Struct ctural l ch chang nges in in fo food od an and d gr - PowerPoint PPT Presentation

Struct ctural l ch chang nges in in fo food od an and d gr groc ocery y mar arket an and d the pot otent ntia ial l im impact ct of of Brexi xit Richard Lim, CEO, Retail Economics

There was significant growth in the number of food stores throughout the UK… 10.0% 9.2% 9.2% 9.0% 7.6% 8.0% % change year-on-year 6.4% 6.0% 5.4% 5.4% 5.0% 3.8% 4.0% 2.0% 0.3% 0.1% 0.0% -2.0% -2.3% -4.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Retail Economics, Company reports

A reduction in household disposable income put a focus on value… 10.0 8.0 % growth - year-on-year 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Company reports

Consumer-driven structural changes Physical channel shift Digital Experience channel economy shift Structural Change Lifestyle Discounters

Physical channel shift 100% 5.4% 6.4% 4.4% 5.6% 90% 6.2% 10.8% 80% 21.0% 70% 21.7% 60% 50% 40% 62.9% 30% 55.4% 20% 10% 0% 2014 2017 Supermarket Convenience Discount Online Other Source: IGD

Higher frequency of shopping has reduced average basket values… Annual food shopping trips per buyer Average basket value (£ - volumes) 190 £22.00 +14.3% more -8.2% shopping trips 179 average £21.18 180 basket value £21.00 170 160 £20.00 157 £19.45 150 £19.00 140 130 £18.00 2013 2018 2013 2018 Source: Nielsen Homescan

Online food sales have more than doubled from 2010 to 2017… 15,000 8.0% 6.9% 13,000 7.0% 11,000 6.0% % of food sales online 10,032 9,000 5.0% Online food sales (£m) 4.4% 7,000 4.0% 3.5% 6,103 5,000 3.0% 4,416 3,000 2.0% 1,000 1.0% 2010 2013 2017 -1,000 0.0% Online Food (£m) LHS Penetration online food (%) RHS Source: Retail Economics

Comparisons of market share shift – Big Four versus Discounters 14 78 12 76 Market Share of discounters (%) Market Share of Big Four (%) 10 74 8 72 6 70 4 68 2 66 0 64 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Aldi and Lidl Big Four Source: Kantar Worldpanel

A period of strategic transformation.. Reshaping cost base New markets Differentiated Strategic and new proposition transformation strategic partnerships Accelerating convenience and ecommerce

The convenience market has become much more competitive as multiples grow market share... 50,000 +11% 2,277 45,000 2,535 +32% 3,756 32% 4,940 40,000 +3% 8,377 35,000 Number of stores 8,593 -9% 30,000 13,538 25,000 12,378 20,000 -7% 15,000 10,000 18,826 17,816 5,000 0 2013 2018 Independent Symbol Group Forecourt Multiple Co-Operative Source: Retail Economics, ACS

Own- label versus brands… 100% 90% 80% 45% 55% 55% 70% 67% 74% 60% 50% 40% 30% 55% 45% 45% 20% 33% 26% 10% 0% Chilled food Frozen food Dairy Canned food Ambient food Own label Brands Source: The Grocer

T esco, Sainsbury’s and Morrisons have reduced their workforce for the last three years… 3.0% 2.6% 2.0% % change year-on-year 2.0% 1.8% 2.0% 1.8% 1.6% 1.1% 0.9% 1.0% 0.0% -0.4% -0.5% -1.0% -2.0% -2.4% -3.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Company reports, Retail Economics analysis

Driven by concerns over Brexit… 49% Brexit 49% 16% Lack of savings 12% 11% Repayment of debts and loans 8% 9% Weaker economy 14% April 2019 6% Weaker job security 5% January 2019 4% Rising interest rates 6% 6% Rising inflation 6% Source: Retail Economics

Food and drink imports into the UK… £48 billion Source: Retail Economics

Most food imports are from the EU… £14 billion Non-EU £34 billion EU

EU is by far the largest import market for the UK… Top op 10 10 Wor orldwide ldwide Mark rkets ts Irish Republic 9% Germany 10% Chile France India 1% Rest of World 10% 1% EU EU Spain 15% Brazil 7% 72% 72% Netherlands 1% Italy 12% China 6% 1% New Zealand 2% Thailand Other EU Belgium 2% South Africa US Denmark Poland 5% 5% 2% 3% 3% 4%

UK food retailers will face the highest new tariffs from the EU… 30% 27% 25% Average weighted tariff 20% 15% 11% 10% 10% 4% 5% 0% Non-Food Cars Apparel Food and Drink

Cost of sourcing food from EU in event of no-deal rises by: £9.3 billion Source: Retail Economics

Hard Brexit would have a significant impact on the UK economy… Unemployment forecast Inflation forecast Source: Bank of England

Cost of sourcing food from EU in event of no- deal rises by… £1 billion Source: Retail Economics

UK no-deal tariff rates and TRQs UK no-deal ta tariff rate rates an and TRQ RQs fo for r sele lected ite items Tar ariff iff cod ode Product EU MFN rate UK MFN rate UK TRQ 02012020 Fresh beef quarters 12.8% + 6.8% + 93 euro/tonne 125,000 tonnes (for all 176euro/tonne fresh/ chilled beef products 04 04051011 Naturel butter in packs 189.6 euro/100kg 60.5 euro/100kg N/A 04 04069021 Cheddar cheese 167.1 euro/100kg 22.1 euro/100kg N/A

What should we focus on… 1. Tariffs rates need to change following a ‘no - deal’ Brexit to combat price rises [Bank of England projections] 2. The government is proposing to scrap most tariffs at least for a temporary period 3. Tariff reductions will reduce the cost of importing from outside the EU 4. Large non-EU agricultural producers will benefit from significant reductions in food and drink tariffs 5. EU meat and dairy suppliers will face new duties

Are retailers prepared for a no-deal scenario?

Are retailers prepared?... 36% Very under Little to no prepared preparation

Retailers’ biggest concerns are… 64% 56% 52% 44% Supply chain management Labour (availability and Tariff costs Continuity of supply cost)

Final thoughts… • Outcome of Brexit remains uncertain but retailers’ attentions focused on their core business • Priorities are on: o Fewer stores and repurposing space o Driving efficiency through simpler business models o Scale though partnerships and acquisition (maybe?) o Store-in-store concept to drive footfall o Fewer workers and utilising technology o Driving online convenience – Uber Eats, Deliveroo, Just Eat • Pivoting business models to more sustainable footing

Get in touch richard.lim@retaileconomics.co.uk +44(0)20 3633 3698 www.retaileconomics.co.uk