Retail Industry Executive Survey

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KPMGs Business Pulse 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 2011. Participants were asked about business conditions in their sector, the most significant revenue growth areas, and factors that would impede or support their sectors recovery. They were also asked to provide insights into their capital spending and investing plans as well as any challenges or opportunities that may lie ahead. Responses were compared to the findings of a similar survey conducted among executives in the second quarter of 2010.
2011 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. 24659NSS

Contents Foreword Key Findings from the KPMGs 2011 Retail Industry Pulse Survey Business Conditions Revenues Headcount Timeline for U.S. Economic Recovery Factors Hindering Retail Sector Recovery On the Path toward Growth Capital Spending and Investing A Closer Look at Regulation and Risk Conclusion
2011 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. 24659NSS

2 4 4 6 8 8 9 9 10 11 12 13

KPMG: A Leader in Serving the Retail Industry

2 | Retail Industry Executive Survey

Foreword
KPMG LLP (KPMG) is pleased to present the 2011 Retail Industry Executive Survey. This survey of 100 CEOs and other C-level suite executives in the retail industry asked participants to assess business conditions, name the most significant growth areas for the sector, estimate a time line for full economic recovery, and identify the conditions that could help or hinder economic recovery. This survey was conducted during May and June 2011 and is a follow-up to the survey conducted in the second quarter of 2010. In this publication, we share the findings of the survey and, where possible, compare them to those in the 2010 survey. This years survey found that industry leaders expect modest revenue growth and profitability improvement over the next year. Executives indicated that the biggest drivers of revenue growth over the next one to three years will be the retention and addition of customers, innovative merchandising strategies, market expansion, and increased consumer spending. Retail executives anticipate gradual improvements in hiring, as they expect to keep headcount relatively the same or to increase it slightly next year. However, one of out every five respondents indicated that they do not think headcount will ever return to pre-recession levels. Notably, the executives surveyed are not as confident of an economic rebound as they were a year ago. They expect the economy to improve only moderately next year, and they do not anticipate a complete economic recovery until 2013 2014 or later. However, more than half of the executives believe the retail sector will recover ahead of the U.S. economy.
2011 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. 24659NSS

Despite this tempered outlook, these executives indicated that their companies have significant cash on their balance sheets and they are investing it. They identified investing in organic growth, improving operational processes and related technology, and making changes to business models as their top initiatives over the next two years. Almost half of the respondents plan to increase spending in information technology (IT) over the next year. Retail executives see high national unemployment and decreased consumer confidence as significant problems. They have indicated that pricing pressures, lack of customer demand, and increasing input costs are significant barriers to growth over the next year. They also indicated costs of inputs and discounting as the greatest threats to profit margins. We would like to thank those who participated in this survey and we hope the findings are useful as you address the challenges and opportunities you face. We also welcome the opportunity to discuss this study and its implications for your business in the year ahead.

Mark Larson Global Sector Leader, Retail KPMG LLP

 2011 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. 24659NSS

Retail Industry Executive Survey | 3

4 | Retail Industry Executive Survey

Key Findings from KPMGs Business Pulse Survey

KPMGs survey reflects the responses of 100 retail sector executives from large, U.S.-based companies with $100 million+ annual revenue. The majority of respondents (41%) work for companies with annual revenues between $1 billion and $10 billion, while 31% represent companies with annual revenues of more than $10 billion, and 28% with revenues in the $100 million to $1 billion range. Seventy one-percent of these companies are publicly-held versus 29% that are privately-held companies.

Key findings from the survey included: More than half of the executives surveyed expect moderate improvement in economic conditions over the next year, but 62% believe a full economic recovery will not occur until the end of 2013 or later. Retail executives see IT as a high priority investment area, with 47% of respondents expecting to increase IT spending over the next year. Nearly 70% of survey respondents view data analytics as a core component of strategy and planning. Forty-seven percent of respondents said their companys current revenue is somewhat higher than last year, while 68% anticipate a moderate revenue increase one year from now. More than 50% of sector executives plan to add personnel in the next year, but nearly one quarter of respondents predict that their companys U.S. headcount will never return to pre-recession levels. A significant majority of survey respondents (72%) acknowledge that they have a great deal of cash on their balance sheets, and 44% say theyre already investing that money or will before the year closes.

