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Idea Transcript


September 18, 2017 05:04 AM GMT

September 18, 2017

Amazon Disruption Symposium

MORGAN STANLEY RESEARCH North America

Where so Far? Where to Next? Who is Safe?

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.

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 2017

2

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

9:50 a.m. – 10:35 a.m.

• 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.

• Kimberly Greenberger, Managing Director, Softlines/Department Store Equity Research Analyst

• Ricky Goldwasser, Managing Director, Healthcare Services & Distribution Equity Research Analyst

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

10:55 a.m. – 11:10 a.m.

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

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

Food Retail: A 10 Year Journey? Moderator - Ashton Curtis, Managing Director, Sector Sales • Brian Nowak, Executive Director, Internet Equity Research Analyst

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

• Simeon Gutman, Executive Director, Hardlines & Broadlines Equity Research Analyst

• Simon Flannery, Managing Director, North American Telecom 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.

Digging Into Distribution Moderator - Brian Nowak, Executive Director, Internet Equity Research Analyst • Jiayan Zhou, Vice President, Industrial Conglomerates Equity Research Analyst

• Brian Nowak, Executive Director, Internet Equity Research Analyst

8:55 a.m. – 9:40 a.m.

Amazon’s Impact on the eCommerce Supply Chain Moderator - Brian Nowak, Executive Director, Internet Equity Research Analyst

BREAK

• Brian Nowak, Executive Director, Internet 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 • Brian Nowak, Executive Director, Internet Equity Research Analyst • Vincent Sinisi, Executive Director, Food Retailers / Distributors & Dollar Stores Equity Research Analyst

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

3

Biographies 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.

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. AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

4

Biographies 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.

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.

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

5

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.

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

6

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.

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

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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.

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

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Biographies 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.

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 top10 stock picker across Wall Street, top Auto stock picker and been named a "Rising Star" by Institutional Investor.

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

9

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.

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

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Amazon Disruption Symposium

The Amazon Effect

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

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

US Retail Spend*: eCommerce Mix ($bn) 3,000 2,500

2,485

2,535

2,585

2,379

2,440

11.0%

12.1%

13.3%

14.7%

16.1%

17.6%

2013

2014 2015 US eCommerce

2016 US Retail (Offline)

2017E

2018E

2,302

2,000

1,500 1,000 500 -

Note: * US Retail Spend = USCB Retail Total (ex- building materials, gasoline stations, motor vehicles, and non-store retailers) AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Sources : US Census Bureau, comScore, Forrester, Company Data, Morgan Stanley Research;

12

Amazon’s Share of eCommerce Continues Growing

US eCommerce Marketplace Mix % 100% 90% 80%

70%

68%

66%

62%

64%

59%

55%

60% 50% 40%

30%

12%

11%

20%

22%

2013

2014

20% 10%

9%

10%

28%

25%

9% 33%

8% 37%

0% 2015 Amazon

2016 eBay

2017E

2018E

Other

Note: * US Retail Spend = USCB Retail Total (ex- building materials, gasoline stations, motor vehicles, and non-store retailers) AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017 Sources : US Census Bureau, comScore, Forrester, Company Data, Morgan Stanley Research;

13

Amazon Driving 50% of All US PCE Growth

17%

30%

20%

10%

0%

56%

60% 54% 47%

50%

38%

29%

40%

60%

40% 30% 20%

15%

50%

Amazon % Contrib. to US eCommerce Growth

70% 51%

49%

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

9%

Amazon % Contribution to US Retail Growth

60%

52%

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

10% 0%

2013

2014

2015

2016

Sources: BEA PCE, Company Data, Morgan Stanley Research

2017E

2018E

2013

2014

2015

2016

2017E

2018E

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

14

Largely Driven by Prime, aka Behavior Modification 101

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

AMZN Prime US HH Penetration 60% Weighted Average Spend per Shopper

50%

45%

40%

35%

30% 23% 20% 10% 0% 2015

2016

2017E

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

2018E

4.6X More

$3,000

51%

$2,500

$2,486

$2,000 $1,500

$1,000 $544 $500 $0 Prime

Non-Prime

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

15

What Happens in Behavior Modification 201? Customer Pain Point 1-2 Hour Shipping

Amazon Innovation

Voice IoT Smart-Home

Alexa Echo Products Dash Buttons

Prime Now Last-mile Brick & Mortar

Physical presence

Customer

Prime 1.0 Prime 2.0

Sources: Company Data, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

16

A Growing AWS Profit Pool Allows for Continued Heavy Retail Investment

$12,000

14,000

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

$10,000

12,000 10,000

$8,000 7,327

6,918

CSOI ($mn)

