Retail Sector: Global and Mexican highlights of the supermarket & hypermarket industry. Selected information about the supermarket retailing industry

Transcription

1 Retail Sector: Global and Mexican highlights of the supermarket & hypermarket industry Selected information about the supermarket retailing industry July 2015

2 Index Introduction... 3 Industry Definition... 4 Global Supermarket Industry... 5 Retail Overview... 6 Consumer Behavior... 8 Food & Grocery Market Mexican Supermarket Industry Retail Overview Channel Performance Commercial Structure Consumer Profile Megatrends Bibliography Annex About KC Reach us

3 Introduction The global economic setbacks undergone in the past years have had a direct impact on consumer s disposable incomes, which as a result incited an inhibition when consuming. Nevertheless, the retail channel has managed to achieve growth, particularly in the food and grocery category. By 2013, hypermarkets, supermarkets & hard-discounters recorded a value of 3,104 billion USD in the previously mentioned category, and by 2018 they are expected to rise up to 3,857 billion USD. The top 5 fastest growing retail channels worldwide, ranked by the CAGR from 2013 to 2018, are expected to be online retailers with a CAGR of 12.1%, convenience stores with 8.3%, duty free retailers with 6.4%, hypermarkets, supermarkets & hard-discounters with 4.4% and department stores with 4.2%. In Mexico, the overall retail sales grew from 3,394.3 billion MXN in 2008 to 4,027.5 billion in 2013, at a CAGR of 3.5%. It is forecasted that by 2018, sales will reach 5,032 billion MXN representing a CAGR of 4.5% between 2013 and Moreover, during 2013 the largest retail channel group for Mexico was general retailers, contributing with 54.5% (2,195.9 billion MXN) of the total Mexican retail sales, and the largest category group within this segment was food and grocery by signifying over69.7% of the total Mexican retail sales by Hypermarket, Supermarket and Hard-discounters are the largest group by sales value among the general retailers in Mexico. From 2008 to 2013, this channel equated to a share of 48.3% of the total general retailers market. In 2013, it represented retail revenues of 1,060,858.6 million MXN and is estimated to increase to 1,346,712.2 million MXN by This study is based on an overview of the global and Mexican stage of retail, consumer behaviour, household consumption and food & grocery market with a highlight on the impact of the Hypermarket, Supermarket and Hard-discounters industry. At the end of this publication you will find the megatrends that influence the future of the industry such as technological breakthroughs, demographic shift and shifts in the global economic power. 3

4 Industry Definition Channel: Hypermarket, Supermarket and Hard-discounters Main products In this retail channel, the products mainly commercialized are: Hypermarkets and mass merchandisers include all sales through retailers, with floor areas over 2,500 square meters that carry full lines of both grocery and general merchandise. Supermarkets include all sales through retailers with floor areas of 300 2,500 square meters that offer a wide, departmentalized range of groceries, and may carry some general merchandise lines. Hard Discounters include all sales through retailers that are engaged in the sale of grocery items and which have a stocking policy that focuses on a high private label share, low prices and often a relatively limited number of stock keeping units (SKUs) offered within a channel. Such retailers are also known as food discounters. 1 Beverage (including alcohol) Frozen foods Dairy Products Fruit and Vegetables Drugs and Health products Other food items Fresh and frozen meat Other non-food items Source: IBIS 1 Conlumino 4

5 Global Supermarket Industry Retail Overview Retail Sales by Region Europe holds the largest number of companies by region from the Top 250 retailers worldwide, followed by North America with 88 companies. Albeit, both regions represent the highest percentage of retail business in the world, they also were the smallest growing areas in Their composite growth rate in 2013 was 2.6% for Europe and 3.1% for North America. Retailers have seen a slower growth pace in their top-line revenue since 2009, but on the bright side, profitability saw some improvement in contrast with 2012, letting Europe reach a 3.2% net profit margin, as well as North America with a reported 3.5%. Nonetheless, the region that makes a better use of its resources was North America, with a Return on Assets (ROA) of 6.8% versus 4.5% in Europe. Japanese retailers had a 10% increase on their sales, which was the force behind the robust growth presented in the Asia-Pacific region and its 9.7% retail revenue. The second fastest growing region in 2013 was Latin America, where almost all of its retailers reported having increasing sales. Latin America saw a 10.4% growth on the composite revenue, but do not makes as good use of its resources, with a ROA of only 3.3%, however, both sales growth and profitability for the region declined from their 2012 levels. The most profitable region in 2013 was Africa and Middle East with 4.7% on their net profit margin and 15.2% of retail revenue growth. Moreover, the six publicly held retailers in this region stated having a profitable year Global Retail Sales growth and profitability by region (%), Africa/Middle East Asia/Pacific Other Asia/Pacific Europe Latin America North America retail revenue CAGR 2013 retail revenue growth 2013 net profit margin 2013 ROA Source: STORE Magazine 2 STORE Magazine 5

