ResearchFARM. Online Grocery Retailing in the EU April Beyond m-commerce and click & collect, future models and 6 innovation ideas

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1 April 2012 Online Grocery Retailing in the EU 2012 Beyond m-commerce and click & collect, future models and 6 innovation ideas May 2012 ResearchFARM

2 INTRODUCTION Whilst growth for total grocery in the EU was 2.5% last year, achieved against considerable headwinds, online outpaced the sector, advancing by 22.1% in Accounting for just under 1.5% of total grocery spend in the EU right now, further strong growth is predicted for the online channel, as the leading multichannel operators and pureplays such as Amazon continue to roll out their services across the EU. However currently, very few best practise methods and benchmarks for FMCG players and retailers have been established, so there is still all left to play for in the online space. This report focuses on four key issues. It provides an analysis into the context the sector operates in by focusing on the wider trends impacting online grocery and crucially it provides all the data needs, by showing how developed online grocery is in the EU now and what the state of play in online grocery retailing will be in the future. Secondly the report focuses on real world examples where online grocery players have made the business model work against all the odds, by focusing on three key case examples. The report explains Tesco, the global online grocery leader and the reasons behind its success, before assessing LeShop, a player that is similar to the UK s Ocado, in being more of a service provider than a retailer. This case example shows how big the average basket can become in terms in online grocery and how long it takes for such a business model to become profitable. Thirdly the report takes an in depth look at the drive phenomenon in France, that has led to a growth explosion in the sector. In the third section the report looks at strategic issues and actionable recommendations and highlights some innovations and growth opportunities in online grocery. We have identified curated shopping, subscription models, generating fulfillment efficiencies, customisation, the online marketplace opportunity and shopping lists as decisive going forward and provide in-depth analysis on real life business case examples. In the fourth and final chapter the focus shifts to providing an outlook for the sector going forward. The report explains the key learnings around costs and states that leveraging existing asset bases and infrastructure is absolutely vital. Then the real first mover benefits are discussed and we give our view on how the sector will develop when connected kitchens and the rise of the shopping lists is becoming ever more acute. Finally a section of actionable recommendations rounds off the report, where we give detailed recommendations what retailers and FMCG manufacturers thinking about the online sector should do next.

3 KEY QUESTIONS ANSWERED Data Which is the biggest European online grocery market - after the UK? Where is the greatest growth potential in the EU right now? How fast are the markets growing? Is the UK a model that the others will follow? Or is the US model, focusing on shelf stable products first, a more reliable predictor? Structure of the market Why is click and collect so successful in France and Belgium, but not in the Netherlands? What is the state of play in Germany, what is the outlook for CEE and what will happen in Southern Europe and in the periphery? Why is Scandinavia a hotbed of development for online grocery right now? Amazon Why is consumables the fastest growing category of Amazon s 43 business units in the US? How many Amazon customers buy online grocery products from the pureplayer at the moment? How is the company transforming its front and back end business to drive even faster growth in the US? Which of these innovative techniques are hitting Europe as we speak? Retailers How long will it take Ocado before the company becomes profitable for a whole year, what player has achieved this with a similar business model before? How big can online grocery baskets become in money terms, and which retailer achieves this (it s not a UK based player)? What are Auchan and Tesco up to in terms of internationalising their online grocery operations? Who are the most promising, innovative and exciting new start ups? Which ones have established themselves by now? Innovations What are the new initiatives in online grocery beyond apps and mobile commerce right now? What is the next step in the continuing evolution to drive costs down after click & collect and drive throughs? Where is there untapped potential for lean supply chain management? What have most companies missed out on so far? How are online grocers driving growth through curation and customisation right now? Why does grocery lend itself perfectly to these concepts?

4 KEY QUESTIONS ANSWERED Marketplaces and subscriptions Why are online marketplaces so successful? Which small players are rivalling the multinationals by leveraging local? Why are marketplaces so important for the FMCG industry? Why will FMCG branded storefronts become a huge growth opportunity going forward? What is the true potential in subscriptions services? What will happen if subscriptions will combine with curation and customisation aspects driven by the shopper? Which retailers are the ones to watch in this space? The shopping list What will the rise of shopping lists mean for the future of online grocery retailing? How can retailers and FMCG players alike exploit this new opportunity? How can they work together? Which role will smartphones play in list management? Will the connected fridge or bin be central to the list in future? Will the lists of the future be about price or about nutrition? Will it be about convenience, recipes or about new products? Why is online grocery shopping an ideal test bed for new product innovations and development? What is the future of private label in the online space? How can retailers and FMCG companies get their products on the online shopper s lists?