$6,000 4,524

5,428

3,706

$4,000

8,000 6,000 4,000

1,864 1,993 $2,000

673 154 1,166

$0

1,808 660

4,266

4,099 2,751

0

1,292 -144

2,000

-91

-478 -2,000 -2,776

-$2,000

-4,000

-$4,000

-6,000 2013

2014 North America Retail

Sources : Company Data, Morgan Stanley Research;

2015 International Retail

2016 AWS

2017E Total

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

17

As Do AMZN’s Growing High Margin Revenue Streams

Credit Card

'16-'18 CAGR 51%

Advertising

34%

Retail subscriptions

36%

20,000

Amazon Gross Profit ($ mn)

18,000 16,000

655 13,954 455

14,000 12,000

4,045

8,000 6,000

2,000

5,280

9,630 286

10,000

4,000

17,811

4,084 157 1,165

6,177 200 1,510

2,951 11,876 9,455 6,393

4,467 2,762

0 2014

Sources : Company Data, Morgan Stanley Research;

2015

2016

2017e

2018e

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

18

20,000

Y/Y Abs. Growth

18,000

Y/Y % Growth

18,506

60%

15,788

16,000

70%

50%

14,000 11,118

12,000

32%

10,000 8,000

7,038

6,000

25%

40%

34% 30%

30% 20%

4,000 10%

Core Retail Opex*, Y/Y % Growth

Core Retail Opex*, Y/Y Abs. Growth ($ mn)

Allowing for Accelerating Investment, Share Gains and Expanding TAMs

2,000 0

0% 2015

2016

2017e

2018e

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

Sources : Company Data, Morgan Stanley Research;

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

19

From Books…to ~5 Trillion? We See Amazon Attacking a Core $2.5tn Bucket of Consumer Expenditure… in $ millions (U.S. Only)

Retail Product Categories Grocery Clothing Personal care & household products Home furnishings & accessories Consumer electronics Jewelry & Watches Shoes Sporting goods Auto parts & accessories Eye Glasses/Contacts/Orthopedic Appliances Children's Toys and Children's Durables Pet food & pet supplies Home improvement items & tools Office & school supplies for home use Large home appliances Books Luggage Other Total Personal Consumer Expenditure*

2015 Spend ($ mn) % of Total 766,836 30% 305,069 12% 301,175 12% 241,645 10% 216,911 9% 77,167 3% 74,433 3% 72,429 3% 67,000 3% 67,499 3% 64,385 3% 60,035 2% 50,732 2% 47,013 2% 41,509 2% 41,068 2% 35,132 1% 12,575 0% 2,542,613 100%

…and Expanding Into New Categories Outside of Traditional Retail and Consumer in $ millions (U.S. Only)

New/Emerging Categories New/Used Motor Vehicles (Autos) Pharmacy/Prescription Drugs Online Restaurant Delivery Total Advertising (Traditional and Online) Industrial Supply/B2B Postal & Delivery (Transports) Repair of Equipment (e.g. IT Home Services) Total New/Emerging Categories

2015 Spend ($ mn) % of Total 1,200,000 54% 410,071 18% 221,606 10% 181,031 8% 150,000 7% 70,000 3% 8,407 0% 2,241,114 100%

~$4.8 Trillion 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 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

20

Examples

Barriers

BRIAN: A Framework to Assess Competitive Moat Against Amazon Bespoke Products

Regulatory Hurdles

Industry/Business Model

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B

R

I

A

N

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

• • • •

• Large items that don’t ship well (furniture, HVAC, autos) • Low turnover (auto parts, lumber, home improv.)

• Concierge service • Appliances/automechanic installation • B2B relationships

• Prescriptions/Pharma • Personal home/autos • B2B long-term agreements / projects

Pharmaceutical trials Franchise laws Health inspections FCC build out requirements

Sources: Company Data, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

21

Amazon Disruption Symposium

Consumer Retail Where Are We Now?

MORGAN STANLEY RESEARCH North America

Brian Nowak, CFA [email protected] +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

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.

Consumer Retail…Where are We Now?