Business Conditions

Enthusiasm over the economic outlook has dwindled from last year. While more than half (59%) of retail sector executives believe that the economy will improve over the next year, it is a marked difference from the prior year survey response of 90%. Meanwhile, the number of executives who believe the economy will stay the same over the next year dramatically increased to 33% in 2011, up from 8% a year ago.

2% 8%

8%

33%

90% 59%

2010 (Q2)
Key Better next year About the same

2011 (Q2)
Worse next year

2011 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. 24659NSS

Retail Industry Executive Survey | 5

2011 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. 24659NSS

A Modest Outlook for the Year Ahead

According to the retail industry executives surveyed, business conditions are modestly improving but at a slower rate anticipated by last years survey participants. While this years respondents expect moderate improvements to continue in revenue, the economy, and hiring, they are fairly guarded in their future outlook, believing a full economic recovery is still several years away. Within the sector, pricing pressures, lack of consumer demand, and increasing merchandise costs continue as barriers to growth. However, an expected increase in IT investment over the next year may offer retailers the competitive advantage they need to add new customers and increase revenue from their existing customer base.

6 | Retail Industry Executive Survey

Revenues

Nearly half (47%) of respondents reported an increase in revenues over the last year, while 36% said their revenues have remained the same.
50

40

30

47%
20

11%

4% 24%

36% 17%

10 0
Key Increase in revenues About the same

89%
Decrease in revenues

72%

2010 (Q2)
Key

2011 (Q2)

Better next year Same next year Worse next year

2011 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. 24659NSS

When asked to describe their revenue expectations a year from now, 72% of this years survey respondents said they believe revenues will increase, while 24% said they believe revenues will remain the same. This marks a drop from revenue expectations in 2010, when 89% of respondents said they believed revenues would increase over the next year and 11% said they believed revenues would remain the same.

Customers Key to Revenue Growth When it comes to driving revenue growth, its all about the customers. Survey respondents cited retaining and adding customers as their companys top revenue growth driver during the next three years. This marks a dramatic shift from the prior year, in which no survey respondents cited this as a significant driver toward revenue growth over the next three years. Biggest Drivers of Companys Revenue Growth: Next 1 3 years
5% 3% 2% 11% 37% 5% 29% 6% 34% 37% 29% 38% 8% 4%

2011 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. 24659NSS

11% 37% 14% 16%

48%

2010 (Q2)
Key

2011 (Q2)

Retaining and adding customers Innovative merchandising strategies Expansion in core/new markets Improving economic conditions Increasing consumer spending

Product innovations Focus on emerging markets Merger and acquisition activity Changed pricing strategies Growth of green products/services
1

Environmentally friendly

8 | Retail Industry Executive Survey

Headcount

Forty percent of respondents noted an increase in headcount over the last year, while 31% acknowledged a decrease. Retailers have higher hopes for the year ahead, with 52% of sector executives expecting to add headcount and only 15% anticipating a decline during this time.

Time Line for U.S. Economic Recovery

Retail sector executives surveyed anticipate that the projected time line for an overall U.S. economic recovery is still a few years away. More than half of respondents believe that the economic recovery will not occur until 2013 or later. This is a difference from the previous year, when 43% believed it would take that long to achieve.

