Retail Automation: Stranded Workers?Opportunities and risks for labor and automation

Prepared by Cornerstone Capital Group For the Investor Responsibility Research Center Institute

June 8, 2017

Agenda

• Introductions• Research  Review• IRRCi Perspective  • Q&A

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Speakers

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Jon  LukomnikExecutive  DirectorInvestor  Responsibility  Research  Center  Institute

Sebastian  VanderzeilDirector,  Global  Thematic  Analyst

About  the  Investor  Responsibility  Research  Center  Institute

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§ Not-­‐for-­‐profit  established  in  2005.§ Funds,  disseminates  objective,  unbiased  research  on  range  of  issues  at  intersection  of  corporate  

responsibility,  investors  informational  needs.§ Academic  &  practitioner  research  examining  capital  market  context  that  impacts  how  investors,  

companies  make  decisions.§ Annual  research  award  with  two  $10K  awards.  Deadline  October  6,  2017.§ More  than  60  research  reports  available  at  no  charge.

About  Cornerstone  Capital  Group

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• Founded  in  2013,  Cornerstone  Capital  is  a  financial  services  firm  offering  research-­‐driven  investment  advisory  and  strategic  consulting  services.  

• Our  research  connects  global  themes  to  industry  and  equity  market  analysis  to  identify  investment  opportunities  and  risks  across  sectors.

• We  work  with  investors,  corporations  and  financial  institutions  to  drive  the  systematic  analysis  of Environmental,  Social  and  Governance  (ESG)  factors  throughout  the  global  capital  markets.  

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Overview

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Setting the Stage

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Summary  of  Key  Findings• 16  million  Americans  employed  in  retail,  representing  10%  of  the  working  population  and  6%  of  US  GDP.

• Retail  landscape  experiencing  unprecedented  change  from  online  shopping  (esp.  Amazon)  and  increasing  wage  pressure.  

• US  economic  growth  inseparable  from  growth  in  automation,  but  high-­‐change  periods  have  triggered  job  losses,  particularly  hollowing-­‐out  of  middle-­‐skilled  workers.

• Based  on  analysis  from  World  Economic  Forum  and  Oxford  computerization  study,  6-­‐7.5  million  retail  jobs  are  at  high  risk  of  automation,  representing  a  greater  percentage  reduction  than  the  US  manufacturing  industry  experienced.

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Summary  of  Key  Findings  (cont.)• Of  30  retailers  examined  in  this  report:

• Most  companies  discuss  in-­‐store  technologies  such  as  mobile  devices,  self-­‐checkout,  digital  kiosks  and  proximity  beacons;  sensor-­‐based  checkouts  and  smart  shelves  are  a  small  but  growing  application  (Amazon  Go  stores).

• None  reported  key  labor  indicators  (employee  turnover,  labor  expenses  or  employee  satisfaction).• Most  do  not  exhibit  signs  of  a  explicit  consumer  strategy  (experience  or  convenience)  for  their  stores  as  defined  

by  our  framework.• Only  four  companies  paid  cashiers  and  sales  associates  at  or  above  the  living  wage  as  calculated  by  the  

Department  of  Health  and  Human  Services.• Five  companies  have  explicit  programs  to  enable  workers  to  skill-­‐up  or  transition  away  from  jobs  that  are  likely  to  

be  automated  while  two  additional  companies  have  technical  skills  programs.

• Women  are  particularly  exposed  to  retail  automation  as  they  constitute  73%  of  retail  cashiers,  which  face  a  very  high  risk  of  automation  from  existing  technologies.

• Big  box  retailers  such  as  WalMart have  greater  market  share  in  communities  with  less  than  500,000  people  compared  to  metropolitan  areas,  which  means  that  retail  automation  by  retailers  could  disproportionately  impact  these  communities.

