December 2015

• Convenience stores are outperforming in each of the countries covered by this report—the UK, France and EUROPEAN Germany. CONVENIENCE • But there are major differences in scale: in the UK, convenience stores are estimated to account for fully 27% of grocery retail in 2015, while in France they account for STORE just under 4% and in Germany, only 0.3%. • A common theme across these countries is the RETAILING encroachment of major grocery retailers such as Carrefour and Tesco into the convenience sector. • But these retailers risk cannibalizing sales from their larger stores, as there is less justification for shoppers to make a trip to the chains’ bigger shops. • In those countries where e-commerce, including e-grocery, is gaining share of retail, we see convenience continuing to outperform due to the two channels’ complementary natures. DEBORAH WEINSWIG Executive Director – Head of Global Retail & Technology Fung Business Intelligence Centre [email protected] US: 646.839.7017 HK: 852.6119.1779 CHN: 86.186.1420.3016

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 1 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Table of Contents

EXECUTIVE SUMMARY ...... 3 MARKET SNAPSHOT ...... 5 EUROPEAN TRENDS ...... 7

UK ...... 12 FRANCE ...... 18 GERMANY ...... 24 KEY TAKEAWAYS ...... 29

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 2 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

EUROPEAN CONVENIENCE STORE RETAILING EXECUTIVE SUMMARY Convenience stores are outperforming in each of the countries covered by this report—the UK, France and Germany. In each, the sector is registering growth above that of total grocery and above rates of food-price inflation. In the UK and France, convenience is a bright spot in a negative-growth grocery sector, which has been pulled down by price wars and consequent deflation. In Germany, the grocery sector is more stable. While all three markets are seeing strong performance from convenience, there are major differences in scale. In the UK, convenience stores are forecast to account for fully 27% of grocery retail in 2015, while in France they will account for just under 4% and in Germany, only 0.3% (excluding 27% filling station stores in France and Germany). Germany’s tiny sector size is mostly a result of its grocery sector being dominated by competing small- store formats, such as discounters and small, neighborhood supermarkets that take the place of convenience stores. In the UK, convenience A common theme across these countries is the encroachment of major stores are forecast to grocery retailers into the convenience sector. Big retailers, including Tesco account for fully 27% of and Carrefour, are looking for alternative growth channels in the face of grocery retail in 2015, potential saturation of mature channels such as superstores. Moreover, in while in France they will the UK especially, there has been a noticeable downturn in demand for out- account for just under 4% of-town, big-store shopping as consumers have begun to split their and in Germany, only 0.3% shopping between different types of stores and the Internet. But there are some risks for the big-name grocers that are pushing into convenience. The most pressing of these is that retailers risk cannibalizing sales from their own larger stores: as chains bring fresh foods, their own brands and big-name products to consumers’ doorsteps, there is less justification for shoppers to make a trip to the chains’ larger shops. Another risk is the higher operating costs and lost sales that convenience entails. Small-basket shops are more expensive for retailers to service, small stores generate just a fraction of their larger counterparts’ sales and impulse purchases of the types of nongrocery items stocked in superstores can be lost.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 3 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Nevertheless, in those countries where e-commerce, including e-grocery, is gaining share of retail, we see convenience continuing to outperform due to the two channels’ complementary natures. First, convenience stores, particularly those with the fresh-heavy formats major chains offer, are a natural complement to occasional, bulk online grocery shops. Second, as For the more forward- general merchandise categories such as electronics migrate to online, thinking convenience shoppers have less reason to make trips to large, out-of-town superstores retailers, convenience laden with nongrocery ranges. Third, for the more forward-thinking stores are the latest convenience retailers, notably Tesco in the UK, convenience stores are the locations to serve as latest locations to serve as collection points for online, nongrocery click- collection points for online, and-collect orders. In time, we could see small shops function as grocery click-and-collect points, too. nongrocery click-and- collect orders. A number of grocery chains are tapping the urban consumer market through their convenience stores. They are serving these consumers with more meal solutions, which, for some retailers, includes building in food- service propositions. Especially in central and transit locations, convenience stores function as food-to-go outlets that can compete with specialist food- service outlets.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 4 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

MARKET SNAPSHOT The convenience store sector is outperforming: in the UK, in France and in Germany, the convenience sector outpaced both total grocery growth and inflation in food prices last year. In the UK and France, this was in the context of intense price competition creating a deflationary grocery market.

Figure 1. Convenience Store Sales Growth vs. Total Grocery Sales Growth and Food-Price Inflation, 2014

The UK has by far the biggest convenience store sector of the three countries.