6 Retail Sales by Sector The retail product s segment is divided in four: apparel & accessories, fast-moving consumer goods (FMCG), hardline & leisure goods and diversified. In 2013, the most important phenomenon was the fact that hardline retailers outpaced FMCG, the product segment that had been in the first place over the past years. FMCG still dominated in number and size of companies, by 2011 and 2012 this sector had a significant higher growth in comparison with other product groups, but in 2013 both softlines and hardlines had a bigger impact in terms of growth rates. FMCG accounted for 22 billion USD in retail revenue by 2013, and had a composite retail revenue growth of 4% plus a steady net profitability margin of 2.8%. Businesses in this sector are the least geographically dispersed, having operations in only 4.9 countries and 40% of them operate only within their domestic borders. The fastest-growing product group was Apparel & Accessories, reporting a 5.8%composite revenues growth, and even though the group of companies working in this segment is relatively small in size, they had average retail revenue of 9.1 billion and have the largest geographical dispersion. They have positioned themselves across more than 27 countries and generated one-third of their revenue internationally. Same strategy also used by many retailers of hairlines and leisure goods, who have operations in 8.7 countries and also generated one-quarter of their total retail revenues outside their headquarters. This sector saw an improvement in both top-line sales and bottom-line profits, having a composite retail revenue growth of 5.3% and a net profit margin of 3.8%. On the other side, there is the smallest group, Diversified retailers, which has a broad product offering and companies within this segment have an average size of 16 billion USD. However, this sector has been underperforming compared with the others recently, and shows a composite revenue growth of only 1% and a net profit margin of 2.1%. 3 Global Retail Sales growth and profitability by product sector (%), retail revenue CAGR 2013 retail revenue growth 2013 net profit margin 2013 ROA Apparel&Accessories Hardlines&Leisure Goods Fast-Moving Consumer Goods Diversified Source: STORE Magazine 3 STORE Magazine 6

7 Index Consumer Behaviour Consumer Confidence The Nielsen Global Survey of Consumer Confidence and Spending Intentions around the World, gives a detailed insight on a consumer confidence level, which is measured above and below a baseline of 100, indicating degrees of optimism and pessimism, respectively. For the second quarter of 2014, the consumer confidence index increased one index point to 97, following stagnation in 2013 were the index remained unchanged at a level of 94. In comparison with the first quarter of 2014, regional consumer confidence increased in North America (103) and Europe (77), rising three and two points, respectively. But the index saw its highest levels in the Asia-Pacific region where it scored 106. On the other side, confidence decreased in Latin America (90) and Middle East and Africa regions (93), falling three points and one point, respectively. The countries with the highest levels of confidence were India (128), Indonesia (123) and Philippines (120). As for the lowest levels, Portugal had the first place with 48, followed by Slovenia with 49, and Croatia with 50. In the case of Mexico, there was a one point declination during the same period, going from 86 to 85 points. 4 Top 10 countries by Consumer Confidence Index (Q2 2014) Source: Nielsen 4 Nielsen 7

8 Household Consumption In 2013, the global household final consumption continued to have a growing tendency, except of some countries where the levels remained steady or decreased compared to the previous year. The United States was the number one consumer worldwide with aproximately 11,000 trillion USD (current 2005 USD) of consumption, according to World Bank. The second biggest consumist country, normally belonged to Japan, but over this year China took this place accounting for aproximately 3,000 trillion USD ( current 2005 USD). Japan had a setback on his expediture levels in comparaison with the figures reported in 2012, going from 3,631 trillion USD in 2012 to 3,007 trillion USD in As a result, China became the second biggest consumer. Mexico gained a position between 2012 and 2013, going from 790 billion USD in 2012 to 869 billion USD in This made Mexico go up one place within the list of the biggest consumer countries, Household final consumption expenditure in trillion from 13 th to 12 th. 5 United States (1 st ) 11,484 Germany (4 th ) 2,086 China (2 nd ) 3,446 Mexico (12 th ) 869 Japan (3 rd ) 3,007 Brazil (7 th ) 1,406 Source: World Bank 5 World Bank 8

9 Billion USD Food & Grocery Market Value For the food and grocery retail, the top 5 biggest channels by value in 2013 were convenience stores & gas stations, hypermarket, supermarkets & hard-discounters, food & drinks specialists, cash & carries & warehouse clubs and value, variety stores & general merchandise retailers. The convenience stores & gas stations recorded a value of 3,165 billion USD in 2013 while the hypermarkets, supermarkets & hard-discounters recorded a value of 3,104 billion USD. However, the landscape is expected to change in The online retailers will take the place of value, variety stores and general merchandise retailers and will become the fifth biggest channels for food and grocery retail. The top 4 will remain the same. The convenience stores & gas stations will reach a value of 4,712 billion USD, followed by the Hypermarkets, supermarkets & hard-discounters and food & drinks specialists, each with a value of 3,857 billion USD and 2,332 billion USD respectively. 6 Top 4 largest channels by value in billion (USD), 2013 & ,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, ,165 4,712 3,104 3,857 1,922 2, * * * * Convenience Stores & Gas Stations Source: Conlumino Hypermarkets, supermarkets & harddiscounters Food & Drinks Specialists Cash & Carries and Warehouse Clubs *forecast 6 Conlumino 9