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Retail  employment

Source:  US  FRED,  Cornerstone  Capital  Group  

JobsProbability  of  

computerization  (0-­‐1)

Number  of  workers  in  retail  trade  sector

(  2014)

Order  Clerks 0.99 52,600

Parts  Salesperson 0.98 167,300

Counter  and  Rental  Clerks 0.97 87,900

Cashier 0.97 2,778,500

Retail  Salesperson 0.92 4,189,800

Laborers  and  freight,  stock,  and  material  movers,  hand 0.85 312,700

Total  number  of  workers 7,588,800

Retail  employment  eclipsed  manufacturing  in  2001… …  but  more  than  7.5  million  workers  face  high  risk  of  computerization

Source:  Frey  and  Osborne,  “The  Future  of  Employment:  How  Susceptible  Are  Jobs  to  Computerisation?”  Oxford  University,  September  2013;  BLS,  2014

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Rise  of  Amazon

Source:  US  Census  Bureau,  Cornerstone  Capital  Group  

E-­‐commerce  rising  as  percent  of  total  US  retail  sales…   …  and  Amazon  dominates  US  e-­‐commerce  sales

Source:  Internet  Retailer,  ChannelAdvisor,  Slice  Intelligence,  US  Commerce  Department,  Cornerstone  Capital  Group  

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Amazon  pressures  retailers  through  prices  and  costs

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Societal  pressure  to  raise  wages  is  increasing36%  of  retail  workers  receive  a  government  payment… …  linking  into  concerns  about  growing  income  inequality

Source:  US  Census  Bureau,  Cornerstone  Capital  Group  

Source:  EPI  analysis  of  Current  Population  Survey  Annual  Social  and  Economic  Supplement  microdata,  pooled  years  2012-­‐2014  

“Brick  and  mortar”  retailers:  transforming  under  pressureTwo  broad  consumer  strategies:  

• Convenience  – focus  on  removing  the  ‘friction’  of  the  purchase  process  within  the  retail  store  to  increase  sales  volume  and  decrease  labor  costs  through  technology.  

• Experience  – focus  on  increasing  the  consumer  interaction  with  the  store  and  its  employees  to  increase  pricing  power.  

Source:  McKinsey,  ‘Making  stores  matter  in  a  multichannel  world’,  Cornerstone  Capital  Group  

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Retail  sector  labor  productivity    

Retail  labor  productivity  has  grown  faster  than  economy  average… …  but  primarily  driven  by  electronic  shopping  

Source:  Bureau  of  Labor  Statistics,  Cornerstone  Capital  Group Source:  Bureau  of  Labor  Statistics,  Cornerstone  Capital  Group

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Bricks  and  mortar  store  labor  productivity  

Source:  Bureau  of  Labor  Statistics,  Cornerstone  Capital  Group

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Retailers  are  discussing  technologiesTechnology Description Focus Frequency  of  Use  

Mobile  devicesMobile  apps  enable  consumers  to  scan  a  barcode  or  take  a  picture  of  a  product  to  access  product  info  or  find  other  colors  and  sizes  on  the  retailer’s  e-­‐commerce  site

Consumer High

Self-­‐checkout Customers  scan  and  finalize  purchase  at  terminal Consumer/Operational High

Digital  kiosks Touch  screens  that  enable  consumers  to  view  product  info,  access  customer  reviews,  and  place  orders  for  delivery   Consumer High

Proximity  beaconsDevices  that  alert  shoppers  to  promotions  or  provide  sales  associates  with  information  on  frequent  store  visitors  to  deliver  high-­‐touch  service

Consumer High

Workforce  and  task  management  solutions

Software  that  analyzes,  forecasts,  and  manages  labor  scheduling  and  task  management Operational High

RFID  technology Radio  Frequency  Identification  (RFID)  tags  enable  enhanced  inventory  tracking  throughout  the  supply  chain Operational Medium

Autonomous  robots Smart  robots  that  aid  in  areas  ranging  from  leading  customers  to  desired  products  to  inventory  replenishment   Consumer/Operational Medium/Low

Smart  price  tags Smart  price  tags  can  be  changed  in  real  time  based  on  demand  or  other  trends Consumer Medium/Low

Sensor-­‐based  checkout Contactless  checkout  by  automatic  scanning  of  product  as  customer  walks  out  of  store Consumer/Operational Low

Smart  shelves   Sensor-­‐based  shelves  that  detect  when  inventory  is  low Operational Low

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Connecting  into  consumer  needs

0.48

0.24

0.23

0.21

0.17

0.17

Knowledgeable  store  associates

Self-­‐service/mobile  checkouts  

Bar-­‐code  scanners  to  confirm  product  priceand  features

Personalized  coupons/offers  through  asmartphone

Personalized  coupons/offers  through  social-­‐networking  sites

Wi-­‐fi  access  for  comparison  shopping

Source:  Deloitte  Annual  Holiday  Survey,  2014  (Question  not  asked  in  2015  or  2016)

