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Amazon Disruption Symposium Where so Far? Where to Next? Who is Safe?

M O R G A N S T A N L E Y R E S E A R C H

North America

September 18, 2017

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of

Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

September 18, 2017 05:04 AM GMT

2 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

Table of Contents

Agenda…………………………………………………………………………………………………………… 3

Morgan Stanley Biographies…………………………………………………………………………………... 4

Presentations

The Amazon Effect………………………………………………………………………………… 11

Consumer Retail: Where Are We Now?............................................................................... 22

Food Retail: A 10 Year Journey?.......................................................................................... 36

Amazon’s Impact on the eCommerce Supply Chain…………………………………………... 46

Digging Into Distribution…………………………………………………………………………… 54

AlphaWise…………………………………………………………………………………………… 61

Amazon is Everywhere: Media, Entertainment, Advertising & Telecom……………………... 68

Hot Button Industries: Disrupted or Protected?..................................................................... 75

Disclosures………………………………………………………………………………………….. 82


Amazon Disruption Symposium

SEPTEMBER 18, 2017 | MORGAN STANLEY | 522 FIFTH AVENUE | NEW YORK CITY

Agenda

7:00 a.m. – 7:30 a.m. Breakfast & Registration

7:30 a.m. – 7:35 a.m. Welcome & Opening Remarks

David Adelman, Managing Director, Director of Equity Research for the

Americas

7:35 a.m. – 8:00 a.m. The Amazon Effect

Brian Nowak, Executive Director, Internet Equity Research Analyst

8:00 a.m. – 8:10 a.m. Introducing the AMZN Basket

Joanie Kim, US Derivatives Sales Desk

8:10 a.m. – 8:55 a.m. Consumer Retail: Where Are We Now?

Moderator - Bob Leask, Managing Director, US Core Sales

• Brian Nowak, Executive Director, Internet Equity Research Analyst

• Kimberly Greenberger, Managing Director, Softlines/Department Store

Equity Research Analyst

• Jay Sole, Executive Director, Branded Apparel & Footwear Equity

Research Analyst

• Richard Hill, Executive Director, REITS Commercial/Retail Equity

Research Analyst

8:55 a.m. – 9:40 a.m. Food Retail: A 10 Year Journey?

Moderator - Ashton Curtis, Managing Director, Sector Sales


• Simeon Gutman, Executive Director, Hardlines & Broadlines Equity

Research Analyst

• Vincent Sinisi, Executive Director, Food Retailers / Distributors & Dollar

Stores Equity Research Analyst

• Dara Mohsenian, Managing Director, Household Products and

Beverages Equity Research Analyst

• Matthew Grainger, Executive Director, Food and Tobacco Equity

Research Analyst

9:40 a.m. – 9:50 a.m. BREAK

9:50 a.m. – 10:35 a.m. Amazon’s Impact on the eCommerce Supply Chain

Moderator - Brian Nowak, Executive Director, Internet Equity

Research Analyst

• Ravi Shanker, Executive Director, Transportation Equity Research

Analyst

• Vikram Malhotra, Executive Director, REITS Commercial/Retail Equity

Research Analyst

10:35 a.m. – 10:55 a.m. Digging Into Distribution

Moderator - Brian Nowak, Executive Director, Internet Equity

Research Analyst

• Jiayan Zhou, Vice President, Industrial Conglomerates Equity

Research Analyst

• Ricky Goldwasser, Managing Director, Healthcare Services &

Distribution Equity Research Analyst

10:55 a.m. – 11:10 a.m. AlphaWise

Shaivali Shah, Executive Director, Americas Head of AlphaWise

11:10 a.m. – 11:55 a.m. Amazon is Everywhere: Media, Entertainment, Advertising & Telecom

Discussion

Moderator - Sean Diffley, Executive Director, Media/Telco Sector

Sales

• Ben Swinburne, Managing Director, Cable/Satellite & Media Equity

Research Analyst

• Simon Flannery, Managing Director, North American Telecom Equity

Research Analyst


11:55 a.m. – 12:40 p.m. Hot Button Industries: Disrupted or Protected

Moderator - Morag Sutherland, Managing Director, US Core Sales

• Simeon Gutman, Executive Director, Hardline/Broadline Retail Equity

Research Analyst


• Vincent Sinisi, Executive Director, Food Retailers / Distributors & Dollar

Stores Equity Research Analyst


Biographies

Simon Flannery Telecom Services [email protected], (212) 761-6432

Simon Flannery is a Managing Director covering the North American Telecom Services sector within Equity Research. He has consistently ranked among the leading analysts in the sector and has been recognized in a variety of investor polls. He joined Morgan Stanley in 1999 from JP Morgan where he had covered the US and Latin American Telecom sectors. He followed the European Telecom and Media sectors for JP Morgan from London, before moving to New York in 1993. Simon has been analyzing the Telecom industry for some 20 years. Before joining JP Morgan, Simon worked at Price Waterhouse. Simon holds a BA in Economics from Trinity College, Dublin, and an MBA from Cass Business School, London. He is also a Chartered Accountant.

Brian Nowak Internet [email protected], (212) 761-3365

Brian Nowak joined Morgan Stanley in January 2015 to lead the department’s US Internet research team and was named a Runner Up in the 2016 Institutional Investor poll. Previously, he worked at Susquehanna Financial Group and Nomura Securities, also covering US Internet stocks, and during that time was voted II “Rising Star” in US Internet. Prior to Nomura, Brian worked at Sanford C. Bernstein & Co. as part of a four-time II No. 1-ranked US Media research team. Brian began his career at PricewaterhouseCoopers LLP, after graduating from the University of Michigan with a Bachelor’s degree in Business and a Master’s in Accounting. He also holds the Chartered Financial Analyst designation.


Biographies

Ricky Goldwasser Healthcare Services & Distribution [email protected], (212) 761-4097

Ricky Goldwasser is a Managing Director at Morgan Stanley who joined the firm in 2009 and covers the Healthcare Services and Technology industry. Prior to joining Morgan Stanley, Ricky was co-head of the US Healthcare research team at UBS, where she covered Healthcare Services, Diagnostics, and Generic companies. She started her research career as an associate at Salomon Smith Barney in 1998. Ricky has ranked in the Institutional Investor All America research team for the last ten years. She holds an MBA degree from The Kellogg School of Management and a BA in Economics and Political Science from Tel-Aviv University.

Benjamin Swinburne Cable/Satellite & Media [email protected], (212) 761-7527

Benjamin Swinburne is a Managing Director at Morgan Stanley Research covering the Cable/Satellite, Entertainment, and Advertising industries, areas he has followed for over a decade. He has consistently ranked among the leading analysts in multiple media sectors and been recognized in a variety of investor polls. Prior to joining Morgan Stanley as a member of the media research team in 1999, he worked at Lucent Technologies as an analyst in the mergers and acquisitions division. Benjamin holds a B.A. in public policy with a concentration in finance from Washington & Lee University and an M.S. in accounting from Babson College. He also holds the Chartered Financial Analyst designation.


Biographies

Kimberly Greenberger Specialty Retail & Department Stores [email protected], (212) 761-6284

Kimberly Greenberger is a Managing Director who covers North American Specialty Apparel & Department Store retailers. She joined Morgan Stanley in 2010. Kimberly has covered the industry for 17 years, including prior positions at Citigroup, Lehman Brothers, and Credit Suisse. Before becoming an equity research analyst, Kimberly gathered industry experience working for bebe stores, inc. and the Mervyn's division of Target, Inc. Kimberly has recently been ranked No. 1 by Institutional Investor and No. 1 in the Greenwich survey. She has also been recognized for her stock-picking record, ranking highly in the 2009 Wall Street Journal "Best on the Street" survey and by Zacks Investment Research.

