INDUSTRY PROFILE

1/23/2012

Retail Sector
SIC CODES: 52 , 53 , 54 , 55 , 56 , 57 , 58 , 59 NAICS CODES: 44, 45

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Industry Overview
The US retail industry includes about 1 million outlets with combined annual revenue of $4 trillion. Major companies include Wal-Mart, Home Depot, Kroger, Costco, and Target. While large companies dominate some retail sectors (such as mass merchandisers and grocery stores), other sectors (such as auto dealers and convenience stores) are fragmented. Many specialty retailers are single-store operations. The global retail industry generates about $15 trillion in annual revenue, according to the Global Powers of Retailing report from Deloitte and STORES Media. Major international companies include Carrefour (France), Metro (Germany), Tesco (France), Schwarz Unternehmens Treuhand (Germany), and Aldi Einkauf (Germany). Many of the biggest US retailers are also major international players, with Wal-Mart ranking as the world's top retailer. The US retail industry includes auto dealers and Internet and catalog retailers and generally excludes food and drinking establishments, such as restaurants and bars. COMPETITIVE LANDSCAPE Personal income, consumer confidence, and interest rates drive demand. The profitability of individual companies depends on efficient supply chain management and effective merchandising and marketing. Large companies have advantages in purchasing, distribution, and marketing. Small companies can compete effectively by selling unique merchandise, providing superior customer service, offering a distinctive shopping experience, or serving a local market. Annual revenue per worker averages $250,000, but ranges from $600,000 for new car dealers to less than $200,000 for grocery stores. Imports are a significant part of the US market for many retail categories, including apparel, shoes, computers, electronics, toys, and cut flowers. Due to low labor costs, manufacturers in Asian countries, such as China and India, play an important, and somewhat controversial, role in the supply chain for many retailers. PRODUCTS, OPERATIONS & TECHNOLOGY Major retail sectors include motor vehicles dealers (20 percent of sales); food and beverage stores and drugs and cosmetics stores (14 and 10 percent each); and clothing and footwear (6 percent). Motor vehicles and parts dealers include new and used car dealers. General merchandise stores include department stores, discount department stores, warehouse clubs, and superstores. Food and beverage stores include grocery; specialty food; and beer, wine, and liquor stores. Convenience stores may sell gas. Non-store retailers include Internet retailers, mail order catalogs, vending machine operators, and fuel dealers. Other retail sectors include health and personal care stores (drugstores); clothing and accessory stores; furniture and home furnishings stores; electronics and appliances stores; and sporting goods, books, hobby, and music stores. Retailers buy goods from suppliers or wholesalers and resell them for a profit. The industry includes national and regional chains, franchises, and independent retailers. Franchises allow independent operators to leverage a wellknown brand name and benefit from the parent company's purchasing and operational efficiencies. Because franchise owners pay royalties and bear much of the financial burden of opening a retail outlet, franchising is a cost-effective way for companies to expand. The degree of specialization differentiates types of retailers. Department and general merchandise stores offer a wide range of items, while specialty retailers offer a broad selection within a product category. Numerous market segments can exist within a category. For example, clothing stores may focus on a particular gender (men, women, children); price tier (high, medium, low); style (traditional, contemporary, designer); or size (petite, tall, plus-size). At some discount retailers, such as dollar stores, merchandise can vary from week to week. For brick-and-mortar retailers (those with physical stores), location is key to driving customer traffic. Typical sites include enclosed, outdoor, and strip malls, and stand-alone sites. Large retailers typically occupy desirable anchor spots in shopping malls. When selecting locations, retailers consider local demographics (population growth, income); traffic patterns; proximity to complementary and competitive retailers; and lifestyle. Retail format can vary: gigantic superstores offer massive selections, while kiosks allow companies to set up scaled-down versions of retail operations in small spaces. Pop-up stores allow both large and small retailers to take over vacant space for a limited period of time, as short as a one-day event, to take advantage of high traffic locations and build product buzz. Specialty retailers may also lease locations within larger retailers.

