Adobe Digital Insights Digital Dollar Q1 2018

1. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Executive Summary Leveraging Adobe Analytics Cloud data, the Digital Dollar Report for the first quarter of 2018 is the first release of a new quarterly series of reports focusing on retail and economics. Like the ADI Holiday, Digital Economy Project, and retail reports, this report uses aggregate and anonoymized data from the Adobe An- alytics Cloud to develop insights on online retail and economic trends. Releases feature updates on general trends in e-commerce and predictions and summaries of quarterly online retail, updates on pricing via the Digital Price Index, and features focusing on product insights and trends. Section 1: E-commerce Trends • Fast growth in the U.S. online sector continues: Q1 2018 records $112B in online retail in the U.S., up 14.1% year-over-year and Q2 2018 expected to top $115 Bin online retail in the U.S., up 14.4% • Martin Luther King Jr. Day and President’s Day anchor Q1 online retail at $1.5 and $1.7B respectively. Memorial Day in Q2 2018 is the next big e-commerce holiday and ADI predicts $1.9B in U.S. online sales and 19.0% growth year-over-year Section 2: Digital Price Index (DPI) Update • Adobe DPI shows faster deflation online continues into 2018; DPI deflation at -0.7% year-over-year while offline deflation at -0.1% for comparable categories Section 3: Product Insights – Trends in Smart Products • Smart TVs are the now the norm: in Q1 2018 9/10 TVs sold online were smart-equipped. On track to become smart-dominant: smartwatches (1/5 watches sold in Q1 2018 are smart-enabled) and smart-speakers (more than half of speakers sold in Q1 2018 come with voice assistant technology on-board) Section 4: Digital Marketing Trends Update • Smartphone visits nearly equal desktop visits in March 2018 (44% compared to 47% from desktops, respectively) but the pace of smartphone visit growth is plateauing • Average revenue-per-visit is up across all devices but increasing at a fast-pace on the smartphone. The average smartphone visit is worth over 30% of a desktop visit, nearly double the share from 2014

2. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 The Digital Dollar leverages Adobe Sensei to identify retail insights from trillions of data points that flow through Adobe Analytics. Adobe’s retail report, the most comprehensive set of insights and predictions of its kind in the industry, is based on an analysis of more than one trillion aggregated and anonymized visits to over 4,500 retail sites and 55 million SKUs. Adobe Analytics measures online transactions at 80 of the largest 100 U.S. web retailers. All use of the data, insights, and assets from this presentation are property of Adobe but can be used with appropriate citations. Please cite data, insights, or assets from this report and any derivatives as “Adobe Digital Insights analysis of Adobe Analytics data”. The Digital Price Index price changes are measured using the Fisher Ideal Price Index model. Our special thanks to Pete Klenow at Stanford University and Austan Goolsbee at the University of Chicago for their continued advice and guidance on the Digital Economy Project and Digital Price Index.

3. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 The first quarter of 2018 showed strong online growth in retail, emerging as the first Q1 ever with over $100 billion in online retail revenue in the U.S. This level represents a strong 14.1% growth over 2017Q1 and a close pace of growth relative to the 2017 holiday season, which Adobe Digital Insights recorded at 14.7% year-over- year. Adobe’s own Michael Klein, Director of Industry Strategy for Retail says, “The first quarter of the calendar year is a time of transition for most retailers. Many are wrapping up their books on the fiscal year, attempt- ing to liquidate any excess inventory from the holidays. While simultaneously, brands are introducing fresh assortments and campaigns that capitalize on the key shopping events in the first three months of the year; MLK, Valentine’s, President’s Day and Easter. On both of these fronts; ‘out with the old, and in with the new’, eCommerce continues to help consumers efficiently find what they want, when they want at the price they’d like to pay. The YoY double-digital growth of Q1 eCommerce sales is evidence of this”.

4. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Adobe Digital Insights expects the pace of online shopping to pick up in the second quarter of 2018, where we predict 14.4% growth and $115.5 billion in online revenue in U.S .retail. Growth in revenue in U.S. retail typically picks up in the second and fourth quarter and ADI predicts 2018 will be no different. As shoppers gear up for summer, retailers can expect shopping to spike during Memorial Day, which is on track to become the next major online shopping day outside of the holiday season.

5. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 For the savvy retailer, key holiday shopping days are a perfect opportunity to road-test deals and marketing strategies that can pay off during the Novem- ber-December holiday season. In general, the best time to start preparing for the next holiday season is right after the previous one is over. As ADI showed in our Holiday Recap Report retailers that performed well during the regular shopping year (Q1-Q3) won big during the holiday season. Record growth in online sales is accompanied by a continued concentration of dollars on key shopping days. Consumers are becoming more deal-sensitive and retailers are attracting customers by creating deals on major holidays. Year-over-year, it’s clear that key shopping days are becoming more import- ant to retailers and consumers alike. This trend can create a positive effect on retail revenues for multiple days in a row, such as with Thanksgiving week, where we see an incredible increase in online shopping for 5 days in a row. Presidents’ Day is a different story; Presidents’ Day Monday attracted revenue from the days around it. We find a net 4% decrease in revenue in the 5 days surrounding Presidents’ Day compared to the average corresponding days that quarter. To keep up with average Q1 weekly revenues, retailers must launch appropriate deals, have a clear Presidents’ Day marketing strategy, and dedicate extra time, effort and money.

6. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Looking ahead to Q2, it’s clear that Memorial Day weekend is fast becoming the key online shopping day outside of the holiday season, even though it hasn’t quite broken the $2 billion mark. During November-De- cember 2017, ADI recorded 15 days with over $2B revenue in online revenue in the U.S. There hasn’t yet been a $2B day in 2018, and our model predicts that we won’t have one again until mid-No- vember. Some retailers have been trying to mend this with new holidays like “Prime Day” or “Way Day,” but perhaps the next best holiday for retailers to rally around is Memorial Day. While Memorial Day still hasn’t breached the $2B threshold, it’s the fastest growing day of the year, along with Thanksgiving Day. This year, our model predicts a 19.0% growth for Memorial Day, far above the overall Q2 growth of 14.4%, and above the 15% growth of Cyber Monday and Black Friday in 2017. 15 out of 61November 2017 - December 2017 0 out of 272Q1 2018 - Q3 2018 (Predicted) Number of $2B days

7. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Consumers can also make the most of key shopping days outside of the holiday season by waiting for deals to emerge for items on their shopping lists. Deep discounts and consumer awareness drive the increasing importance of key shopping holidays. Through January, discounts driven by Martin Luther King, Jr. Day included televisions (down -0.6% over prices at the end of 2017) and medical equipment and supplies (down -0.5%). In February, President’s Day discounts drove overall price declines in tablets (down -5.5% since the end of 2017), televisions (-2.5%), appliances (-1.6%) and toys (-1.6%). Looking ahead to the second quarter of 2018, predicted discounts through May, driven by Memorial Day, will include computers (-5.0%), appliances (-3.3%), furniture & bedding (-2.2%), personal care products (-1.7%) and tools & home improvement (-1.1%).

8. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Looking at monthly discounts and other price changes over time gives us a more complete picture of inflation or deflation online, as we’ve been publishing in the ADI Digital Economy Project’s Digital Price Index (DPI). This quarter’s Digital Dollar report features a quarterly release of the Digital Price Index (DPI) and updates from the Digital Economy Project. As previous work from the Digital Economy Project has shown, online deflation and price declines as measured by the DPI have been faster online than in comparable categories as measured by the Bureau of Labor Statistics Consumer Price Index (CPI). This pattern has continued into 2018 with deflation across all shared categories between the CPI and the DPI showing the DPI is -0.6 percentage points lower (-0.7% in the DPI vs -0.1% in the CPI) year-over-year through March. Academic research based on analysis of the Digital Price Index from economists Pete Klenow and Austan Goolsbee shows that prices for goods online as calculated in the DPI show faster deflation than comparable goods as measured in the CPI, which tracks almost exclusively in-store prices. Klenow says, “From 2014 to 2017, annual inflation was fully 1.3 percentage points lower online (in the DPI) than offline (in the CPI) for the same categories. The entry of new products and the exit of old products is rapid online, suggesting that true inflation online – incorporating the quality and variety of new goods – is even lower than matched-model inflation.” Find Klenow and Goolsbee’s presentation here. Find more charts and graphs from the Adobe Digital Price Index in the Appendix. A flat file of the data can be obtained here.

9. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 This quarter’s Digital Dollar report features a deep-dive into the growth and trend in smart products includ- ing TVs, watches, and speakers. Smart TV’s growth is unapparelled by any other smart home product today, evidenced by the fact that nine out every ten TVs sold in the first quarter of 2018 were smart TVs. In the last two years, we have seen the smart TV reach full maturity as almost every TV bought today is a smart TV. These TVs are Wi-Fi enabled or have built in Chromecast, Roku, Firestick, or other streaming devices. Driving the evolution of the smart TV is the increasing importance of home entertainment systems: we’re starting to see streaming services and video games deliver 4K content. In addition, consumers are seeking out higher resolution TVs with larger screen sizes, two TV features that have enabled consumers to have a better at-home viewing experience. We see a trend towards larger screen sizes. In fact, more than half of TV’s sold in the first quarter of 2018 had screens larger than 45 inches. Also, in Q1 2018, resolution of TV sales is predominantly 4K, while 1080p re- mains on the decline. And bigger is typically better: three out of every four TVs sold with a screen size above 45 inches has 4K resolution while only half of TVs with screen size under 46 inches are 4K.

10. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Of all watches sold in Q1 2018, one in every five is equipped with smart technology, a huge leap from five years ago when less than one in ten watches sold was smart-enabled. We attribute the increase in sales of smartwatches to the product not only becoming more affordable but also diversifying. Consumers can now buy watches with smart capabilities for as low as under $50, a steep drop from the introduction of smart watches. The Apple Watch and Fitbit still dominate sales in the smartwatch market but we are now seeing conventional watch brands join the competition and appeal to non-sporty consumers who still want smart technology – Fossil, Michael Kors, Misfit, and Tagital all now have watches enabled with smart technology. It’s not just gym memberships: the pattern of smartwatch sales tracks closely with New Year’s resolutions. Retailers see an influx in sales of smartwatches in January every year as consumers invest more in their health and savvy marketers can take advantage. 2X as many smartwatches sold in Q1 2017 than Q2

11. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Sales of smart home speakers are continually increasing, likely attributed to voice technology enablement. In 2017, we saw sales of smart speakers surpass conventional speakers, driven by the most popular smart speaker devices: Google Home and Amazon Echo. Although sales are dominated by major brands, we are starting to see other audio companies power their products with smart technology and steal share from the three most prominent devices. For example, Adobe Analytics data shows Sonos drove twice as many sales in Q1 2018 compared to Q1 2017, likely the result of the new ‘Sonos One’ powered by Amazon Alexa. In the next year, we will see consumers rely on voice assistance technology more and more. As previous ADI work has shown, the vast majority of users believe that current voice recognition is good, while less than 5% of consumers consider it to be poor. According to our data, over half of consumers with a voice assistance use them at least once a day. Here’s a look at the most popular uses of voice command:

12. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Just because we can connect our everyday items to the internet doesn’t mean consumers necessarily want to. There are many cases in which it is sensible to take a conventional home product and advance it to “smart” status, but not all products need to be smart-enabled, as consumer shopping data shows. For example, smart refrigerator and smart lightbulb systems have not made the same meaningful leaps as smartwatches and speakers. Both smart fridges and lightbulbs have taken minimal share of their respective conventional products in the last five years. Consumers pay for experiences, not products, and these devices have a ways to go in demonstrating the added value of smart technology to consumers.

13. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Driving retail trends, discounts, and product purchases are marketers’ efforts to reach consumers no matter where or how they are shopping. Since their introduction more than a decade ago, smartphones have been taking up share of online browsing time and visits. The speed of our devices has been improving and the way we connect to websites on the go has become lightning fast with Edge, then 3G, LTE, and soon 5G. Today, most websites have made vast improvements to the mobile experience, contributing to the rise of the smartphone in retail. We’re now seeing that visit growth from smartphones is beginning to level off. Smartphone visits are still increasing in share, but the pace is slower than in years past as we approach an equilibrium between retail visits from smartphones and desktops. For the past two quarters the growth rate has been about half of what it was in 2014. A lot of improvements to the mobile experience have already been made, and smartphone penetration is already high in the U.S. Until that next revolution in smartphone technology, we don’t expect to see big leaps in smartphone visits. For more data on trends in smartphones, particularly the mobile checkout experience, see the Appendix.

14. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 While smartphone visit share is slowly starting to plateau, the value of smartphone visits is increasing at a quick rate, much faster than desktop, and smartphones are taking up revenue share at an ever-increasing rate. Each smartphone visit is worth double what it was worth in the beginning of 2014, which justifies a much higher commitment to mobile marketing strategies. The average smartphone visit was worth $0.18 on the dollar compared to a desktop visit in 2014. That figure is now up to $0.33 to the dollar. We should expect the threshold to cross the $0.50 milestone in the near future. It’s worth noting that these numbers don’t account for the customer journeys that begin on smartphone and transition to desktop for checkout, or where customers access mobile websites to enhance their in-store purchasing experience. If we were to account for this added value, the smartphone experience becomes even more valuable to the average retailer. While revenue from smartphones represented only 23% of all online shopping in the first quarter, there’s a lot of room for improvement, and a lot of value added from an amazing mobile experience given continued smartphone visit and revenue trends.

15. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Turning carts into purchases doesn’t follow a similar pattern over time: any visit over 10 minutes on site leads only to marginal improvements. Clearly, smartphones are lagging the most at the cart-to-order conversion step, meaning that retailers still have a lot of room for improvement in the checkout experience on smartphones. Retailers that manage to improve this process will see a significant improvement in their bottom line. More time on site directly translates to higher conversion rates and order values for retailers. Good content, and consequentially more time spent on site gives customers time to make up their mind on a big and costly purchase. It also adds the opportunity to cross-sell and increase cart sizes with complementary products. Cart expansion increases in a linear fashion with visit duration: longer web visits lead to bigger carts.

16. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Marketers can expect consumers to shop in an “on the go” mode on the weekends. A good online marketer knows that day of the week is an essential dimension to be aware of. There are a lot of behavioral differences from consumers when it comes to shopping on a work day from the office vs. on a day off. There’s an apparent difference between a “weekend desktop”, and a “weekday desktop.” Weekday desktop purchases tend to be higher than weekend ones. Conversion rates on desktops spike on Sundays, suggesting that consumers like to make bigger or more decisive purchases on off-hours from work. Smart- phone conversion rates spike on Mondays, perhaps from customers who didn’t complete a Sunday purchase at home but check-out first thing on Monday. In general, consumers tend to switch off their desktops on weekends and choose to use their mobile devices instead. These leads retailers to see more visits from smartphones than desktops on the weekend

17. DIGITAL DOLLAR: RETAIL AND ECONOMICS UPDATE 2018Q1 Looking over Quarter 1 by day of the week helps to explain the trend in revenue over the three months. As expected, Mondays are high in general with an average revenue of $1.36B. This is partially due to the two holidays, MLK Jr. Day and Presidents Day, falling on Mondays. Despite their importance, removing these two holidays from the average still keeps Mondays the highest average revenue day of the week. Comparatively, Saturdays drove on average 19% less revenue than Mondays. Over the course of the year, Saturdays are the worst day of the week for online shopping by a significant margin: nearly $100 million dollars. Every retailer should be aware of their own consumer buying cycle, and of the shape of their own season. Focusing around the first week of January and the two major holidays for Q1 is a good starting point. The shape of daily Q1 revenue is much flatter when compared to the holiday season, where extreme revenue spikes are the norm, as a result of the year’s biggest online shopping days: Black Friday and Cy- ber Monday. While other holidays like MLK Jr. Day and President’s Day are increasing their importance, they’re still in their infant stage in terms of online shopping revenue. Average Revenue by Day of Week (Q1 2018) Monday $1.36B Tuesday $1.27B Wednesday $1.29B Thursday $1.26B Friday $1.19B Saturday $1.10B Sunday $1.22B

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Adobe Digital Insights Digital Dollar Q1 2018

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