Simeon Gutman Hardlines & Discount Retail [email protected], (212) 761-3920

Simeon Gutman is an Executive Director who covers the Retail Hardlines and Discount spaces. He joined Morgan Stanley in 2014 and has more than 16 years of US Retail industry research experience. Prior to Morgan Stanley, Simeon covered Retail Hardlines at Credit Suisse and retail stocks at Canaccord and Goldman Sachs. Simeon has received Honorable Mentions in the Institutional Investor All-America Research Poll in Retail Hardlines. Simeon holds a BA in Economics from Brandeis University, an MBA from the NYU Stern School of Business, and is a CFA charterholder.


Biographies

Richard Hill REITs & CRE Debt Research [email protected], (212) 761-9840

Richard Hill is the Head of U.S. REIT Equity and Commercial Real Estate Debt Research at Morgan

Stanley. He has been an II ranked CMBS analyst for the past several years. Prior to his current role,

Richard was a Director of CMBS Strategy at Royal Bank of Scotland ("RBS") Securities where he was

responsible for developing and communicating investment strategies , working with both internal and

external clients. Richard started his career at Banc of America Securities. From 2004 to 2008 he was Vice

President in the Structured Securities Group where he managed a deal team of four professionals

responsible for the origination, structuring and distribution of securitization backed by commercial real

estate debt. From 2001 to 2004 he was an Associate in the Interest Rate Derivatives group where he

structured hedging strategies for commercial real estate developers. Richard is a graduate of Georgetown

University with B.S.B.A in finance.

Vikram Malhotra REITs [email protected], (212) 761-7064

Vikram Malhotra is an Executive Director who covers the REIT industry and previously covered Machinery and Business Services. Vikram joined Morgan Stanley in 2007 after serving as a Senior Manager with Jones Lang LaSalle, a global real estate solutions firm. He has also worked for Colliers International as a real estate investment consultant. Vikram holds a BS in industrial management from Purdue University and an MBA from the University of Michigan’s Ross School of Business.


Biographies

Dara Mohsenian Beverages & Household Products [email protected], (212) 761-6575

Dara Mohsenian, a Managing Director, joined Morgan Stanley in 2009 to cover the Household Products and Beverages industries. He is ranked a top 3 analyst in both industries in the Institutional Investor survey and the Greenwich survey. Prior to joining Morgan Stanley, Dara covered consumer staples for a decade at JP Morgan and was an associate at Sanford Bernstein and Paine Webber. Dara holds a BA in economics from Tufts University, is a CAGNY board member, and has the Chartered Financial Analyst designation.

Matthew Grainger Food & Tobacco [email protected], (212) 761-8023

Matthew Grainger is an Executive Director who joined Morgan Stanley in 2008 and heads the US Food and US/European Tobacco research teams. He was voted an All-America Rising Star by Institutional Investor in 2012, 2013, and 2014. Matthew has a BA in Classics from Williams College and an MBA from Columbia Business School.


Biographies

Ravi Shanker Freight Transportation [email protected], (212) 761-6350

Ravi Shanker is an executive director at Morgan Stanley and covers the North American transportation industry. Ravi joined the firm’s global automotive industry research team in 2004 as a research associate before picking up lead coverage of North American Autos in 2009 through 2015. Ravi holds Bachelor of Commerce and Master of Management (Finance) degrees from the University of Mumbai, India. Ravi has been recognized by The Financial Times/StarMine as a top-10 stock picker across Wall Street, top Auto stock picker and been named a "Rising Star" by Institutional Investor.

Vincent Sinisi Food Retailers, Foodservice Distributors, and Dollar Stores [email protected], (212) 761-1358

Vincent Sinisi is an Executive Director covering Food Retailers, Foodservice Distributors, and Dollar Stores. He was named a Runner Up in the 2016 Institutional Investor poll. Prior to joining Morgan Stanley, he covered Retail Hardlines companies at Bank of America Merrill Lynch in 2008-13. Vinnie worked at Lehman Brothers in 2004-08, primarily within Retail Hardlines. He holds a BS in finance, as well as a Business Law Certificate, from Seton Hall University.


Biographies

Jay Sole Branded Apparel & Footwear [email protected], (212) 761-5866

Jay Sole is an Executive Director covering the branded footwear and apparel space. Jay began his career in 2006 when he joined Morgan Stanley's retail research team. In 2009, he moved to the single-name options research team before returning to retail equity research in 2011. Jay holds a BS degree in biology from the Oakland (MI) University and has an MBA from Fordham University.

The Amazon Effect


North America

Brian Nowak, CFA [email protected]

+1 212 761 3365

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have

a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in

making their investment decision.




US Retail Spend a ~$2.5tn TAM …with Spend Shifting Online

11.0% 12.1% 13.3% 14.7% 16.1% 17.6%

2,302 2,379 2,440 2,485 2,535 2,585

-

500

1,000

1,500

2,000

2,500

3,000

2013 2014 2015 2016 2017E 2018E

US Retail Spend*: eCommerce Mix ($bn)

US eCommerce US Retail (Offline)

Note: * US Retail Spend = USCB Retail Total (ex- building materials, gasoline stations, motor vehicles, and non-store retailers)

Sources : US Census Bureau, comScore, Forrester, Company Data, Morgan Stanley Research;

13 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Note: * US Retail Spend = USCB Retail Total (ex- building materials, gasoline stations, motor vehicles, and non-store retailers)

Sources : US Census Bureau, comScore, Forrester, Company Data, Morgan Stanley Research;

Amazon’s Share of eCommerce Continues Growing

20% 22%25%

28%33%

37%12% 11% 10% 9%

9%8%

68% 66% 64% 62% 59% 55%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017E 2018E

US eCommerce Marketplace Mix %

Amazon eBay Other

14 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Sources: BEA PCE, Company Data, Morgan Stanley Research

Amazon Driving 50% of All US PCE Growth

... As AMZN Driving More than 50% of eComm Growth

From 9% to ~50% in 3 Years...

9%

17

%

29

%

49

% 52

%

51

%

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 2017E 2018E

Am

azo

n %

Co

ntr

ibu

tio

n t

o U

S R

eta

il G

row

th

15

%

38

%

47

%

54

%

60

%

56

%

0%

10%

20%

30%

40%

50%

60%

70%

2013 2014 2015 2016 2017E 2018EA

maz

on

% C

on

trib

. to

US

eC

om

me

rce

Gro

wth


Largely Driven by Prime, aka Behavior Modification 101

$2,486

$544

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Prime Non-Prime

Wei

ghte

d A

vera

ge S

pen

d p

er S

ho

pp

er

How much have you spent on Amazon in the past 12 months?

4.6X More

Sources: Company Data, Morgan Stanley Research;, AlphaWise Survey

23%

35%

45%

51%

0%

10%

20%

30%

40%

50%

60%

2015 2016 2017E 2018E

AMZN Prime US HH Penetration

16 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Sources: Company Data, Morgan Stanley Research

What Happens in Behavior Modification 201?

