BAIN RETAIL HOLIDAY NEWSLETTERIssue 5 | 20182019HOLIDAY RECAP AND TECHNOLOGY TRENDS FOR 2019 By Aaron Cheris, Darrell Rigby and Suzanne TagerConsumers propelled a stellar holiday season, with overall retail sales growing an estimated 5.0% to 5.2%, well above the 10-year average of 3.9% and just below last years 5.3%. In-store sales accounted for much of this success, increasing more than 4% over last year. E-commerce growth remained strong, with estimated gains of 14% over last year. However, while the industry results met Bains expectations, winners and losers are diverging. As customer demands heighten, which retailers will continue to win? In this issue, we examine disruptive technologies that retailers are deploying to delight customers and win share in 2019 and the years to come.2018 holiday recapEarly estimates suggest that retailers had a stellar holiday season in 2018. Though the US government shutdown has delayed the Census Bureaus estimate of December sales, other data sources provide strong evidence of success. In partnership with Earnest Research, we analyzed the sales performance of 21 major retailers. Our sample, combined with the Census Bureaus advanced November sales estimates, indicates that sales were up 5.0% to 5.2% this holiday season (see Figure 1). While these preliminary top-line results are encouraging, it is important to note that they are only part of the picture. Retailers have lowered and raised their earnings guidance, yet full details on the seasons profitability are still pending. 2 | Bain Retail Holiday Newsletter 201null201nullnullsue null | Bain 2018 growth is an estimate based on data from Earnest Research and the US Census Bureaus Novemberadvanced retail sales data; 20012017 growth is based on US Census Bureau retail sales dataSources: US Census Bureau; Earnest Research; Bain analysisFigure 1: Holiday sales grew an estinullted null0nullto null2null whinull is higher than the anullrage nullr the nullst denulldeCan you discern fact from fiction in sales results?Postholiday quizTrue orfalse?12345E-commerce represented more than one-third of total holiday sales Big box retailers won big online this holiday seasonOnline conversion rates (that is, the percentage of browsers who followedthrough with purchases) peaked on Cyber MondayE-commerce basket sizes boomed this holiday seasonIn December 2018, department stores saw higher return rates than other retailers 3 | Bain Retail Holiday Newsletter 201null201nullnullsue null | Bain interactions refer to site visitors who viewed a product page or performedan on-site search; analysis based on data from 10 major retailersSource: JumpshotFigure 2: nullline nullnnullrsion rates nullanulld on Denullnuller 1nullretailers saw the most significant increases in online transaction volume, with 24% and 23% higher volumes, respectively. This growth can be attributed partially to expanded free shipping with lower minimum or no minimum purchase requirements. For example, this holiday season, Target intro-duced free two-day shipping with no purchase minimum, while Walmart expanded the number of items available for free two-day delivery with a $35 purchase minimum. Quesnullon null. 5: nullrue or nulllsenullIn nullcemnullr 2018, deparnullennullsnullres sanullhigher renullrn ranulls nullan onuller renullilersTrue. In partnership with Earnest Research, we analyzed returns made for refunds (as opposed to store credit or gift cards) during the month of December across a sample of major retailers. Depart-ment stores saw the highest return rates at twice the sample average (see Figure 3). Though returns are costly for retailers, research confirms that they are a critical part of the customer experience. In a recent Optoro survey, more than half of respondents said that they always or fre-quently check a retailers return policy before buying an item. Free shipping and the option to receive a full refund instead of store credit are the most important factors consumers consider when evaluat-ing a retailers return policy.5 | Bain Retail Holiday Newsletter 201null201nullnullsue null | Bain analysis based on a sample of 20 major retailers; convenience store returnrates exclude sales and returns made onlineSources: Earnest Research; Bain analysisFigure 3: null Denullnuller, denullrtnullnt store return rates were nullre than twinull the anullragenull | Bain Retail Holiday Newsletter 201null201nullnullsue null | Bain they require significant changes in cost management practices and organizational cul-ture. In our experience, when executed with the proper ambition and executive sponsorship, companies can save 20% or more by implementing ZBB. Outsource select capabilities. Retailers need to decide which capabilities will be their key differen-tiators and make them world class. For the remaining capabilities, outsourcing may be the most strategic and cost-effective approach. Ahold Delhaize went this route, recently announcing a part-nership with start-up Takeoff to pilot the development of small, highly automated fulfillment cen-ters. But retailers also must weigh the trade-offs of outsourcing, especially vis-à-vis their competi-tors. Amazon and Alibaba are building large ecosystemsvast, interconnected communities that 10 | Bain Retail Holiday Newsletter 201null201nullnullsue null | Bain & Company, Inc.offer a range of services, including those outside of traditional retail. Amazon has established it-self as a one-stop shop for a huge base of loyal customers by satisfying a host of needs, from com-merce to entertainment to cloud platforms and web services. Ecosystem customers tap into Ama-zons stream of traffic as well as its advanced capabilities. Retailers can sell through Amazons platform, use its supply chain (Fulfillment by Amazon) or advertise through its many channels. However, these retailers are left vulnerable to the ecosystem owners, which collect detailed data from those that rely on their model. Ecosystem owners can then use the information gleaned to turn from conduit to competitor, eventually pushing other retailers or even brands out of the equation entirely. Profit from your own capabilities and hidden assets. On the other side of that coin, retailers with unique or valuable capabilities can package these services and generate new revenue streams by selling to other companies. Just as Amazon decided to offer its world-class logistics systems, cloud capabilities and more to the market, Alibaba is empowering traditional trade retailers with sophisticated store operations tools via its Ling Shou Tong business. Kroger and Microsoft recent-ly announced that they will codevelop and market a retail-as-a-service (RaaS) product with front- and back-end technology. Through RaaS, Kroger will resell its competency in generating consum-er insights, measuring employee productivity, monitoring out-of-stock issues and more. Target sells its marketing expertise, providing first-party consumer data and marketing consulting to help brands advertise more effectively on digital channels through its Target Media Network. What capabilities does your company have that offer a competitive advantage? Have you devel-oped expertise that can be packaged into a service and sold?There are many potential ways to decrease costs, just as there are many technologies that could be ad-opted. The options can be dizzying. What will set the winners apart is a crisp strategy, staying focused on the elements that matter most to their customers and that help deliver their brand promises. nullrenulls null a renullilnulllled 201nullThis is the last issue of this seasons holiday newsletter. Thank you for tracking the holiday season with us. We hope youve enjoyed our discussions of holiday trends, Amazons influence, the shifting labor market, marketing that improves customer lifetime value and innovation in 2019. We look forward to keeping in touch with you throughout the year, and we will be back later this year to share our 2019 holiday outlook. As always, we welcome your thoughts and questions at RetailHolidayNewsletterbain.