10 CAGR (%) Compound Annual Growth Rate (CAGR) The top 5 fastest growing channels, ranked by the CAGR from 2013 to 2018 are expected to be online retailers with a CAGR of 12.1%, convenience stores & gas stations with a CAGR of 8.3%, duty free retailers with a CAGR of 6.4%, Hypermarkets, supermarkets & hard-discounters with a CAGR of 4.44% and department stores with a CAGR of 4.2%. The online retailers, convenience stores & gas stations and duty free retailers are expected to reach even higher CAGRs compared to their CAGRs of Hypermarkets, supermarkets & hearddiscounters and department stores are the new entrants in this ranking, taking the places of value, variety stores & general merchandise retailers and food & drinks specialists. 7 Top 5 fastest growing channels in CAGR (%), % 12% 12.1% 10% 8% 6% 8.3% 6.4% 4.4% 4.2% 4% 2% 0% Online Retailers Source: Conlumino Convenience Stores & Gas Stations Duty Free Retailers Hypermarkets, supermarkets & Hard-discounters Department Stores 7 Conlumino 10

11 Billion USD Leading Countries The largest market for hypermarkets, supermarkets & hard-discounters segment is the US. The top 5 countries by channel sales for food and grocery market in 2013 were the US with a total sale of 854 billion USD, China with a total sale of 318 billion USD, Japan with a total sale of 228 billion USD, France with a total sale of 165 billion USD and Germany with a total sale of 156 billion USD. However, Brazil with a channel sale of 188 billion USD is forecasted to take the place of Germany and become the fifth countries with the largest channel sales in The other top 4 will remain the same. The channel sales of the US will reach 960 billion USD, followed by China with 581 billion USD, Japan with 263 billion USD and France with 196 billion USD. Hypermarket, supermarkets & hard-discounters with a market share of 36.2% in 2013 contributed partly to the rapid growth in the global food and grocery retail sector. The convenience and online channels, which cater more effectively to modern shopping behavior, have become the biggest competitors of the hypermarket, supermarkets & hard-discount segment. In addition, the growth of the channel sale is expected to benefit from the expansion plans of major retail chains to underpenetrated and unorganized developing markets. A new shopping experience and wider range of product offers also appeal to the consumers in the developing markets. 8 1,200 Top 4 countries by sales in the Food & Grocery Market in billion (USD), 2013 &2018 1, * * * * US China Japan France Source: Conlumino *forecast 8 Conlumino 11

12 Mexican s Supermarket Retail Overview Retail by channel group The overall Mexican retail sales grew from 3,394.3 billion MXN in 2008 to 4,027.5 billion in 2013, at a CAGR of 3.5%. The forecast for this segment in the country is to growth with a CAGR of 4.5 between 2013 and 2018 and reach 5,032 billion MXN in 2018.The retail channel is commonly divided in the following categories: general retailers, specialist retailers, value retailers and online retailers (see Annex). In 2013, general retailers were the largest channel group, contributing with 54.5% (2,195.9 billion MXN) of the total Mexican retail sales. Moreover, the fastest growing channel group, from 2008 to 2013, was online retailers with a CAGR of 19.2% and an expected CAGR ( ) of 19.1%. 9 Mexico s overall retail sales by channel group in billion (MXN), Channel group * 2015* 2016* 2017* 2018* CAGR * General retailers 2, , , , , , % Specialist retailers 1, , , , , , % Value retailers % Online retailers % Total 4, , , , , , % Source: Canadean Retail by categories During 2013, food and grocery signified the largest category group for retail sale, accounting for 69.7% of total Mexican retail sales, which represented a value of 2,808.1 billion USD and in 2018 is forecasted to account for 3,578.3 billion MXN. The Music, video and entertainment software category was the fastest-growing category group between 2008 and 2013 with a CAGR of 7.2% and a projected CAGR ( ) of 8.6%. 10 Mexico s overall retail sales by category group in billion (MXN), Category group * 2015* 2016* 2017* 2018* CAGR * Food & grocery 2, ,943 3, , , , % Apparel, accessories, Luggage & Leather goods % Electrical & electronics % Home & garden products % Furniture and floor coverings % Books, new & stationery % Music, video & entertainment software % Sports & leisure equipment % Total 4, , , , , , % Source: Canadean *forecast 9 Canadean 10 Canadean 12

13 Largest Category Group Food & Grocery was the largest category group with a share of 69.7% (2,808,060 million MXN) of the total Mexican retail market throughout In sales value, this category is expected to remain the largest in the following years, and reach by 2018 a sales value of 3,578,335.3 million MXN at a CAGR ( ) of 5%. Food & Grocery products are mainly commercialized through the General retailer s channel, as from the total sales of the category in 2013 (2,808,060 million MXN), 1,907,837.1 million MXN were reported to be generated in this channel. By 2018, it is forecasted that General retailer s will signify 2,555,679.1 million MXN in sales with a CAGR ( ) of 6%. Nonetheless, the fastest growing channel between 2013 and 2018 will be Online retailers, going from 1,225.4 million MXN to 3,014.7 million MXN at a CAGR ( ) of 19.7%. 11 Channel group Mexico s Food & Grocery retail sales by channel group in million (MXN), * 2015* 2016* 2017* 2018* CAGR * General retailers 1,907, ,011, ,129,413 2,255, ,402, ,555, % Specialist retailers 862, , , , , , % Value retailers 36, , ,572 41, , , % Online retailers 1, , , , , , % Total 2,808, ,941, ,085, ,242, ,410, ,578, % Source: Canedean *forecast Largest Channel Group With a contribution of 54.5% of the total retail sales in the country, General retailers registered sales revenues of 2,195,916.3 million MXN in This channel is estimated to grow at a CAGR of 5.9% between 2013 and Within the General retailers channel group, Hypermarkets, supermarkets and hard-discounters was the largest channel contributing 48.3% towards the channel group revenues in 2013, with sales of 1,060,858.6 million MXN, which are expected to reach 1,346,717.2 million MXN by Convenience Stores followed with a share of 44.2% or 969,579.1 million MXN in 2013, which is projected to rise up to 1,359,427.8 million MXN by Mexico s General Retailers Sales in million (MXN), Channel group * 2015* 2016* 2017* 2018* Hypermarkets, supermarkets & hard discounters Convenience stores CAGR * 878, , , , ,012, ,060, % 779, , , , , , % Department stores 70, , , , , , % Other general & non-specialist direct retailers 63,394 5, , ,287 6, , % Vending machines 5, , , ,287 6, , % Total 1,796,196 1,819, ,888, ,989, ,086, ,195, % 11 Canadean 12 Canadean Source: Canadean +forecast 13