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

AMZN is Now the Second Largest US Apparel Retailer…

Protected Burberry Channel Gucci Louis Vuitton Lululemon (LULU)

Brand Quality/Perception

High

The Suppliers 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)

Threatened Gap (GPS) J.C. Penney (JCP) Kohl's (KSS) Macy’s (M) Old Navy (GPS) Target (TGT) Walmart (WMT)

Low

Sales Velocity Low

Sources: Company Data, Morgan Stanley Research

High

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

23

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

Source: Company Data, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

24

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

Source: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

25

Consumers Shop for Clothing on Amazon Because of Convenience, Prime Membership/fast-shipping, and its Wide Selection Top Reason for Purchasing Clothes on Amazon 0%

5%

10%

15%

20%

35%

40%

18%

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

12%

Amazon has the widest selection

11%

Amazon has the lowest/best prices

8%

Amazon offers fashionable clothing and the brands I like

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

6%

Amazon offers free returns

6%

Source: AlphaWise, Morgan Stanley Research

30%

36%

Amazon is an easy/convenient shopping experience

A different reason

25%

3%

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

26

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

Source: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

27

Nike and adidas are the Most Purchased Clothing Brands on Amazon

Source: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

28

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

Source: Forrester, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

29

Apparel Lends Itself to Online Shopping: 18-19% of Department Store and Specialty Apparel Sales are Online Today eCommerce penetration has increased ~670 bps for Dept Stores and ~310 bps for Specialty Apparel since 2013 Category Online Sales Penetration (Sales Weighted) 25% 19%

20%

18% 16%

15%

13% 11%

10% 7% 5% 0% Department Stores 2011 Sources: Company Data, Morgan Stanley Research

2012

Specialty Apparel 2013

2014

2015

2016

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

30

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

Subsector EBIT Margin (sales weighted) vs. U.S. eCommerce Retail Sales Penetration 14.0% 11.7%

12.0%

11.7%

10.8%

10.8%

10.0% 8.0%

6.5%

6.8%

10.1%

6.4%

6.0% 4.0% 2.0% 0.0% U.S. eCommerce as a % of Retail Sales

Sources: Company Data, Morgan Stanley Research

Off-price

Specialty Apparel 2006

Department stores

2016

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

31

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

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

32

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

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

Mkt Cap Impacted by Amazon Effect ($bn)

0.0 -0.1 -0.2

-0.2

-0.3

-0.3 -0.3

-0.4 -0.5

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

-0.6 -0.7

-0.7

-0.8

-0.9

-0.8 KIM

REG

FRT

DDR

RPAI

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 ResearchAMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

33

Branded Apparel and Footwear Neutral Exposure

Favorable Exposure

• Retailers with truly differentiated value proposition and strong ecomm platform likely to remain insulated

• Branded wholesalers with value positioning who embrace Amazon opportunity likely to win • CRI, SKX, SHOO

• Exclusive, sought-after product • GOOS, FL

Amazon Fashion Unfavorable Exposure

Mixed Exposure

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

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

• DSW, EXPR

• Premium product will need to be sold through DTC and higher-end wholesale channels • NKE, UA, PVH, VFC

Sources: Company Data, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

34

Consumer Retail: Where Are We Now? Bespoke Products

Regulatory Hurdles

Industry/Business Model

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B

R

I

A

N Most Exposed

REITS Branded Apparel / Footwear Commercial/Retail

Softlines/ Dept. Stores

Most Protected

Off-Price

Brands Embracing

Sources: Morgan Stanley Research

Department Stores

Specialty

Differentiated Brands

Strips

Retailers Competing

Malls

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

35

Amazon Disruption Symposium

Food Retail A 10 Year Journey?

MORGAN STANLEY RESEARCH North America

Brian Nowak, CFA [email protected] +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

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.