Source:  Deloitte  Annual  Holiday  Survey,  2016;  Cornerstone  Capital  Group

Consumer  wants  knowledgeable  sales  associates …  as  well  as  avoiding  crowds  and  delays  

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Broader  stakeholders  

Women  are  over-­‐represented  as  cashiers,  a  highly  automatable  function

Source:  Osborne  and  Frey,  US  Bureau  of  Labor  Statistics,  Cornerstone  Capital  Group

“A UCLA study on Wal-­‐Mart shows that since 2006,

its average grocery market share in the 25 most

populated metropolitan areas grew from 5.5% to

almost 12%. However, Wal-­‐Mart possesses an

average market share of 25% in metropolitan areas

with populations fewer than 500,000 residents.”

Regional  centers  could  be  affected  more  than  metropolitan  areas

Source:  http://www.irle.ucla.edu/publications/documents/AnthonyRobert_Wal-­‐MartReport_July2015.pdf

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Companies  examined  in  this  report  

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Company  assessmentCriteria Description

Public  discussion  of  automation  initiatives  

Public  disclosure  and  discussion  of  technology  initiatives  including  discussion  on  impacts  to  labor  suggests  that  a  company  is  appropriately  attentive  to  the  issue.  

Changing  labor  profile A  changing  labor  profile  can  be  indicative  of  a  company’s  future  management  of  its  labor  force,  as  well  as  its  relationship  with its  consumer  base.  The  framework  provides  an  indication  of  companies’  positioning  towards  an  experience  or  convenience  consumer  strategy.  The  ability  of  a  company  to  execute  its  strategy  will  be  impacted  by  its  exposure  to  minimum  wage  risk,  current  investment  in  labor,  and  public  perception.  

Minimum  wage  risk  exposure  and  government  subsidization  

The  research  suggests  that  minimum  wage  increases  prompt  automation.  Companies  exposed  to  states  with  upcoming  minimum  wage  increases  may  pursue  automation  more  rapidly  to  offset  labor  cost  headwinds.  In  addition,  retailers  that  pay  wages  below  the  poverty  line  may  be  perceived  by  stakeholders  as  taking  advantage  of  government  support  schemes.  Growing  stakeholder  concern  could  lead  to  public campaigns  and  calls  for  minimum  wage  increases.

Investing  in  labor  to  support  the  strategy

Based  on  the  analysis,  retailers  that  invest  in  training  and  development  programs  are  likely  to  be  developing  a  motivated  and skilled  employee  base  that  will  support  technology  initiatives.  Public  announcements  of  tuition  support  and  training  that  go  beyond  existing  day-­‐to-­‐day  job  development  signal  such  an  intention.  

Public  perception  of  employee  practices,  social  policies,  and  prior  reputation

As  indicated  by  Mission  Measurement  data,  companies  with  strong  consumer  perception  of  employee  treatment  and  fair  wages  may  face  less  scrutiny  should  they  have  to  reduce  their  labor  force.  Additionally,  a  high  social  score  from  Sustainalytics shows  an  ability  to  manage  social  issues,  which  could  protect  companies  from  being  perceived  negatively  by  stakeholders.  

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Unclear  strategy  with  fewer  employees Experience  strategy

Convenience  strategy Unclear  strategy  with  more  employees

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Retail  wages  

$0.00  

$4.00  

$8.00  

$12.00  

$16.00  

Dollar  G

eneral

Foot  Locker

Kroger

Ross  Stores

Kohl's

TJX  Co

mpanies

Walgreens  Boo

tsUlta  Salon

J.C.  Pen

ney

Staples

Target

CVS  He

alth

Dick's  Sportin

g  …L  Brands

Advance  Au

to  …

Macy's

Wal-­‐M

art

Gap

Bed  Ba

th  &  …

Sprouts

O'Reilly  Auto

Williams-­‐…

Best  Buy

Home  De

pot

Lowe's

Who

le  Foo

dsNordstrom

Costco

Tiffa

ny  &  Co

Federal  minimum wage

Poverty level  wage

0%

10%

20%

30%

40%

50%

60%

70%

Sprouts

Costco

Nordstrom

Ross  Stores

Tiffa

ny  &  Co.