*In France and Germany, growth is for convenience stores excluding stores at filling stations. Source: Association of Convenience Stores/IGD/Office for National Statistics/Euromonitor International/Statistisches Bundesamt/INSEE/Eurostat/FBIC Global Retail & Technology

The UK has by far the biggest convenience store sector of the three countries. The sector has long been a complement to the bigger supermarkets in the UK and it has been boosted by more lax Sunday trading restrictions for small stores. In France, out-of-town hypermarkets have traditionally been the leading grocery format. Convenience stores offer a natural complement to occasional, big-store shops, yet the convenience sector has remained minor. With the blossoming of online grocery shopping in France, this could change—and we are seeing major grocery chains push into convenience and other smaller-store formats. German grocery retailing is focused on small-store shopping, often close to home: discounters and small supermarkets dominate, so there is no niche for convenience stores to carve. Consequently, the convenience sector is tiny in Germany.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 5 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Figure 2. Estimated Convenience Store Sales (Left Axis) and Convenience Store Sales as % of Total Grocery Sector Sales (Right Axis), 2015

Note: In France and Germany, data are for convenience stores excluding stores at filling stations. Source: Association of Convenience Stores/IGD/Office for National Statistics/Euromonitor International/Statistisches Bundesamt/INSEE/Eurostat/FBIC Global Retail & Technology

SPAR, which is a Continent-wide player, remains Europe’s largest convenience store retailer, according to Euromonitor International. SPAR operates in most European countries, including the UK, France and Germany. In 2014, Tesco and Carrefour advanced as the second- and third- largest European convenience store retailers, respectively.

Figure 3. Europe’s Biggest Convenience Store Retailers: Net Revenues (Excluding Sales Tax), 2014 and 2013

Source: Euromonitor International

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 6 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

EUROPEAN TRENDS Convenience store shopping is Different Markets, Different Drivers the natural complement to The UK, France and Germany have very different grocery sectors, yet large, occasional bulk shops— common to all is an outperforming convenience subsector. Grocery retailing whether these are undertaken in the UK pivots on high-street supermarkets and out-of-town superstores; at superstores or on the in France it is traditionally focused on hypermarkets; and in Germany it is dominated by discounters and smaller-store supermarkets. Away from Internet. physical stores, too, there are major differences in the migration to online grocery shopping: the UK is a more mature e-grocery market than is France, which, in turn, is well ahead of Germany. These factors matter because convenience store shopping is the natural complement to large, occasional bulk shops—whether these are undertaken at superstores or on the Internet. The reverse is true, too: where smaller-store formats are the everyday choice for grocery shopping, as in Germany, there is no real demand for convenience stores. The marked differences in the convenience store sectors of these three countries are largely the result of these broader structural variances. As we showed in Figure 2, above, the scale of the convenience sector varies substantially: its share of grocery sector sales ranges from fully 27% in the 0.3% UK to 4% in France and just 0.3% in Germany (excluding filling station stores in Germany and France). Given these differences, why are all three nations seeing convenience grow its share of total grocery? In the UK and France, the rapid expansion of big grocery chains such as Sainsbury’s and Carrefour into smaller-store formats The sector’s share of grocery largely accounts for the growth. These retailers are bringing superstore sector sales ranges from fully standards to local shops, making convenience a real alternative to big 27% in the UK to 4% in France grocery stores. In Germany, the tiny convenience sector is being buoyed by and just 0.3% in Germany. newer formats targeting on-the-go consumers with an offering that is heavy on food service.

Figure 4. National Convenience Store Attributes Features of the Sector Convenience Growth Drivers Future Opportunities UK • Large but fragmented, with symbol • Major grocery chains bringing higher • Closer integration with e-commerce, groups and independents holding standards to convenience. with convenience stores serving as

major shares. • More smaller-basket, little-and-often click-and-collect hubs. • Major grocery chains consolidating shopping. • Further consolidation of the sector. the sector, but risking cannibalization • Complement to increasingly popular of their supermarket sales. option of less frequent, bulk Internet grocery shopping. France • Relatively small but concentrated • Major grocery chains introducing • Broaden usage of the niche convenience store sector. convenience formats to more convenience channel. • Major grocery chains expanding, shoppers and bringing higher • New players could challenge helping to drive sector growth. standards to convenience. Carrefour’s dominance.

• Leading grocer (Carrefour) is the • Complement to occasional, bulk • Encourage usage for top-up shops that dominant player. shopping online or at hypermarkets. complement e-grocery purchases; integration with nongrocery e- commerce by serving as collection points. Germany • Tiny sector, stifled by the dominance • Renewed focus on food service from • Transit retail niche sidesteps Sunday of alternative smaller-store formats in new entrants such as REWE To Go. trading limits.

