Reshape the Retail Industry—— Chairman Douglas Hsu’s Address at FEDS “50th Anniversary” Vendors’ Party

Firstly, I would like to take this opportunity to thank all the vendors for your continuous supports during the past year to the success of Far Eastern Department Stores (FEDS).  Today’s speech is divided into two sections, the first part is the outlook of global economy and the developments of retail industry, and the second part is how to reshape the retail industry.

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I. Global Economic Outlook and Developments of the Retail Industry
While attending the 2017 World Department Store Forum (WDSF) in Canada, I noticed that usually participants from the retail industry would only join one day and then leave for their other arrangements.  However, this year most of the retailers stayed throughout the entire programs which demonstrated their urgent sense of uncertainty in the current environment.  Given the theme of “Digital and Bricks & Mortar—One Magic Experience,” the integration of virtual and physical stores has become the focus for all retailers.  Furthermore, retailers also dedicate their efforts to innovative measures in order to stay competitive.  During the meeting, I was impressed by Nordstrom with its idea of “Create Fashion.”   Despite being a traditional U.S. department store, Nordstrom has strived to transform, which leads us to rethink how the retail industry should position itself in facing challenges through the integration of physical and virtual worlds.

According to the forecast of IHS, global economic growth in 2017 is around 3.1%, the highest since 2012.  Economies of the developed and emerging countries all enjoyed growth in the first half of 2017.  Aside from U.S. and Japan, most countries have revised their forecast upward in 2017.  Only Korea and China showed decline in 2017 compared to the same period in 2016.  In contrast, U.S., Japan, Eurozone, Singapore and Taiwan all demonstrated positive growth.  2017 is a year full of challenges for the retail industry that consisted of slow growth in the advanced economies, high level of debts in the emerging markets, deflation or low inflation in advanced economies, rising anti-globalization sentiment in trade protectionism, turbulent credit in some markets, and deteriorated population structure in many countries.

Despite of economic uncertainties, global retail industry was able to hold growth at 5%, in particular the significant revenue drive by e-commerce.  Major growth momentum came from two sources: First, the continuous increase of middle-class population in the world, and elevated income level in the Asian countries.  Second, thanks to the development of internet technologies, online retail continued to grow and accounted for 8% of total revenues since 2017.  U.K., China, and Norway ranked top in terms of global online sales.  With the aid of smartphones, mobile commerce has increased tremendously in total e-commerce sales.

Since the spring of 2017, Macy’s and Sears (including Kmart) have announced the closure of 68 and 150 stores, respectively.  JC Penny also announced to close down its 140 branches.  Main causes for mass closures are derived from over-expansions during early booming phases, failure to keep up with rapid market changes, or wrong strategic decisions.  These retailers all encounter with the same challenge - the threat of online shopping.

Development of Asian retail market can be briefly summarized as follows: First is the emerging dominant voices by the middle-class and millennials that gradually shifts the consumer market toward a new direction.  Second, the tremendous growth of mobile payment in China, Korea and many Asian countries, provided new momentum for mobile commerce, whilst social media platforms such as Facebook and Line were able to congregate consumers and offer new marketing channels for retailers.

However, as the complexities of shopping channels intensify, offering seamless online and offline shopping experiences are essential for Asian retailers.  Many retailers are applying new technologies such as AR and VR to provide exceptional experiences and connectedness with customers.  New opportunities in personalized services and experiences are also expected by all retailers through new business models to seek more stickiness with consumers.  On the other hand, “mergers and acquisitions” is also a quick approach to grow the industry.  Furthermore, with strong growth in duty free shops (“DFS”) contributed by the thriving Chinese tourists, establishing DFS in downtown areas has become a popular trend, particularly in South Korea, Thailand, and Japan.

Among Asian retail markets, Chinese market is showing moderate growth instead of accelerating pace in the past.  Total retail sales of consumer goods have increased tenfold from NT$3.1 trillion in 1997 to NT$33.23 trillion in 2016.  The speed of growth has peaked in 2008, up 22.7% during the same period, and then dropped to 10.4% in 2016.  Aside from the unstable macroeconomic environment, the “New Normal” economy and changes of consumer behaviors have also decelerated the total retail growth in consumer goods.

In retrospect to Taiwan’s economy, the economic outlook of 2018 should be more optimistic than this year based on the strong export performance and other indicators.  Economic growth is forecasted to reach 2% if there were expanded investments in the public sectors.  There is a possibility to achieve the government’s “targeted 2%” growth.

Given moderate growth and slight recovery for the domestic economy, Taiwan Institute of Economic Research estimated the retail sales volume this year will reach NT$13.72 trillion, a slight 0.88% growth than that of 2016 due to weak momentum.  Facing with reduced consumer income level and rising commodity prices, weak consumer confidence, and negative impact on the tourism sector due to rapid decline in Chinese tourists, the domestic sentiment is gloomy with slow growth in domestic consumption which is not in line with stronger performance in exports than imports.

