European Grocery Retailing

European Grocery Retailing Change is the only constant May 2014 1 planetretail.net Kelly Tackett Research Director

Agenda 1. Market Overview 2. Leading Retailers 3. Key Trends 4. Takeaways 2

1. Market Overview

Economic recovery is not universal GDP Real Growth 2013 (%) +1.5% Finland +0.8% Norway Sweden -1.4% +0.8% +4.2% +1.3% +3.1% Estonia +0.4% Latvia Denmark Lithuania +1.8% +1.6% +0.9% Russia Ireland -0.3% Portugal Spain United Kingdom Belarus Netherlands +0.5% +0.3% Poland +8.9% -0.8% Germany +0.9% Belgium Czech Rep +2.0% +1.1% +3.5% Ukraine +0.4% Slovakia +0.3% -0.9% +0.0% France Switzerland Italy -1.9% Austria Slovenia Croatia Hungary +1.2% -1.1% Bosnia & -1.0% Herzegovina Serbia +0.7% Albania +2.5% Greece Romania +3.1% Macedonia +0.9% Bulgaria Moldova +3.2% +3.2% Georgia Armenia +5.8% -1.4% -1.2% Azerbaijan -3.9% Cyprus 4 Source: Planet Retail. -1.0%

Spending power varies dramatically Norway Switzerland Ireland Denmark Luxembourg UK Cyprus Sweden Finland France Austria Germany Netherlands Belgium Slovenia Latvia Iceland Poland Italy Czech Republic Spain Estonia Slovakia Portugal Croatia Lithuania 1.4 1.4 1.3 1.1 1.1 Hungary Bulgaria Macedonia Greece Romania Russia Serbia Bosnia and Herz. Montenegro Ukraine Georgia Azerbaijan Armenia Moldova Belarus 6.0 MGD Grocery Spend per Capita 2013 ( 000) 5.0 5.3 5.0 4.2 4.0 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.0 2.8 2.6 2.5 2.5 2.4 2.0 2.1 2.1 1.9 1.8 1.8 1.6 1.6 1.5 1.5 1.5 1.0 1.0 0.9 0.8 0.8 0.6 0.5 0.3 0.3 0.2 0.2 0.2 0.0 MGD Grocery Spend defined as sales of total grocery products (edible grocery, household & petcare, health & beauty and foodservice) from modern grocery distribution retailers and wholesale enterprises (MGD) per capita. Source: Planet Retail 5

Consumers are very different 15 Groups 67 Types 6

Grocery retail markets have different heritages % of Grocery Sales Positive retail sales do not necessarily reflect the full picture 100% 90% 80% 70% 60% Grocery Market: Breakdown by Channel 2002 (%) 2.8% 1.5% 6.6% 39.1% 6.8% 1.5% 32.2% Cash & Carries & Wholesale clubs Convenience & Forecourt stores Discount stores 50% 40% 15.1% 27.8% Supermarkets & Neighbourhood stores Superstores 30% Hypermarkets 20% 32.1% 12.6% 10% 0% France 9.1% Germany Other comprises Department & Variety Stores, Non-store Commerce, Other Grocery formats, Other Non-Food Formats, Catering and Wholesale.. Source: Planet Retail. 7

But change is a common denominator Hectic work/home schedules Two working parents Busy lifestyles Commuting Increasing single person households Smartphone/tablet penetration Urban dwelling Changing Demographics Increasing access to technology Tech-savvy generations becoming key consumers Shoppers becoming more informed Ageing population Home access to the internet 8

And grocery channels are changing around this Positive retail sales do not necessarily reflect the full picture 9

Sales (EUR bn) Growth by channel Western Europe 450 Western Europe: Total Banner Sales by Channel, 2008-2018f (EUR bn) 400 350 300 250 200 2008 2013 2018f 150 100 50 0 Note: f forecast; Source: Planet Retail Hypermarkets & Superstores Supermarket & Neighbourhood Discount Convenience & Forecourt Drugstores Cash & Carries 10

