1. Presented by: Vincent Verdier September 2008
Understanding the implications of an economic slowdown over the UK retail industry
Presented by:
Vincent Verdier
September 2008

2. Copyright and Disclaimers
Copyright © 2008 Management Ventures, Inc. All Rights Reserved.
20 University Road, Cambridge, MA USA (617)
No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photography, recording, or any information storage and retrieval system now known or to be invented, without the express written permission of Management Ventures, Inc.
The printing of any copies for back up is also strictly prohibited.
Disclaimers
The analyses and conclusions presented in this seminar represent the opinions of Management Ventures, Inc. The views expressed do not necessarily reflect the views of the management of the retailer(s) under discussion.
This seminar is not endorsed or otherwise supported by the management of any of the companies covered during the course of the workshop or within the following slides.

3. www.MVI-Insights.com Retail Analysis and Planning Tool
Customise to your needs
MyMVI & Alerts ReportBuilder “Save Report”
Plan & analyse using
Insight Centres: Retailer, Channel & Country
Call or to schedule a product training or demo!
Rema Iyer
EMEA Web Product Manager e: p:
6, More London Place, Tooley Street, London SE1 2QY 3

4. MVI: Who We Are, What We Do
MVI is a dynamic global research, training, and consulting company focused on the retail trade sector
Founded in 1988, MVI has research hubs around the globe
Our analyst teams create insights on the tactical and strategic developments of major retailers and their growth markets
We deliver strategic, actionable insights for improving and growing supplier/retailer relationships
We bring our analysis and insights to our clients through a variety of ways – online, onsite, or in an MVI classroom
Our clients are CPG/FMCG suppliers, brand manufacturers, financial institutions, advertising or brand agencies and strategic marketing companies, servicing the retail industry.

5. Benefit from MVI’s Retail Thought Leadership, Research, Insight and Analysis
MVI Onsite
Critical Thinking, Facts and MVI Analysis
MVI Publications
Retail News, Views, and Industry Trends in Our Featured Research
MVI Retail Consulting
Winning Strategies for Global, Market, Channel, Product Lifecycle, Shopper and Customer Management
MVI ShareGroups
The Future of Retailing Focusing on Joint Business Planning, Category Management and Shopper Insights

6. We are at the beginning of a multi-year economic slowdown
“The nice decade is behind us.”
Mervyn King
Governor of the Bank of England
May 2008

7. Across the political spectrum, the Media is feeding further consumer anxiety

8. Today’s Agenda
Evolution of the economic landscape in the UK and its impact on retailers
Understanding the discount channel and its increasing role in this environment
Future outlook and conclusions

9. Evolution of the economic landscape in the UK and its impact on retailers
Pressure on UK financial sector and lower consumer confidence
UK consumers are now more concerned by the “value” proposition
Conclusions

10. The UK financial sector came under pressure in July 2007
Within the space of a few weeks, the multi-billion pound market for mortgage backed securities froze
This was due to the falling value of US property values
The reduction of credit available in this market rolled through to other debt markets across Europe
Available corporate credit evaporated within a manner of weeks
Consumer credit began tightening within the next few weeks

11. The UK economy is directly exposed to a contraction in the financial sector
UK firms were responsible for half of all private equity investment in Europe
About 50% of global derivatives trades went through the UK
8% of GDP is directly linked to financial services with related business services totalling nearly 30% of GDP

12. Credit market contraction has hit consumers through the housing market
The housing market correction is still in a phase where both existing homeowners and first time buyers are suffering.

13. Value of GBP expressed in EUR for the past 2 years
The fall in the value of Sterling has put additional pressure on UK inflation
Value of GBP expressed in EUR for the past 2 years
The Bank of England is limited in its options because of the credit crisis. Normal measures to control the value of Sterling are restricted by pressure to maintain liquidity.
Source: Yahoo Finance

14. Food inflation is now well ahead of other retail price inflation
Year over Year change in %
Consumer prices for food are under pressure from the basket of commodity price increases—both energy costs and raw foodstuffs costs. The last time we saw this kind of separation in inflation, shoppers flocked to the discounters.

15. UK consumer confidence is plunging, as people start to feel the pressure
Consumer confidence index
Source: British Retail Consortium and MVI Analysis

16. The number of unemployed people is expected to rise further
“The BCC expects unemployment to rise by 250,000 to 300,000 over the next two to three years”
FT Article, August 2008
Claimants in ‘000s
Source: The British Chambers of Commerce;
The Financial Times, 18th August 2008

17. UK consumers are cutting back on discretionary expenses
“Once you have covered your essential living expenses, which of the following statements best describes what you do with your spare cash...?”
Source: British Retail Consortium

18. Conclusions for the lagging side of the economic crisis
Things will get worse before they get better
Job losses are just beginning to hit the market
Governments will have to reduce expenditure
The economic engine of the UK is too exposed to the financial sector
Restructuring will take months as banks need to sell assets and change their focus
The government is no longer in a position to export the wealth of the few to the rest of the country
The effect outside of London will worsen later as the government will be slower to react