Selecting the appropriate merchandise is critical. Buyers may attend trade shows or search through product catalogs or supplier websites to review upcoming new products. Vendors may set up individual meetings with large retailers to review product offerings. Because most companies place orders many months in advance of product receipt, buyers must have thorough knowledge of market and consumer trends to make good buying decisions. Volume discounts are common and favor large retailers. In industries where suppliers are numerous, retailers often buy from distributors or wholesalers, which consolidate merchandise and simplify purchasing. Retailers with multiple stores often operate their own warehouses or distribution centers to receive and store merchandise from suppliers. Effective supply chain management controls the flow of merchandise from suppliers to individual retail outlets and helps keep operating costs low. Many companies, particularly large retailers, have implemented sophisticated information systems that integrate data from manufacturers, distributors, warehouses, transporters, and retail outlets to track merchandise movement, monitor inventory levels, and ensure timely delivery of stock to stores. Inventory management helps companies identify slow- and fast-moving items and spot shrinkage due to damage, spoilage, or theft. Rapid inventory turnover is especially critical for retailers selling perishable items, such as fresh foods or dairy products. Retailers periodically discount or "mark down" items that aren't selling to clear floor space for new merchandise. When developing store layouts, retailers allocate space to basic merchandise, special promotions, checkout, and storage. Companies evaluate how efficiently they're using space by monitoring sales per square foot. Most retailers group similar merchandise and may place complementary items adjacent to one another to generate incremental sales. Well-designed layouts and window displays attract and maximize store traffic. Store atmosphere can vary significantly, based on the type of shopping experience retailers want to deliver. For example, a high end clothing store may feature lavish decor and expensive fixtures, while warehouse clubs offer little more than the basics. Checkout procedures can also vary: high volume retailers, such as grocery stores, typically have a centralized checkout area with multiple lanes to process as many transactions as possible. Department stores usually have checkout stations throughout the store. More retailers are offering self-checkout. Newer check-out options include mobile contactless payments using smartphones, a method already popular in other countries such as Japan. Computer information systems generally support the most basic retail operations. Point-of-sale (POS) technology records sales transactions and processes payments. Fully integrated information systems link POS, inventory, forecasting, purchasing, and many backoffice functions, such as payroll, finance, and accounting. Electronic data interchange (EDI) allows retailers to place purchase orders electronically. Automatic replenishment systems help companies maintain desired inventory levels of key products. To access real-time sales data, large companies link individual store systems to corporate systems. To better manage merchandise movement, many large retailers have implemented enterprise resource planning (ERP), which improves companies' visibility into the supply chain by connecting retailer systems with manufacturers, raw material suppliers, distributors, and transporters. Some companies participate in cooperative supply chain networks that share sales data and forecasts from retailers and supply and production data from raw material suppliers and manufacturers. Known as just-in-time (JIT) merchandising, coordinating demand and supply information allows supply chain participants (including retailers) to reduce inventory carry costs and minimize write-offs and discounting. Universal product codes (UPC), implemented with bar codes on product packaging, provide standard identification for retail products and allow retailers to scan items electronically. In addition to bar codes, a growing number of retailers are using radio frequency identification (RFID) devices, which can transmit and store product information. While more expensive to implement than bar code processing, RFID gives companies greater tracking abilities since RFID codes can be unique to an individual item. In addition, RFID allows retailers to monitor product movement more efficiently because supply chain participants can scan merchandise by the pallet. Advances in payment system technology have allowed many retailers to improve the checkout process. RFID allows retailers to offer contactless payment through special tags or cards. Some companies, such as grocery stores and home improvement chains, have added self-checkout lanes. Biometric identification allows customers to pay with a fingerprint and also can assist with tracking employees at key areas such as at the cash register and time clock. Handheld checkout devices and mobile contactless payments eliminate the need for dedicated stations. SALES & MARKETING Customer demographics vary by retailer and can be different within a retail segment. For example, while women buy more clothing and beauty products, men are more likely to buy motorcycles and consumer electronics. Generation Y, for

a generational example, expects instant gratification and puts a priority on spending on the latest technology. Demographic trends can affect retailer strategy and marketing. Common marketing and promotional vehicles include TV, print, radio, newspaper advertising, the Internet; direct mail; and in-store events. Social media outlets, such as Facebook, are used by many companies to give special deals and gifts to connected customers and spread the word about special sales and discounts. Small retailers benefit from grassroots marketing, word-of-mouth, and local event sponsorship. Retailer brand names and brand name merchandise help attract a distinct clientle. Loyalty programs, which reward frequent or large purchases, help retailers develop a customer base. Gift cards are a popular way to generate repeat visits. Retailers may hold special sales or events to drive store traffic, introduce items, or clear out excess merchandise. Discounts or markdowns are common in some categories, such as women's apparel. Large retailers rely on extensive consumer research to guide merchandising and pricing decisions. Syndicated data helps companies track competitors' performance and evaluate the effectiveness of marketing programs. Customer service tends to be more important for expensive products (such as cars) or sophisticated products (electronics). Pricey or complicated products may have a longer selling cycle and require more personal attention from sales staff. For volume-driven retailers, such as grocery stores, customers are more likely to appreciate fast, efficient service. Many retailers measure customer service through surveys or follow-up phone calls. The Internet has greatly affected the retail operating model by expanding consumer access to goods and allowing consumers to compare prices more effectively. Internet-only retailers, such as Amazon, can offer a vast selection of merchandise and enjoy low overhead due to the absence of physical stores. Many traditional retailers have established websites to develop an online presence, offer an expanded merchandise selection not available in stores, and compete with Internet-only retailers. Links from complementary websites help expose retailer websites to a broader audience. Companies can also offer links to other websites and may receive commissions for referral sales. In some categories, online retailing has allowed suppliers to bypass traditional retail channels and reach consumers directly, although suppliers are often hesitant to sell directly for fear of losing product distribution. Some companies have drop ship agreements with suppliers, which allow the retailer to process online orders and the supplier to ship merchandise directly to customers. Retailers may offer merchandise in multiple price tiers to appeal to a broad customer base. Brand name merchandise (including designer brands) is typically the most expensive. Large retailers may offer private-labels or store brands, which offer comparable quality but lower prices than brand names. Discount brands appeal to price-conscious customers. Companies may use promotional funding from manufacturers to discount retail prices. FINANCE & REGULATION Many retailers have highly seasonal sales and cash flow can be uneven. For example, toy retailers generate most sales and profits during the winter holidays, while children's clothing retailers depend on back-to-school sales. The most important peak period, by far, is the winter holidays, followed by back-to-school, Mother's Day, Valentine's Day, and Easter. Receivables for most retailers are low, since most consumers pay with cash or third-party credit cards. Most large retailers issue branded credit cards and may run their own credit card operations or outsource credit services to third parties. The ability to help consumers get credit is especially important for large purchases, such as cars or major electronics and appliances. Companies with variable seasonal inventory levels typically require short-term financing, often through commercial banks or suppliers. Inventory financing for trendier items, such as toys and apparel, can be risky. Inventory turnover is an important measure, but can vary significantly depending on retail segment: while large grocery stores' inventory average 20 days sales, car dealers can exceed 90. Large projects, such as major renovations or expansions, can require significant capital investment. Gross margins average 30 to 40 percent, but can vary significantly by retailer and merchandise type. Retailers that sell low-margin merchandise (such as groceries) must rely on volume to generate profits. In general, retailers that sell highmargin merchandise (such as original art or motorcycles), rely less on volume and more on profit margins. Most retailers have established merchandise return policies. Large retailers typically set aside allowances for returns, based on historical trends. Losses due to crime, such as theft, fraud, or robbery, can also be problematic. Many large retailers use security systems and electronic merchandise tags to deter and prevent crime.