Customer

Customer Pain Point Amazon Innovation

Voice

IoT

Smart-Home

Alexa

Echo Products

Dash Buttons

1-2 Hour

Shipping

Prime Now

Last-mile

Prime 1.0

Prime 2.0

Physical

presence

Brick & Mortar

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjT8__O4rbVAhXCXD4KHQUgBNkQjRwIBw&url=http://www.droidforums.net/threads/amazon-now-limits-prime-sharing-benefits-to-one-other-user.283513/&psig=AFQjCNG48O2YZTHk2RKw65lYVwKwLPkZXQ&ust=1501701944617412

17 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Sources : Company Data, Morgan Stanley Research;

A Growing AWS Profit Pool Allows for Continued Heavy Retail Investment

1,166 1,292

2,751

4,099 4,266

154

-144 -91 -478

-2,776

673660

1,864

3,7065,428

1,993 1,808

4,524

7,327 6,918

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

-$4,000

-$2,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2013 2014 2015 2016 2017E

CS

OI

($m

n)

North America Retail International Retail AWS Total

AWS CSOI Growth'13-'15 CAGR: 66%'15-'17 CAGR: 71%


As Do AMZN’s Growing High Margin Revenue Streams

2,762 4,467

6,393

9,455

11,876

1,165

1,510

2,951

4,045

5,280

157

200

286

455

655

4,084

6,177

9,630

13,954

17,811

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2014 2015 2016 2017e 2018e

Am

azo

n G

ross P

rofi

t ($

mn

)

Credit Card

Advertising

Retail subscriptions

'16-'18 CAGR51%

34%

36%


Allowing for Accelerating Investment, Share Gains and Expanding TAMs

7,038

11,118

15,788

18,506

25%

32%34%

30%

0%

10%

20%

30%

40%

50%

60%

70%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2015 2016 2017e 2018e

Co

re R

eta

il O

pex*,

Y/Y

% G

row

th

Co

re R

eta

il O

pex*,

Y/Y

Ab

s.

Gro

wth

($ m

n)

Y/Y Abs. Growth

Y/Y % Growth

*Gross Shipping Costs, Fulfillment, Marketing, Technology & Content (ex AWS)


Note: Total PCE = **ex Services, Energy Goods, Motor Vehicles, Boats/Aircrafts/Motorcycles, Newspapers, Prescription Drugs and Medical Products

Sources: BEA PCE, Company Data, Morgan Stanley Research

From Books…to ~5 Trillion?

in $ millions (U.S. Only)

Retail Product Categories Spend ($ mn) % of Total

Grocery 766,836 30%

Clothing 305,069 12%

Personal care & household products 301,175 12%

Home furnishings & accessories 241,645 10%

Consumer electronics 216,911 9%

Jewelry & Watches 77,167 3%

Shoes 74,433 3%

Sporting goods 72,429 3%

Auto parts & accessories 67,000 3%

Eye Glasses/Contacts/Orthopedic Appliances 67,499 3%

Children's Toys and Children's Durables 64,385 3%

Pet food & pet supplies 60,035 2%

Home improvement items & tools 50,732 2%

Office & school supplies for home use 47,013 2%

Large home appliances 41,509 2%

Books 41,068 2%

Luggage 35,132 1%

Other 12,575 0%

Total Personal Consumer Expenditure* 2,542,613 100%

2015

We See Amazon Attacking a Core $2.5tn Bucket of Consumer Expenditure…

…and Expanding Into New Categories Outside of Traditional Retail and Consumer

in $ millions (U.S. Only)

New/Emerging Categories Spend ($ mn) % of Total

New/Used Motor Vehicles (Autos) 1,200,000 54%

Pharmacy/Prescription Drugs 410,071 18%

Online Restaurant Delivery 221,606 10%

Total Advertising (Traditional and Online) 181,031 8%

Industrial Supply/B2B 150,000 7%

Postal & Delivery (Transports) 70,000 3%

Repair of Equipment (e.g. IT Home Services) 8,407 0%

Total New/Emerging Categories 2,241,114 100%

2015

~$4.8 Trillion


BRIAN: A Framework to Assess Competitive Moat Against Amazon

Industry/Business

Model Bespoke Products

Regulatory Hurdles

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

Bespoke Regulatory Industry Attention Nuances

• Non-commoditized

• Low product uniformity

• Bespoke design

elements

• Specificity, fit and

customization

• Legal complexity (Local,

State, and Federal

laws)

• Agency approval /

scrutiny (FDA, FCC,

etc.)

• Costly R&D and trials

required

• Low order frequency/

inventory turnover

• High SKU mix

requirements

• Low reliance on retail

for distribution

• Logistical complexities

• Low prices/gross

margins

• Experiential component

• Specialized service

• Installation and

expertise requirement

• Relationship-based

sales

• Contractual structures

• Financing agreements

• Insurance

reimbursement

• High time sensitivity

• Bespoke suits/shoes

• Custom clothing

• Custom fabricated

parts

• Exclusive or limited

item

• Luxury goods

• Pharmaceutical trials

• Franchise laws

• Health inspections

• FCC build out

requirements

• Large items that don’t

ship well (furniture,

HVAC, autos)

• Low turnover (auto

parts, lumber, home

improv.)

• Concierge service

• Appliances/auto-

mechanic installation

• B2B relationships

• Prescriptions/Pharma

• Personal home/autos

• B2B long-term

agreements / projects

Ba

rrie

rs

Ex

am

ple

s

B R I A N

Consumer Retail

Where Are We Now?


North America


+1 212 761 3365

Kimberly Greenberger [email protected]

+1 212 761 6284

Jay Sole [email protected]

+1 212 761 5866

Richard Hill [email protected]

+1 212 761 9840







Consumer Retail…Where are We Now?

…as Apparel Suppliers/Brands Are Increasingly Partnering with Amazon…

AMZN is Now the Second Largest US Apparel Retailer…

Bra

nd

Qu

ali

ty/P

erc

ep

tio

n

Sales Velocity

High

Low

Low High

Protected

BurberryChannel

GucciLouis Vuitton

Lululemon (LULU)

Threatened

Gap (GPS)J.C. Penney (JCP)

Kohl's (KSS)Macy’s (M)

Old Navy (GPS)Target (TGT)

Walmart (WMT)

Calvin Klein (PVH)Carters (CRI)

Champion (HBI)Columbia (COLM)Fruit of the Loom

Hanes (HBI)Lee (VFC)

Maidenform (HBI)Nautica (VFC)

North Face (VFC)Perry Ellis (PERY)Ralph Lauren (RL)

Soffes (DLA)The Children’s Place (PLCE)

Tommy Hilfiger (PVH)Under Armour (UA)

Wrangler (VFC)Nike (NKE)

The Suppliers


Amazon is Now the Second Largest Apparel Retailer in the US, but the Overall Market Remains Highly Fragmented

Source: Company Data, Morgan Stanley Research


46% of Surveyed Consumers Purchased Clothing on AMZN Over the Last 12 Months

Source: AlphaWise, Morgan Stanley Research


Consumers Shop for Clothing on Amazon Because of Convenience, Prime Membership/fast-shipping, and its Wide Selection


36%

18%

12%

11%

8%

6%

6%

3%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Amazon is an easy/convenient shopping experience

I am a Prime member and can get free 2-day shipping

Amazon has the widest selection

Amazon has the lowest/best prices

Amazon offers fashionable clothing and the brands I like

Amazon offers basic items I need (t-shirts, socks, underwear)

Amazon offers free returns

A different reason

Top Reason for Purchasing Clothes on Amazon


Casual Tops, Shoes, and Athletic Apparel are the Top Apparel Categories Purchased on AMZN



Nike and adidas are the Most Purchased Clothing Brands on Amazon



At 14% of sales, Apparel and Accessories was relatively underpenetrated in 2014 compared to other categories

Source: Forrester, Morgan Stanley Research


Apparel Lends Itself to Online Shopping: 18-19% of Department Store and Specialty Apparel Sales are Online Today