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

Sources: Company Data, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

37

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…

Source: AlphaWise, Morgan Stanley Research, Company Data

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

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

38

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) x Avg WFM Gross Margin (post ~6% Price Cut) = Total Gross Profit

Source: Morgan Stanley Research, Company Data

$40.0 30% $12.00

- Pick and Pack

$3.75

- Delivery Wage Costs

$3.60

- Other Delivery Costs (Truck/Fuel/OH)

$2.07

= Order Gross Profit Order Margin

$2.58 6%

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

39

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

Source: AlphaWise, Morgan Stanley Research, Company Data

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

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

40

Consumers Skew 'Unlikely' to Purchase Groceries Online, but Purchase Resistance is Decreasing Likelihood to Order Groceries Online N6M 100%

Very unlikely

90% 80% 46%

41%

38%

41%

36%

48%

Somewhat unlikely

70% 60% 50%

12% 13%

40% 30%

13%

13%

13% 14%

14%

17%

17%

19%

16%

17%

20% 13% 10%

9%

15%

19%

15%

14%

Very likely

7%

0%

Source: AlphaWise, Morgan Stanley Research

15% 12%

17%

2015: Shipped

Somewhat likely

19% 15%

Neither likely nor unlikely

2016: Shipped

2017: Shipped

2015: Picked up 2016: Picked up 2017: Picked up at a store at a store at a store

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

41

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

Source: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

42

E-Commerce as a % of Total Category Sales

E-Commerce as a % of 2016 Sales (US) 12%

% of Global Sales

11%

10% 8% 8% 5%

6%

3%

4%

2%

2%

1%

1%

Packaged Food

Soft Drinks

0% Consumer Beauty & Health Personal Care

Pet Care

Source: Company Data, Euromonitor, Morgan Stanley Research Estimates

Tissue & Hygiene

Home Care

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

43

E-Commerce as a % of Total Company Sales Weighted E-Commerce % of Sales - US 9% ~8% 8%

7% ~6%

6%

5%

~5%

~4% ~4%

4% ~3% 3%

~3% ~2%

~2%

2%

~2%

~2% ~1%

~1%

~1%

~1%

~1%

KHC

KO

PEP

DPS

1%

0% EL

CL

PG

CHD

EPC

ENR

Source: Company Data, Euromonitor, Morgan Stanley Research Estimates

CLX

MDLZ

SJM

GIS

K

CPB

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

44

Food Retail: A 10 Year Journey? Bespoke Products

Regulatory Hurdles

Industry/Business Model

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B

R

I

A

N Most Exposed

Household Products

Wholesome Pet Food

Dollar Stores

Hardlines / Broadlines Sources: Morgan Stanley Research

Food Retail

Food Distributors

Food and Tobacco

Food Retail / Dollar Stores

HPC / Beverages

Most Protected

Packaged Foods

Club

Broadline Retail

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

45

Amazon Disruption Symposium

Amazon’s Impact on the eCommerce Supply Chain

MORGAN STANLEY RESEARCH North America

Brian Nowak, CFA [email protected] +1 212 761 3365

Ravi Shanker [email protected] +1 212 761 6350

Vikram Malhotra [email protected] +1 212 761 7064

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.

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

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

47

AMZN Network Cost per Package Breakeven Analysis

Cost Per Package

$14 $12 $10

UPS/FDX Rev per Package

$8 Est. AMZN Cost per Package

$6

Est. UPS Last Mile Cost per Pkg

$4

USPS Rev per Package

$2 $0

40

60

80

100 120 140 160 Packages per Day per Driver

180

200

Source: Company data, Morgan Stanley Research estimates AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

48

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

Delivery expectations for Free Shipping have Declined

Est. # of Prime Members

100

87 45

80 International

US

60

60 41

40 27 20

0

18

5 13 2013

2014

18

12

8

19

34

28

42

54

62

Avg Expected Wait Time for free delivery in days

105 '16-'18 CAGR US: 21% Int'l: 58% Total: 32%

5.6

5.5

5.4 5.2 5.0

5.0

4.8

4.8

4.6 4.4

2015

2016

2017e

2018e

2012

2014

2016

Source: AlixPartners "Final Mile Delivery, July 2016", Morgan Stanley Research AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

49

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

Amazon's leasing patterns have recently emphasized last-mile warehouses driving proximity to the consumer

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

Avg Population within 10 miles in 000s

1,200

90 80 70 60 50 40 30 20 10 -

1,061

1,000 800

600 400

477 385

200

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-

1999

Amazon Growth of Distribution center space Million of Sq.ft Leased

100

Phase 1: Pre-2009

Phase 2: 2010-13

Phase 3: 2014-16

Source: AlphaWise, Costar, Company documents, various media articles, Morgan Stanley Research AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

50

Omnichannel Benefits from AMZN’s Acquisition of WFM; Warehouse Leasing to Accelerate as AMZN & Peers Compete to Increase Market Penetration The race for space has likely escalated as AMZN will need to significantly increase their warehouse footprint if they want to increase market penetration