The financial terms of franchise agreements typically include an initial payment, royalty payments based on a percentage of sales, and advertising fees. Most franchise agreements include minimum operating requirements and may require retailers to achieve specific annual sales volumes. The FTC and state governments generally enforce laws against deceptive sales and advertising practices, predatory pricing, and monopolistic behavior. Other government regulations may affect retailers depending on the type of merchandise sold. For example, because the FDA regulates food, drug, and some beauty products, it can issue product recalls, which greatly affect grocery, drug, and health and beauty stores. INTERNATIONAL INSIGHTS The global retail industry sales totaled $15 trillion in fiscal year 2009, according to the Global Powers of Retailing report from Deloitte and STORES Media. Slow growth in global retail sales is forecast to continue with emerging countries leading the way. Major international companies include Carrefour (France), Metro (Germany), Tesco (France), Schwarz Unternehmens Treuhand (Germany), and Aldi Einkauf (Germany). Many leading US retailers also have international operations; Wal-Mart is considered the world's largest retailer. A third of the top 250 global retailers are based in the US, while Europe accounts for slightly more at about 35 percent and Japan for nearly 13 percent, according to the Global Powers of Retailing. Measuring the penetration of international retail brands, the UK ranks first, attracting nearly 60 percent of international brands in a recent survey by real estate firm CBRE Group. The next most international markets are the United Arab Emirates, with 54 percent of brands surveyed, and the US, with 50 percent. In terms of developing countries ripe for global retail expansion, A.T. Kearney ranks the top as Brazil, Uruguay, Chile, India, Kuwait, China, and Saudi Arabia. South America fared well during the recession and is poised for more growth. Brazil and China in particular have been targets for luxury retailers. The luxury brands have found customers in the countries' newly wealthy who have the disposable income and the desire to sport recognizable luxury labels as symbols of their success. Retailers who expand internationally face many challenges and may want to take into consideration social and cultural differences, regional suppliers, local talent pool, employment laws, political issues, currency exchange, and government regulation. Some retailers choose to partner with local retailers or sell their products through a local channel first to develop a better sense of local demand. India may have high potential for retailers, but foreign investors are currently hampered by foreign investment rules that allow foreigners to own only 51 percent in single-brand retail or 100 percent of wholesale operations. Some global retailers such as Wal-Mart are increasing their wholesale outlets in the country in anticipation of a possible relaxation of the retailing regulations, according to BloombergNews. REGIONAL HIGHLIGHTS Climate, ethnic populations, and regional preferences can affect demand for certain types of merchandise. For example, cold weather apparel sells better in Midwest states, such as Minnesota and North Dakota, while warm weather apparel sells better in Southeast states, such as Florida and Georgia. Large minority populations in major urban markets, such as New York and Los Angeles, drive demand for ethnic products. HUMAN RESOURCES The retail sector is the largest employer in the US and provides more than 15 million jobs. Typical jobs include sales, cashiering, and stocking. Most jobs require few skills and pay low wages. Average hourly industry wages are moderately lower than the average for all US workers. As a result, employee turnover exceeds 50 percent annually, higher than the average for all industries. Retailers rely heavily on part-time help because sales volume varies during the day and week, and seasonally. In certain high-end retail segments, such as original art, some consumer electronics, and luxury autos, sales staff require specialized education or training. Expensive or complicated merchandise may involve a longer sales cycle and extensive customer relationship development. Companies specializing in high-end merchandise may use commissions as compensation to motivate sales staff. The industry injury rate is moderately higher than the average for all US workers, primarily due to lifting-related injuries from restocking jobs.

