RESEARCH

Unwrapping the 2018

Holiday Retail Outlook

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November 16, 2018

Building on last year’s blistering growth, J.P. Morgan estimates holiday sales in 2018 will increase by 3%, boosted by significant wage growth and disruption within the retail industry.

Today, consumers are shopping with the expectation of a seamless interaction of online and brick-and-mortar, often purchasing directly on mobile devices or even voice assistants - all while anticipating fast and free shipping. The trends reveal a dramatic change in the retail landscape from a decade ago, when Black Friday crowds queued for hours overnight to grab prized discounted items in stores. Although consumer needs and shopping habits have evolved, the retail industry is growing and the outlook is positive. Ahead of this year’s holiday season, the J.P. Morgan Global Research team examines the key drivers of continued strong holiday retail growth and emerging e-commerce trends.

Brick-and-Mortar Retail Adapts

The U.S. consumer is alive and well: unemployment is at 3.7%, the lowest since 1969 and wage growth is accelerating 3.1% in October with consumer confidence at an 18-year high. Although several major retailers such as Toys “R” Us have closed their doors this year, many others are well-positioned with streamlined operations, capitalizing on the strong consumer economy and finding new opportunities among leftover categories that major retailers have exited.

Unemployment stands at a 49 year low

Group Created with Sketch. 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 6% = 50-Yr. Avg. Unemployment Oct. 3.7% Unemployment = 49-Yr. Low 3.0% Source: BLS , J.P. Morgan Jul-62 Oct-64 Jan-67 Apr-69 Jul-71 Oct-73 Jan-76 Apr-78 Jul-80 Oct-82 Jan-85 Apr-87 Jul-89 Oct-91 Jan-94 Apr-96 Jul-98 Oct-00 Jan-03 Apr-05 Jul-07 Oct-09 Jan-12 Apr-14 Jul-16 Oct-18

No Room for Silos

In an ever-shifting environment, J.P. Morgan expects U.S. brick-and-mortar will continue to lose share to the e-commerce channel this holiday season. That said, as shoppers move from aisles onto the internet and toggle between online and offline to research and purchase items, traditional retailers have been refining their “omni-channel” playbooks to stay relevant and retain customers. From enhancing the overall in-store experience to optimizing their digital channels such as offering in-store coupons on Facebook, traditional retailers are revamping all customer touchpoints to encourage purchase consideration.

Group 6 Created with Sketch. As the line across all of retail becomes blurred, retailers have refined and improved their omni- channel strategies. What emerges is a picture of consumers with loyalty to global brands, but not where to shop. The question will ultimately be: who can benefit from the disruption over the next couple of years? Matt Boss Managing Director, Global Research, J.P. Morgan

Several brands such as Walmart have not only made significant investments to their fulfillment centers and supply chain capabilities, but also to their strategic expansion into new online channels. Walmart led with its $3 billion acquisition of Jet.com in 2016 to drive its capabilities and has since focused on building out its stable of brands including clothing site Bonobos in 2017 and more recent acquisitions of Modcloth and Bare Necessities to build its competitiveness with Amazon.

Largest U.S. retailers

Group 2 Created with Sketch. Walmart $330B 4% 25% 3% 10% 7% 3% 4% (2%) Y/Y Growth $234B $125B $101B $98B $74B $64B $58B Amazon Kroger Costco Home Depot Target Lowe’s Sam’s Club $125B

Source: Company filings, J.P. Morgan estimates. Note: Nearest fiscal year & adj. sales growth used where available.

Similarly, Macy’s has presented a number of new ideas to modernize its stores and overall consumer experience. The department store’s recent launch of “buy-online-ship-to-store” or BOSS, a new purchasing and shipping option, is expected to generate additional purchases as shoppers enter a store for pick-up. In addition, Macy’s debut of its mobile checkout system will allow consumers to pay through the Macy’s mobile app to avoid waiting in lines. The technology will be tested and introduced to almost every store for this holiday season.

Toys “R” For All

The $27 billion toy industry is expected to deliver more than just gifts under the tree, with potentially $5.6 billion in sales this year. Following the liquidation of Toys “R” Us in March, retailers are eager to capitalize on the new market opportunity and win over shoppers by expanding their range of toy selection, adding more aisles and stocking up their in-store inventory.

But retailers less known for their toys such as Party City, the leading vertically integrated party goods company in North America, is also expanding into toys by piloting “Toy City” pop-up stores this holiday season. The temporary toy storefronts are Party City’s first step toward a more comprehensive and long-term expansion into toys. Even Best Buy, the American multinational consumer electronics retailer is also pushing into the toy market this holiday season.

In turn, reminiscing on the iconic “Wish Book” distributed by Sears, Amazon mailed out a toy catalog, “A Holiday of Play,” to millions of customers with the hopes to push further into physical retail. The toy catalog features toys with QR codes, allowing shoppers to scan and purchase products.