Population within 10 miles of store/warehouse (A) Total US Census population in footprint in millions (B)

147

85

164

151

172

290

216

180

221

184

229

324

68%

47%

74%

82%

75%

90%

$103k

$91k

$100k

$85k

$97k

$82k

Millennial Penetration within 10 miles of store or warehouse in millions

35

21

40

36

41

68

Number of stores + distribution centers

~450+

~200+

~650+

~2800+

~500+

~3950+

Market penetration (A divided by B) Avg income within 10 miles

Source: AlphaWise, Costar, Morgan Stanley Research estimates AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

51

Prologis (PLD) Best Positioned Among Industrial REITs

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

PLD's 10 last mile warehouses per million people is 3 times the average of all other REITs 12

Last-mile Warehouses per 1 million people in Top 15 MSAs

10 10 8 6 4

3 2

2

2

2

2

TRNO

LPT

1

0 PLD

EGP

FR

DCT

DRE

Source: AlphaWise, CoStar, Morgan Stanley Research. Note: grey bars are not-covered AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

52

Amazon’s Impact on the eCommerce Supply Chain Bespoke Products

Regulatory Hurdles

Industry/Business Model

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B

R

I

A

N Most Exposed

REITS Commercial / Retail

Transportation

Most Protected

Logistics

Freight Brokers

Parcel

Industrial REITS

Sources: Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

53

Amazon Disruption Symposium

Digging Into Distribution

MORGAN STANLEY RESEARCH North America

Brian Nowak, CFA [email protected] +1 212 761 3365

Jiayan Zhou, CFA [email protected] +1 212 761 5766

Ricky Goldwasser [email protected] +1 212 761 4097

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.

Amazon’s Impact on Industrial and Medical Suppliers

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

Sources: Company Data, Morgan Stanley Research

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

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

55

Industrial Distribution – The Amazon Effect What makes Industrial Distribution an attractive market for Amazon?

1,000 500

Aug-17

Feb-17

Source: Google Trends; Note: Search volumes are relative for the terms presented in the chart; indexed to 100 at start date.

May-17

Nov-16

Aug-16

Feb-16

May-16

Nov-15

Aug-15

Feb-15

May-15

Nov-14

Aug-14

Feb-14

May-14

Nov-13

Aug-13

Feb-13

May-13

Nov-12

Aug-12

May-12

-

3Q17E

1,500

1Q17

2,000

3Q16

2,500

1Q16

Name change from Amazon Supply to Amazon Business

3Q12

3,000

1Q12

W. W. Grainger

3Q11

4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% -7%

Amazon Business

1Q11

Google Trends search indexed

3Q10

GWW Pricing Trend

1Q10

Web Traffic – Amazon Business vs. Grainger

3Q15

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

1Q15



3Q14

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.

1Q14



3Q13

US Industrial Distribution is a large (~$150bn), highly fragmented market, with relatively high margins and low supply chain/ regulatory complexity.

1Q13



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

56

Industrial Distribution – Who’s More Exposed to Amazon? BRIAN Framework for Amazon Disruption: Industrial Distribution Category

Bespoke Products

Regulatory Hurdles

GWW Industrial MRO

More standardized

Relatively Low

Industrial MRO (~65%)

More standardized

Fasteners (35%)

Nonstandardized

HDS

Facility MRO

More standardized

WSO

HVAC

More standardized

Risks High FAST

Industry/ Business Model

Low supplier and customer concentration Low supplier and Relatively Low customer concentration Lower inventory Relatively Low turnover, high SKU Low supplier and Relatively Low customer concentration Bulky items that don't Medium ship well

Low WCC

Source: Morgan Stanley Research

Electrical Equipment

More customized

Medium

Low reliance on retail distribution

Attention Post Sale/ Service Element

Nuances/ Complexities Behind Transaction

Less technical

na

na Less technical na Less technical

Break & fix products, high time sensitivity

Installation required

na

More technical products and valueadded services required (kitting, assembly, prefabrication, etc.)

Large project oriented (~50%)

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

57

Amazon Makes Healthcare Headlines Japan Times 4/19/17

CNBC 5/17/17

CNBC 7/26/17

Bloomberg 9/15/17

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

“Amazon is hiring a business lead to figure out how the company can break into the multibillion-dollar pharmacy market.”