31%

15%

33% 29%

43%

62%

40%

52%

57% 36%

Key Increase About the same Decrease

2010 (Q2)
Key

2011 (Q2)

2011 2012 2013 or later

Notably, almost a quarter (23%) of survey respondents expect their U.S. headcount will never return to pre-recession levels. Headcount: Return to Pre-Recession Levels
30 25 20 15 10 5 0
Key Already at, or greater than, pre-recession level 2012 2013 2014 or later Second half of 2011 Never

25%

Looking forward, retail sector executives view external factors as a greater cause for concern than internal factors. Sixtynine percent of respondents admitted being more concerned about the economy, competition, and the impact of regulatory changes over their ability to compete or whether they have the right strategic direction moving forward (31%). Which Concerns You More About Your Companys Future?
80 70 60 50

23% 17%

18%

16%

69%

1%

40 30 20 10 0
Key

31%

External factors (I am more concerned

about the economy, competition, and the impact of potential regulatory changes)

Internal factors (I am more concerned

about our ability to compete and whether we have the right strategy going forward)

2011 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. 24659NSS

Headcount within last year

Headcount expected year ahead

0%

2%

Retail Industry Executive Survey | 9

Factors Hindering Retail Sector Recovery

More than half of survey respondents view a loss of consumer confidence (69%) coupled with continued high national unemployment rate (58%) as the two leading factors hindering the retail sectors recovery. Other leading factors cited include the distressed real estate market (28%) and tighter access to consumer credit (16%). These responses are in line with the answers provided by sector executives surveyed a year ago. Retail Factors Hindering Recovery

Barriers to Growth
50
45% 42%

40

30
22% 21% 20% 17% 10% 9%

20

10
29% 7% 20% 17% 23% 22% 28% 28% 66% 64% 9% 11% 11% 15% 16% 28% 58% 9% 8%

8%

6% 6% 5% 5%

0
Key
69%

3% 2% 1%

2010 (Q2)
2011 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. 24659NSS
Key

2011 (Q2)

Pricing pressures Lack of customer demand Energy prices Inflation Labor costs Volatile commodity/input prices Regulatory and legislative pressures Increased taxation

U.S. dollar strength Access to and managing capital Staying on top of emerging technologies Lack of qualified workforce Risk management issues Other (please specify): Foreign competition Exchange rate fluctuations

Decreased consumer confidence Continued high national unemployment Distressed real estate market Limited access to credit for consumers Increased government regulation Limited access to credit for businesses

Uncertainty in the credit markets Instability overseas Decreased investor confidence Competitive threats from countries Other
2 4

Despite such barriers, 76% of survey respondents expect the retail industry to experience growth increases over the next year. Of that amount, 60% predict modest gains of about 5% or less, while 14% expect increases in the 6 10% range, and 2% believe growth will increase by 11 20%. Retail Industry Growth Rate
80

On the Path toward Growth

70 60 50 40 30 20 10 0
Key

76%

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

16% 8%

Increase over next year

Turmoil in the Middle East/North Africa and the crisis in Japan Threats to U.S. business from Asia and abroad 4 Other 2010 categories included: uncertainty of government regulatory actions; lack of government regulatory action; and increase in IT-related fraud.
2 3

No change

Decrease over next year

10 | Retail Industry Executive Survey

Threat to Profits Discounting and other sales incentives, merchandise costs, and decreasing sales volumes were widely seen by sector executives as posing the greatest threats to profit margins over the next 12 months. Greatest Threats to Profit Margins 60
53%

50 40 30 20 10 0
Key

51%

49%

22% 18% 11%

8%

1%

Discounting and other sales incentives Costs of inputs or merchandise Decreased sales volumes Administrative and marketing costs

Inventory carrying costs Foreign exchange variability Regulatory compliance Other

Capital Spending and Investing

Technology will be an integral component of many retailers future strategies as evidenced by their capital spending plans. Overall, 55% of survey respondents predict that their companys capital spending will increase in the next year while 28% expect it to stay the same. Much of this spending is expected in the areas of IT (47%), geographic expansion (29%) and new products and services (27%). Increased Areas of Capital Spending Over the Next Year
50
47%

40
29%

30

27% 22% 22% 20% 17% 15%

20

10 0
Key Information technology Geographic expansion New products or services Acquisition of a business Advertising and marketing Expanding facilities

