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March3,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Top 10 Takeaways from the 2017 AAFA Executive Summit

1) Innovationisthewaytoadapttodisruptiveforcesintheretailindustry

2) Personalizationandcustomizationplayakeyroleinthecustomerexperience

3) Coachexemplifiesthemassivechangenecessarytoadapttotheshiftingretaillandscape

4) Off-priceandfastfashionofferconsumersareasontokeepcomingbackintostores

5) Fastfashionisdrivenbysocialmedia,andconsignmentandrentalconceptsmaybetakingshare

6) Consumersaretrainedtowaitformarkdowns,giventheabundanceofproductavailable

7) AlibabasetanewbarforshoppingholidayswithSingles’Day

8) Socialcommerceisthenextbigdisruptor

9) iTunes:thelargeststoreintheworld

10) TradetransformersintheTrumpera

TheFungGlobalRetail&TechnologyteamattendedtheAmericanApparel&FootwearAssociation(AAFA)ExecutiveSummit,heldMarch1–2inWashington,DC.Here,weshareour10keytakeawaysfromtheevent.

1.InnovationIstheWaytoAdapttoDisruptiveForcesintheRetailIndustryAlmostallofthepresentersattheAAFAExecutiveSummittouchedontheunprecedentedrateofchangetheretailindustryisfacing,andmanysaidthatinnovationisthewaytoadapt.Retailersneedtocombineshopping,entertainmentandasocialexperienceintoone.BarryMcGeough,ChiefInnovationOfficeratPVHCorp.,

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March3,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

talkedabouttheconceptofinnovationandhowitappliestobrandsandretailers.Hesaidtheyoungergenerations,themillennialsandGenZers(or,ashereferredtothem,theSnapchatGeneration),arebrandagnostic.Consumerexpectationsarechangingandbrandsandretailersareworkingtogetcloserandclosertowhatconsumerswant.

Successfulbrandsareusingartificialintelligenceandmachinelearningtoidentifyreal-timetrendsthatareconsumerspecific.StitchFixisoneexampleofacompanythatisdoingthis.ThecompanysaysthateventuallyitwillhavemoredataaboutitscustomersthanAmazonhasaboutitsown,whichisanambitiousstatement.StitchFixisusingalgorithmstoputtherightitemsinitssubscriptionboxesinordertoenticeeachcustomertobuyalltheitemsinthebox.

2.PersonalizationandCustomizationPlayaKeyRoleintheCustomerExperienceExecutivesfromanumberofmajorbrands—includingNewBalance,BirchboxandLululemonAthletica—talkedaboutthecustomerexperience,andtheyallnotedthatakeypartoftheexperienceiscustomizationandpersonalization.NewBalance,forinstance,createdashoelinecalledNB1thatenablescustomerstocustomizetheirfootwearandhaveitattheirdoorstepwithintwoweeks.TheproductsaremanufacturedintheUSandtherearemorethanaquadrillionpossiblestylesofshoesthatcanbecustom-designed,accordingtothecompany.NewBalancehasbeenprovidingcustomizationoptionsforfiveyearsandstartedofferingtheserviceonlinein2013.

Birchboxusesthedataitcollectsfromcustomersaboutthemselvesandtheirpreferenceswhentheysignupforasubscriptiontotailorandpersonalizetheitemsintheboxesitsends.Lululemonappliesthisconceptbyallowingstoremanagerstotailortheirspecificstoretotheirlocalaudience,whichmaydifferfromothersaroundthecountry.

Overall,customizedproductshavehigherperceivedvalue,andconsumersarewillingtowaittogetthem.Starbucksisanotherexampleofacompanythathassuccessfullycreatedpersonalizedproducts:eachStarbuckscustomerhasthepowertocreateanindividual,uniqueitem,andthecompanyhasbuiltaculture,completewithauniquelanguage,aroundthispersonalizationoffering.

3.CoachExemplifiestheMassiveChangeNecessarytoAdapttotheShiftingRetailLandscapeCoachisanexampleofacompanythatexperiencedtheshiftsintheretaillandscapeandimplementedsignificantchangesinitsbusinessseveralyearsagoinresponse.Thecompanyhasstartedtoturnthecorner,andsawcompincreasesinthelatestholidayseason.ChiefAdministrativeOfficerToddKahndiscussedtheboldpaththecompanyhasdefinedfortransformingitself.WhileCoachisnowstartingtoseesomepositiveresults,Kahnnotedthatthereisnosilverbulletforsuccessfullytransformingabrand.Theprocessofchangebeganin2013,whenCoachreevaluateditsbrand,storefleet,promotionalstrategyandmarketing.Thecompanyhadgonepublicin2000anduntilabout2007,itfacednorealcompetitionintheaccessibleluxurycategory.Then,newentrants,includingMichaelKors,KateSpadeandToryBurch,becameviablecompetitors.ThishappenedjustasCoachwaslosingsomeofitsidentity.Thecompanydidnotknowwhoitscorecustomerwas,andhadtakenitseyeofftheballontheproductside,astheCoachlogohadbecomeubiquitous.KahnstressedthatCoachandotherretailersneedtocontinuetolearn,evolveandrespondtothenewglobalconsumer.

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March3,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

4.Off-PriceandFastFashionOfferConsumersaReasontoKeepComingBackintoStoresDepartmentstoresarecurrentlyturninginventoryat3–3.5timesperyear.Meanwhile,fast-fashionretailerssuchasZaraareturninginventoryat5–6timesperyearandtherateforoff-priceretailerssuchasT.J.Maxxisevenhigher,at7times.Thishelpsexplainwhydepartmentstoresareseeingsomanychallenges:bothfast-fashionandoff-priceretailersoffermoreofareasonforconsumerstocomebackintostoresagainandagain.Off-priceretailersalsoflowproductintostoresatleastonceaweek,andsoofferconsumersaunique“treasurehunt”experience,asshoppersneverknowwhattheymightfind.