Industry Employment Growth Bureau of Labor Statistics

Average Hourly Earnings & Annual Wage Increase Bureau of Labor Statistics

Recent Developments
INDUSTRY INDICATORS Total US consumer spending, an indicator of retail sales, rose 2.5 percent, primarily from nondurable goods expenditures, in November 2011 compared to the same month in 2010. Total US retail sales, a measure of the retail sector, increased 7.8 percent in the first eleven months of 2011 compared to the same period in 2010. US tourism spending on shopping, which impacts retail sector revenues, increased 5.9 percent in the third quarter of 2011 compared to the same period in 2010. QUARTERLY INDUSTRY UPDATE Retailers Embrace Free Shipping - More retailers are incorporating free shipping deals as a way to capture customers. More than 90 percent of online retailers were expected to offer free shipping during the 2011 holiday season, up from 84 percent in the 2010 holiday season, according to the National Retail Federation's Shop.org. The service is not free for retailers, who have to budget in advance for the free shipping offers. Google is reportedly working with certain retailers to offer a competitive fast shipping program that compares with Amazon's popular Amazon Prime plan. Retailers have recognized that free shipping deals may draw in shoppers who then feel comfortable buying more products because they aren't paying for shipping. Return Fraud Expected to Drop - Return fraud during the 2011 holiday season was expected to cost retailers $3.5

billion, compared to $3.7 billion in 2010, according to the annual Return Fraud Survey by the National Retail Federation. Nearly two-thirds of retailers have changed policies to reduce fraud losses. More than 60 percent ask customers who don't have a receipt to show their identification and 10 percent ask customers with a receipt to show an ID. Nearly 90 percent of retailers say they have experienced the return of stolen merchandise and employee return fraud or collusion with others within the past year. Other common frauds include "wardrobing," the return of special occasion apparel and certain electronics, and criminals using counterfeit receipts to return merchandise.

Business Challenges
CRITICAL ISSUES Retail Demand Depends on the Economy - Economic factors, including personal income, consumer confidence, job growth, and interest rates, can greatly affect consumer spending and the retail sector. During recessionary periods, retail sales growth can slow drastically and even decline. Retail spending grows rapidly during periods of strong economic growth, as consumers spend a greater share of income and increase their personal debt. Rising interest rates affect consumer credit and consumer ability to finance large retail purchases, such as cars. Industry Concentration - In many retail segments, large companies dominate and hold the majority of the market. Even specialty retailers in fragmented markets must compete with mass merchandisers and warehouse clubs that offer a smaller selection of comparable merchandise at low prices. Suppliers favor large retailers by offering volume discounts. With limited marketing funds, small retailers struggle to compete with the large advertising budgets enjoyed by major retailers. OTHER BUSINESS CHALLENGES Seasonal Cash Flow - For many retailers, cash flow is uneven because of seasonal demand. Due to increased demand during the winter holidays, many retailers, including toy, jewelry, and consumer electronics stores, generate a disproportionate share of revenue during the fourth quarter. Back-to-school and spring and fall fashion introductions drive sales peaks for apparel retailers. Even general merchandise stores must build and finance inventory in seasonal merchandise categories to prepare for key selling periods. Crime-Related Losses - Despite security measures, theft, shoplifting, and fraud are ongoing problems for retailers. Employee theft accounts for about 45 percent of losses, while shoplifting accounts for 35 percent, according to a recent National Retail Security Survey. Administrative error and vendor fraud make up about 15 percent and 4 percent of retail losses, respectively. An increasing number of retailers have become victims of organized crime, where crime rings illegally obtain merchandise and gift cards and either fence goods or sell them online. Categories with above average losses include cards, gifts, floral, novelty, books and magazines, accessories, and food items. Protecting Customer Information - Growing concern over identity theft and credit card fraud has resulted in increased scrutiny over the security of customer data in the retail sector. Retailers access and often store confidential customer information through loyalty programs and credit card payment data. Security breaches have allowed hackers to steal credit card numbers and other sensitive information from large retailers. Adopting new security systems can be slow and costly, especially for retailers using older technology. Trends Affect Demand - Consumer tastes and preferences can change rapidly and greatly affect demand for retail items. Fashion fads and product life cycles can be unpredictable and companies may struggle to make merchandising decisions based on future trends. Forecasting error can result in excess merchandise or out-of-stocks and missed opportunity. The fickle nature of certain demographics, such as children and young adults, has resulted in short product life cycles and high new product failure rates in some categories. High Worker Turnover - Employee turnover in the retail industry is high, averaging 50 percent annually, due primarily to low pay and perceived low career growth potential at the entry level. Recruiting and training new personnel is a constant activity for most retailers and can be costly and disruptive. Inadequate staffing can result in customer service problems.

Trends & Opportunities

BUSINESS TRENDS Retail Sales Growth Slowing - A weaker housing market combined with difficult economic conditions has slowed