14 Channel Performance Hypermarket, Supermarkets & Hard-discounters From 2008 to 2013 the first largest group by sales value among general retailers was the hypermarket, supermarkets & hard-discounters, which equated to a share of 48.3% of the overall general retailers market. Between 2013 and 2018, it is forecasted that the sales of hypermarkets, supermarkets and hard-discounters will be surpassed by the sales of convenience store channel, with hypermarkets, supermarkets & hard-discounters representing 46.2% of the market share and the convenience store accounting for 46.5%. 13 In 2013, the hypermarkets, supermarkets and hard-discounters channel recorded retail revenues of 1,060,858.6 million MXN and is estimated to increase to 1,346,717.2 million MXN by 2018 at a CAGR of 4.9% over the forecasted period. The Food & Grocery category group was the largest revenue source for the retail channel in 2013, generating revenues of 878,423.4 million MXN (82.8%), followed by home and garden products with revenues of 72,158.5 million MXN (6.8%). By 2018, it is forecasted that food & grocery will remain the leading revenue source for the channel, generating 1,119,453.5 million MXN (83.1%). 14 Mexico s Hypermarkets, Supermarkets & Hard-Discounters sales by category group in million (MXN), Category group * 2015* 2016* 2017* 2018* Food & grocery 878, , , ,014, ,068,524 1,119, % Apparel, accessories, Luggage & 72, , , ,893 78, , % Leather goods Electrical & electronics 48, , , , , , % Home & garden 35, ,878 39, , , , % products Furniture and floor coverings 13, , , , , , % Sports& leisure 6, , , , , , % equipment Books, new & stationery 3,545 3, , ,862 3, , % Music, video & entertainment 2, ,371 2, , , ,106 7% software Total 1,060, ,111, ,166,473 1,222,494 1,284,883 1,346, % CAGR * Source: Canedean +forecast 13 Conlumino 14 Canadean 14

15 Commercial Structure 15 The Mexican commercial structure is mainly divided in three segments: Supermarkets, Department Stores and Specialized shops. The number of stores that these segments accounted for together in 2014 was 40,056, from which 32,573 belonged to specialized shops, 5,428 to Supermarket and 2,055 to department stores. Mexican commercial structure in N of stores, % 32,573 14% 5,428 5% 2,055 Source: ANTAD Supermarket Department stores Specialized shops Mexican commercial structure in thousands of (M 2 ), % 5,661 19% 4,826 58% 14,378 Regarding the space the above mentioned segments occupied in 2014 was 24,864 square meters. Supermarkets represented the largest share of this figure with 14,378 M 2 (58%). Source: ANTAD Supermarket Department stores Specialized shops Mexican commercial structure in N of jobs, 2014 Moreover, this sort of commerce creates a large amount of jobs in the country. Just in 2014, the sector generated 733,430 direct jobs. 397,238 were given by supermarkets, 198,392 by department stores and 137,800 by specialized shops. 27% 198,392 19% 137,800 54% 397,238 Source: ANTAD 15 ANTAD Supermarket Department stores Specialized 15 shops

16 Million MXN 5,252 5,948 6,465 7,093 7,715 8,210 8,056 8,968 9,809 10,348 10,818 % 2002=100 Consumer Profile Consumer confidence The global economic recession had a significant impact in, and its consequences could be palpable in the household consumption and savings. The lowest pick point for the economy was in 2009, but before the years that follow the economic crisis, Mexican households had a continuous growth in their purchasing power with growth in annual disposal income. Therefore, the overall consumption of basic goods (clothing and footwear, household appliances, and consumer electronics and other leisure and Mexican Consumer Confidence Index (%), * Source: INEGI *yearly average recreational goods and services) sustained an ascending quota throughout the years. Nevertheless, the economic downturn had a direct influence on the high income and employment level decrease. Additionally, the consumer confidence suffered an important drop due to the upsurge of personal income tax and value added taxes and the rising product prices due to the high levels of inflation. In the middle of this economic crisis, a part from those consumers that remained loyal to their brand and cut back on spending, a large amount of Mexican consumers changed their purchasing habit in order to surpass their financial difficulties. A main help for those value-conscious consumers adapting to a lower budget, was the wider offer of cheaper and private label brands by manufacturers. Thus, private label and lower-priced brands gained ground within this segment. 16 Household Consumption Expenditure On the other hand, the Mexican economy has seen a recovery over the past years, giving an optimistic outlook to Mexican consumers on the overall economic situation of the country. Consequently, the consumer confidence improved to 93.6 points in December 2014, the highest percentage since December 2013 where the index was The household final consumption expenditure also saw a positive change, going from 8,056 million MXN in 2009 (its lowest point), to 10,818 million MXN in ,000 10,000 5,000 0 Mexican Household Final Consumption Expenditure, billion (MXN) and Growth rate (%), Source: Conlumino Houshold Consumption Growth Rate (%) INEGI 17 Canadean 16