Sources: Company Data, Morgan Stanley Research

7%

13% 11%

16% 18%

19%

0%

5%

10%

15%

20%

25%

Department Stores Specialty Apparel

Category Online Sales Penetration (Sales Weighted)

2011 2012 2013 2014 2015 2016

eCommerce penetration has increased ~670 bps for Dept Stores and ~310 bps for Specialty Apparel since 2013


eCommerce Growth Cannibalizes Store Sales, Eroding Store Profitability While Adding Variable Fulfillment & Shipping Expense, Which Drives Overall Company EBIT Margins Down


6.5% 6.8%

11.7%

10.1%10.8%

11.7%10.8%

6.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

U.S. eCommerce as a % ofRetail Sales

Off-price Specialty Apparel Department stores

Subsector EBIT Margin (sales weighted) vs. U.S. eCommerce Retail Sales Penetration

2006 2016


Closing Stores to Cut Costs, or Moving to a Variable Store Expense Structure Could Help Stabilize Apparel Retailer Margins

Sources: ICSC, Company Data, Morgan Stanley Research


Note: Collaborated with MS Research Analyst (Richard Hill - US REIT Equity and Commercial Real Estate Debt)

Sources: Thomson Reuters (stock price performances from 6/19/17-6/24/17), Company Data, Morgan Stanley Research

Retail Strip REITs (Indirect Impact from AMZN/WFM Announcement)

AMZN’s Growing Brick and Mortar Presence Could Further Pressure Mall REITS…

…Hurting the Strip Mall Operators, as the REITs Fell ~7% ($2.3bn in Mkt Cap) on the News

What Happened: With the 6/16/17 announcement that AMZN is set to potentially acquire WFM, Strip Mall operators equity values are struggling too (major strip REITs’ portfolios have ~70% grocery store component).

-0.8

-0.7

-0.3

-0.3

-0.2

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

KIM REG FRT DDR RPAI

Mkt

Cap

Imp

acte

d b

y A

maz

on

Eff

ect

($

bn

)

Total of ~$2.3bn in Retail REITsMarket Cap (-6.7%)

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjkivOn5rPVAhVBOT4KHQSjDA0QjRwIBw&url=https://patch.com/illinois/naperville/expanded-whole-foods-wheaton-strip-mall-attracts-new-starbucks-other-new&psig=AFQjCNH9mcbpOyW6rOkhi6zl8USS0-QkUg&ust=1501600067144806


Branded Apparel and Footwear

Neutral Exposure

• Retailers with truly differentiated value proposition and strong e-comm platform likely to remain insulated

• Exclusive, sought-after product

• GOOS, FL

Amazon

Fashion

Favorable Exposure

• Branded wholesalers with value positioning who embrace Amazon opportunity likely to win

• CRI, SKX, SHOO

Unfavorable Exposure

• Retailers competing on price with undifferentiated assortment likely to face greatest challenges

• DSW, EXPR

Mixed Exposure

• Wholesalers with premium positioning must segment offering, sell lower-end product on Amazon

• Premium product will need to be sold through DTC and higher-end wholesale channels

• NKE, UA, PVH, VFC


35 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Sources: Morgan Stanley Research

Consumer Retail: Where Are We Now?

Industry/Business


Regulatory Hurdles



B R I A N

Most Protected Most Exposed

Off-Price Specialty Department Stores

Retailers Competing

So

ftli

nes

/ D

ep

t. S

tore

s

Bra

nd

ed

Ap

pa

rel

/ F

oo

twe

ar Differentiated Brands Brands Embracing

Malls

RE

ITS

Co

mm

erc

ial/R

eta

il

Strips

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi69sud76fWAhUp3IMKHbaTAxAQjRwIBw&url=https://www.pinterest.com/pin/311733605437916752/&psig=AFQjCNE6ZgpPR83itmhx3jSmG2klCDNS-w&ust=1505588126882509

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwj5sfjyvp3WAhXCtRQKHXC2CMUQjRwIBw&url=https://www.costco.com/&psig=AFQjCNGAmEszau4KovbBP4Evg9hZEQU37g&ust=1505231621308820


http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwj0zJqylKjWAhVn6oMKHQKiBUwQjRwIBw&url=http://weheartit.com/entry/18908024&psig=AFQjCNGdB7x41Qr8JV3VYjMiMhWaSeNpEw&ust=1505597550205551

Food Retail

A 10 Year Journey?


North America


+1 212 761 3365

Simeon Gutman, CFA [email protected]

+1 212 761 3920

Vincent Sinisi [email protected]

+1 212 761 1358

Dara Mohsenian, CFA [email protected]

+1 212 761 6575

Matthew Grainger [email protected]

+1 212 761 8023







Grocery/Food Retail: A 10 Year Journey…as WFM the Latest Shoehorn

• Last mile acquired: no need to spend next 5 years brick building

• Focus on price and convenience: under-penetrated user opportunity (13mn shoppers)

• WFM + Prime Now: personalized 1-2 hour shopper

• Private label: high margin opportunity

• Opens new doors: Pharma, SKU intensive sectors

• Next gen store?: machine vision, etc



We Expect AMZN’s Lowered WFM Prices to Drive Shopper Growth

Our Survey Shows ~13mn Households Shop at WFM vs. 45mn AMZN Prime and ~24mn for Kroger…

… and Pricing Continues to be the Primary Reason Consumers Don't Shop at Whole Foods

Source: AlphaWise, Morgan Stanley Research, Company Data


Expect Prime Now 1-2 Hour Delivery To Drive Growth and Change Behavior

PrimeNow Grocery Delivery Unit Economics

Prime Now

Amazon Unit Economic P&L

$ Average Order Value (AOV) $40.0

x Avg WFM Gross Margin (post ~6% Price Cut) 30%

= Total Gross Profit $12.00

- Pick and Pack $3.75

- Delivery Wage Costs $3.60

- Other Delivery Costs (Truck/Fuel/OH) $2.07

= Order Gross Profit $2.58

Order Margin 6%

Source: Morgan Stanley Research, Company Data


We Expect AMZN to Drive Incremental Prime Membership

We Expect Amazon to Capture Half of the ~5mn WFM Shoppers Who Are Not Prime by the End of 2019

Amazon Prime Members Spend 4.6X More on Amazon Annually than non-Prime Members, on Average

Source: AlphaWise, Morgan Stanley Research, Company Data


Consumers Skew 'Unlikely' to Purchase Groceries Online, but Purchase Resistance is Decreasing


9%17% 15%

7%

15% 14%

13%

15% 17%

12%

15% 19%

19%

14% 17%

19%

16%17%

13%

12%13%

14%

13%

13%

46%41% 38%

48%41%

36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015: Shipped 2016: Shipped 2017: Shipped 2015: Picked upat a store

2016: Picked upat a store

2017: Picked upat a store

Likelihood to Order Groceries Online N6M

Veryunlikely

Somewhatunlikely

Neitherlikely norunlikely

Somewhatlikely

Very likely


Perishables Less Likely to Be Ordered Online For Delivery; More Even Category Split For Pick-Up At-Store



E-Commerce as a % of Total Category Sales

11%

8%

5%

3%

2% 1% 1%

0%

2%

4%

6%

8%

10%

12%

ConsumerHealth

Beauty &Personal Care

Pet Care Tissue &Hygiene

Home Care PackagedFood

Soft Drinks

E-Commerce as a % of 2016 Sales (US) % of Global Sales

Source: Company Data, Euromonitor, Morgan Stanley Research Estimates


E-Commerce as a % of Total Company Sales

Source: Company Data, Euromonitor, Morgan Stanley Research Estimates

~8%

~6%

~5% ~4%

~4%

~3%

~3%

~2% ~2%

~2% ~2% ~1%

~1% ~1% ~1% ~1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

EL CL PG CHD EPC ENR CLX MDLZ SJM GIS K CPB KHC KO PEP DPS

Weighted E-Commerce % of Sales - US


Food Retail: A 10 Year Journey?