5.FastFashionIsDrivenbySocialMedia,andConsignmentandRentalConceptsMayBeTakingShareTheconceptoffastfashionallowsrunwayandreal-timetrendstobemadeavailableinstoreswithinweeksatanaffordableprice.H&MandZaraareleadersinthespace,andZarasells950milliongarmentsperyear.Giventheprevalenceofsocialmediaandtheimportantroleitplaysinthelivesofyoungerconsumers(millennialsandGenZers),itisimportanttomanyyoungpeoplethattheynotbephotographedinthesameoutfittwice.Socialmediahasalsoincreasedtheferociouspaceatwhichtrendsemerge.Fastfashionhasallowedconsumerstocontinuouslypurchasenew,on-trendgarments,evenwhentheiroldonesarenotyetwornout.

Theincreasingpopularityofconsignmentandclothingrentalconceptsmeansthatconsumerscancontinuallywearnewoutfits,butcanconsumeapparelinamoresustainableway.Theresalemarket,whichisexpectedtoreach$25billionby2025,helpskeepdiscardedclothingoutoflandfills,whichisimportant,astextilewastehasincreasedby40%inthelast10years.Sustainabilityusedtobesomethingthatgotinthewayofthedesignprocess.Now,itispartoftheprocess,drivinginspirationandforcingdesignerstobemoreinnovative.

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March3,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

6.ConsumersAreTrainedtoWaitforMarkdowns,GiventheAbundanceofProductAvailableTheUSisoverinventoriedandoverstored,resultinginmarkdownsandpromotionsfrommanyretailers.Thereisjusttoomuchstuff.Markdownsaresoprevalentthatconsumersknowthatiftheyjustwait,itwillbeworththeirwhile,andtheywillbeabletogettheproducttheywantatalowerprice.Onewaytoaddressthisproblemisforretailtoshifttomoreofascarcitymodel,withfewermalls,fewerandsmallerstores,andlessproductandlessinventoryinstores.

7.AlibabaSetaNewBarforShoppingHolidayswithSingles’DayConsumershavebeentrainedtoshoparoundeventsor“shoppingholidays,”suchasBlackFridayandtheback-to-schoolperiod.InChina,AlibabasetanewbarforshoppingeventswiththelaunchofSingles’Day(November11),whichisnowtheworld’slargest24-houronlineshoppingholiday.Singles’DaydwarfsBlackFridayintermsofsales:in2016,Singles’Daygenerated$17.8billioninsales,upfrom$14.3billionin2015andcomparedwithabout$5billiononBlackFriday.OnlinesalesinjustonedayinChinaweremorethanBrazil’stotalprojectede-commercesalesforallof2016.IfSingles’Daywereacountry,itwouldbetheeleventhlargestintheworld,justaheadofBrazilandjustbehindSouthKorea.

8.SocialCommerceIstheNextBigDisruptorThenextbigdisruptorintermsofshoppingwillbesocialcommerce,orconsumersshoppingonsocialmediachannels.Shoppinghasevolvedfromasinglechannel—whereconsumersexperiencedasingletouchpointandretailers’channelknowledgeandoperationsexistedintechnicalandfunctionalsilos—tomultichannel,whereconsumersmakepurchasesacrosschannelsandformats.Theidealscenarioisoneofubiquitousdistribution,whereconsumerscanexperiencebrandsnotjustwithinaparticularchannel,butacrossbrick-and-mortar,digital(mobileanddesktop,aswellassocialcommerce)andinteractiveTV.

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March3,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

9.iTunes:TheLargestStoreintheWorldiTunesillustratesthepotentialofthestoreasaplatformconcept.Withoutofferinganyphysicalproducts,iTuneshas600millioncustomersand$20billioninannualsales.OtherthingsthatdifferentiatetheiTunesplatformfromatraditionalbrick-and-mortarstoreareitsproductratings,customerreviews,best-sellerlists,prioritizationandpopularity.Amazonisofferingmanyofthesefunctions,aswell.RetailerscanlooktoiTunesandapplysomeoftheplatform’suniqueofferingstotheirownwebsitesandstores.

10.TradeTransformersintheTrumpEraThepossibilityofanewtradepolicyintheUShasbeenahottopicofdiscussionlately,givennewlyelectedPresidentDonaldTrump’scommentssurroundingthetopic.TomGlaser,PresidentofSupplyChainatVFCorp.,commentedthatthepresident’stonehasshiftedfromanoffensivepositioningtoamoredefensivepositioning.Ultimately,therearemorequestionsthanthereareanswersonthetopicofglobaltraderightnow.Detailsaboutproposednewpoliciesarefoggy,butthedetailsareimportant,andwillultimatelydeterminehowcompaniesandretailersrespond.

SomeretailersattheAAFAExecutiveSummitcommentedthattheywerepreparingfortheworst-casescenario.TherewasalsodiscussionaboutpotentiallyshiftingmanufacturingtotheUSinresponsetochangesintradepolicyandtaxes.Someattendeesnotedthatcertainpartsofthemanufacturingprocess,suchasspinningandweaving,wheretheUSismorecompetitive,couldbemoreeasilymovedtotheUSthancouldsomeothers.Butcomplicatedproducts,suchasjeans,aredifficulttomanufactureandrequiremoreskilledlabor—andthedifferenceinmanufacturingcostbetweentheUSandChinaissignificant.

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March3,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comShoshanaPollackSeniorResearchAssociate

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