Key Markets Germany Top 3 Grocery Players by Total Banner Sales (2013e) 50.2 bn 36.9 bn 34.1 bn 3.2% GDP CAGR 2013-2018F 2.1% Grocery banner retail sales CAGR 2013-2018F Germany: CAGR Growth by Channel, 2013-2018f (%)** Top 3 Grocery Players by Food Retail Format Market Share (2013e) **Please note, hypermarkets includes superstores, convenience includes forecourts & supermarket includes neighbourhood stores. 25.7% 18.5% 16.0% Drugstores Supermarkets Discount stores Convenience Cash & Carries Hypermarkets Note: f forecast Source: Planet Retail 0 2 4 6 8 CAGR (%) 11

Key Markets France Top 3 Grocery Players by Total Banner Sales (2013e) 45 bn 42 bn 31 bn Top 3 Grocery Players by Food Retail Format Market Share (2013e) 3.0% GDP CAGR 2013-2018F Convenience Cash & Carries Drugstores Discount stores 2.7% Grocery banner retail sales CAGR 2013-2018F France: CAGR Growth by Channel, 2013-2018f (%)** 12 **Please note, hypermarkets includes superstores, convenience includes forecourts & supermarket includes neighbourhood stores. 18.7% 17.3% 12.5% Hypermarkets Supermarkets Note: f forecast Source: Planet Retail 0 2 4 6 CAGR (%)

Key Markets UK 13 Top 3 Grocery Players by Total Banner Sales (2013e) 57.9 bn 31.7 bn 30.4 bn Top 3 Grocery Players by Food Retail Format Market Share (2013e) 26.1% 14.9% 14.0% **Please note, hypermarkets includes superstores, convenience includes forecourts & supermarket includes neighbourhood stores. 4.9% GDP CAGR 2013-2018F UK: CAGR Growth by Channel, 2013-2018f (%)** Discount stores Convenience Cash & Carries Supermarket Drugstores Hypermarkets Note: f forecast Source: Planet Retail 4.0% Grocery banner retail sales CAGR 2013-2018F 0 2 4 6 8 10 12 CAGR (%)

Key Markets Italy Top 3 Grocery Players by Total Banner Sales (2013e) 13 bn 10 bn 9 bn 2.4% GDP CAGR 2013-2018F 2.1% Grocery banner retail sales CAGR 2013-2018F Italy: CAGR Growth by Channel, 2013-2018f (%)** Top 3 Grocery Players by Food Retail Format Market Share (2013e) Discount stores Drugstores Hypermarkets Supermarkets 14 8.0% 6.4% 5.6% **Please note, hypermarkets includes superstores, convenience includes forecourts & supermarket includes neighbourhood stores. * Based on food retail format market share. Convenience Cash & Carries Note: f forecast Source: Planet Retail -1 0 1 2 3 4 5 CAGR (%)

Key Markets Spain Top 3 Grocery Players by Total Banner Sales (2013e) 20 bn 16 bn 9 bn Top 3 Grocery Players by Food Retail Format Market Share (2013e) 1.9% GDP CAGR 2013-2018F Drugstores Convenience Supermarkets 3.8% Grocery banner retail sales CAGR 2013-2018F Spain: CAGR Growth by Channel, 2013-2018f (%)** 15 **Please note, hypermarkets includes superstores, convenience includes forecourts & supermarket includes neighbourhood stores. 23.3% 14.3% 10.2% * Based on food retail format market share. Cash & Carries Discount stores Hypermarkets Note: f forecast Source: Planet Retail 0 2 4 6 8 10 12 CAGR (%)

Key Markets Portugal Top 3 Grocery Players by Total Banner Sales (2013e) 5 bn 5 bn 2 bn 3.0% GDP CAGR 2013-2018F 4.6% Grocery banner retail sales CAGR 2013-2018F Portugal: CAGR Growth by Channel, 2013-2018f (%)** Top 3 Grocery Players by Food Retail Format Market Share (2013e) Drugstores Discount stores Supermarkets 16 20.3% 19.4% 8.1% **Please note, hypermarkets includes superstores, convenience includes forecourts & supermarket includes neighbourhood stores. * Based on food retail format market share. Hypermarkets Cash & Carries Convenience Note: f forecast Source: Planet Retail -2 0 2 4 6 8 10 CAGR (%)