Industry/Business


Regulatory Hurdles



B R I A N


Wholesome Pet Food Household Products

Food Retail Dollar Stores

Broadline Retail

HP

C /

B

eve

rag

es

Fo

od

Re

tail

/

Do

lla

r S

tore

s

Ha

rdli

nes

/

Bro

ad

lin

es

Club

Food Distributors

Fo

od

an

d

To

ba

cc

o

Packaged Foods

Sources: Morgan Stanley Research

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjjz5HVtJ3WAhXhx4MKHS6jDeoQjRwIBw&url=https://www.2ndvote.com/business-entity/dollar-general/&psig=AFQjCNEsuj9ts0MZb3_0YmOP_l4_eghZ6g&ust=1505228861338017

http://corporate.walmart.com/




https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwio6taJv53WAhWHXBQKHYgeBqwQjRwIBw&url=https://commons.wikimedia.org/wiki/File:Target_logo.svg&psig=AFQjCNEAQ_0Y53KCbZ0SHe4Lh6gblPKlUg&ust=1505231665568097

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwisiITNv53WAhXIPRQKHbHkBmQQjRwIBw&url=https://www.indeed.com/cmp/Dollar-Tree/salaries&psig=AFQjCNFaPj_uZA-GiEra5-oZoHbZWhFIlw&ust=1505231810227795

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=0ahUKEwiN8Oecu6XWAhUl6YMKHTtqDvoQjRwIBw&url=http://www.supervalu.com/misc/for-the-media/logos-image-library.html&psig=AFQjCNHBTfQ0lgFSzO3viiSMVnDGQNZl8Q&ust=1505505417422059

Amazon’s Impact on the eCommerce Supply Chain


North America


+1 212 761 3365

Ravi Shanker [email protected]

+1 212 761 6350

Vikram Malhotra [email protected]

+1 212 761 7064







Amazon’s Impact on Transportation and Logistics

AMZN continues building its own logistics network past 2-3 years:

1) Deployed last-mile delivery in several US and European cities

2) Acquired 1000’s of truck trailers/hundreds of trucks

3) Building $1.5B Kentucky air hub to house its aircraft

4) Leased 40 B767 air freighters with the option to pick up equity stakes air lessors

5) Acquired ocean freight forwarding license

6) Building in-house freight mgmt tech platform/app

Source: NBC News, Company data, Morgan Stanley Research estimates


AMZN Network Cost per Package Breakeven Analysis

$0

$2

$4

$6

$8

$10

$12

$14

40 60 80 100 120 140 160 180 200

Co

st

Per

Packag

e

Packages per Day per Driver

Est. AMZN Cost per Package

UPS/FDX Rev per Package

USPS Rev per Package

Est. UPS Last Mile Cost per Pkg

Source: Company data, Morgan Stanley Research estimates


AMZN’s Prime Subscriber Base and Consumer Expectations for Faster Deliveries Continue to Rise…

Amazon's growing Prime subscriber base is driving its fulfillment capacity demands

Source: AlixPartners "Final Mile Delivery, July 2016", Morgan Stanley Research

Delivery expectations for Free Shipping have Declined

5.5

5.0

4.8

4.4

4.6

4.8

5.0

5.2

5.4

5.6

2012 2014 2016

Avg

Exp

ecte

d W

ait

Tim

e f

or

free

deli

very

in

days

13 19

28

42 54

62

5

8

12

18

34

45

18

27

41

60

87

105

0

20

40

60

80

100

2013 2014 2015 2016 2017e 2018e

Est

. #

of

Pri

me M

em

bers

International US

'16-'18 CAGRUS: 21%Int'l: 58%Total: 32%


…Boosting Demand for Last Mile Warehouse Space that Increases Proximity to the Consumer

AMZN's warehouse expansion represents over 10% of US warehouse leasing since 2010

Source: AlphaWise, Costar, Company documents, various media articles, Morgan Stanley Research

Amazon's leasing patterns have recently emphasized last-mile warehouses driving

proximity to the consumer

385

477

1,061

-

200

400

600

800

1,000

1,200

Phase 1: Pre-2009 Phase 2: 2010-13 Phase 3: 2014-16

Avg

Po

pu

lati

on

wit

hin

10 m

iles

in 0

00s

-

10

20

30

40

50

60

70

80

90

100

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Am

azo

n G

row

th o

f D

istr

ibu

tio

n c

en

ter

sp

ace

Millio

n o

f Sq

.ft

Lease

d


Omnichannel Benefits from AMZN’s Acquisition of WFM; Warehouse Leasing to Accelerate as AMZN & Peers Compete to Increase Market Penetration

Population within 10 miles of

store/warehouse (A)147 85 164 151 172 290

Total US Census population in footprint

in millions (B)216 180 221 184 229 324

Market penetration (A divided by B) 68% 47% 74% 82% 75% 90%

Avg income within 10 miles $103k $91k $100k $85k $97k $82k

Millennial Penetration within 10 miles of

store or warehouse in millions35 21 40 36 41 68

Number of stores + distribution centers ~450+ ~200+ ~650+ ~2800+ ~500+ ~3950+

Source: AlphaWise, Costar, Morgan Stanley Research estimates

The race for space has likely escalated as AMZN will need to significantly increase their warehouse footprint if they want to increase market penetration


Prologis (PLD) Best Positioned Among Industrial REITs

46% of PLD's US Portfolio is within 10 miles of top 15 most densely populated MSAs

Source: AlphaWise, CoStar, Morgan Stanley Research. Note: grey bars are not-covered

PLD's 10 last mile warehouses per million people is 3 times the average of all other REITs

10

3

2 22 2

1

0

2

4

6

8

10

12

PLD EGP FR DCT TRNO LPT DRE

Last

-mil

e W

are

ho

use

s p

er

1 m

illi

on

peo

ple

in

To

p 1

5 M

SA

s


Amazon’s Impact on the eCommerce Supply Chain

Industry/Business


Regulatory Hurdles



B R I A N


Logistics Parcel

Industrial REITS

Tra

nsp

ort

ati

on

R

EIT

S

Co

mm

erc

ial / R

eta

il

Freight Brokers




Digging Into Distribution


North America


+1 212 761 3365

Jiayan Zhou, CFA [email protected]

+1 212 761 5766

Ricky Goldwasser [email protected]

+1 212 761 4097







Amazon’s Impact on Industrial and Medical Suppliers

We Believe AMZN Business Created Pricing Pressures in 1Q17 in Industrial Supply Sector

AMZN Hired a Healthcare Exec and a Source Said is Building an Internal PBM for Employees


http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjh_KiQrazVAhUBGj4KHfcQACQQjRwIBw&url=http://www.smartseoservice.com/instructions-on-operating-a-business-at-amazon-com/&psig=AFQjCNHZWXudI3nnEAfOyNLE71_BR17eiA&ust=1501344171450809


Industrial Distribution – The Amazon Effect

Source: Google Trends; Note: Search volumes are relative for the terms

presented in the chart; indexed to 100 at start date.

What makes Industrial Distribution an attractive market for Amazon?

• US Industrial Distribution is a large (~$150bn), highly fragmented market, with relatively high margins

and low supply chain/ regulatory complexity.

