
8%
7%
7%
7%
5%
3%
0
Key
 Pricing pressures
Lack of customer demand
 U.S. dollar strength
Energy prices

Lack of qualified workforce

Staying on top of emerging technologies Increased taxation

Inflation

Regulatory and legislative pressures

Volatile commodity/input prices

Risk management issues

Labor costs

Access to and managing capital

Foreign competition

Exchange rate fluctuations

Other

Multiple responses allowed.

capital  Foreign competition  Exchange rate fluctuations  Other Multiple responses allowed.

Retail Industry Outlook Survey | 9

Retail factors hindering recovery More than half of survey respondents view decreased consumer confidence (57 percent) and the continued high national unemployment rate (55 percent) as the two top factors hindering the retail sector’s recovery. Other top factors cited include limited access to credit for consumers (23 percent) and the distressed real estate market (22 percent).

60 57% 55% 50 40 30 23% 22% 20 16% 16% 13% 13% 10 8%
60
57%
55%
50
40
30
23%
22%
20
16%
16%
13%
13%
10
8%
7%
0
Key
 Decreased consumer confidence
 Continued high national

Limited access to credit for consumers

Distressed real estate market

Decreased investor confidence

Threats to U.S. business from Asia and abroad

Turmoil in the Middle East/North Africa

Multiple responses allowed.

unemployment

Increased government regulation

Uncertainty in the credit markets

Limited access to credit for businesses

credit markets  Limited access to credit for businesses Greatest threats to profits Merchandise costs (39

Greatest threats to profits Merchandise costs (39 percent), discounting and other sales incentives (36 percent), and decreasing sales volumes (32 percent) were widely seen by sector executives as posing the greatest threats to profit margins over the next 12 months.

50

40 39% 36% 32% 30 20% 20 15% 14% 14% 12% 10 6% 0 Key
40
39%
36%
32%
30
20%
20
15%
14%
14%
12%
10
6%
0
Key
 Costs of inputs or merchandise
 Discounting and other sales incentives
Decreased sales volumes
Administrative costs
Regulatory compliance
Foreign exchange variability
Marketing costs
Inventory carrying costs

Other

Multiple responses allowed.

Strategies to combat costs Volatile input costs continue to challenge retailers. To help combat these costs, 62 percent of executives report optimizing sales, general and administrative (SG&A), and supply chain costs, and 52 percent are implementing customer-centric pricing strategies.

70 62% 60 52% 50 40 29% 30 21% 20 10 0 Key  Optimizing
70
62%
60
52%
50
40
29%
30
21%
20
10
0
Key
Optimizing SG&A and supply chain costs
Customer-centric pricing strategies
Revisiting service delivery models
(offshoring/shared services)
Hedging strategies for commodities

Multiple responses allowed.

10 | Retail Industry Outlook Survey

Capital Spending and Investing

Retailers have significant cash on their balance sheets and are ready to invest. In fact, 77 percent of survey respondents report that their company has significant cash on its balance sheet, of which 34 percent acknowledge that investment is already significantly underway.

Investment timeframe

40

34%

30 19% 20 21% 13% 12% 10 0 Key  Investment is significantly under way
30
19%
20
21%
13%
12%
10
0
Key
Investment is significantly under way
Second half of 2012
First half of 2013
Second half 2013
 2014 and beyond

Ready to spend

Moreover, 58 percent of survey respondents expect their company’s capital spending will increase over the next year, while 34 percent anticipate that it will stay the same. Much of this spending will be in the areas of information technology, (51 percent) new products and services (43 percent), and geographic expansion (33 percent).

51%

50 43% 40 33% 30 24% 23% 20 18% 18% 10 8% 7% 7% 4%
50
43%
40
33%
30
24%
23%
20
18%
18%
10
8%
7%
7%
4%
0
Key
 Information technology
New products or services
 Geographic expansion
Advertising and marketing
 Expanding facilities
Business model transformation
 Acquisition of a business
Employee compensation and training

Regulation/control environment

Green/sustainability initiatives

Multiple responses allowed.

Research and development

When asked about the top initiatives on the mind of management, more than a quarter (28 percent) of survey respondents cited the need to improve operational processes and related technology.