“Amazon has a secret skunkworks lab called 1492, dedicated to health care tech.”

“Earlier, Shop Apotheke Soars on Report Amazon Wants Dutch Online Pharmacy”

“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.”

“Areas of exploration include a platform for electronic medical record data, telemedicine and health apps for existing devices like the Amazon Echo.”

“Currently there are no talks or negotiations with Amazon, online pharmacy company Shop Apotheke says in statement.”

“…Lyons is tasked with building an internal pharmacy benefits manager for Amazon employees, which might be later scaled out” Note: Amazon to our knowledge has not commented on the indicated news reports Source: Japan Times, CNBC, Bloomberg, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

58

Next on Amazon’s List?

Complexity

Pharmaceutical Drugs

Medical Supplies

Frequency of Purchase Source: Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

59

Digging Into Distribution Bespoke Products

Regulatory Hurdles

Industry/Business Model

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B

R

I

A

N Most Exposed

Electrical

Healthcare Services & Distribution

Industrial Conglomerates

Most Protected

Sources: Morgan Stanley Research

HVAC

Pharmaceutical Supply Chain

Facility MRO

Industrial MRO

Medical Supply Supply Chain

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

60

Amazon Disruption Symposium

AlphaWise

MORGAN STANLEY RESEARCH 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

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.

About AlphaWise Links qualitative intelligence with quantitative evidence to give analysts an edge

AlphaWise combines unique data with rich analytics and visualization

MS Analysts harness the power of AlphaWise to highlight meaningful patterns and alphagenerating investment insights

Sources: AlphaWise

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

62

Amazon Related Pieces

Sources: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

63

Grocery is Not a Winner-take-all Industry Sprouts more at risk than Kroger

Online grocer awareness overall low

2016 & 2017: 84%

Room for price-driven share gains

Sources: AlphaWise, Morgan Stanley Research

7 in 10

40%

Non-WFM shoppers see price as main adoption barrier

WFM shoppers not AMZN Prime members

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

64

Increasing Flexibility Over the Last Mile of the Supply Chain Warehouse leasing behavior shifts

WFM expanding the AMZN Network

Distribution and retail footprint of key players

Sources: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

65

Digital Food Delivery is Surging Resizing the total addressable market

2016: $60B

Delivery is replacing dine-in

2017: $220B

12% 40%

2016: 38% 2017: 43%

Competition is on the rise

1. GrubHub: 43% 2. UberEats: 28% 3. Amazon Restaurants: 25% 4. Yelp Eat24: 21%

Sources: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

66

Disrupting Traditional Business Models Amazon’s credit card impact on PLC

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% Sources: AlphaWise, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

67

Amazon Disruption Symposium

Amazon is Everywhere Media, Entertainment, Advertising & Telecom

MORGAN STANLEY RESEARCH North America

Brian Nowak, CFA [email protected] +1 212 761 3365

Benjamin Swinburne, CFA [email protected] +1 212 761 7527

Simon Flannery [email protected] +1 212 761 6432

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.

Behavior Modification 201 Customer Pain Point 1-2 Hour Shipping

Amazon Innovation

Voice IoT Smart-Home

Alexa Echo Products Dash Buttons

Prime Now Last-mile Brick & Mortar

Physical presence

Customer

Prime 1.0 Prime 2.0

Sources: Company Data, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

69

We See Amazon Continuing to Invest in Prime Instant Video

We See Amazon Content Spend Reaching $6bn by 2018

Sources: AlphaWise, Morgan Stanley Research

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

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

70

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

% Using Amazon Prime Video Service

Sources: AlphaWise, Morgan Stanley Research

% Using Netflix Streaming Service

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

71

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

Direct Competition - Today

Indirect Negative Impact

• Subscription music & downloads

• Advertising & marketing budgets

• General entertainment TV & Film viewing • Direct response advertising

Potential Direct Competition • Pay-TV bundles • Sports networks • Concert ticketing • Movie theaters

Amazon is directly or indirectly impacting all 31 of our covered companies.

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 Sources: Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

72

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

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

73

Amazon is Everywhere: Media, Entertainment, Advertising & Telecom Bespoke Products

Regulatory Hurdles

Industry/Business Model

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B

R

I

A

N Most Exposed

Most Protected Search

US Internet

Display

N.A. Telecom

Cable/Sat. & Media

Content

Sources: Morgan Stanley Research

Towers

Streaming

Networks

Satellite

Cable

Exhibitors

Music

Agencies

Telecom

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

74

Amazon Disruption Symposium

Hot Button Industries Disrupted or Protected?