• There has been a shift towards e-Commerce in the Industrial Distribution space, which is likely to

continue as the millennials enter into the workforce.

• For the incumbents, volumes are at risk, but the larger impact could be from price discovery.

Web Traffic – Amazon Business vs. Grainger GWW Pricing Trend

Source: Company Data, Morgan Stanley Research

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

3Q

16

1Q

17

3Q

17

E

-

500

1,000

1,500

2,000

2,500

3,000

Ma

y-1

2

Aug-1

2

No

v-1

2

Feb

-13

Ma

y-1

3

Aug-1

3

No

v-1

3

Feb

-14

Ma

y-1

4

Aug-1

4

No

v-1

4

Feb

-15

Ma

y-1

5

Aug-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Aug-1

6

No

v-1

6

Feb

-17

Ma

y-1

7

Aug-1

7

Google Trends search indexedAmazon Business W. W. Grainger

Name change from Amazon Supply to Amazon Business


BRIAN Framework for Amazon Disruption: Industrial Distribution

Industrial Distribution – Who’s More Exposed to Amazon?

Source: Morgan Stanley Research

Category Bespoke

Products

Regulatory

Hurdles

Industry/ Business

Model

Attention Post Sale/

Service Element

Nuances/

Complexities Behind

Transaction

GWW Industrial MROMore

standardizedRelatively Low

Low supplier and

customer

concentration

Less technical na

Industrial MRO

(~65%)

More


Low supplier and

customer

concentration

na

Fasteners

(35%)

Non-


Lower inventory

turnover, high SKUna

HDS Facility MROMore


Low supplier and

customer

concentration

Less technicalBreak & fix products,

high time sensitivity

WSO HVACMore

standardizedMedium

Bulky items that don't

ship wellInstallation required na

WCCElectrical

Equipment

More

customizedMedium

Low reliance on retail

distribution

More technical

products and value-

added services

required (kitting,

assembly,

prefabrication, etc.)

Large project oriented

(~50%)

FAST Less technical

High

Low

Risks


Amazon Makes Healthcare Headlines

“Amazon.co.jp also started selling category No. 1 drugs, which require consultation with a pharmacist before purchase, at its website.”

“Amazon has a secret skunkworks lab called 1492,

dedicated to health care tech.”

“Amazon is hiring a business lead to figure out how the

company can break into the multibillion-dollar pharmacy

market.”

Japan Times

4/19/17

CNBC

5/17/17

CNBC

7/26/17

“Before placing orders, customers need to report

their symptoms and medical history via a form on

Amazon’s site. Items will only be delivered after approval by

a pharmacist.”

“[Amazon] recently started selling medical supplies and equipment in the U.S., and is

hiring for its "professional health care program" to

ensure that the company is meeting regulatory

requirements.”

“…Lyons is tasked with building an internal pharmacy benefits manager for Amazon

employees, which might be later scaled out”

“Currently there are no talks or negotiations

with Amazon, online pharmacy company Shop

Apotheke says in statement.”

“Earlier, Shop Apotheke Soars

on Report Amazon Wants Dutch

Online Pharmacy”

Bloomberg

9/15/17

“Areas of exploration include a platform for electronic

medical record data, telemedicine and health apps

for existing devices like the Amazon Echo.”

Note: Amazon to our knowledge has not commented on the indicated news reports

Source: Japan Times, CNBC, Bloomberg, Morgan Stanley Research


Next on Amazon’s List?

Pharmaceutical

Drugs

Medical

Supplies

Co

mp

lexi

ty

Frequency of Purchase

Source: Morgan Stanley Research


Digging Into Distribution

Industry/Business


Regulatory Hurdles



B R I A N


Electrical Facility MRO Industrial MRO

Pharmaceutical

Supply Chain

Ind

ustr

ial

Co

ng

lom

era

tes

H

ealt

hca

re S

erv

ices

&

Dis

trib

uti

on

Medical Supply

Supply Chain

HVAC




http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiTydij-KfWAhVL74MKHfLSAF8QjRwIBw&url=http://elasticmusicproductions.com/commercial/&psig=AFQjCNHjsgjpN5MSDQo2plyVwbgNXr8oSQ&ust=1505590521707875

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiBpdHB-KfWAhWMSRoKHfKMAjsQjRwIBw&url=https://en.wikipedia.org/wiki/File:Express_Scripts_logo.svg&psig=AFQjCNGELr1XaFTTdQFgwO08QfZu9NOBhQ&ust=1505590684362275

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjYs47b-KfWAhWJ7IMKHS4-C_gQjRwIBw&url=https://cvshealth.com/social-responsibility/our-giving/foundation-giving&psig=AFQjCNFzvTOgcYOwwaBGfAkrrziMu2e7xA&ust=1505590715919251

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi_l_Hz-KfWAhXILhoKHeo6DxUQjRwIBw&url=http://www.cardinalhealth.com/&psig=AFQjCNEizsp9fKoZ2N8o7qHTnVyPC-unbg&ust=1505590790227390

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiTydij-KfWAhVL74MKHfLSAF8QjRwIBw&url=http://elasticmusicproductions.com/commercial/&psig=AFQjCNHjsgjpN5MSDQo2plyVwbgNXr8oSQ&ust=1505590521707875

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjZvY-tkqjWAhUJ64MKHRORAa4QjRwIBw&url=https://ommarketplace.com/&psig=AFQjCNEOOZKb5f2bal1wxUpfi88soMdcLg&ust=1505597620507454

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwj0rN3LkqjWAhVqzoMKHQXeB-cQjRwIBw&url=https://www.implantpracticeus.com/corporate-profile/henry-schein-dental-surgical-solutions-corporate-profile/&psig=AFQjCNEFPJXM86KCw9DKzUzWArQgdH8XGA&ust=1505597656287384

AlphaWise


North America

Angus Lund [email protected]

+44 (0)20 7677 6620

Brian Kelleher [email protected]

+1 852 3407 0702

Shaivali Shah is Executive Director,

Head of AlphaWise in the Americas







MS Analysts harness the power of AlphaWise to highlight meaningful patterns and alpha-

generating investment insights

AlphaWise combines unique data with rich analytics and

visualization

Links qualitative intelligence with quantitative evidence to give analysts an edge

About AlphaWise

Sources: AlphaWise


Amazon Related Pieces

Sources: AlphaWise, Morgan Stanley Research


Sprouts more at risk than Kroger

Grocery is Not a Winner-take-all Industry

WFM shoppers not AMZN Prime

members

40%

Room for price-driven share gains

Non-WFM shoppers see price as main adoption barrier

7 in 10

Online grocer awareness overall low

2016 & 2017: 84%



Warehouse leasing behavior shifts

Distribution and retail footprint of key players

WFM expanding the AMZN Network

Increasing Flexibility Over the Last Mile of the Supply Chain



Resizing the total addressable market

2016: $60B

12%

2017: $220B

40%

Digital Food Delivery is Surging

Competition is on the rise

1. GrubHub: 43%

2. UberEats: 28%

3. Amazon Restaurants: 25%

4. Yelp Eat24: 21%

Delivery is replacing dine-in

2016: 38%

2017: 43%



Amazon’s credit card impact on PLC

Disrupting Traditional Business Models


Amazon taking share from traditional dept stores

1. WMT: 60%

2. AMZN: 48%

3. TGT: 42%

4. KSS: 41%

5. JCP: 38%

6. Macy’s: 35%

Amazon is Everywhere

Media, Entertainment, Advertising & Telecom


North America


+1 212 761 3365

Benjamin Swinburne, CFA [email protected]

+1 212 761 7527

Simon Flannery [email protected]