17 43,698 42,865 37,574 38,125 MXN Index Total Quarterly Current Average Income by Household in MXN & GINI index coefficient, ,000 40,000 30,000 20,000 10,000 0 Source: INEGI Total Current Income GINI Coefficient Consistent with a INEGI s survey, the current average quarterly income in 2012 was 38,125 MXN. This represents an increase in comparison with the income obtained in 2010 (37,574 MXN). On the other hand, the GINI index coefficient has gone from 0.45 to 0.44 over 2006 and This coefficient measures the inequality based on the income distribution, therefore, Mexico has had an improvement concerning the inequality of the wealth distribution. Mexican household biggest consumption inside segment is food, beverages and tobacco, which are products widely sold in all the supermarket stores. The total quarterly household expenditure in 2012 was 806,495,926 MXN, from which 34% were destined to food, beverages and tobacco. Within this segment, the food and beverages segment was the largest consumed inside the household with a total spend of 212,675,875 MXN, where 83% were spend in localities with over 2,500 inhabitants and 17% in those with less than 2,500 inhabitants. 18 Household Spend on Food & Bevarages Consumed Inside by Locality Size in MXN, 2012 Source: INEGI 36,316,848 Total: 806,495, ,359,026 Over 2,500 Inhabitants Less Than 2,500 Inhabitants 18 INEGI 17

18 Household Spend on Food and Bevarages Consumed Outside by Locality Size in MXN, 2012 Source: INEGI 5,220,451 Total: 59,070,465 53,850,014 The second largest category belongs to Food & Beverages consumed outside the Household; with a total spend of 59,070,465 MXN. In localities with over 2,500 inhabitants, 91.1% were spent, and only 8.3% were consumed in localities with less than 2,500 inhabitants. Over 2,500 Inhabitants Less Than 2,500 Inhabitants Tobacco is the last consumption category from this segment, and signified 2,446,242 MXN from the total Household Spend, from which 90.5% were spent in cities with over 2,500 inhabitants and 9.5% in cities with a population lower than 2,500. In line with the national addiction survey, in 2011 Mexico had 17 million of active smokers, and 7.1 million from them smoked on a daily basis. 19 Mexico has 17 million active smokers Household Spend on Tobacco by Locality Size in MXN, ,659 Total: 2,446,242 2,213,583 Source: INEGI Source: INEGI Over 2,500 Inhabitants Less Than 2,500 Inhabitants 19 INEGI 18

19 % Household Disposable Income Mexican interest rates are known for being high and exceed those practices in the US. The cost of borrowing money for ordinary consumer purchases was quite high in 2013, and will continue with the same trend in the following years, because banks are tightening their lending limit after the economic crisis. Furthermore, deposit rates were lowered down to led consumer to rely on informal institutions for their savings. Over the past 10 years, the percentage of disposable income in Mexico has gone from 11.4% in 2003 to 7.6% in Furthermore, another fact affecting savings is the declination of the value of the Mexican peso among other major currencies, which has also led to an upsurge on the value of imported goods. All of this has conducted Mexican consumer to depend on their financial reserves for any new purchase. 20 Retail Expenditure Between this precarious economic situations, the per capita expenditure on retail kept growing, going from 25,730 million MXN in 2005 to 32,923 million MXN in From which the most important buyer segment belonged to the family shoppers (25-44 years old), representing 51.3% and 52.1% from the total retail spend in Mexico in 2005 and 2013 respectively. The second most import segment was teenagers (15-24 years old) with 24% and 24.5% during the same years. Finally, the third largest group, mature shoppers (45-64 years old), held 19.7 % Per Capita Expenditure on Retail, million (MXN), 2005 & ,730 in 2005 and 19.9% in 2013 of whole retail spending in Mexico % 10.1% 10.1% 10.1% 9.7% 9.2% 9% 9% 32, ,000 20,000 30,000 40,000 Million MXN % 7.9% 7.6% Source: Conlumino Mexican Household Savings (% of Disposable Income), Source: Conlumino 20 Banco de México 21 Conlumino 19

20 Trend Underlyi ng trend Impact on the society Industrial impact Megatrends Summary PwC has identified five megatrends (demographic shifts, shifts in global economic power, accelerating urbanization, climate change and resource scarcity, and technological breakthroughs) that will impact the future of both PwC and its clients over the next decade and reshape the global marketplace. Within these five megatrends, there are three that will have the strongest influence in the supermarket industry: Technological Breakthroughs, Demographic Shifts and Shift in Global Economic Power. The new information technologies are reshaping the way businesses identify the needs and preferences of their customers, as well as the channels through which they interact with them. Additionally, the demographic shifts will change the demands of customers and the focus directing business decisions. Finally, the shifts in the global economic power will highlight the importance of investing on emerging markets when expanding businesses. Technological Breakthroughs >Big Data >E-commerce and smartphone >Consumer-centric market >Growing number of internet and smartphone users linked to online retailing >Prediction of consumers needs and behaviors >Development of online retailing through apps and websites >Obesity vs. Healthier food >Changing lifestyles and concern for unhealthy eating habits >Commercialization of healthy food products Demographic Shifts >Upsurge of emerging economies >Increasing purchasing power of consumers in emerging markets >Prioritization of emerging economies to expand businesses Shift in global economic power 20