Top initiatives on the mind of management

30 28% 20 19% 14% 12% 11% 10 6% 5% 3% 1% 0
30
28%
20
19%
14%
12%
11%
10
6%
5%
3%
1%
0

Key

Significant improvement of operational processes and related technology

Significant investment in organic growth 2

Significant cost reduction initiatives

Significant changes in business model

Merger/acquisition

Strategic divestiture of current assets

Navigating significant changes in the regulatory environment

Significant changes to financial processes and related technology

Improve enterprise risk management programs/processes

2 i.e., new product development, pricing strategies, geographic expansion

enterprise risk management programs/processes 2 i.e., new product development, pricing strategies, geographic expansion
enterprise risk management programs/processes 2 i.e., new product development, pricing strategies, geographic expansion
enterprise risk management programs/processes 2 i.e., new product development, pricing strategies, geographic expansion
enterprise risk management programs/processes 2 i.e., new product development, pricing strategies, geographic expansion
enterprise risk management programs/processes 2 i.e., new product development, pricing strategies, geographic expansion

Retail Industry Outlook Survey | 11

Realizing the Value of Data Analytics

For retailers, data analytic capabilities are becoming increasingly important in helping support strategic decision making throughout the organization. In fact, more than two-thirds (68 percent) of survey respondents say that data analytics plays a key role in helping provide customer insight as well as in the areas of brand and product management (64 percent) and in pricing decisions (50 percent).

Key areas using data analytics to support strategic decisions

68% 70 64% 60 50% 50 45% 40 37% 30 23% 20 10 0 Key
68%
70
64%
60
50%
50
45%
40
37%
30
23%
20
10
0
Key
Customer insight
 Brand and
product management
Pricing decisions
 Market expansion
Operating model optimization
Portfolio rationalization

Multiple responses allowed.

When asked to describe the organizational maturity regarding usage of data analytics, forty percent of executives rate their company’s data analytics literacy as average. Data analytics maturity of company

40 40% 30 24% 22% 20 10 7% 5% 2% 0
40 40%
30
24%
22%
20
10
7%
5%
2%
0

Key

Average when it comes to utilizing analytics 3

Rapidly moving toward high analytical literacy

High data analytics literacy

Average to low analytical literacy 4

No formal data analytics capabilities 5

Don’t know

3 Our management team and workforce have an average analytical literacy. At the moment we are behind our competitors when it comes to utilizing analytics, and our management team and workforce have average to low analytical literacy. Our management team and workforce have low analytical literacy.

5

4

and workforce have average to low analytical literacy. Our management team and workforce have low analytical
and workforce have average to low analytical literacy. Our management team and workforce have low analytical
and workforce have average to low analytical literacy. Our management team and workforce have low analytical

12 | Retail Industry Outlook Survey

Exploring Digital Marketing Channels

Not surprisingly, retailers are increasing their use of digital marketing channels to explore new ways of doing business and reaching more customers. When asked which digital marketing channels are having the greatest impact on their businesses, online shopping (59 percent), social media (58 percent), and e-mail campaigns (49 percent) rounded out the top three responses.

Digital marketing channels having greatest impact 60 59% 58% 49% 50 40 36% 30 28%
Digital marketing channels having greatest impact
60
59%
58%
49%
50
40
36%
30
28%
21%
20
10
2%
0
Key
 Online shopping
Social media (Facebook, Twitter, etc.)
 E-mail campaigns
Mobile shopping
 Mobile promotions
Mobile payments

Other

Multiple responses allowed.

Retail executives plan to use digital, social, and mobile technologies in a variety of ways over the next 12 months. In fact, 57 percent have plans to use social media for external brand promotion.

Digital marketing strategies planned for year ahead

60

57%

51% 50 45% 44% 40 36% 33% 30 28% 25% 24% 22% 20 19% 19%
51%
50
45%
44%
40
36%
33%
30
28%
25% 24% 22%
20
19% 19%
18%
18%
17%
10
9%
5%
0
Key
 Social media for external brand promotion

Social media for customer insight

Social media for two-way customer engagement

Social media for recruiting

Customer-facing mobile applications

Mobile-specific customer-facing websites

Social media for enterprise collaboration/knowledge sharing

Location-based marketing using mobile technology

Social media for customer crowdsourcing

Creation and distribution of digital media internal messages using video

Mobile-specific enterprise websites (i.e., mobile intranets)

Enterprise mobile applications

Creation and distribution of digital media marketing messages using video 6

Social media for enterprise crowdsourcing

Mobile-commerce technologies (NFC-enabled payments, mobile wallets, etc.)

Social media for enterprise risk management

Don’t know

Multiple responses allowed.