Macy's

Who

le  Foo

dsStaples

Williams-­‐Sono

ma

Bed  Ba

th  &  Beyon

dTarget  

Gap

Kroger

Home  De

pot

L  Brands

TJX  Co

mpanies

Best  Buy

Ulta  Salon

Kohl's

Walgreens  Boo

tsCV

S  He

alth  

O'Reilly  Auto

Lowe's

J.  C.  Pen

ney

Dick's  Sportin

g  Go

ods

Wal-­‐M

art  

Advance  Au

to  Parts

Dollar  G

eneral  

%  of  stores  in  states  

Few  companies  pay  at  or  above  the  poverty  level  wage… …  and  exposure  to  minimum  wage  increases  is  concentrated  in  a  few  companies  

Source:  Glassdoor,  US  Department  of  Health  and  Human  Services,  US  Department  of  Labor,  Cornerstone  Capital  Group

Source:  Company  reports,  Cornerstone  Capital  Group

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Public  perception  of  labor  practices  matters

-­‐8%-­‐12% -­‐13% -­‐13% -­‐14% -­‐14% -­‐14% -­‐15% -­‐15% -­‐16% -­‐17%

-­‐21% -­‐21% -­‐22% -­‐24%-­‐28%

0%

20%

40%

60%

80%

100%

Source:  Mission  Measurement,  Cornerstone  Capital  Group

Consumer  perceptions  of  labor  practices  relative  to  leading  company,  Costco

Shareholder  engagement  questions• What  is  the  long-­‐term  strategy  of  the  retail  company  and  how  does  labor  policy  inform  or  drive  this  strategy?  

• How  does  technology  catalyze  business  and  labor  strategy?  

• Given  its  current  wage  structure,  how  does  the  company  consider  potential  minimum  wage  increases?

• How  will  the  workforce  evolve  to  achieve  the  long-­‐term  strategy?  What  metrics  are  used  to  monitor  the  labor  strategy?  

• How  are  labor  stakeholders  engaged  in  development  of  the  long-­‐term  strategy?  

• What  management  challenges  are  created  by  the  “hollowing-­‐out”  of  labor?  

• What  are  expectations  for  employee  turnover?

• Where  does  responsibility  lie  in  the  organization  for  labor  strategy?  To  what  extent  does  this  occur  at  the  store  level  or  with  Board  involvement?  

From  IRRCi’s Perspective

• Important  market  segment  undergoing  rapid  change

• Report  designed  to  suggest  how  investors  can  differentiate  companies  by  strategy  /  execution

• Report  does  that,  but,  in  process,  larger  story  emerged• Hard  to  ignore  likely  multi-­‐million  job  hollowing  out• With  these  jobs  belonging  to  working  poor,  economic  disruption  likely  to  stress  social  safety  net• Potentially  disparate  effects  on  specific  small  metropolitan  and  rural  geographies

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From  IRRCi’s Perspective

• Key  questions  for  investors:

• What  is  company’s  automation  /  labor  strategy  designed  to  accomplish?• Convenience  /  experience  continuum  is  relevant  intellectual  paradigm  to  consider• What  are  labor  /  automation  implications?  Risks?  Opportunities?• What  is  the  path  of  transformation?• What  disclosures  /  metrics  should  a  company  make  to  help  investors  understand  if  it  is  executing  on  its  strategy?

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Contacts  

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Sebastian  VanderzeilGlobal  Thematic  AnalystCornerstone  Capital  Group1.646.661.1958Sebastian.Vanderzeil@cornerstonecapinc.com@Cornerstone_Capwww.cornerstonecapinc.com

Jon  LukomnikExecutive  DirectorIRRCi1.646.512.5807jon@irrcinstitute.org@irrcresearchwww.irrcinstitute.org