19. Evolution of the economic landscape in the UK and its impact on retailers
Pressure on UK financial sector and lower consumer confidence
Retailers adapting their messages to the “value” proposition
Conclusions

20. Foodservice businesses which promote convenience and value continue to grow
McDonald’s like for like sales are up 10% and management is looking at selective pricing actions to continue projecting a value image despite cost pressures
Burger King is also showing results slightly ahead of the grocery market

21. Grocery discounters are thriving while premium chains suffer
Notes: Discounters include: Farmfoods , Netto, Iceland, Aldi and Lidl
Notes: Premium retailers include: Marks and Spencer and Waitrose
Source: Retailers and MVI estimates

22. Aldi is ready to capitalise on mass market concerns about prices
Source: Aldi.co.uk, MVI store visits

23. Lidl is using a variety of simple and clear price messages
Source: Aldi.co.uk, MVI store visits

24. And Lidl is now strengthening its convenience positioning
Source: MVI Store visits

25. M&S has began a series of modestly endorsed promotions
Source: MVI Store visits

26. Sainsbury’s is aggressively trying to reposition itself
Source: The Store store visit

27. Pressure is building on Sainsbury’s for another big idea
Results are flagging as consumers look for better value alternatives in this market
Growth plans have been costly for Sainsbury’s bottom line prior to the current economic situation
Clearly things are getting worse
Expect Sainsburys to be a candidate for M&A activity in the coming months

28. Waitrose is taking on other premium competitors
Waitrose is also looking to roll-out a new convenience concept that will go head to head with Sainsburys Local and M&S Simply Food.
Source: MVI Store visits

29. Different strategies for the two extremes of grocery retailing
Discounters
Clear positioning which is to lower the cost of monthly grocery shopping through a combination of price points and price competitiveness
Premium grocers
Taking the fight to foodservice with a hope of capturing aspirations of a quality meal for the family

30. Looking across the mainstream grocers, there is a race to the bottom...
Evolution of like-for-like sales (%)

31. Morrisons has had great success with new promotional messages
Source: MVI Store visits

32. ASDA continues to sharpen its price position
Source: MVI Store visits

33. As the grocery market reference, Tesco is having to pull at all the stops
Source: Tesco

34. Tesco is both reducing the basket and trying to encourage frequency
Source: MVI Store visits

35. Evolution of UK grocery sales by format
180
160
Total £152.4
Total £146.5
4.2
Total £140.3
3.7
6.4
140
Total £134.1
3.2
5.7
Total £127.7
10.0
2.7
5.0
9.9
4.5
2.1
9.8
3.9
11.7
120
9.7
11.4
9.5
11.1
Online
10.7
17.1
10.2
16.1
Discounter
14.8
Grocery Sales (£ billion)
100
13.2
11.9
16.7
Cash & Carry
16.0
15.2
14.6
13.5
Drug 80
Hypermarket 60
Convenience
Supermarket
86.3 40
76.6
78.7
81.2
83.7 20
2006
2007
2008
2009
2010
Source: MVI database

36. Tesco, ASDA and Lidl will be the most successful retailers in the next two years
Note: Sales figures are expressed as GBP Billions
Note: Grocery sales are expressed as the sum of the total grocery formats operated by the retailer (includes online retailing)
Source: MVI database

37. Evolution of the economic landscape in the UK and its impact on retailers
Pressure on UK financial sector and lower consumer confidence
UK consumers are now more concerned by the “value” proposition
Conclusions

38. Conclusions Real incomes are being squeezed
The Bank of England is virtually powerless to stop inflation in the current context
Consumers are very nervous and looking for answers
The Discounters are getting favourable press coverage and accelerating expansion as part of the solution
The mainstream chains are trying to reposition their brands as helping consumers live better in a tough economy (a different type of aspiration than the past decade)

39. Conclusions
Retailers are running to convenience as an added-value during this crisis
The success of foodservice shows that time pressure remains a key issue for UK consumers
New small format concepts in development from Waitrose, Tesco and Morrisons
One-stop shopping from M&S
The discounters will lead growth in the market
This will force more restructuring amongst competitive chains

40. Today’s Agenda
Evolution of the economic landscape in the UK and its impact on retailers
Understanding the discount channel and its increasing role in this environment
Future outlook and conclusions

41. “The worse off people are, the better off we are
“The worse off people are, the better off we are.” Attributed to Anna Albrecht, mother of Aldi founders Karl and Theo
Source: Aldi Nord and Coriolis research report with original quote source unknown

42. Understanding the discount channel and its increasing role in this environment
Discounters business model and key principles
Competing in the UK context
Implications for branded manufacturers

43. There are three types of financial business models in modern retailing
Waitrose, Whole Foods, M&S
MARGIN FOCUS (%)
Tesco, Asda, Sainsbury’s
HYBRID MODEL
GROSS PROFIT FOCUS (£)
Lidl, Aldi, Netto

44. Discounters run on a simple model based on cash margin
Possible units sold X Gross margin = Cash margin
Initial unit forecast made by buyer.
Initial margin forecast made by buyer
Cash margin is estimated at the time of negotiation.
Source: MVI 44

