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Global consumer discretionary:
2016 outlook
Seema Shah, Charles Allen, Shan Liu, Catherine Lim
Bloomberg Intelligence analysts
North American consumer hardlines 2016 outlook
Housing, online drive consumer hardlines sales
Consumer hardlines, comprising multiple retail categories, refers
to non-apparel merchandise including home products and
furnishings, jewelry, beauty and wellness and office supplies.
The U.S. housing recovery and increased online penetration
have boosted these retailers’ sales, while free shipping and rising
investments in technology pressure margins. Though mostly U.S.-
focused, these retailers must be cognizant of global trends, such
as currency fluctuations, particularly if they seek international
expansion.
Improving housing market drives hardlines sales
As home prices rise in the wake of the 2008 recession, retailers
have seen a sales resurgence driven by increasing consumer
confidence in home values. Home-improvement retailers and
furnishers, in particular, have benefited as 67% of U.S. housing
stock is over 27 years old, often requiring improvement.
Private fixed-residential investment, at 3.7% at the end of 3Q, remains
significantly below the 4.6% 60-year average, leaving ample room for
further spending in the home discretionary category.
Market saturation drives focus on productivity
The boom in retail store growth over the last 25 years, 4x faster than
the U.S. population, has led many retailers to over expand, limiting
their ability to continue to grow organically, according to McKinsey.
Multichannel retailing and the decline of malls has shifted this
emphasis to increased productivity within existing footprints.
Retailers aim to lift same-store sales through better customer
experiences, direct and targeted marketing, including loyalty
programs, and branded merchandise.
Hardline retailers taking on e-commerce challenge
Many retailers, including well-known hardline names from Bed Bath
& Beyond to Ulta Beauty, were slow to see the threat of e-commerce,
particularly from Amazon. They’re now focused on driving sales
in this channel, investing in technology to build out and integrate
infrastructure as customers demand 24-hour, seven-days-a-week
access to products and brand content.
Websites allow retailers with space constraints in stores to showcase
a greater array of merchandise and can also provide product and
market research.
Capital allocation critical to retailer earnings
Share buybacks and dividends may reach new high in 2016, possibly
topping $1 trillion, according to S&P Capital IQ. Low interest rates,
lowering the cost to borrow, and uncertain economic conditions have
prompted many hardline retailers to return cash to shareholders to
boost earnings growth and investors’ total returns, often in lieu of
investing internally.
Continued buybacks may signal that there are few growth
opportunities in sight and may leave some retailers with obsolete or
aging assets.
European apparel retail 2016 outlook
Europe apparel retail makes costly shift to mobile
Apparel retailers cannot ignore online shopping as the transition
from stores accelerates and mobile browsing becomes the starting
point for many purchases. Online retail poses its own set of
challenges, including expensive customer acquisition and investment
in fulfillment to get garments to shoppers even faster.
There are signs that retailers are becoming more prudent in their
spending on shops, as profitability could be threatened by lower in-
store sales and the cost of online operations.
Mobile drives online apparel retail to grab share
The rise of mobile-shopping means consumers are browsing more
often, prompting apparel-retailers to expand their online offerings.
Yet effectively converting the increasing traffic into sales remains a
challenge for many companies.
Attracting new customers online can increase costs,with pure-play
Web retailers such as Asos and Zalando prioritizing sales growth over
profitability.Store-based retailers,including Inditex and M&S,are also
embracing the Internet to stay competitive and generate higher sales.
Expanding e-tail warehouses add to online capex
Capital spending is building up at online retailers including Asos and
Zalando, as they add fulfillment facilities to keep up with expanding
sales. This exemplifies the way in which additions to warehouse
space are replacing the expansion of physical retail space as a way to
capture consumer spending.
Online orders typically still have to be picked and packed individually,
making it difficult to achieve scale economies, especially when sales
are concentrated into event days, such as Black Friday.
Clothing retailers rethink extravagant store capex
Clothing retailers raced to upgrade their stores to lure customers
tempted by online shopping, particularly mobile. A shop visit needs
to be a worthwhile experience, with an exciting store design and
extensive product assortment.
However, the sales response to this has been uneven, so more focus
is being applied. Flagship stores in major centers should remain well
supported. Capital spending on stores is likely to decline, or at least
stabilize, as it is directed at developing online shopping.
Asia-Pacific retail-discretionary 2016 outlook
Asia retail earnings may rise on e-commerce, malls
Asia retailers’ earnings may recover in 2016 as sales gain on
investment in e-commerce and malls, which draw more customers
than department stores. E-commerce marketing costs may rise as
retailers such as Alibaba and Intime’s partnership, Golden Eagle and
Esprit seek to boost shopping online and offline.