Important disclosures

The  information  in  this  material  is  for  illustration  and  discussion  purposes  only.    It  is  not  intended  to  be,  nor  should  it  be  construed  or  used  as,  investment,  tax  or  legal  advice,  any  recommendation  or  opinion  regarding  the  appropriateness  or  suitability  of  any  investment.    No  representation  is  made  that  the investment  advice,  investment  process,  or  risk  management  techniques  of  Cornerstone  Capital  Inc.  (together  with  its  affiliates,  “Cornerstone”)  or  that  a  client’s  objectives  or  goals  will or  are  likely  to  be  achieved  or  successful  or  that  any  underlying  investment  will  make  any  profit  or  will  not  sustain  losses.    All  investments  involve  risk.    Cornerstone  may  engage  in  investment practices  or  trading  strategies,  or  give  investment  advice,  that  may  increase  the  risk  of  investment  loss  and  a  loss  of  principal  may  occur.    The  risk  management  techniques  that  may  be  utilized  by  Cornerstone  cannot  provide  any  assurance  that  a  client  will  not  be  exposed  to  risks  of  significant  trading  losses.    An  investor  is  subject  to  potential  loss  of  his/her  investment.  

Any  descriptions  involving  investment  process,  investment  advice,  investment  examples,  statistical  analysis,  investment  strategies  or  risk  management  techniques  are  provided  for  illustration  purposes  only,  will  not  apply  in  all  situations,  may  not  be  fully  indicative  of  any  present  or  future  investments,  may  be  changed  in  the  discretion  of  Cornerstone  and  are  not  intended  to  reflect  performance.    Portfolio  characteristics  and  limits  reflect  guidelines  only  and  are  implemented,  and  may  change,  in  the  discretion  of  Cornerstone.    To  the  extent  that  Cornerstone  is  given  discretionary  authority,  investments  will  be  selected  by,  and  will  vary  in  the  discretion  of,  Cornerstone  and  are  subject  to  availability  and  market  conditions,  among  other  factors.  A  client’s  actual  returns  and  volatility  will  depend  on  a  variety  of  factors  including  overall  market  conditions  and  the  ability  of  Cornerstone and/or  the  client  to  implement  the  client’s  investment  objectives  and  policies.    Investments  are  subject  to  the  risks  of  market  volatility,  which  may  be  severe.    Such  market  volatility  may  be  caused by,  among  other  events,  unpredictable  economic  and  political  events  that  may  cause  sudden  and  severe  reductions  in  the  value  of  investments.

Any  opinions,  assumptions,  assessments,  statements  or  the  like  (collectively,  “Statements”)  regarding  future  events  or  which  are forward-­‐looking,  including  regarding  portfolio  characteristics  and  limits,  constitute  only  subjective  views,  beliefs,  outlooks,  estimations  or  intentions  of  Cornerstone,  should  not  be  relied  on,  are  subject  to  change  due  to  a  variety  of  factors,  including  fluctuating  market  conditions  and  economic  factors,  and  involve  inherent  risks  and  uncertainties,  both  general  and  specific,  many  of  which  cannot  be  predicted  or  quantified  and  are  beyond  Cornerstone’s  control.    Future  evidence  and  actual  results  (including  actual  composition  and  investment  characteristics  of  an  investment  portfolio)  could  differ  materially  from  those  set  forth  in,  contemplated  by,  or  underlying  these  Statements,  which  are  subject  to  change  without  notice.    In  light  of  these  risks  and  uncertainties,  there  can  be  no  assurance  and  no  representation  is  given  that  these  Statements  are  now,  or  will  prove  to  be  accurate,  or  complete  in  any  way.    Cornerstone  undertakes  no  responsibility  or  obligation  to  revise  or  update  such  Statements.    Statements  expressed  herein  may  not  necessarily  be  shared  by  all  personnel  of  Cornerstone.  This  material  is  as  of  the  date  indicated,  is  not  complete,  is  subject  to  change  and  does  not  contain  material  information  regarding        Cornerstone  or  any  specific  investment  or  investment  advice.    No  representation  is  made  with  respect  to  the  accuracy,  completeness  or  timeliness  of  information  and  Cornerstone  assumes  no  obligation  to  update  or  otherwise  revise  such  information.    Unless  the  context  otherwise  requires,  the  term  “investor”  and  “client”  may  be  used  interchangeably.  

This  information  is  confidential,  is  the  property  of  Cornerstone,  is  intended  only  for  intended  recipients  and  their  authorized  agents  and  representatives  andmay  not  be  reproduced  or  distributed  to  any  other  person  without  prior    written  consent.

©  Cornerstone  Capital  Inc.  2017