Group 7 Created with Sketch. with consumers voting with their dollars every day in thousands of stores and online. Times have changed and it’s great to see how my companies have responded to the evolving consumer habits. Chris Horvers Managing Director, Global Research J.P. Morgan The retail landscape is incredibly dynamic

E-Commerce Continues to Grow

In an already demanding market, e-commerce continues to grow and evolve rapidly. Building on the momentum of the past several holiday seasons, the latest projections from J.P. Morgan Global Research estimate e-commerce to represent 14.2% of overall retail market share and this is projected to rise to 17.8% by 2020.

U.S. e-commerce as % of adjusted retail

Group 8 Created with Sketch. 2010A 6.3% 7.0% 7.8% 8.6% 9.4% 10.4% 11.5% 12.8% 14.2% 15.9% 17.8% 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E

Source: U.S. Department of Commerce, J.P. Morgan estimates. Note: Adj. retail sales excludes food services, auto, & gas.

Mobile is King

Many customers now expect brands to deliver a seamless experience across all channels and mobile is expected to represent 28% of e-commerce sales this year, growing four times faster than desktop e-commerce.

As mobile shopping continues to grow as the preferred platform, the convergence of mobile and social media, known as “m-commerce,” has become a critical factor to a brand’s holiday strategy. Although social media has traditionally been utilized as a discovery tool, mainly to find discounts and research gift ideas, more consumers are beginning their purchase journeys starting on mobile. In an emerging trend, m-commerce is estimated to reach $144 billion with a 39% year-over-year growth.

U.S. M-Commerce Y/Y Growth

Group 9 Created with Sketch. Source: comScore, U.S. Department of Commerce, & J.P. Morgan estimates. 2013A $27B $35B $55B $77B $104B $144B $196B 39% 34% 41% 56% 28% $260B 2014A 2015A 2016A 2017A 2018E 2019E 2020E 36% 33%
Group 10 Created with Sketch. The progress of e-commerce is gradual, but inevitable as it takes greater share of the retail market from traditional brick-and- mortars. This means all retailers will need to constantly innovate in the digital space. Doug Anmuth Managing Director, Global Research, J.P. Morgan


Amazon Setting the Bar Again

Tracking J.P. Morgan’s expectations for a 16.5% increase in e-commerce sales this holiday season, the firm also expects Amazon to remain the dominant e-commerce player with a 41% share of U.S. e-commerce. As a leader in consumer innovation, Amazon has put additional pressure on overall retail competition by offering free shipping to all U.S. customers for the first time ever, in addition to over three million items eligible for same-day delivery for Prime members. Competitors have also announced faster and cheaper delivery options, with Target offering free two-day shipping on hundreds of thousands of items for the first time ever with no minimum purchase while Walmart expanded their free two-day shipping option to millions of new marketplace items with a $35 order minimum.


Amazon U.S. sales as % of e-commerce


Group 11 Created with Sketch. 2014A Amazon U.S. GMV as % of E-commerce Amazon U.S. GMV as % of Adj. Retail Sales 27% 31% 36% 40% 41% 41% 41% 2.5% 3.2% 4.2% 5.3% 6.4% 7.1% 7.8% 2015A 2016A 2017A 2018E 2019E 2020E

Source: U.S. Department of Commerce, J.P. Morgan estimates. Note: Adj. retail sales excludes food services, auto, & gas. AMZN U.S. GMV as % of e-commerce excludes Whole Foods GMV.



Furthermore, Amazon’s recent strategic moves prove that the line between traditional retail and e-commerce is becoming blurred. As part of Amazon’s fast-growing store strategy, Amazon 4-star, a new physical store holding only items rated 4 stars and above “is a direct reflection of [Amazon’s] customers—what they’re buying and what they’re loving.”1 In an effort to widen the gap even further from competitors, Amazon continues to experiment with its 2017 acquisition of Whole Foods, by offering same-day delivery and grocery pickup options through Prime Now in select cities. With multiple competitors sights' set on Amazon this holiday season, the retail giant continues to innovate in order to meet the demand of the festive period while gaining market share.




Sleigh Bells Will Ring and so
Will Cash Registers

With holiday shopping approaching and retailers unveiling their holiday deals, consumers are already researching reviews and deciding what they’re buying, when they’re buying and where they are shopping. Driven by high consumer confidence, low unemployment and accelerated wage growth, both big box retailers and e-commerce giants are ready and well-positioned for what is expected to be another strong holiday shopping season.

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1Day One Staff (2018, September 26). Introducing Amazon 4-star. Retrieved November 12, 2018, from https://blog.aboutamazon.com/shopping/amazon-4-star

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