2. Leading Retailers

Retail Banner Sales (EUR bn) Competitive Environment 70 60 50 40 30 Western Europe: Top 10 Grocery Players by Total Banner Sales, 2013e (EUR bn) 65.0 64.6 61.0 51.6 50.2 49.2 46.6 44.5 39.0 32.8 20 10 0 e estimate Source: Planet Retail. 18

Competitive Environment Retail Banner Sales (EUR bn) 90 Western Europe: Top 10 Grocery Players by Total Banner Sales, 2018f (EUR bn) 80 70 60 50 40 30 20 10 0 Note: f forecast Source: Planet Retail 19

Key Players Carrefour #1 Carrefour Carrefour is focussing on revitalising operations in core markets with further disposals of peripheral operations a possibility. Turn around ailing hypermarket format Improve its price image Expand smaller formats under the Carrefour Express, City and Contact banners Grow multi-channel via drive format Multi-channel is a key priority for Carrefour with the expansion of the Drive concept. Carrefour is expanding it s smaller format s such as Carrefour City above. 20

Key Players Schwarz Group #2 Schwarz Group Schwarz Group is one of the most aggressively growing companies, with a presence in 25+ European markets. Aims to become the largest food retailer in Europe Working to propel Lidl past Aldi as largest discounter in Europe Introducing minimum turnover per outlet requirements Investing heavily on the instore experience Schwarz Group s Lidl banner is seeing continued expansion albeit at a slower pace. Lidl has been rolling out instore bakeries across W Europe as it looks to attract a broader spectrum of shoppers. 21

Key Players Tesco #3 Tesco Tesco has unveiled the next phase in its UK improvement plan with seven areas targeted - EDLP, product innovation, service, GM, destination stores, convenience, Clubcard and multi-channel. Strategic shifting to EDLP with incremental EUR 245 million investment Focusing on the refurbishment of big-box stores in 2014 Tesco has successfully launched the Clubcard Fuel Saver programme. Expanding convenience formats will open 150 Express per annum Will double the number of click & collect locations Tesco is rapidly rolling out c-stores Express and One Stop. 22

Key Players Metro #4 Metro Group For some time now, Metro Group has been battling on all divisional fronts due to its portfolio of structurally troubled formats. Exiting non-core markets to focus on core and key emerging markets Refining cash & carry concept in saturated markets of WE to boost attractiveness to business customers The Casa dell HoReCa features easier customer navigation with colour-coded departments. Adapting to changing customer needs with diverse formats Closing unprofitable hypermarkets Undertaking a series of long-overdue store refurbishments The Real remodels feature a higher-quality service counter for fresh items, including bakery. 23

Key Players Edeka #5 Edeka Edeka is reviving its co-operative roots as it refocuses on the strengths of its regional set-up and its thriving independent retailers. Diminish the diversity of banners and regional and local idiosyncracies Support its independent shopkeepers with the development of new supermarket concepts Reassess and reposition its Netto discount chain Strengthen national buying by bundling sourcing at the Hamburg headquarters The Für Dich (For You) ranged supplied by candy manufacturer Katjes is available exclusively at Edeka. Edeka s Omega 3 sausages were developed in collaboration with the Frauenhofer Institute. 24

3. Key Trends

Death of the hypermarket? Increasingly restrictive planning legislation Apparent saturation in some markets Positive retail sales do not necessarily reflect the full picture Difficulty in finding / securing appropriate sites Lack of investment Rising land and development costs Less one-stop shopping / format fatigue Online migration (esp in General Merchandise) Shifting consumer trend towards convenience 26