5 TABLE OF CONTENTS (1/4) Executive summary Context the Macro-economic outlook for the EU GDP sizes: EU 27, 2011 in bn, the structure from Germany to Malta GDP sizes: EU 27, in 000 bn GDP sizes: EU 27, 11 countries still lagging behind their 2008 levels GDP sizes: EU 27, Currency devaluations, Poland keeps momentum going, ECB action Unemployment: EU 27, annual average 2011 (%) from Spain to Austria Unemployment: EU 27, Misery in the periphery while Unemployment: EU 27, Germany roars on due to the right policy mix Inflation: Euro Area and EU27, (HICP), % Inflation: EU 27, deflation avoided, lost decade in store? Inflation: Euro Area 17, (HICP), %, welcoming Estonia Interest rates: ECB and BoE, record low rates and quantitative easing Interest rates: breathing space for southern Europe, LTRO Context EU Retailing in 2012 Retail sizes: EU 27, in 000 bn Retail sizes: EU 27, crisis has left a deep, deep scar Retail sizes: EU 27, growth in %, CAGR Retail sizes: EU 27, a sector in turmoil, e-commerce, housing markets, ageing populations Per capita retail spend: EU 27, 2011 in, from Luxembourg to Romania EU Grocery Retailing in 2012 Grocery sizes: EU 27, in 000 bn Grocery sizes: shoppers cut back, shop around, trade down and go to hard discounters Grocery sizes: EU 27, growth in %, CAGR Grocery growth rates: EU in %, growth in Poland, decline in Ireland Grocery growth rates: Ireland as a template for the rest of the periphery? Grocery sizes: The leading countries, Top 3 take one of every 2 spent Grocery share of total retail: EU 27, in % Grocery share of total retail: Clear crisis impact - all but four show higher share again Grocery per capita sizes: EU 27 in 2011 in, from the UK to Bulgaria EU Grocery Retailing in 2012 Online sizes Online grocery sizes sizes: EU 27, in 000 m e Online percentage share of total grocery: EU 27, UK, France, Benelux and Spain Online grocery: Scandinavia a hotbed of development, tough German market Online grocery: CEE the opportunity, driven by Auchan, Tesco et al Online grocery: EU Growth rates and forecast to 2015 Forecast : data EU Total & Online grocery in bn p15 p17 p18 p19 p20 p21 p22 p23 p24 p25 p26 p27 p28 p29 p30 p31 p32 p33 p34 p35 p36 p37 p38 p39 p40 p41 p42 p43 p44 p46 p47 p48 p49 p50 p51 p52 p53

6 TABLE OF CONTENTS (2/4) Drivers of Change Drivers of change: The ESTLE background Drivers of change: retailer push and consumer pull Drivers of change: Technological innovation and click & collect Drivers of change: starting the beneficial cycle p54 p55 p56 p57 p58 A model for future development? LeShop the service provider p59 LeShop: a model for other markets? LeShop: First y o y decline, as Swiss shop abroad and Coop ramps up online LeShop: link up with Swiss Post, home deliveries only pm or evenings LeShop: Chilled storage box solution no need for cool chain LeShop: the data, 31k new customers per year LeShop: M-commerce and the Migros advantage A model for future development? Tesco the multichannel retailer Tesco: The European and global online grocery leader Tesco: The crucial club card advantage Loyalty: Why has Tesco invested in online? Tesco: Market maker, moving towards dark stores Tesco: Incremental online sales, higher online than offline share UK data, Tesco customers, average spend and growth Tesco: a closer look at the data, the marketplace opportunity Loyalty: Tesco Clubcard migrating online Tesco: the opportunity in store, free Wi-Fi, click & collect and drive p60 p61 p62 p63 p64 p65 p66 p67 p68 p69 p70 p71 p72 p73 p74 p75 A model for future development? Drives in France p76 Auchan: figures, hyper vs Chronodrive France: The development of the drive solution The Chronodrive model: growing strongly France: arterial roads, pure solution versus add on, cost management Click & collect: Data, Q France France: no trading permits needed, boom in the format France click & collect: 892 stations, 30 new per month New concepts: 6 ideas for online grocery New concepts: strategies and recommendations, curated shopping and subscriptions New concepts: strategies and recommendations, running empty and customisation New concepts: strategies and recommendations, marketplaces and internationalisation New concepts: strategies and recommendations, the shopping list p77 p78 p79 p80 p81 p82 p83 p84 p85 p86 p87 p88