Potential tax cuts on imported consumer goods in China may dent
Belle’s fashion-shoe sales, while benefiting luxury brands such as
Prada. Hong Kong retail rents may fall as jewelry and luxury-watch
shops shut.
E-commerce may revive Chinese retailers’ growth
E-commerce partnerships could help Chinese retailers surpass
consensus estimates calling for annual sales and profit growth of less
than 10% during the next three years.
Topping forecasts would depend on the online tie-ups expanding
the retailers’ user bases and becoming profitable before the usual
incubation period of two to three years, according to Bloomberg
Intelligence checks with iResearch. E-commerce growth may help
Chinese retailers offset falling profit margins at department stores
and malls.
Rise of duty-free imports helps China retail sales
Duty-free and travel-related retail sales may surge in China under
government plans to change tax rules and build more shopping
venues. China’s new air and sea ports, as well as downtown duty-free
shops, may add selling space for luxury brands.
Reforms of state-owned companies controlling China’s duty-free
shopping may lure foreign firms into partnerships, boosting sales
for both sides. Tax cuts and free-trade zones that exempt overseas
products from duties are luring shoppers to import goods.
Hong Kong retail profit may recover on rent cuts
Retailers and landlords may strike deals for more rent cuts for Hong
Kong shops. Weak retail sales resulting from lower Chinese spending
have eroded profits at high-rent outlets.
Emperor Watch shut the Cartier shop that it operated for Richemont
in the city and was granted rent cuts of 25-30% for five of its luxury-
watch shops. Coach closed a flagship store in Hong Kong to protect
its local profits. Chow Tai Fook, Chow Sang Sang and Luk Fook may
consider shutting jewelry outlets.
China shoppers may shift travel to Japan, S. Korea
High-spending Chinese shoppers may choose to travel to Japan
and South Korea as social unrest and a strong U.S. dollar-pegged
currency make some avoid Hong Kong. Visitors from China to Japan
more than doubled in the first nine months of 2015, while South
Korea visits rebounded 16% in October, after falling 7% in January-
September due to the MERS virus.
Southeast Asia may also be preferred, led by Thailand. Chinese
travelers spend most on duty-free goods, and growth in tax-free
spending exceeds local retail sales.
Bloomberg Intelligence offers valuable insight and company data,
interactive charting and written analysis with government, credit
insights from a team of independent experts, giving trading and
investment professionals deep insight into where crucial industries
start today and where they may be heading next.

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Global consumer discretionary: 2016 outlook

  • 1. Global consumer discretionary: 2016 outlook Seema Shah, Charles Allen, Shan Liu, Catherine Lim Bloomberg Intelligence analysts
  • 2. North American consumer hardlines 2016 outlook
  • 3. Housing, online drive consumer hardlines sales
  • 4. Consumer hardlines, comprising multiple retail categories, refers to non-apparel merchandise including home products and furnishings, jewelry, beauty and wellness and office supplies. The U.S. housing recovery and increased online penetration have boosted these retailers’ sales, while free shipping and rising investments in technology pressure margins. Though mostly U.S.- focused, these retailers must be cognizant of global trends, such as currency fluctuations, particularly if they seek international expansion.
  • 5. Improving housing market drives hardlines sales
  • 6. As home prices rise in the wake of the 2008 recession, retailers have seen a sales resurgence driven by increasing consumer confidence in home values. Home-improvement retailers and furnishers, in particular, have benefited as 67% of U.S. housing stock is over 27 years old, often requiring improvement. Private fixed-residential investment, at 3.7% at the end of 3Q, remains significantly below the 4.6% 60-year average, leaving ample room for further spending in the home discretionary category.
  • 7. Market saturation drives focus on productivity
  • 8. The boom in retail store growth over the last 25 years, 4x faster than the U.S. population, has led many retailers to over expand, limiting their ability to continue to grow organically, according to McKinsey. Multichannel retailing and the decline of malls has shifted this emphasis to increased productivity within existing footprints. Retailers aim to lift same-store sales through better customer experiences, direct and targeted marketing, including loyalty programs, and branded merchandise.
  • 9. Hardline retailers taking on e-commerce challenge
  • 10. Many retailers, including well-known hardline names from Bed Bath & Beyond to Ulta Beauty, were slow to see the threat of e-commerce, particularly from Amazon. They’re now focused on driving sales in this channel, investing in technology to build out and integrate infrastructure as customers demand 24-hour, seven-days-a-week access to products and brand content. Websites allow retailers with space constraints in stores to showcase a greater array of merchandise and can also provide product and market research.
  • 11. Capital allocation critical to retailer earnings
  • 12. Share buybacks and dividends may reach new high in 2016, possibly topping $1 trillion, according to S&P Capital IQ. Low interest rates, lowering the cost to borrow, and uncertain economic conditions have prompted many hardline retailers to return cash to shareholders to boost earnings growth and investors’ total returns, often in lieu of investing internally. Continued buybacks may signal that there are few growth opportunities in sight and may leave some retailers with obsolete or aging assets.