21 Technological Breakthroughs Big Data Information is power, and companies of all sizes can benefit from it to make smarter and more efficient decisions. In the case of Supermarkets, it means the ability to mine the large amounts of customer information and identify trends and the products that interest buyers. This technological approach is the result of consumers taking control from retailers, and retailers realizing that the market is now consumer-centric. Consumption habits are constantly changing and customers want products and services to be personalize, as well to be the target of one-to-one marketing. These particular consumer desires of customized attention represent a challenge for the industry when a person sees thousands of advertising impressions a day. In the past years, the cost of data storage has had a dramatic drop, and retailers have been able to collect huge amounts of transaction-level and customer data, particularly enhanced by Point of Sale (POS) improvements and the growing importance and usage of social media and smartphones. According to the various studies, companies have around one million gigabytes of data in average. However, the question still is what to do and how to decode these amounts of information in favor of an efficient business strategy. Big Data s success is linked to the power of predicting consumers needs and behaviors by gathering information through multiple sources and shaping offerings in connection with a personal relationship with the customer. For instance, this data gives an insight on what does a client wants in every aspect of operations, going from store design to site selection to product offer and promotional offering. In an example, Take a jar of capers. It s likely not a high-volume, high-margin item at most mainstream supermarkets. Before, merchandising managers might have decided to stop stocking the specialty item. Now, analyzing household data may show that big-spending top customers buy a jar every once in a while. They might not make a trip to the store just for capers, but they want them when they want them and if they re not on the shelf, the shopper might just take all her business to the rival down the road. Big data allows supermarkets to use the information they gather to personalize the shopping experience, with in-store promotions and instant coupons based on both previous purchases and what s in the basket today. The key relies on analyzing purchasing patterns to increase basket size. Another form of building this personal bond with customers is through loyalty cards; this allows convenience retailers to identify a customer when entering the store and give offerings based on information. The Hypermarket, Supermarket, Hard-discounters channel must take into account that in a market full with choices, the traditional ideas of price, distribution or innovation based competition are not the only tools they need to succeed in the industry. Therefore, they have to embrace customer intimacy as (probably) the most important game changer International Business Times 21

22 As Big Data s importance rises, so does the global spending on it. By 2018, it is projected that 114 billion USD will be destining to Big Data worldwide. Moreover, according to the PwC survey, in % of executives affirmed that big data changed their decision making process and one in three executive describes making big decisions as highly data driven. 23 In Mexico, the Big Data market is taking a bigger role in the big decision process of companies. It is forecasted that the Big Data market will grow by 60% in 2015, which is three times faster than the whole Latin America region. In fact, during 2014, Mexican companies invested 215 million USD in Big Data and Analytics, from which 85% were big corporations. Nowadays, the top three sectors using this Big Data in the country are: Finance, Telecommunication and Retail in 3 executive describe making big decisions as highly data driven Source: PwC The top 3 sectors investing in Big Data are Finance Telecommunication Retail Source: IDC 23 PwC 24 IDC 22

23 Technological Breakthroughs E-commerce and smartphone applications In the food& grocery sector many have entered the world of internet retailing by allowing customers to purchase products online and have their groceries delivered to their homes and offices. Recently, many supermarket chains have started to offer internet retailing, particularly now with the rapid development of telecommunication technologies and the popularity of smartphones. Besides creating a web page with the online offer of their products and services, grocery retailers are creating applications that people can download to improve their shopping experience. In this type of application, the customer can see the latest coupon offers, weekly special and store locations, as well as scanning bar codes and ringing up purchases as they walk through the aisles of a supermarket. 25 Online retailing in Mexico is still on its early stages, but is the fastest growing retail channel with a CAGR of 19.16% during The major challenges this channel faces are the lower penetration of banking services, weak internet, and poor logistical infrastructure. Despite these problems, there is a positive outlook for the online retail industry, as it is set to grow further as internet penetration and speeds improve. Between 2013 and 2018, it is projected that online retailing will rise at a CAGR of 19.13%. Furthermore, many retailers in Mexico have been taking advantage of the growth of this sector by launching online stores and investing more in this business. In 2013, one of the major players of the Hypermarket, Supermarket and Hard-discounters channel, started offering same day delivery services to its Mexican online customers and this initiative has shown great success and acceptance. 26 One of the motives behind the importance of online retail is associated with the highly growing number of internet users in Mexico. From 2012 to 2013, the number of user had a 13% upsurge going from 45.1 to 51.2 million users and signifying a 43.5% of penetration in Internet users are equally distributed between men and women, and the largest age groups are between years old (24%), years old (21%), years old (18%). Additionally, the most important users by socioeconomic status are lower-middle (46%) and upper-middle class (31%). During 2013, the average Mexican affirmed spending an average of 5 hours and 36 minutes online a day. Moreover, the mostly used internet connection devices are Laptops (59%), PC (57%) and Smartphones (49%). In fact, the fastest growing connection device over the past years was the Smartphone, with 5 in 10 internet users getting online through it in Smartphone usage grew nearly 50% from 2012 to 2013, and in 2014 it was projected that 33.3 million persons will own a smartphone in 10 internet users get online with a Smartphone Source: AMIPCI 33.3 million persons owned a smartphone in 2013 Source:eMarketer 25 IBIS 26 Canadean 27 AMIPCI 28 emarketer 23