growth in the retail sector. Retail segments associated with housing, including furniture and home improvement stores, experienced declining sales in 2009 and 2010. Rising gas prices and a tight credit market have slowed auto sales and affected car dealerships, which account for about 20 percent of the total retail sector. Increasing Industry Concentration - Tough economic conditions affect retailers, regardless of size, and have resulted in fewer players in many retail segments due to M&As and bankruptcies. Slow retail growth forces many companies to grow through acquisition versus expansion. Purchasing and supply chain efficiencies allow large retailers, such as Wal-Mart, to sustain low prices at the expense of small retailers. Market contraction and manufacturer efforts to reduce the number of franchises have reduced the number of small new car dealerships. Increasing Diversity - Ethnic diversity in the US population continues to increase, challenging retailers about marketing and merchandising. Many ethnic groups have different needs and preferences compared to the general population. Census projections predict that the majority of the US will consist of racial minorities by mid-century. Hispanics are expected to account for an estimated 30 percent of the population due to high birth rates and immigration. AfricanAmericans are projected to be about 15 percent, while Asians will account for 9 percent. Evolution of Shopping Venues - Changes in consumer shopping behavior have caused an evolution in shopping venues. Time-pressed consumers are shopping at traditional malls less frequently and spending less time per trip, according to the International Council of Shopping Centers (ICSC). Regional vacancies have forced some malls to fill anchor locations with nontraditional retailers instead of department stores. Open-air malls and integrated retail/business/residential centers designed to accommodate pedestrian traffic are becoming more popular. INDUSTRY OPPORTUNITIES Loyalty Programs - Loyalty programs can help retailers retain customers, encourage repeat store visits, and increase purchase amounts. Many retailers reward frequent or large purchases by offering discounts or free items as incentive. Companies may also give loyal customers advance notice for sales or access to invitation-only events. Information collected by loyalty programs provides valuable market research data about customer shopping habits. Many retailers have started using social media, such as Facebook, to reward customers for loyalty and for notifying them of special events. Internet Sales - Widespread acceptance of the Internet as a retail channel has made websites an essential marketing vehicle for many retailers. Internet sales increased from about $5 billion to more than $140 billion between 1999 and 2008. A growing number of consumers are shopping online to save time and gas. Many large brick-and-mortar retailers are expanding their Internet presence to capture online sales and mitigate declining in-store sales. While search engine marketing is a popular way to promote retail websites, some companies are experimenting with social network advertising and widgets. Large online retail categories include apparel, computers, and cars, according to Forrester Research. Improved Inventory Management - Radio frequency identification (RFID) devices give companies real-time access to supply chain data and allow retailers to track merchandise more effectively. Wal-Mart is working to implement RFIDbased inventory management systems and requiring suppliers and distributors to adapt accordingly. Some retailers are experimenting with RFID. As more retailers adopt RFID, implementation costs should decrease, making the technology more accessible and cost-effective. Alternate Payment Systems - Improved payment technology can help retailers process transactions faster and reduce customer waiting times. Several retail segments, including gas stations, convenience stores, and grocery stores, have implemented contactless payment with RFID tags or cards. By allowing customers to pay with a fingerprint, biometric identification eliminates the need for a credit card signature. In lieu of checkout counters, some retailers are using mobile payment devices to bring the checkout process to the customer. Self-checkout appeals to customers with small transactions and helps reduce labor needs. Leveraging the Environmental Movement - Retailers can tap into growing concern over environmental issues by selling "green" products and implementing eco-friendly operating procedures. Natural and organic goods, fuel-efficient vehicles, and chemical-free products attract environmentally conscious consumers. The appeal of "green" products is growing and spans retail segments. By sponsoring recycling programs and decreasing energy use, retailers can save money and promote an environmentally friendly image.

Executive Insight

CHIEF EXECUTIVE OFFICER - CEO Creating a Retail Niche The retail sector offers consumers a multitude of shopping options. With many retailers offering identical or comparable merchandise, competition can be intense. To differentiate, small retailers may stock unique merchandise, deliver superior customer service, serve a local market, or provide a distinctive shopping experience. Large retailers may rely on broad selections and competitive pricing to attract customers. Developing a Merchandising Strategy Retailers must adapt merchandise selections to reflect evolving market conditions. Various factors, including trends, fads, demographic shifts, and economic factors, can affect demand for retail products. Companies may look at historical sales trends to help predict future sales and guide purchasing decisions. Retailers may also attend trade shows to evaluate the potential for new merchandise. CHIEF FINANCIAL OFFICER - CFO Optimizing Inventory Balancing inventory levels of slow- and fast-moving products is an ongoing challenge for most retailers. Excess inventory takes up valuable selling space and results in additional carrying costs. Lack of inventory causes out-of-stocks and lost sales. Retailers typically liquidate excess inventory through discounts and clearance sales. Some companies centralize excess merchandise in certain stores, outlets, or clearance centers. Constant monitoring and automatic replenishment programs help retailers maintain adequate stock of high-volume sellers. Developing a Competitive Pricing Strategy Price-based competition can erode margins for entire retail segments. Large retailers, such as Wal-Mart, offer low everyday prices, which have driven some smaller retailers out of business. By setting different profitability requirements for various merchandise categories, companies can price certain items low to be competitive while recouping profits on other goods. National retailers may have regional pricing strategies to address local competition. CHIEF INFORMATION OFFICER - CIO Improving Inventory Management Technology Retailers often struggle to monitor merchandise movement due to the sheer volume of products and sales transactions involved. Supply chain inefficiencies generally result in operating problems and higher costs. Enterprise resource planning (ERP) systems link retailer information systems to the systems of other supply chain participants to improve communication of supply and demand trends. RFID can transmit and store product information and give companies greater inventory tracking abilities. Leveraging the Internet Widespread consumer acceptance has made Internet retailing both an opportunity and a competitive necessity for retailers. Web-based sales continue to grow strongly, as more retailers expand their online presence. Standard retail websites display merchandise and allow consumers to buy products online. An increasing number of retailers use the Internet to develop targeted email lists, sell exclusive merchandise, deliver special promotions, and support customer service. Companies may refer consumers to retail websites through other advertising vehicles, such as catalogs, direct mail, or mass media. HUMAN RESOURCES - HR Developing Compensation Programs Poor customer service damages a company's reputation and hurts business. Offering compensation programs that reward outstanding performance can help motivate staff and increase sales. Many high-end retailers use commissionbased incentive programs to encourage sales staff. Retailers may offer merchandise-specific bonus plans to promote sales of certain products. Minimizing Turnover Worker turnover is a constant problem for retailers: turnover averages 50 percent annually, higher than the average for