  • 13. European apparel retail 2016 outlook
  • 14. Europe apparel retail makes costly shift to mobile
  • 15. Apparel retailers cannot ignore online shopping as the transition from stores accelerates and mobile browsing becomes the starting point for many purchases. Online retail poses its own set of challenges, including expensive customer acquisition and investment in fulfillment to get garments to shoppers even faster. There are signs that retailers are becoming more prudent in their spending on shops, as profitability could be threatened by lower in- store sales and the cost of online operations.
  • 16. Mobile drives online apparel retail to grab share
  • 17. The rise of mobile-shopping means consumers are browsing more often, prompting apparel-retailers to expand their online offerings. Yet effectively converting the increasing traffic into sales remains a challenge for many companies. Attracting new customers online can increase costs,with pure-play Web retailers such as Asos and Zalando prioritizing sales growth over profitability.Store-based retailers,including Inditex and M&S,are also embracing the Internet to stay competitive and generate higher sales.
  • 18. Expanding e-tail warehouses add to online capex
  • 19. Capital spending is building up at online retailers including Asos and Zalando, as they add fulfillment facilities to keep up with expanding sales. This exemplifies the way in which additions to warehouse space are replacing the expansion of physical retail space as a way to capture consumer spending. Online orders typically still have to be picked and packed individually, making it difficult to achieve scale economies, especially when sales are concentrated into event days, such as Black Friday.
  • 20. Clothing retailers rethink extravagant store capex
  • 21. Clothing retailers raced to upgrade their stores to lure customers tempted by online shopping, particularly mobile. A shop visit needs to be a worthwhile experience, with an exciting store design and extensive product assortment. However, the sales response to this has been uneven, so more focus is being applied. Flagship stores in major centers should remain well supported. Capital spending on stores is likely to decline, or at least stabilize, as it is directed at developing online shopping.
  • 23. Asia retail earnings may rise on e-commerce, malls
  • 24. Asia retailers’ earnings may recover in 2016 as sales gain on investment in e-commerce and malls, which draw more customers than department stores. E-commerce marketing costs may rise as retailers such as Alibaba and Intime’s partnership, Golden Eagle and Esprit seek to boost shopping online and offline. Potential tax cuts on imported consumer goods in China may dent Belle’s fashion-shoe sales, while benefiting luxury brands such as Prada. Hong Kong retail rents may fall as jewelry and luxury-watch shops shut.
  • 25. E-commerce may revive Chinese retailers’ growth
  • 26. E-commerce partnerships could help Chinese retailers surpass consensus estimates calling for annual sales and profit growth of less than 10% during the next three years. Topping forecasts would depend on the online tie-ups expanding the retailers’ user bases and becoming profitable before the usual incubation period of two to three years, according to Bloomberg Intelligence checks with iResearch. E-commerce growth may help Chinese retailers offset falling profit margins at department stores and malls.
  • 27. Rise of duty-free imports helps China retail sales
  • 28. Duty-free and travel-related retail sales may surge in China under government plans to change tax rules and build more shopping venues. China’s new air and sea ports, as well as downtown duty-free shops, may add selling space for luxury brands. Reforms of state-owned companies controlling China’s duty-free shopping may lure foreign firms into partnerships, boosting sales for both sides. Tax cuts and free-trade zones that exempt overseas products from duties are luring shoppers to import goods.
  • 29. Hong Kong retail profit may recover on rent cuts
  • 30. Retailers and landlords may strike deals for more rent cuts for Hong Kong shops. Weak retail sales resulting from lower Chinese spending have eroded profits at high-rent outlets. Emperor Watch shut the Cartier shop that it operated for Richemont in the city and was granted rent cuts of 25-30% for five of its luxury- watch shops. Coach closed a flagship store in Hong Kong to protect its local profits. Chow Tai Fook, Chow Sang Sang and Luk Fook may consider shutting jewelry outlets.
  • 31. China shoppers may shift travel to Japan, S. Korea
  • 32. High-spending Chinese shoppers may choose to travel to Japan and South Korea as social unrest and a strong U.S. dollar-pegged currency make some avoid Hong Kong. Visitors from China to Japan more than doubled in the first nine months of 2015, while South Korea visits rebounded 16% in October, after falling 7% in January- September due to the MERS virus. Southeast Asia may also be preferred, led by Thailand. Chinese travelers spend most on duty-free goods, and growth in tax-free spending exceeds local retail sales.
  • 33. Bloomberg Intelligence offers valuable insight and company data, interactive charting and written analysis with government, credit insights from a team of independent experts, giving trading and investment professionals deep insight into where crucial industries start today and where they may be heading next.