7 TABLE OF CONTENTS (3/4) New concepts: curated shopping Linas Matkasse: the recipe pioneer from Sweden Linas Matkasse: curated e-commerce in grocery Linas Matkasse: an update of box schemes New concepts: subscription models Subscribe & save: Amazon s transformation of US online grocery Amazon: The supplier relationship potential Amazon: Dynamic brand stores New concepts: Beyond drive and click & collect, the potential on the return trip New concepts: multichannel retailers making the store estate count New concepts: making online grocery deliveries efficient New concepts: Reducing the empty runs New concepts: Partnerships will become a necessity as online shopping continues to expand New concepts: customisation and personalisation MyMuesli: The customisation opportunity Customisation: Let the shopper control the personalisation of products New concepts: marketplaces, collaboration potential Marketplaces: FMCG - necessary online presence Marketplaces: especially pertinent in online grocery FMCG response: Alice the industry portal Alice.com: the premier FMCG marketplace operator, the US operation Alice.com: European expansion Strengths of marketplaces: The model Strengths of marketplaces: free market research, price competitiveness Strengths of marketplaces: beneficial cash flow Strengths of marketplaces: unlimited range and network effects Marketplaces: the future Marketplaces: from Japan s Rakuten to Denmark s Nemlig, from global to local Foodzie: one of many US player trying to replicate etsy s business model in food p89 p90 p91 p92 p93 p94 p95 p96 p97 p99 p100 p101 p102 p103 p104 p105 p107 p108 p109 p110 p111 p113 p114 p115 p116 p117 p118 p119 p121

8 TABLE OF CONTENTS (4/4) New concepts: The rise of the shopping list Shopping lists: a new reality, a change for good? Shopping lists: the internet push, how to get on the list Shopping lists: virtual shelf ends, nudging shoppers Learnings & Outlook Learnings: story so far Key learning: sweat the existing asset base and infrastructure to control costs Key learning: it takes time, scale and the space is getting crowded First mover advantage: the benefits First mover advantage: the benefits, Tesco s gains First mover advantage: the benefits, Ocado and organics, on versus offline share Outlook: trends for the next three years Outlook: online only brands, connected kitchen Outlook: product centric versus customer centric operators Actionable recommendations Actionable recommendations: what multichannel and pureplayers should do now Actionable recommendations: what retailers and FMCG companies should do now Sources p122 p123 p124 p125 p127 p128 p129 p130 p131 p132 p133 p134 p135 p136 p137 p138 p139 p140

9 CHARTS & TABLES, ONLINE GROCERY RETAILING IN THE EU 2012 Table 1: GDP sizes: EU 27, 2011 in bn Table 2: GDP sizes: EU 27, in 000 bn Table 3: Inflation: Euro Area and EU27, (HICP), % Table 4: Inflation: Euro Area 17, (HICP), % Table 5: Retail sizes: EU 27, in 000 bn Table 6: Retail sizes: EU 27, growth in %, CAGR Table 7: Per capita retail spend: EU 27, 2011 in Table 8: Grocery sizes: EU 27, in 000 bn Table 9: Grocery sizes: EU 27, growth in %, CAGR Table 10: Grocery share of total retail: EU 27, in % Table 11: Online grocery sizes sizes: EU 27, in 000 m e Table 12: Online percentage share of total grocery: EU 27 Table 13: Forecast : data EU Total & Online grocery in bn p18 p19 p25 p27 p31 p33 p35 p37 p39 p43 p48 p49 p53

10 CHARTS & TABLES, ONLINE GROCERY RETAILING IN THE EU 2012 Chart 1: Unemployment: EU 27, annual average 2011 (%) (1) Chart 2: Unemployment: EU 27, annual average 2011 (%) (2) Chart 3: Interest rates: BOE Chart 4: Interest rates: ECB Chart 5: Grocery growth rates: EU in %, (1) Chart 6: Grocery growth rates: EU in %, (2) Chart 7: Grocery sizes: The leading countries Chart 8: Grocery per capita sizes: EU 27 in 2011 in (1) Chart 9: Grocery per capita sizes: EU 27 in 2011 in (2) Chart 10: LeShop: the data Chart 11: UK data, Tesco customers, average spend and growth Chart 12: Auchan: figures, hyper vs Chronodrive Chart 13: Click & collect: Data, Q France Chart 14: New concepts: making online grocery deliveries efficient p22 p22 p28 p28 p40 p40 p42 p46 p46 p64 p72 p77 p81 p100