6 including company-specific external video channels

risk management  Don’t know Multiple responses allowed. 6 including company-specific external video channels
risk management  Don’t know Multiple responses allowed. 6 including company-specific external video channels
risk management  Don’t know Multiple responses allowed. 6 including company-specific external video channels
risk management  Don’t know Multiple responses allowed. 6 including company-specific external video channels
risk management  Don’t know Multiple responses allowed. 6 including company-specific external video channels

Retail Industry Outlook Survey | 13

Risk and Regulatory Challenges

Evolving regulation and changing marketplace dynamics have added to the need for companies to implement a strong risk framework within their organization. When asked to identify any existing challenges preventing the adoption of a formal risk policy, nearly half (45 percent) of survey respondents believe culture and behavior pose significant obstacles.

Challenges preventing the adoption of a formal risk policy

50

45%

40 30% 30 29% 28% 20 18% 12% 10 0 Key  Culture and behavior
40
30%
30
29%
28%
20
18%
12%
10
0
Key
 Culture and behavior

Shared resources across the organization

Clearly defined roles and responsibilities

Process integration/efficiency of operations

Governance framework

Don’t know

Multiple responses allowed.

Despite obvious challenges, 76 percent of the retail executives surveyed believe their company is at least somewhat prepared to seize opportunities as a result of public policy and regulatory reform.

Ability to seize opportunities from regulatory change

60 54% 50 40 30 22% 20 16% 8% 10 0 Key  Somewhat prepared
60
54%
50
40
30
22%
20
16%
8%
10
0
Key
Somewhat prepared
Very prepared
Don’t know
 Not prepared
50 40 30 22% 20 16% 8% 10 0 Key  Somewhat prepared  Very prepared

14 | Retail Industry Outlook Survey

Conclusion

Maintaining cautious optimism, retail executives expect the industry to proceed on a path of gradual growth over the next year, supported by continued modest gains in revenue and hiring. Concerns over the U.S. economy are evident, as many executives have pushed back their expectations for a substantial recovery until 2014–2015 or later. While waiting for the recovery to take hold, sector executives are focusing on spending the cash built up on their balance sheets by investing more over the next year in information technology, including data analytics and digital marketing channels. They acknowledge the increasing importance of data analytics in their strategic decision making and recognize the significant impact digital marketing channels such as online shopping, social media, and mobile technologies are having on their businesses.

digital marketing channels such as online shopping, social media, and mobile technologies are having on their
digital marketing channels such as online shopping, social media, and mobile technologies are having on their

Retail Industry Outlook Survey | 15

Retail Industry Outlook Survey | 15 The retail sector continues to face a demanding market environment
Retail Industry Outlook Survey | 15 The retail sector continues to face a demanding market environment

The retail sector continues to face a demanding market environment that requires companies to adjust and actively manage change that may impact sales and performance.

Having the right professional services firm—one with the industry depth, knowledge, and insight to help clients address their most pressing issues and achieve their goals—is critical. KPMG’s Retail practice includes professionals with the knowledge, experience, and skills to help our clients address their most pressing challenges, sort through today’s complex business problems, and achieve their goals.

Working with our international network of member firms, we serve clients worldwide, developing insights into major business trends and helping to enhance future plans. Our long-term experience in retail enables us to offer the company-specific guidance needed to help our clients become or remain market leaders.

KPMG: A Leader in Serving the Retail Industry

16 | Retail Industry Outlook Survey

Retail Industry Outlook Survey | 17

Key Contacts

Mark Larson Global Sector Leader, Retail T: 502-562-5680 E: mlarson@kpmg.com

Patrick Dolan National Line of Business Leader Consumer Markets T: 312-665-2311 E: patrickdolan@kpmg.com

John Atkinson National Audit Leader, Retail T: 612-305-5459 E: jwatkinson@kpmg.com

Brian Campbell NationalTax Leader, Retail T: 614-249-1879 E: bcampbell@kpmg.com

Ray Kansal National Line of Business Director Consumer Markets T: 312-665-3623 E: rkansal@kpmg.com

Anne Giometti National Marketing Director Consumer Markets T: 312-665-2922 E: agiometti@kpmg.com

Markets T: 312-665-2922 E: agiometti@kpmg.com kpmg.com KPMG LLP, the audit, tax and advisory firm, is the

KPMG LLP, the audit, tax and advisory firm, is the U.S. member of KPMG International Cooperative (“KPMG International”), a Swiss entity, KPMG International’s member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26285NSS