+1 212 761 6432







Behavior Modification 201

Customer

Customer Pain Point Amazon Innovation

Voice

IoT

Smart-Home

Alexa

Echo Products

Dash Buttons

1-2 Hour

Shipping

Prime Now

Last-mile

Prime 1.0

Prime 2.0

Physical

presence

Brick & Mortar

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjT8__O4rbVAhXCXD4KHQUgBNkQjRwIBw&url=http://www.droidforums.net/threads/amazon-now-limits-prime-sharing-benefits-to-one-other-user.283513/&psig=AFQjCNG48O2YZTHk2RKw65lYVwKwLPkZXQ&ust=1501701944617412


We See Amazon Continuing to Invest in Prime Instant Video

We See Amazon Content Spend Reaching $6bn by 2018

Prime Video is a Popular Reason Why Shoppers Sign Up for Prime in the UK, Germany and Japan



Roughly 60% of Prime Members Use Netflix & Instant Video, Both Up YoY


% Using Amazon Prime Video Service % Using Netflix Streaming Service


Amazon is Everywhere: Media, Entertainment, Cable, Satellite, Music, Advertising

Direct Competition - Today

• Subscription music & downloads

• General entertainment TV & Film viewing

• Direct response advertising

Amazon is directly or indirectly

impacting all 31 of our covered

companies.

Indirect Negative Impact

• Advertising & marketing budgets

Potential Direct Competition

• Pay-TV bundles

• Sports networks

• Concert ticketing

• Movie theaters

Driving Value

• Rights owners (sports, music, etc.)

• Content producers

• OTT services (premiums, int’l markets)

• ISP business

• Spectrum

Coverage group: AMCX, ATUS, BATRK, CBS, CHTR, CMCSA, CNK, DIS, DISCK, DISH, FOXA, FWONK, IPG, LAMR, LBRDK, LBTYA, LGFb, LSXMK, MSG, MSGN, NFLX, OMC, OUT, P, RGC, SIRI, SNI, TRCO, TWX, VIAB, WWE



Wireless, Wireline, Data Centers – Amazon Relies on Connectivity

Wireless - Remember the Fire Phone? Wireless Carriers still dominate phone sales via Retail stores (for now?)

• Data Centers – Is AWS friend or foe?

• Wireline – AWS drives bandwidth demand, but it’s competitive

• Stay Tuned – What does Amazon do next in Communications?

• 5G/IoT/Carrier purchase? … Watch Broadband battles in D.C.

• Space/Satellites – Don’t forget about disruption from Bezos via Blue Origin

Sources: Consumerist ,Company website, Morgan Stanley Research

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjckZPq7afWAhXE5IMKHUQDCpoQjRwIBw&url=https://androidcommunity.com/tag/fire-phone/&psig=AFQjCNHxJtLR6dP5gqvo6bgMwK-L3Otr2g&ust=1505587816045654

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiFz5KD7qfWAhUn7IMKHXs7BtQQjRwIBw&url=http://www.hangthebankers.com/retailers-closing-6000-stores/&psig=AFQjCNGbOmh6yY0DtBYlwiipOkdhO_1U_Q&ust=1505587867822854

74 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Sources: Morgan Stanley Research

Amazon is Everywhere: Media, Entertainment, Advertising & Telecom

Industry/Business


Regulatory Hurdles



B R I A N


Content

Satellite

Music

Towers

Ca

ble

/Sa

t.

& M

ed

ia

N.A

. T

ele

co

m

Telecom

Display Search

US

In

tern

et

Streaming Exhibitors Networks Agencies

Cable



https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjg4L6q8qfWAhVIXBoKHVW0DTEQjRwIBw&url=https://en.wikipedia.org/wiki/American_Tower_Corporation&psig=AFQjCNGiCm0blGdvyqKV5GJ4KC3RcVMEVQ&ust=1505588736937093

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi9jfLX8qfWAhUm9IMKHWiBChsQjRwIBw&url=http://ir.sbasite.com/&psig=AFQjCNHBynbU5RzJeMbwxF6g1ZNYVwfVFA&ust=1505589120426395

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwinianx8qfWAhWix4MKHYr6BZgQjRwIBw&url=http://www.freepik.com/free-icon/question-mark_731610.htm&psig=AFQjCNGGquZrjSxp9X_AQF_3znwoU6ycCQ&ust=1505589169399431

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiHkMzq9qfWAhXIvRQKHWHJDLQQjRwIBw&url=http://www.wrestlingforum.com/artistic-expression/2170298-challenge-fix-wwe-logo.html&psig=AFQjCNHnaIP21X3sZIG6jVP-PvKn2kPIPQ&ust=1505590233100755

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiVkqqA96fWAhWHxRQKHb6_CFoQjRwIBw&url=https://worldvectorlogo.com/logo/madison-square-garden&psig=AFQjCNE8qxCMi_JL2qy3gLD0-dNFbCx3pg&ust=1505590260048373



http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi845a4oqrWAhXkyoMKHWUVC5cQjRwIBw&url=http://gizmodo.com/5995060/how-spotify-got-itself-a-new-logo&psig=AFQjCNEdYc4PAmAJ-5Qmv_lk1QwCIjqY8g&ust=1505670657196592

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiblpXGoqrWAhUjxoMKHVFyDPAQjRwIBw&url=https://www.siriusxm.com/logosandphotos&psig=AFQjCNH7DE0-gD1TihPz4SN40gcM0MP5Uw&ust=1505670687011278

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiblpXGoqrWAhUjxoMKHVFyDPAQjRwIBw&url=https://www.siriusxm.com/logosandphotos&psig=AFQjCNH7DE0-gD1TihPz4SN40gcM0MP5Uw&ust=1505670687011278

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjS4o_Jo6rWAhWm14MKHWvTAPYQjRwIBw&url=https://illuminatisymbols.info/cbs-logo/&psig=AFQjCNHyTZKr6C53Tz_OPh1lB9rzrvrdVw&ust=1505670961478673

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi3teDVo6rWAhUN0IMKHVNCB4MQjRwIBw&url=http://logos.wikia.com/wiki/File:Disney_Logo.png&psig=AFQjCNH_5MhFA4Nj2Nz_khn6IWBYHJotZg&ust=1505670988430027

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiJ6ablo6rWAhXL34MKHXH3DdoQjRwIBw&url=https://newsroom.charter.com/media-library/&psig=AFQjCNFGFKdYVbmiUmaREkb63nbTlKajzQ&ust=1505671021202203

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwij8djwo6rWAhVs04MKHbuxAUIQjRwIBw&url=https://commons.wikimedia.org/wiki/File:Comcast_Logo.svg&psig=AFQjCNHsW3fmPud7rcLiXZivRmD32EkjQA&ust=1505671044991935

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjw4ZidpKrWAhVr0oMKHbkUD_QQjRwIBw&url=https://commons.wikimedia.org/wiki/File:Omnicom_Group_Logo.png&psig=AFQjCNHbuVXy5lyvIn1w-8_B-3fmpe8xCg&ust=1505671138441753

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiAxK2opKrWAhUL0YMKHbDkAyEQjRwIBw&url=http://logok.org/ipg-logo/&psig=AFQjCNEbBCRyvzeGQdRTQIR4QxqdaTmiPw&ust=1505671162170325

Hot Button Industries

Disrupted or Protected?


North America


+1 212 761 3365

Simeon Gutman, CFA [email protected]

+1 212 761 3920

Vincent Sinisi [email protected]

+1 212 761 1358







Hot Button Industries: Disrupted or Protected?