MORGAN STANLEY RESEARCH North America

Brian Nowak, CFA [email protected] +1 212 761 3365

Simeon Gutman, CFA [email protected] +1 212 761 3920

Vincent Sinisi [email protected] +1 212 761 1358

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.

Hot Button Industries: Disrupted or Protected? Bespoke Products

Regulatory Hurdles

Industry/Business Model

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B

R

I

A

N Most Exposed

Travel

Hardline / Broadline Retail

Display

Dollar Stores

Food Retail / Dollar Stores

US Internet

Most Protected

Home Impr.

Sources: Morgan Stanley Research

Auto Parts

Search

Food Distributors

Arts & Crafts

Club

Beauty

Food Retail

Home Furnishings

Broadline Retail

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

76

Amazon Advertising Cometh…

Amazon Sponsored Product Ad Units

Sources: Company Data and Website, Morgan Stanley Research

Amazon Advertising on Kindle Devices

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

77

How Big Could This Business Become?

Advertising is a Growing High Margin Revenue Stream for AMZN Credit Card

'16-'18 CAGR 51%

Advertising

34%

Retail subscriptions

36%

20,000

Amazon Gross Profit ($ mn)

18,000 16,000

13,954 455

12,000

5,280

4,045 9,630 286

10,000 8,000 6,000

2,000

17,811 655

14,000

4,000

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

4,084 157 1,165

6,177 200 1,510

2,951 11,876 9,455 6,393

4,467 2,762

0 2014

2015

2016

2017e

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

2018e

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

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The Best Offense Is A Strong Defense

DIY Auto

Sporting Goods Arts & Crafts Electronics Party Supply

Home Furnishings

Average Basket Price

SKU Count

Inventory Turnover

Average Basket Price

SKU Count

Inventory Turnover

ORLY AAP AZO

$50 $44 $35

23,000 26,000 23,000

1.5x 1.2x 1.4x

WMT TGT COST

$25* $30* $85*

120,000 80,000 3,700

8.4x 5.8x 11.5x

DKS MIK BBY PRTY

$75* $21 $200* $23

45,000* 33,000 5,000* 30,000

3.4x 2.9x 6.0x 2.4x

ULTA SBH GNC VSI

$40 $18 $50 $35

20,000 8,000 2,000 7,000

3.1x 2.2x 2.9x 3.7x

BBBY PIR WSM TCS HOME

$55* $45* $250* $57 $60

30,000* 6,000 10,000* 10,500 50,000

2.6x 2.9x 2.7x 3.7x 1.8x

HD LOW LL TSCO

$57 $65 $1,700 $47

35,000 37,000 400 17,500

5.0x 4.3x 2.1x 3.4x

ODP SPLS

$38* $40

8,000* 7,500

6.8x 7.8x

Discount / Club

Beauty Supply Vitamin Retail

Home Improvement

Office Supply

* Morgan Stanley estimate

Source: Company reports, Morgan Stanley Research

AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2017

79

The Omni-Channel Bullseye: Degrees of Separation From E-Tail Defense • SKU Intensive • Low Inventory Turns • Low Average Purchase Size • Flexibility in Store Base

High Level of Exclusivity

Farm Supply

Beauty Home Furnishings Arts & Crafts

Office Supply Consumer Electronics

High Level of Service

e-tailers

Home Improvement



Risks • Key Item Concentration • Vendor Concentration • Supplier Mindset Product Vulnerability (Exclusivity vs. Service)

Sources: Morgan Stanley Research

High Level of Service

e-tailers

Discount

Sporting Goods

Vitamins / Supplements

DIY Auto

High Level of Exclusivity

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The Most & Least Protected in an Omni-Channel World THREATS (1-3 ranked best to worst) Key Item Concentration Home Improvement

Supplier Concentration

Supplier Mindset

Superior Product Distribution Vulnerability

INSULATION (1-3 ranked best to worst) SKUs, Turns & ASPs

Leverage Leases Point

Omni-Channel Ready

Total 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

Sources: Morgan Stanley Research

182

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Disclosures

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Disclosures

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Disclosures

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Disclosures

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Disclosures

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Disclosures

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© 2017 Morgan Stanley

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