all industries. Entry level jobs can be menial and typically pay little. Most retailers rely on part-time help to fill labor gaps and give workers flexibility. Offering benefits packages can also help reduce turnover. VP SALES/MARKETING - SALES Developing Loyalty Programs Creating customer loyalty is difficult because of intense competition in the retail sector. Consumers looking for low prices or convenience often turn away from small companies in favor of large or Internet retailers. To help develop customer loyalty, companies can offer special discounts to frequent shoppers or customers who make large purchases. Other loyalty program perks include advance notification of sales and new arrivals, access to invitation-only events, and free merchandise with a minimum purchase amount. Creating a Distinct Shopping Experience Competing on price or product selection can challenge many retailers. Many high-volume retail goods are household staple items and have a commodity-like status among consumers. Implementing a low price strategy can be costly over the long term, especially for small retailers. By creating a unique shopping experience, companies can differentiate from competition and attract a specific customer type. Retailers may use decor, layout, or merchandise displays to create a distinct ambiance. Selling exclusive or store-brand products can also give companies a competitive advantage.

Call Preparation Questions

EXECUTIVE INSIGHT CEO: What differentiates the company from other retailers? Small retailers may stock unique merchandise, deliver superior customer service, serve a local market, or provide a distinctive shopping experience. Large retailers may rely on broad selections and competitive pricing to attract customers. CEO: What does the company consider when making merchandising decisions? Various factors, including trends, fads, demographic shifts, and economic factors, can affect demand for retail products. CFO: How does the company control inventory levels? Retailers typically liquidate excess inventory through discounts and clearance sales. Constant monitoring and automatic replenishment programs help retailers maintain adequate stock of high-volume sellers. CFO: How do the company's prices compare to the competition's? By setting different profitability requirements for various merchandise categories, companies can price certain items low to be competitive while recouping profits on other goods. CIO: How has/could technology improve the company's inventory management? ERP systems link retailer information systems to the systems of other supply chain participants to improve communication of supply and demand trends. RFID devices can transmit and store product information and give companies greater inventory tracking abilities. CIO: What are the company's biggest Internet opportunities? An increasing number of retailers use the Internet to develop targeted email lists, sell exclusive merchandise, deliver special promotions, and support customer service. Companies may refer consumers to retail websites through other advertising vehicles, such as catalogs, direct mail, or mass media. HR: How does the company motivate sales staff? Many high-end retailers use commission-based incentive programs to encourage sales staff. Retailers may offer merchandise-specific bonus plans to promote sales of certain products. HR: How does the company reduce turnover? Most retailers rely on part-time help to fill labor gaps and give workers flexibility. Offering benefits packages can help reduce turnover. Sales: How does the company create customer loyalty? Companies typically offer special discounts to frequent shoppers or customers who make large purchases. Other loyalty

program perks include advance notification of sales and new arrivals, access to invitation-only events, and free merchandise with a minimum purchase amount. Sales: What type of shopping experience does the company aim to deliver? Companies can create a unique shopping experience to differentiate from competition and attract a specific customer type. Retailers may use decor, layout, or merchandise displays to create a distinct ambiance or sell exclusive or storebrand products. CONVERSATION STARTERS How sensitive is the company's business to the economy? Economic factors, including personal income, consumer confidence, job growth, and interest rates, can greatly affect consumer spending and the retail sector. How does the company compete with large retailers? In many retail segments, large companies dominate and hold the majority of the market. How do seasonal sales affect the company? For many retailers, cash flow is uneven because of seasonal demand. How effective are the company's loyalty programs? Loyalty programs can help retailers retain customers, encourage repeat store visits, and increase purchase amounts. How has the Internet affected the company's operations? Widespread acceptance of the Internet as a retail channel has made websites an essential marketing vehicle for many retailers. How has increased penetration of RFID devices affected the company's supply chain? Radio frequency identification (RFID) devices give companies real-time access to supply chain data and allow retailers to track merchandise more effectively. QUARTERLY INDUSTRY UPDATE How often does the company offer free shipping through its online shopping sites? More retailers are incorporating free shipping deals as a way to capture customers. OPERATIONS, PRODUCTS, AND FACILITIES How effective is the company's merchandising strategy? Selecting appropriate merchandise is a critical part of retail operations. How do order lead times affect the company's purchasing operations? Because most companies place orders many months in advance of product receipt, buyers must have thorough knowledge of market and consumer trends to make good buying decisions. How does the company stay abreast of new products? Buyers may attend trade shows or search through product catalogs or supplier websites to review upcoming new products. Vendors may set up individual meetings with large retailers to review product offerings. Who are the company's primary suppliers? In industries where suppliers are numerous, retailers often buy from distributors or wholesalers, which consolidate merchandise and simplify purchasing. What tools does the company use to monitor inventory movement? Inventory management helps companies identify slow- and fast-moving items and spot shrinkage due to damage, spoilage, or theft. How does the company get rid of excess inventory? Retailers periodically discount or "mark down" items that aren't selling to clear floor space for new merchandise. If the company is a franchise, what are the main benefits of belonging to the company's franchise? Franchises allow independent operators to leverage a well-known brand name and benefit from the parent company's purchasing and operational efficiencies.