24 Demographic Shifts Obesity vs. Healthier Food Mexico was ranked in 2014 as the world s most obese nation, surpassing the US with 32.8% of the adult population being overweight. The reasons behind Mexican obesity are the consumption of sugary soft drinks and unhealthy fast food. 29 In fact, Mexico was the number one consumer of soft drinks in the world in Sugary drinks accounted for 22,000 deaths in Mexico every year. 30 Percentage of Mexican Adult Population Overweighed, 2014 Given the concerning health situation, the Mexican government is promoting healthier eating and lifestyles through different mean. The impact of their efforts is reflected on the slowly turn of the population eating habits into a healthier path. Nowadays, the market of sugar-free and low-fat processed food products (also called light ) is having an upsurge on their sales due to the consumer s health concern. Moreover, another market gaining ground is the one of organic products, particularly among middle and upper class clients. Their biggest target markets are large cities such as Mexico City, Guadalajara and Monterrey, given their high consumption of organic products, where the annual sales of this sort of products reached 8.4 billion MXN in Source: UN 32.8% The increasing demand of healthy products represents a significant sales opportunity for the retail market. Mexicans are putting every day more emphasis on the type of food they are consuming. However, taking in consideration the fast paced life lived by many, cooking and preparing healthy food is highly undoable. Therefore, grocery retailers need to increase the offer of healthy products in their stores and adapt to the changing needs of their customers United Nations Food and Agriculture Organization 30 American Heart Association 31 Canadean 24

25 Global shift in economic power Upsurge of Emerging markets The world is projected to grow at an average rate of just over 3% annually, from 2011 to 2050, doubling in size by 2032 and nearly doubling again by During these years, the economic landscape of the world will experiment big shifts due to the upsurge of new countries as economic leaders. In the case of China, it is expected that it will overtake the US as the largest economy by 2017 in purchasing power parity (PPP) terms and by 2027 in market exchange rate terms. India will become the third global economic giant by 2050 and Brazil and Mexico are expected to move to the 5 th and 6 th place by Actual and projected top 15 economies ranked based on GDP in PPP terms, * 2050* PPP rank Country GDP at PPP (2014 billion USD) Country Projected GDP at PPP (2014 billion USD) Country Projected GDP at PPP (2014 billion USD) 1 US 17,632 China 36,112 China 61,079 2 China 17,416 US 25,451 India 42,205 3 India 7,277 India 17,138 US 41,384 4 Japan 4,788 Japan 6,006 Indonesia 12,210 5 Germany 3,621 Indonesia 5,486 Brazil 9,164 6 Russia 3,559 Brazil 4,996 Mexico 8,014 7 Brazil 3,073 Russia 4,854 Japan 7,914 8 France 2,587 Germany 4,590 Russia 7,575 9 Indonesia 2,554 Mexico 3,586 Nigeria 7, United Kingdom 2,554 United Kingdom 11 Mexico 2,143 France 3, Italy 2, South Korea Saudi Arabia 1,790 Saudi Arabia South Korea 3,586 Germany 6,338 3,212 United Kingdom Saudi Arabia 5,744 5,488 2,818 France 5,207 1,652 Turkey 2,714 Turkey 5, Canada 1,579 Italy 2,591 Pakistan 4,253 Source:PwC *forecast In Europe, Russia is forecasted to overtake Germany as the largest economy in the continent before 2020 in PPP terms, and by 2035 it will overtake it by market exchange rates. Other important emerging economies will be Brazil, Mexico and Indonesia that could represent a bigger piece of the 32 PwC 25

26 % % economic chart than the UK and France by Advanced economies will have its global importance diminished by the growing developing countries, which can pose a long-term opportunity and challenge for businesses worldwide. For instance, China, India, Brazil, Mexico and other emerging markets, will become not just a low cost production location but also an increasingly larger consumer markets. However, there are also challenges to be overcome, such as the understanding and adaptation to local rules, regulations and customs. As income raises in the E7 33 countries, it is expected that the purchasing power of these markets will outpace that of the G7 34. Based on a projection, E7 countries will be more than 50% larger than the G7 countries when measured by GDP at market exchange rates (MER) by 2050 and around 75% larger in PPP terms. This fast convergence between these two groups of economies is mainly influenced by the fact that developed countries have had a difficult time recovering from the recession of 2008, while emerging economies have maintained growth despite the setbacks. In addition, a significant part of the rise of the E7 will be driven by China, the US and India, as these three will be the largest economies in the world by The supermarket industry should put its focus on investment in emerging markets that are rapidly expanding, instead of developed markets that are further saturated. Therefore, when profitability decreases, the sector will search for new countries for the opportunity of having rising incomes. Furthermore, the levels of growth on the national savings and the gross domestic product (GDP) are estimated to be by far larger in emerging economies and developing markets, which translates in higher levels of consumption and a more dynamic economy. The GDP of the G7 countries by 2020 will have a considerably smaller growth than that of emerging markets and developing economies, as they will grow 5.3% and 1.7% respectively. As for the gross national saving, throughout 2020 it is forecasted that the G7 will assign 20.5% of their GDP to it. In contrast, the emerging markets will destine 32.3% of their GDP % 2.9% Gross domestic product (GDP) in (%) change, % 5.2% 5% 4.6% 4.7% 5% 5.1% 5.2% 5.3% 4.3% 2.3% 2.3% 1.6% 1.4% 1.5% 1.7% 2% 1.9% 1.7% 1.7% * 2016* 2017* 2018* 2019* 2020* Major advanced economies (G7) Emerging market and developing economies Source: IMF *forecast Gross national savings in (%) of GDP, % 33.4% 33.1% 32.5% 32.3% 32.3% 32.5% 32.5% 32.5% 32.4% 32.3% % 18.9% 19.3% 19.4% 19.4% 19.5% 19.7% 19.9% 20.1% 20.3% 20.5% * 2016* 2017* 2018* 2019* 2020* Major advanced economies (G7) Emerging market and developing economies Source: IMF *forecast 33 The E7 is a group of the major seven countries with emerging economies, according to PwC. (China,India,Brazil,Mexico,Russia,Indonesia and Turkey) 34 Group of 7 (G7), is a group consisting of the seven major advanced economies in the world, according to the International Monetary Fund (IMF). (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) 35 PwC 36 IMF 26