Countries most exposed to Big Box 35.0% Hypermarket (>5,000 sq m) Penetration of Grocery Market by Country (%) 30.0% 31% 30% 29% 25.0% 24% 22% 21% 20.0% 20% 19% 19% 18% 18% 17% 15.0% 15% 14% 14% 10.0% 10% 9% 8% 8% 8% 7% 7% 6% 6% 5.0% 4% 4% 3% 1% 1% 0.0% MGD Grocery Spend defined as sales of total grocery products (edible grocery, household & petcare, health & beauty and foodservice) from modern grocery distribution retailers and wholesale enterprises (MGD) per capita. Source: Planet Retail 27

Some perspective Hypermarkets are not dead, many will continue to prosper Huge variations by location, generalizations are dangerous: Country / market Site / catchment But we are likely to see an inevitable slowdown in development of new hypermarket space in some countries Hypermarket sales will continue to grow, although at a slower rate than some other channels (discount stores, c-stores, E-commerce) A large number of hypermarkets are very challenged and many have been subject to under-investment A number are over-spaced and are in need of a radical rethink 28

Selected options for over-spaced hypermarkets No single catch all cure, but a number of options employed in isolation or in unison, according to the needs of the individual store and the catchment it serves. Option 1 Downsize or sub-let surplus space to 3 rd parties Option 2 Re-allocate GM space to extend food offer Option 3 Re-think product mix of GM space Option 4 Improve in-store catering / foodservice 29

Option 1 downsize or sublet Nando s Wembley Park. Sports Direct Three UK sites. Xercise4Less Stockton-on-Tees. 30

Option 2 re-allocate GM to extend food offer 31

Option 3 rethink product mix of GM space 32

Option 4 improve in-store catering 33

Flight to convenience Sales (EUR bn) Western Europe: Total Banner Sales by Channel, 2008-2018f (EUR bn) 450 400 350 2008 2013 2018f 300 250 200 150 100 50 0 Note: f forecast; Source: Planet Retail Hypermarkets & Superstores Supermarket & Neighbourhood Discount Convenience & Forecourt Drugstores Cash & Carries 34

C-stores a pan-european perspective 30,000 No. of C-stores and Forecourt Stores 2013 Top 20 European Markets 25,000 25,442 20,000 15,000 11,940 10,000 8,286 6,585 5,000 4,023 3,034 2,370 1,931 1,907 1,808 1,340 1,308 1,187 1,178 1,161 1,071 980 921 781 696 0 Source: Planet Retail 35

C-stores the recipe for success A new business model, different from supermarkets and big box More strategic location planning A higher cost model Requiring a higher margin product mix Focus on fresh foods and food-to-go Greater emphasis on private labels Catering for a wide range of shopping visits and occasions: - Top up shopping - Breakfast and Lunch - Evening meal solutions. 36

C-stores go hand-in-hand with e-commerce 37

Discounters the march continues (?) Sales (EUR bn) 450 Western Europe: Total Banner Sales by Channel, 2008-2018f (EUR bn) 400 350 2008 2013 2018f 300 250 200 150 100 50 0 Note: f forecast; Source: Planet Retail Hypermarkets & Superstores Supermarket & Neighbourhood Discount Convenience & Forecourt Drugstores Cash & Carries 38

What exactly is a discounter? Limited assortment, low prices and no services I am convinced that the two principles, that of small ranges and low prices, cannot be separated. Karl Albrecht Aldi Founder & Owner (1953) 39

Discounters the European Top 10 Banner Sales (EUR bn) Europe: Top 10 Discount Store Operators by Total Sales, 2007-2017f (EUR bn) 70 68.6 65 60 55 53.8 53.4 2007 2012 2017 50 45 40 37.5 38.1 46.2 35 30 25 20 15 10 5 5.3 15.4 13.7 13.6 11.9 9.4 8.2 8.3 9.3 2.6 13.3 7.3 6.6 3.6 8.3 5.6 5.7 7.1 4.2 5.2 2.6 2.8 3.3 3.7 0 Schwarz Group Aldi Edeka Rewe Group Dia* Jerónimo Martins Reitan Dansk Supermarked NorgesGruppen Norma 40 Note: f forecast; * part of Carrefour until 2011; ranked by 2012 sales. Source: Planet Retail