45. Where do discounters save money
Store Staff’s Responsibilities; Full-range retailer vs. Discounter
Full-range retailer
Discounter
RESPONSIBILITIES
Administration
Store Manger
Store
Manger
Payment
Cashier
Sales
Assistant
Stock
Sales Assistant
Low Productivity
High Productivity
High Personnel Costs
Small Personnel Costs
Source: MVI research

46. Simplicity and consistency are at the heart of the model
LIDL UK
LIDL CZECH REPUBLIC
Source: MVI Store visit

47. Understanding the discount channel and its increasing role in this environment
Discounters business model and key principles
Competing in the UK context
Implications for branded manufacturers

48. The Discounter channel in the UK
Discount Supermarkets
Soft Discounter 40
Hard Discounter
Average Number of Shopping Trips Per Year
Single Price Point
Convenience Discount 5
Need
Want
Merchandise Assortment
Source: MVI research 91

49. The discounters face well established local competition in the UK
Premium
Tesco
ASDA
Immediate
Bulk -
Lidl/Aldi/Netto
Discount
Source: MVI Analysis

50. The key for discounters is to get shoppers in the store once
Over the last 7 years Aldi and Lidl have been able to convert roughly 60% of people that would consider the brand to regular users of the brand
Source: BrandZ Millward Brown

51. Discounters still struggle with awareness and loyalty
Source: MillwardBrown BrandZ

52. However, the discounters are making inroads in building their brands
A nationwide survey by the consumer magazine Which? revealed that British consumers already rated Lidl and Aldi more highly than Tesco, Asda, Morrisons and Sainsbury’s. On overall satisfaction the scores were:
Aldi - 66
Lidl - 64
Sainsbury’s - 61
Tesco/ASDA - 58
Morrisons - 56
Note: Score was based mostly on price satisfaction, not overall satisfaction
Source:Which? Survey 2007

53. Discounters have clearly benefited from this changing economic climate
Lidl UK saw May sales increase 14.9% over the prior year
Aldi has stated that in the UK:
Sales are up 17%, while like-for-like sales are up 12% over the previous year
In Q1 2008, traffic is up 25% with the number of ABC1 shopper up 17%
Netto has stated that in the UK:
“Netto is the fastest growing supermarket in the UK with an 11.2% sales increase over the last 12 months.”
Source: The Guardian 17 May 2008 and the Financial Times 24 May 2008, Netto website, based off of AC Nielsen study

54. Master Slide Specs-May 9.ppt
And are accelerating expansion plans to take full advantage of this trend
May 9, 2006
100%
90%
80%
70%
69.4%
All Other Food Formats
74.5%
60%
Discounters
% of new space added
50%
40%
30%
20%
30.6%
25.5%
10% 0%
Source: MVI database

55. Brands are playing a more prominent role in the channel, with Lidl leading the shift
Source: MVI store visit UK May 2008

56. Brands have a much clearer role in the discounter today
Help improve retail brand quality perception
Provide much needed margin to fuel continued growth
Promotional activity to drive traffic
Lidl has adapted its strategy to incorporate brands and branded promotions.
Offset the cost of promotions through requiring them to be on pallets
For non-palletised SKUs, created additional promotional space in store

57. Understanding the discount channel and its increasing role in this environment
Discounters business model and key principles
Competing in the UK context
Implications for branded manufacturers

58. Discounters are gaining share: implications
Discounters’ positioning is made of simple, value related messages
Branded manufacturers will see most of their growth coming from this channel
Understanding what types of SKUs discounters are interested in
Branded manufacturers are facing challenges across all components of the marketing mix:
Price
Product
Place
Promotion

59. Today’s Agenda
Evolution of the economic landscape in the UK and its impact on retailers
Understanding the discount channel and its increasing role in this environment
Future outlook and conclusions

60. The UK economy is experiencing a major correction following 10 years of growth
This is a crisis in a relative sense
Even as this gets worse, people will generally remain richer than ever before
There is still a possibility that the private sector can restructure itself in the coming months
People are trading down, yes... BUT
These discounts stores are much better than what they used to be

61. For retailers, keeping shoppers in-store is the number one concern
Fragmentation of shopping trips is reaching new heights, impacting both frequency and average basket value
Higher promotional activity is taking place within the Top 4 retailers
Shift from more complex marketing messages to simple price cutting activities

62. Key growth categories will shift from what we saw over the last couple of years
Product
The rise of premium products will slow down or even come to a halt. Organics and other added-value products will make space for mainstream ranges (branded, private label)
Frozen food sales are on the rise again
Price
Mass-market retailers and discounters will further communicate on their price competitiveness. Simple communication messages is key
Place
More convenient shopping trips will further take shares out of the bigger stores
Promotion
Strong promotional activity on KVIs, while premium products will only offer tactical opportunities

63. EMEA Headquarters 6 More London Place Vincent Verdier Tooley Street
London SE1 2QY
Vincent Verdier
Analyst