II.How to Reshape the Retail Industry
During recent business trips, I have noticed the shuffling of merchandize display and newer store designs aimed to offer better shopping experiences and ambience for consumers.  Before our discussion of “how to reshape the retail industry,” I would like to remind you that business operators should at all time remain vigilant about their positioning in the marketplace.  Digitalization has disrupted and affected across all industries.  The degree of digital impact varies across industries and is threatening the incumbents.  For instance, dining, retail, and tourism industries have long been engaged in the fierce competition against digital new comers.  Digital transformation is the only way to survive the immense threats brought by new entrants.

How can enterprises seize the value of digital transformation?  I would like to raise the following points for your reference:
1. Digitalized enterprises can leverage the power of big data analytics by gaining insights from customer data.

2. Nowadays customer’s journey has become more and more complex.  Customers are accustomed to enjoy services at anytime and anywhere through seamless interactions across various platforms and devices.  They are impatient with service delays.  Ultimately, the focus should be on the customers, no matter any type of business model.

3. Digitalization is no longer an added service, but it serves as the transformation cornerstone of core businesses, including the functional units of logistics, supply chain, operations and back office.  In order to keep up in digital era, the company should adopt the collaborative working model instead of operating in silos.  Thus, we should also elevate the business agility and flexibility so to explore the new digital method.

Thus, what are the key points of digital transformation to retail industries?

While online shopping has become consumers’ preferred destination, there is still a need that requires the presence of physical stores.  The world renowned brands will not simply suspend physical stores within department stores or shopping malls just because they already have online presence.  They treat online store as another channel for consumers.  It is interesting to note that some retailers took extreme measures to close the entire physical chains and only operate e-commerce when facing threat from e-tailers.  Others continue to hold strong faith in stores despite falling revenues and deemed the physical channel is the future. They have the common expectation by operating the model of “online purchase, branch store delivery.”  According to the research last year, 57% of retailers are actively promoting the shopping experience of “online purchase, branch store delivery.”  With the ever increasingly blurring lines between online and offline businesses, many retailers have strategized on how to synchronize both online and offline operations. UNTUCKit, the famous U. S. e-commerce of shirts, doubled its revenues since its inception of physical stores.  As of today, UNTUCKit has already established 8 physical stores.

Furthermore, many retailers strive to create better shopping experiences with their physical stores.  The design style of b8ta stores resembles that of Apple stores to display the latest high-tech products.  Since many consumers prefer to try on merchandise in the brick stores first and then place orders online, b8ta focuses on “Hands-on and Educational Experience,” it does not rely on product sales for profit, but emphasizes on fee collection from brands.  Additionally,  it can monitor consumers’ interests in every product though its in-store video cameras, sensors, and data analytics software.

With advanced technologies, retailers have been fervently engaged in IoT and big data technologies to dive into customers’ preferences and needs.  Retailers must integrate online and offline data in order to fully assess customers and thus provide adequate products or services.  According to the statistics, more than 60% of retailers in the world have initiated data analytics.

2017 Cisco Visual Networking Index predicted that by 2021, more than 80% of global mobile data will derive from videos, which means operators and brands would need to empower new life to their brands or products to enable dialogues with millennials.  For instance in 2016, Maybelline invited Angelababy, the popular movie star in China, to live broadcast via Taobao and TMall, and sold out over 100,000 new lipsticks within two hours!

Moreover, with the trend of digital transformation, the demand for information security remains high standard.  Most consumers only shop on their trusted and legitimate websites.  Should there be any negligence on information security, it would significantly reduce the consumers’ confidence.

Last but not least, along with the omnipresent developments of mobile devices and internet, voice chat has gradually replaced text to speedily transmit messages, younger consumers tend to focus on “fast” and “real time” communication.  Chatterbot is not only equipped with the capability to chat, but more importantly is to totally change people’s shopping behavior via these conversations.  Burberry launched Chatbot at last year’s fashion week in New York City, enabling consumers to select and view the newest collections and learn about its creative inspiration to facilitate direct sales with the customers.  As large western high-tech companies currently hold dominance of the global screen portal, Amazon has bet heavily on Alexa, the virtual voice assistant system, hopefully to become the voice interface between users and devices for the next generation.  Surprisingly, Alibaba has also announced this year that it will engage in the research and development of voice assistant equipment.

Conclusion
This year marks the 50th anniversary of Far Eastern Department Stores.  Reflecting back on the Forbes’ ranking of top 20 U.S. enterprises, only AT&T and GE barely remained as the only companies from over a century ago.  Their ranking has mostly declined and some of the companies even disappeared.  We hope that FEDS could engage to digitalized transformation and create another 50 years of glory.#