A one-dimensional model is diversifying In the face of saturation and decelerating growth, discounters are having to change tact and adapt their business models. Tactic 1 Shift in product mix towards freshness Tactic 2 Increased brand listings Tactic 3 Move towards convenience formats 41

Shift towards freshness Penny (Germany, Czech Republic, Italy) Dia Fresh (Spain) Instore bakery trial, Aldi Süd s Hofer (Austria) 42

Shift towards brand listings - Aldi Rationale behind the brand additions: Revitalising sales in saturated markets Attracting more/new shoppers Increasing average spend Countering the success of its main rival, Schwarz Group s Lidl Part of a strategy to become a one-stop destination Aldi: Brand listings of Top 10 FMCG brand companies Sales rank FMCG brand company Brand listings at Aldi* Examples 1 Nestlé Nescafé in Switzerland 2 P&G Gillette in Austria 3 PepsiCo Pepsi in Slovenia 4 Unilever Lusso in Switzerland 5 Mondelez Toblerone in Germany 6 Coca-Cola Co. Römerquelle in Austria 7 ABInBev Stella Artois in the UK 8 Philip Morris Intl. Marlboro in Germany 9 L Oréal Garnier Fructis in Hungary 10 Japan Tobacco Winston in Switzerland Red: Recently added permanent listings (ca. 2010-2013) Broad brand portfolio, in most markets Limited brand portfolio, in selective markets Minor brand portfolio, in a small number of markets Ranking: OC&C Analysis for 2011, excluding regional meat companies. Source: Planet Retail. 43

Move towards convenience formats Aldi and Lidl 44

Grocery E-commerce fad or the future? Proportion of web shoppers who have made grocery purchases online. 11% 27% 8% 10% 10% 7% 33% 13% 31% 7% Source: Planet Retail s Online Shopper Survey data. 45

The great unknown We don t know where the online train is going and how fast it is running. I only know that we need to be on board. ALAIN CAPARROS CEO Rewe Group Indicative of how many European grocery retailers currently feel. 46

Still more questions than answers What s the impact on bricks and mortar stores? Am I just cannabilising existing sales? Can it ever be profitable? Which is the best model store-picking or dedicated DC? Home delivery or Click & Collect? What are the geographic implications? How do channels interract? Who are the main key customer groups? Am I just doing it because everyone else is doing it? 47

Grocery E-commerce - how not to do it. Grocery E-commerce may be high growth but it is not straightforward it needs to be high profile and executed skilfully. 48

Grocery E-commerce drive format The Drive concept is a blend between pure e-commerce and Click & collect, external to a store or as a free-standing unit. traditional bricks and mortar stores 49

Capital Expenditure Drives different business models. Tesco operates van sheds on store car parks for shoppers to collect their groceries quickly by car. Ahold in the US is experimenting with compact standalone Drives by their stores. Metro Group s Real integrated infrastructure alongside stores is the most common form of Drive to date. Catalan retailer Bonpreu has invested heavily in a standalone Drive format, designed to secure a catchment area in its own right. Order Capacity 50

4. Key takeaways

Channel convergence Big Box servicing online home delivery, Click & Collect, Drive formats. HYPERMARKETS Hypermarkets opening dedicated discount areas and formats. E-COMMERCE DISCOUNTERS 52 C-stores deployed as E- commerce fulfillment outlets. C-STORES Discounters opening more conveniencebased formats.

Change is the only constant European retail markets are undergoing substantial change Suppliers need to evolve to move with retail change Polarity of maintaining volumes and driving margin Different strategies for different channels (and markets, retailers) Retailers will be looking to suppliers to help them through change Key watchwords FLEXIBILTY AND COLLABORATION. 53

Thank You

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