6%

5%

5% 2%

Business model transformation Employee compensation and training Green/sustainability initiatives Research and development Regulation/control environment Other

2011 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. 24659NSS

Retail Industry Executive Survey | 11

Data analytics has core strategic role Customer data analytics is critical to many retail companies decision-making processes. A large number (69%) of survey respondents believe that data analytics is a core component of their strategic planning. Use of Data Analytics for Strategic Decisions and Planning
70 60

Expansion into new markets, technology, and marketing and customer programs are seen as the top three highest-priority investment areas for their companies, according to survey respondents.
40

Investment Priorities
30
31%

20 50 40 30 20 10 0
Key

69% 10

17% 13% 11% 10% 10% 8%

0
Key

22% 5%
4%

2011 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. 24659NSS

Core component of strategy and planning Considering using in strategy and planning Not using in strategy and planning Do not know
News reports continue to call attention to companies having a great deal of cash on their balance sheet but lacking the confidence to invest. Among the retail executives surveyed, 72% believe their company has significant cash on its balance sheet, of which 31% acknowledge that investment is significantly under way. Investment Timeframe
40

A Closer Look at Regulation and Risk

Regulatory Impacts A large majority (76%) of sector executives believe they are prepared to seize opportunities resulting from public policy and regulatory changes, while 17% are unsure and 7% report being unprepared. Interestingly, the exact types of opportunities that will arise from such changes are still somewhat unclear, as noted by 39% of the executives surveyed.
40 39% 30
28%

Expansion into new markets Technology Marketing/customer programs Stock repurchase

Not likely to invest/dont know Strategic acquisition New facilities

20 30 31% 15% 25% 20 0 10

13% 13% 11% Key

10

14%

12% 9%

7% 0
Key

Do not know Changing business structure Increased domestic expansion

Increased overseas expansion More capital investment Increased mergers and

acquisitions activity

Investment is significantly under way Second half of 2011 First half of 2012

Second half 2012 2013 and beyond Not likely to invest

12 | Retail Industry Executive Survey

Risk Policies When asked what challenges existed within their organization that might prevent establishing a formal risk policy, survey respondents cited culture and behavior (39%) as the biggest obstacle, followed by process integration and operational efficiency challenges.
40 39% 30

31%

30% 25%

20
15%

10
8%

0
Key Culture and behavior Process integration/efficiency of operations Clearly defined roles and responsibilities Dont know Shared resources across the organization Governance framework

Conclusion
2011 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. 24659NSS

While the road to recovery seems to be on a slow path, retail executives continue to forge ahead with modest expectations for the year ahead. Industry executives believe the economy, revenue, and hiring will see moderate improvements in 2012, but remain guarded longer term, not anticipating a complete economic recovery until 2013 2014 or later. According to survey respondents, a lack of consumer confidence and a high unemployment rate continue to hinder the retail sectors recovery, while pricing pressures and a low consumer demand are seen as the most significant barriers to growth over the next year. Sector executives say they will spend the cash that has accumulated on their balance sheets on IT to gain a competitive edge in attracting new customers and growing revenue from existing customers. As a result, data analytics is seen as a core component of their strategic planning in the year ahead.

Retail Industry Executive Survey | 13

KPMG: A Leader in Serving the Retail Industry

2011 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. 24659NSS

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 firmone with the industry depth, knowledge and insight to help clients address their most pressing issues and achieve their goalsis critical. KPMGs Retail practice includes professionals with the knowledge, experience, and skills to help our clients address their most pressing challenges, sort through todays 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.

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 National Tax 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 Jenna Stoneberg National Marketing Director Consumer Markets T: 480-459-3628 E: jstoneberg@kpmg.com kpmg.com

KPMG LLP the audit, tax and advisory firm, is the U.S. member of KPMG International Cooperative (KPMG International), a Swiss , entity, KPMG Internationals member firms have 138,000 professionals, including more than 7 ,900 partners, in 150 countries. 2011 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. 24659NSS InterAction Activity Code: MTL10324