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Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Management Ventures, Inc. Understanding the implications of an economic slowdown.

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Presentation on theme: "Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Management Ventures, Inc. Understanding the implications of an economic slowdown."— Presentation transcript:

1 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Management Ventures, Inc. Understanding the implications of an economic slowdown over the UK retail industry Presented by: Vincent Verdier September 2008

2 1-2 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-3 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Retail Analysis and Planning Tool Customise to your needs MyMVI & Alerts ReportBuilder Save Report Plan & analyse using Insight Centres: Retailer, Channel & Country Rema Iyer EMEA Web Product Manager e: p: , More London Place, Tooley Street, London SE1 2QY Call or to schedule a product training or demo!

4 1-4 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-5 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Benefit from MVIs 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 1-6 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-7 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Across the political spectrum, the Media is feeding further consumer anxiety

8 1-8 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Todays 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 1-9 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-10 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-11 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-12 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-13 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI The fall in the value of Sterling has put additional pressure on UK inflation 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. Value of GBP expressed in EUR for the past 2 years Source: Yahoo Finance

14 1-14 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Food inflation is now well ahead of other retail price inflation Consumer prices for food are under pressure from the basket of commodity price increasesboth energy costs and raw foodstuffs costs. The last time we saw this kind of separation in inflation, shoppers flocked to the discounters. Year over Year change in %

15 1-15 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI UK consumer confidence is plunging, as people start to feel the pressure Consumer confidence index Source: British Retail Consortium and MVI Analysis

16 1-16 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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, 18 th August 2008

17 1-17 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-18 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-19 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-20 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Foodservice businesses which promote convenience and value continue to grow McDonalds 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 1-21 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Grocery discounters are thriving while premium chains suffer Source: Retailers and MVI estimates Notes: Discounters include: Farmfoods, Netto, Iceland, Aldi and Lidl Notes: Premium retailers include: Marks and Spencer and Waitrose

22 1-22 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Aldi is ready to capitalise on mass market concerns about prices Source: Aldi.co.uk, MVI store visits

23 1-23 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Lidl is using a variety of simple and clear price messages Source: Aldi.co.uk, MVI store visits

24 1-24 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI And Lidl is now strengthening its convenience positioning Source: MVI Store visits

25 1-25 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI M&S has began a series of modestly endorsed promotions Source: MVI Store visits

26 1-26 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Sainsburys is aggressively trying to reposition itself Source: The Store store visit

27 1-27 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Pressure is building on Sainsburys for another big idea Results are flagging as consumers look for better value alternatives in this market Growth plans have been costly for Sainsburys 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 1-28 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-29 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-30 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Looking across the mainstream grocers, there is a race to the bottom... Evolution of like-for-like sales (%)

31 1-31 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Morrisons has had great success with new promotional messages Source: MVI Store visits

32 1-32 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI ASDA continues to sharpen its price position Source: MVI Store visits

33 1-33 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI As the grocery market reference, Tesco is having to pull at all the stops Source: Tesco

34 1-34 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Tesco is both reducing the basket and trying to encourage frequency Source: MVI Store visits

35 1-35 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Evolution of UK grocery sales by format Total £ Online Discounter Cash & Carry Drug Hypermarket Convenience Supermarket Grocery Sales (£ billion) Total £134.1 Total £140.3 Total £146.5 Total £152.4 Source: MVI database

36 1-36 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Tesco, ASDA and Lidl will be the most successful retailers in the next two years Note: Sales figures are expressed as GBP Billions Source: MVI database Note: Grocery sales are expressed as the sum of the total grocery formats operated by the retailer (includes online retailing)

37 1-37 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-38 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVIConclusions 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 1-39 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVIConclusions 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 1-40 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Todays 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 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Management Ventures, Inc. 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 1-42 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-43 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI There are three types of financial business models in modern retailing MARGIN FOCUS (%) GROSS PROFIT FOCUS (£) HYBRID MODEL Waitrose, Whole Foods, M&S Tesco, Asda, Sainsburys Lidl, Aldi, Netto

44 1-44 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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

45 1-45 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Where do discounters save money Administration Payment Stock Store Manger Cashier Sales Assistant Sales Assistant Store Manger Full-range retailer Discounter RESPONSIBILITIES Low ProductivityHigh Productivity High Personnel CostsSmall Personnel Costs Store Staffs Responsibilities; Full-range retailer vs. Discounter Source: MVI research

46 1-46 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Simplicity and consistency are at the heart of the model Source: MVI Store visit LIDL UK LIDL CZECH REPUBLIC

47 1-47 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-48 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI The Discounter channel in the UK NeedWant Average Number of Shopping Trips Per Year 5 40 Merchandise Assortment Source: MVI research Single Price Point Hard Discounter Soft Discounter Convenience Discount Discount Supermarkets

49 1-49 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Source: MVI Analysis The discounters face well established local competition in the UK Bulk Immediate Premium Discount Tesco ASDA Lidl/Aldi/Netto

50 1-50 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI The key for discounters is to get shoppers in the store once Source: BrandZ Millward Brown 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

51 1-51 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Discounters still struggle with awareness and loyalty Source: MillwardBrown BrandZ

52 1-52 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 Sainsburys. On overall satisfaction the scores were: Aldi - 66 Lidl - 64 Sainsburys - 61 Tesco/ASDA - 58 Morrisons - 56 Note: Score was based mostly on price satisfaction, not overall satisfaction Source:Which? Survey 2007

53 1-53 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-54 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI And are accelerating expansion plans to take full advantage of this trend Source: MVI database All Other Food Formats Discounters % of new space added 25.5% 30.6% 74.5% 69.4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

55 1-55 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Brands are playing a more prominent role in the channel, with Lidl leading the shift Source: MVI store visit UK May 2008

56 1-56 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-57 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-58 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-59 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI Todays 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 1-60 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-61 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 1-62 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.eu © 2008 MVI 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 Thank You!... A Partner in Your Success Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.com © 2008 MVI Vincent Verdier Analyst EMEA Headquarters 6 More London Place Tooley Street London SE1 2QY


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