27 % 13, , , , , , , ,930.6 Billion MXN % Change Mexico is one of the blooming emerging markets, offering several profitable investment opportunities and increasing consumption rates. It is expected that the country rises from the 11 th (2014) to the 9 th (2030) to the 6 th (2050) place in the rank of the top economies worldwide. The international monetary fund (IMF) forecasted that the GDP of Mexico will go from 13,470.9 billion MXN in 2013 to 16,930.6 billion MXN in 2020, and that its gross national savings will rise from 19.3% of its GDP in 2013 to 21.5% in ,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Mexican Gross domestic product in billion (MXN) & (%) change, % 3.8% 3.8% 3.5% 3.3% 3% 2.1% 1.4% * 2016* 2017* 2018* 2019* 2020* Source: IMF *forecast GDP in ( billion MXN) GDP in (%) change Mexican Gross national savings in (%) of GDP, % % % % % 19.7% % 19.2% * 2016* 2017* 2018* 2019* 2020* Source: IMF *forecast 37 IMF 27

28 Bibliography AMIPCI (2014). Estudio de marketing digital y social media AMIPCI (2014). Estudio sobre los hábitos de los usuarios de internet en México 2014 ANTAD(2014). INDICANTAD BMI (2014). Mexico Retail Repot Canedean (2014). Consumer Attitudes and Online Retail Dynamics in Mexico, Canedean (2014). Food and Grocery Retailing in Americas, Canedean (2014). Global Consumer Trend Framework Canedean (2014). Global Retail Innovation Canedean (2014). The Future of Retailing in México to 2018 Danielle Gagne and Lowell Chandler (2013). Supermarkets can combat climate change: Maine grocery store adopts HFC-free refrigeration system. Environmental Investigation Agency. Chedraui (2014). Annual Report Euromonitor (2013). Internet Retailing in Mexico FMI(2014). Data and Statistics Frank Tobe (2012). Distribution Centers: An Emerging Robotics Frontier. Everything Robotic. Hana Ben-Shabat, Mike Moriarty, Helen Rhim and Fabiola Salman (2014). The 2014 Global Retail Development Index TM : Full Steam Ahead for Global Retailers. AT Kearney. IBIS (2014). Supermarkets & Grocery Stores in the US ISI(2014). Dealwatch IMF (2014). Data and Statistics International Business Times (2014). Big Data INEGI (2012). Encuesta Nacional de Ingresos y Gastos de los Hogares 2012 (ENIGH) Jo Confino (2014). Asda: 95% of our fresh produce is already at risk from climate change. The Guardian Liz Webber (2014). Retailers should act on climate change. Supermarket News. National Retail Federation (2015) Top 250 Global Powers of Retailing Nielsen (2014). Consumer Confidence PwC (2013). World in 2050 (The BRIC s and beyond: prospects, challenges and opportunities) PwC (2014). Consumer Insights in Mexico PwC (2014). Global Megatrends - Focus Mexico PwC (2014). Retail Insights in Mexico World Bank (2013). Household consumption 28

29 About KC Knowledge Center Mexico acts as a knowledge, innovation and best practices provider to PwC practitioners. This enables the practitioners to successfully identify new service offerings, approach the market and complete projects. The expert staff of Knowledge Center designs innovative solutions for PwC partners and managers. The Knowledge Center delivers knowledge and experience through: Provide consulting and training in the use of various knowledge management tools. Research and information searches, based on the information needs of PwC staff & partners. Participating in the strategy design, related to global Knowledge Management & Innovation Management. 29

30 Reach us José Antonio Quesada Partner Clients & Markets Manuel Flores De Orta Sr. Specialist Manager Knowledge Management and Knowledge Center Clients & Markets +52 (55) Alexandra Mendes Senior Consultant ext Ekaterina Ponkratova Senior Consultant ext Itzel Andrade Consultant ext PwC Mexico. All rights reserved. PwC ( provides industry-focussed assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. PwC refers to PwC Mexico which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity and does not act as agent of PwCIL or any other member firm. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm s professional judgement or bind another member firm or PwCIL in any way.d 30