How specialized is the company's merchandise? The degree of specialization differentiates types of retailers. Department stores and general merchandise stores offer a wide range of items, while specialty retailers offer a broad selection within a product category. What does the company consider when evaluating potential store locations? When selecting locations, retailers consider local demographics (population growth, income); traffic patterns; proximity to complementary and competitive retailers; and lifestyle. How efficiently is the company using its floor space? Most retailers group similar merchandise and may place complementary items adjacent to one another to generate incremental sales. How does the company's store atmosphere affect the company's image? Store atmosphere can vary significantly, based on the type of shopping experience retailers want to deliver. How efficient are the company's checkout operations? Checkout procedures can vary: high-volume retailers, such as grocery stores, typically have a centralized checkout area with multiple lanes to process as many transactions as possible. CUSTOMERS, MARKETING, PRICING, COMPETITION Who is the company's typical customer? Customer demographics vary by retailer and can be different within a retail segment. What demographic factors affect the company's target market? Demographics, including the aging US population, growth of minority populations, and Generation Y, affect retailer strategy and marketing. What are the company's most effective marketing and promotional vehicles? Common marketing and promotional vehicles include TV, print, radio, and newspaper advertising; direct mail; and instore events. What does the company's brand name represent to customers? Retailer brand names and brand name merchandise help attract a distinct clientle. How important are special sales and markdowns to the company's marketing plan? Retailers may hold special sales or events to drive store traffic, introduce items, or clear out excess merchandise. How important is consumer research to the company's merchandising and marketing operations? Large retailers rely on extensive consumer research to guide merchandising and pricing decisions. How would the company's customers rate its customer service? Customer service tends to be more important for expensive products (such as cars) or sophisticated products (electronics). What role does the Internet play in the company's marketing strategy? The Internet has greatly affected the retail operating model by expanding consumer access to goods and allowing consumers to compare prices more effectively. How important is price in the company's retail category? Retailers may offer merchandise in multiple price tiers to appeal to a broad customer base. How important are sales of company's private-label merchandise? Large retailers may offer private-label or store-brand merchandise, which offers comparable quality but costs less than brand names. REGULATIONS, R&D, IMPORTS AND EXPORTS What government regulations affect company operations the most? The FTC and state governments generally enforce laws against deceptive sales and advertising practices, predatory pricing, and monopolistic behavior. How do government regulations affect the products the company sells? Government regulations may affect retailers depending on the type of merchandise sold.

How important are imports to the company's product mix? Imports are a significant part of the US market for many retail categories, including apparel, shoes, computers, electronics, toys, and cut flowers. What problems has the company experienced as a result of selling imported goods? Due to low labor costs, manufacturers in Asian countries, such as China and India, play an important, and somewhat controversial, role in the supply chain for many retailers. ORGANIZATION AND MANAGEMENT What jobs does the company struggle to fill? Typical jobs include sales, cashiering, and stocking. Most jobs require few skills and pay low wages. What are company's biggest obstacles when filling jobs? Wages are lower than the average for all US workers. How important is part-time help? Retailers rely heavily on part-time help because sales volume varies during the day and week, as well as seasonally. FINANCIAL ANALYSIS How does seasonality affect the company's sales? Many retailers have highly seasonal sales and cash flow can be uneven. How does the company provide consumer credit? Most large retailers issue branded credit cards and may run their own credit card operations or outsource credit services to third parties. How does the availability of consumer credit affect the company's sales? The ability to help consumers get credit is especially important for large purchases, such as cars or major electronics and appliances. How does the company fund seasonal inventory? Companies with variable seasonal inventory levels typically require short-term financing, often through commercial banks or suppliers. What are the company's target inventory levels? Inventory turnover is an important measure, but can vary significantly depending on retail segment: while large grocery stores' inventory average 20 days sales, car dealers' inventory can exceed 90. How does the company fund major projects? Large projects, such as major renovations or expansions, can require significant capital investment. What factors affect the company's margins the most? Gross margins average 30 to 40 percent, but can vary significantly by retailer and merchandise type. What allowances does the company make for merchandise returns? Most retailers have established merchandise return policies. How does the company minimize losses due to crime? Many large retailers use security systems and electronic merchandise tags to deter crime. If the company is a franchise, how much control does the franchiser have over the company? The financial terms of franchise agreements typically include an initial payment, royalty payments based on a percentage of sales, and advertising fees. BUSINESS AND TECHNOLOGY STRATEGIES How have information systems improved the company's basic operations? Fully integrated information systems link point-of-sale (POS); inventory; forecasting; purchasing; and many backoffice functions, such as payroll, finance, and accounting. What benefits has the company realized by using electronic data interchange (EDI)? EDI allows retailers to place purchase orders electronically.

What experience has the company had with just-in-time (JIT) merchandising? JIT merchandising coordinates demand and supply information and allows supply chain participants (including retailers) to reduce inventory carry costs and minimize write-offs and discounting. How might increasing use of RFID affect the company's supply chain and store operations? RFID gives companies greater tracking abilities and allows retailers to monitor product movement more efficiently because supply chain participants can scan merchandise by the pallet. What types of new technology is the company considering to improve the checkout procedure? RFID devices allow retailers to offer contactless payment through special tags or cards. Some companies have added self-checkout lanes. Handheld checkout devices eliminate the need for dedicated stations. How secure is the company's customer data? Growing concern over identity theft and credit card fraud has resulted in increased scrutiny over the security of customer data in the retail sector. How do long-term demographic changes affect the company's customer base? Ethnic diversity in the US population continues to increase, challenging retailers in terms of marketing and merchandising. How has the company's store traffic changed over time? Time-pressed consumers are shopping at traditional malls less frequently and spending less time per trip, according to the International Council of Shopping Centers (ICSC). How is the company leveraging growing interest in environmentally friendly retail products? Retailers can tap into growing concern over environmental issues by selling "green" products and implementing ecofriendly operating procedures.