11 TESTIMONIALS AND CLIENTS «I found it very insightful. [...] Impressed with the amount of information that has been covered by your report.» (Retail merchandising company) «I found the document easy to read, well laid out and the content thought-provoking. It reminds me of the major considerations that affect our markets, and to address these key issues when approaching the global brands and retailers. Retail Predictions 2011 is a very good demonstration of the quality of how ResearchFarm operates and communicates.» (Technology supplier) «The content is very interesting to us, as we look after many of the largest shopping centres and we also represent many international retailers entering our market. There is plenty of food for thought.» (Property consultants) «It looks impressive.» (Property company) «It was helpful. It helped me to persuade my boss to take on a project about e-commerce research. I was really surprised by the importance of legal issues. I never read that elsewhere before.» (Government) «Thank you again for the study. These are very, very interesting, well explained (so, logical) predictions. Highly reliable and useful (I like the idea very much that loyalty schemes will move onto smartphones). It s quite impressive!» (Publishing group) «Great research, very useful.» (Retailer) «We have enjoyed reading your research information and have found it to be helpful in validating some of the other Grocery industry news information and predictions.» (Retailer) «On DLF s (Danish Association of Fast Moving Consumer Goods Manufacturers) New Years Conference on the 20th of January 2011 we had the great pleasure to hear ResearchFarm speak about future trends in online grocery retailing. The feed back from the conference participants was very positive as they gave ResearchFarm s presentation the highest score of all speakers, finding the analysis about the key success factors of chosen EU and US online retailers both very interesting and inspiring. We can therefore give ResearchFarm our best recommendation.» Dagligvareleverandørerne Danish Association of Fast Moving Consumer Goods Manufacturers

12 OUR METHODOLOGY LAY THE GROUND FOR NEW GROWTH! Researchfarm strives to deliver a starting point for constructive discussions and provide clear solutions and direction. Our in depth observations of fundamental changes combined with our strategic insights into the sector and our entrepreneurial thinking provide unrivalled, actionable and meaningful solutions. Our recommendations will enable you to formulate new strategies, head for the right milestones, drive future growth and set the right incentives. DELIVERING ADDED VALUE THROUGH OUR REPORTS 1. ACTIONABLE RECOMMENDATIONS Our reports provide you with recommendations for each chapter to help your strategic decisions. 2. BEST PRACTICE Every chapter features a case example and in-depth insights and recommendations. 3. INTERVIEWS WITH KEY PEOPLE The report is based on in depth conversation with business leaders, CEOs and CRM specialists. ABOUT RESEARCHFARM ResearchFarm is focused on strategic insight and innovative topics and trends in the FMCG/retail space. A key word for us is innovation. We try to unearth what works and what doesn t and tell our audience about it. For us the client comes first, as such we are focused on the story to tell, sharing insight and analysis, not on getting our names in the media though we will engage in this as well occasionally.

13 SAMPLE PAGES Zoom in to read Linas Matkasse: The Recipe Pioneer From Sweden Grocery Sizes: Eu 27, Growth In %, Cagr Table 9 90 ResearchFarm - Retail Analysts No part of this report may be reprinted or reproduced in any way without the written permission of ResearchFarm. 39 ResearchFarm - Retail Analysts No part of this report may be reprinted or reproduced in any way without the written permission of ResearchFarm.

14 SAMPLE PAGES Zoom in to read Alice.Com: The Premier Fmcg Marketplace Operator The single online platform provided by Alice allows FMCG players to interact with the consumer in a broader way than if suppliers only went through their own operations as Alice reaches the online customers of the FMCG competition as well. Moreover once an online ordering system has trained its customers to keep working shopping lists, it is compelling them to make ordering routine. Once it has become routine the customer is hooked. This is really where online grocery retailers need to focus their attentions on in terms of loyalty. is report may be reprinted or reproduced in any way without the written permission of ResearchFarm. This means Alice can be light on capital expenditure as FMCG players fund the stock and inventory, all items on the site are covered by a direct-from-the-supplier sales model. While Alice charges suppliers a service fee on each sale to cover costs, it does not own the inventory itself. What stands out at Alice.com is the deep discounting, which is not usually part of the online grocery selling model. Previously it made no economic sense for FMCG players to sell low-margin products directly to consumers online, but Alice could change that, especially as other US online retailers in the dry grocery arena such as Diapers.com and Drugstore.com have prices that are above physical stores such as Wal-Mart or Kroger. 112 ResearchFarm - Retail Analysts No part of thi

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