Industry/Business


Regulatory Hurdles



B R I A N


Travel Display Search

Food Retail

Auto Parts Beauty Arts & Crafts

Dollar Stores

Broadline Retail

Home Impr.

US

In

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et

Fo

od

Re

tail

/

Do

lla

r S

tore

s

Ha

rdli

ne /

Bro

ad

lin

e R

eta

il

Home Furnishings

Club

Food Distributors


https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjrzZj0s5jWAhUK_4MKHU7FDmgQjRwIBw&url=https://en.wikipedia.org/wiki/File:Expedia_logo.svg&psig=AFQjCNE3jph4S3OWZYXvOno0FCbV5wBmgg&ust=1505056869375421

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjh4MaetJ3WAhVD4YMKHT-WD1kQjRwIBw&url=http://www.mayfairetown.com/store/michaels_arts_and_crafts&psig=AFQjCNGxu0qq0y1z0kDn-v2h3q36jfwG0g&ust=1505228755141086

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjjz5HVtJ3WAhXhx4MKHS6jDeoQjRwIBw&url=https://www.2ndvote.com/business-entity/dollar-general/&psig=AFQjCNEsuj9ts0MZb3_0YmOP_l4_eghZ6g&ust=1505228861338017

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwj8hJ6YtZ3WAhUHnRoKHUOaAzEQjRwIBw&url=https://en.wikipedia.org/wiki/Ulta_Beauty&psig=AFQjCNGe7iQx0kRnP3GZp5V85dwERm8ydA&ust=1505229012104526

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiqxtymtZ3WAhUGqxoKHRMoBYAQjRwIBw&url=http://westgateohio.com/sally-beauty-supply/&psig=AFQjCNG1xgVrL0hf3vPDZ0e7haTHoAuipA&ust=1505229044246427

http://corporate.walmart.com/




https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwio6taJv53WAhWHXBQKHYgeBqwQjRwIBw&url=https://commons.wikimedia.org/wiki/File:Target_logo.svg&psig=AFQjCNEAQ_0Y53KCbZ0SHe4Lh6gblPKlUg&ust=1505231665568097

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwj53KGpv53WAhWBbRQKHXM8DpYQjRwIBw&url=https://en.wikipedia.org/wiki/The_Home_Depot&psig=AFQjCNFdBafwvRUMQAWiqRVXz10Ymw7jyA&ust=1505231735147652

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwisiITNv53WAhXIPRQKHbHkBmQQjRwIBw&url=https://www.indeed.com/cmp/Dollar-Tree/salaries&psig=AFQjCNFaPj_uZA-GiEra5-oZoHbZWhFIlw&ust=1505231810227795

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwij8s-QwZ3WAhWHtxQKHbmIDlUQjRwIBw&url=https://www.groupon.com/coupons/stores/lowes.com&psig=AFQjCNF1nKvNb_rAo_oI1f0Zvu9AffCjjg&ust=1505232219400446

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjk14_Kw53WAhXDRhQKHf4OC1cQjRwIBw&url=https://www.groupon.com/coupons/stores/bedbathandbeyond.com&psig=AFQjCNFgOlmMW-lqL14Q2w6TVX8jNTis_Q&ust=1505232872364200

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiN8Oecu6XWAhUl6YMKHTtqDvoQjRwIBw&url=http://www.supervalu.com/misc/for-the-media/logos-image-library.html&psig=AFQjCNHBTfQ0lgFSzO3viiSMVnDGQNZl8Q&ust=1505505417422059

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiN8Oecu6XWAhUl6YMKHTtqDvoQjRwIBw&url=http://www.supervalu.com/misc/for-the-media/logos-image-library.html&psig=AFQjCNHBTfQ0lgFSzO3viiSMVnDGQNZl8Q&ust=1505505417422059

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=0ahUKEwiN8Oecu6XWAhUl6YMKHTtqDvoQjRwIBw&url=http://www.supervalu.com/misc/for-the-media/logos-image-library.html&psig=AFQjCNHBTfQ0lgFSzO3viiSMVnDGQNZl8Q&ust=1505505417422059


Amazon Advertising Cometh…

Amazon Sponsored Product Ad Units Amazon Advertising on Kindle Devices

Sources: Company Data and Website, Morgan Stanley Research


How Big Could This Business Become?

Source: Magna Global, IAB, Company data, Morgan Stanley Research

2,762 4,467

6,393

9,455

11,876

1,165

1,510

2,951

4,045

5,280

157

200

286

455

655

4,084

6,177

9,630

13,954

17,811

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2014 2015 2016 2017e 2018e

Am

azo

n G

ross P

rofi

t ($

mn

)

Credit Card

Advertising

Retail subscriptions

'16-'18 CAGR51%

34%

36%

Advertising is a Growing High Margin Revenue Stream for AMZN

We See Amazon Share of Advertising Continuing to Grow to MSD%


The Best Offense Is A Strong Defense

Average

Basket Price SKU Count

Inventory

Turnover

Average

Basket Price SKU Count

Inventory

Turnover

ORLY $50 23,000 1.5x WMT $25* 120,000 8.4x

AAP $44 26,000 1.2x TGT $30* 80,000 5.8x

AZO $35 23,000 1.4x COST $85* 3,700 11.5x

DKS $75* 45,000* 3.4x ULTA $40 20,000 3.1x

MIK $21 33,000 2.9x SBH $18 8,000 2.2x

BBY $200* 5,000* 6.0x GNC $50 2,000 2.9x

PRTY $23 30,000 2.4x VSI $35 7,000 3.7x

BBBY $55* 30,000* 2.6x HD $57 35,000 5.0x

PIR $45* 6,000 2.9x LOW $65 37,000 4.3x

WSM $250* 10,000* 2.7x LL $1,700 400 2.1x

TCS $57 10,500 3.7x TSCO $47 17,500 3.4x

HOME $60 50,000 1.8x

ODP $38* 8,000* 6.8x

SPLS $40 7,500 7.8x

* Morgan Stanley estimate

DIY Auto

Sporting Goods

Arts & Crafts

Electronics

Party Supply

Home Furnishings

Office Supply

Discount / Club

Beauty Supply

Vitamin Retail

Home Improvement

Source: Company reports, Morgan Stanley Research


The Omni-Channel Bullseye: Degrees of Separation From E-Tail

Risks • Key Item Concentration • Vendor Concentration

• Supplier Mindset • Product Vulnerability (Exclusivity

vs. Service)

Defense • SKU Intensive

• Low Inventory Turns • Low Average Purchase Size

• Flexibility in Store Base Farm Supply

Beauty

Home Furnishings

Arts & Crafts Office Supply

Consumer Electronics

Home Discount Sporting Goods

Improvement

Vitamins /

Supplements DIY Auto

High

Level of

Service

High Level of Exclusivity

High

Level of

e-tailersService

High Level of Exclusivity

e-tailers



The Most & Least Protected in an Omni-Channel World

THREATS (1-3 ranked best to worst) INSULATION (1-3 ranked best to worst)

Key Item

Concentration

Supplier

Concentration

Supplier

Mindset

Superior

Distribution

Product

Vulnerability

SKUs, Turns

& ASPs

Leverage

PointLeases

Omni-Channel

ReadyTotal

Home Improvement 200

199

DIY Auto 198

197

Club Stores 196

195

Arts & Crafts 194

193

Beauty 192

191

Consumer Electronics 190

189

Home Furnishings 188

187

Vitamins/Supplements 186

185

Sporting Goods 184

183

Broadline Retail 182



Disclosures

amazon disruption symposium - morgan stanley€¦ · amazon disruption symposium where so far?...

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