Financial Information
COMPANY BENCHMARK INFORMATION NAICS: 44, 45 Data Period Small Company Data Table Data Format Last Update 2010 Sales < $1 Million Mean

All Company Count 497527

Small Company 353085

Income Statement Net Sales Gross Margin Officer Compensation Advertising & Sales Other Operating Expenses Operating Expenses Operating Income Net Income 100% 22.9% 1.5% 1.1% 19.0% 21.7% 1.2% 0.4% 100% 29.7% 3.4% 1.5% 23.3% 28.2% 1.5% 0.6%

Balance Sheet Cash Accounts Receivable Inventory Total Current Assets Property, Plant & Equipment Other Non-Current Assets Total Assets Accounts Payable Total Current Liabilities Total Long Term Liabilities Net Worth 9.6% 12.4% 37.7% 65.3% 21.3% 13.5% 100.0% 13.4% 32.3% 21.8% 45.9% 9.5% 11.8% 38.8% 66.1% 20.1% 13.8% 100.0% 16.1% 33.6% 27.1% 39.3%

Financial Ratios (Click on any ratio for comprehensive definitions) Quick Ratio Current Ratio Current Liabilities to Net Worth Current Liabilities to Inventory Total Debt to Net Worth Fixed Assets to Net Worth Days Accounts Receivable Inventory Turnover Total Assets to Sales Working Capital to Sales Accounts Payable to Sales Pre-Tax Return on Sales Pre-Tax Return on Assets Pre-Tax Return on Net Worth Interest Coverage EBITDA to Sales Capital Expenditures to Sales 0.73 2.02 70.3% x0.86 x1.18 x0.46 14 x6.74 30.6% 10.1% 4.1% 0.7% 2.3% 5.1% x1.75 2.4% 1.4% 0.69 1.97 85.3% x0.86 x1.54 x0.51 16 x4.79 38.2% 12.5% 6.1% 0.9% 2.4% 6.0% x1.92 2.9% 1.6%

Financial industry data provided by MicroBilt Corporation - Use our Integra Financial Benchmarking Data for detailed Business Valuation and analysis data from over 900 industries (SIC & NAICS) and 13 sales size ranges. 2010 data and historical data from 1998-2009 available by subscription or single report purchase at www.microbilt.com/firstresearch.

ECONOMIC STATISTICS AND INFORMATION Annual Retail Sales Growth - Census Bureau

Industry Forecast
The output of retail trade in the US is forecast to grow at an annual compounded rate of 4 percent between 2011 and 2016. Data Published: October 2011 Retail Industry Growth Flattens

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy.

First Research Industry Growth Rating

The First Research Industry Growth Rating reflects the expected industry growth relative to other industries, based on INFORUM's forecasted average annual growth for the combined years of 2010 and 2011. INFORUM forecasts were prepared by the Interindustry Economic Research Fund, Inc. Demand: Driven by spending and interest rates Need good supply chain management, merchandising, and marketing Risk: Economic health affects consumer confidence and spending

First Research Industry Drivers

Changes in the economic environment that may positively or negatively affect industry growth. Data provided by First Research analysts and reviewed annually.

Interest Rates: Change in prime and related interest rates Consumer Spending: Change in overall level of consumer spending on goods and services

Commodity Prices: Changes in prices for commodities, such as crops, metals, and other raw materials

Web Links & Acronyms

INDUSTRY WEBSITES Chain Store Age News, trends, and statistics for chain retailers. Internet Retailer News and trends for online sales. LP Magazine News on loss prevention for retailers. National Association of Retail Merchandising Services Weekly and quarterly news and trends. National Retail Federation Industry news, trends, statistics from trade association. Retailer surveys available for purchase. Retail Council of Canada Media, reports, events, advocacy, and industry resources. Retail Merchants' Association of Canada Industry information and resources. Retail Traffic Retail real estate trends. Retailing Today News, trends, and statistics with free subscription. Shopping Centers Today News and trends from International Council of Shopping Centers. Stores Magazine News, trends, and statistics - National Retail Federation magazine.

GLOSSARY OF ACRONYMS EDI - electronic data interchange ERP - enterprise resource planning ICSC - International Council of Shopping Centers JIT - just-in-time NRF - National Retail Federation POS - point-of-sale RFID - radio frequency identification UPC - universal product codes

The purpose of the Profiles is for sales call preparation and general business and industry analysis. Profiles provide general background information only and are not intended to furnish detailed information about the creditworthiness of any individual borrower or purchaser or to be used for making any loans, leases or extension of credit to any individual borrower or purchaser. First Research, Inc. is not an investment advisor, nor is it in the business of advising others as to the value of securities or the advisability of investing in securities, and the Profiles are not intended to be relied upon or used for investment purposes. Copyright 2011, Hoover's, Inc., All Rights Reserved. This information cannot be copied, sold or distributed in any manner without the written permission of First Research, Inc. www.firstresearch.com