German grocery. • New fascias focusing on urban • Differentiate from discounters and • Restrictive Sunday trading hours are a commuters, sidestepping direct supermarkets through food-service and further depressing force. Transit competition with supermarkets or multi-channel services such as click- locations have greater freedom to discounters. and-collect. open on Sundays. Source: FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 7 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Adding to the distinctions between these markets is the short-term grocery environment. In the UK and France, the big grocers are currently engaged in intense price competition that has pushed the grocery sector into deflationary territory. This price competition is inevitably trickling down to convenience stores, so we expect the subsector to grow much more slowly in the UK and France in 2015 than in some recent years. Germany has also seen intensified grocery price competition, but the sector there is much more stable, largely due to the constancy of the discount stores. Big Grocery Chains Push into Convenience Stores… A common theme across these countries is the encroachment of major grocery retailers into the convenience subsector. Push and pull factors are 2015 influencing these moves. On the push side, major retailers, including Tesco and Carrefour, are facing potential saturation of mature channels such as superstores. Moreover, in the UK especially, there has been a noticeable downturn in demand for out-of-town, big-store shopping as consumers’ Price competition is weekly shopping has splintered into Internet retailing, discounters and inevitably trickling down to stores closer to home—what we term repertoire shopping. On the pull side, convenience stores in 2015. there is the prospect in the UK of consolidating the sector; convenience is the last major grocery channel to experience concentration by major chains. And in France and, to a lesser extent, in Germany, there are opportunities to grow usage of the still-niche convenience channel by bringing the format within reach of more shoppers. As retailers seek to tap this growth channel, big names such as Sainsbury’s and Carrefour are piling in. Carrefour, for instance, is synonymous with the hypermarket format, yet it has 15 times as many convenience stores as it does hypermarkets.

Figure 5. Number of Smaller-Store Outlets vs. Regular Formats for Selected Major Grocers 2010 2011 2012 2013 2014 Carrefour (France) Convenience Store Format 3,217 3,285 3,342 3,458 3,673 Annual % Change N/A 2.1 1.7 3.5 6.2 Hypermarket Format 231 232 220 234 237 Annual % Change N/A 0.4 (5.2) 6.4 1.3 Sainsbury’s (UK) Convenience Store Format (Sainsbury’s Local) 377 440 523 611 707 Annual % Change N/A 16.7 18.9 16.8 15.7 Supermarket Format 557 572 583 592 597 Annual % Change N/A 2.7 1.9 1.5 0.8 Source: Company reports In the UK, the convenience store channel is more fragmented than other grocery channels are—yet big grocery retailers have already established strong positions. Tesco leads in UK convenience with a share of about 18%. In France, Carrefour already represented half of the convenience store market in 2014, and the company continues to expand; it opened about 518 convenience stores last year. In their most recent financial reports, two of Tesco’s rivals, Marks & Spencer and Sainsbury’s, said that expanding their convenience store network was a strategic priority. In 2014, Marks & Spencer opened 62 M&S Simply Food stores, while Sainsbury’s opened 96 new Sainsbury’s Local stores.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 8 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

We think the biggest risk is that …but Risk Cannibalization, Lower Profits and Lost Sales retailers can end up cannibalizing In the race to tap this faster-growing channel, big-name retailers must sales from their own larger remain aware of the risks. We think the biggest risk is that retailers can end stores. up cannibalizing sales from their own larger stores. When chains bring fresh foods, their own brands and big-name products to consumers’ doorsteps, there is less justification for those consumers to make a trip to the chains’ larger shops. The resulting consumer shifts—and the positive small-store comps they fuel—can be used to justify further convenience store openings, creating a spiral of cannibalization. For retailers in the UK and France, then, moving into convenience requires tapping genuine growing demand without actively encouraging shoppers to switch from their existing supermarkets. The threat of pushing consumers The threat of pushing consumers to smaller stores is all the greater due to to smaller stores is all the greater the lost sales and higher costs that convenience entails versus big-store due to the lost sales and higher retailing. Small-basket shops are more expensive for retailers to service, costs that convenience entails. small stores generate just a fraction of their larger counterparts’ sales and impulse purchases of nongrocery items stocked in superstores can be lost. According to a study from commercial property firm CBRE, it can take about 12 convenience stores to generate the same level of sales as a single full- size supermarket—not just because of the differences in store size, but also because of the limited product ranges sold in smaller stores. So, tapping new regions with smaller stores rather than supermarkets could hit sales and margins in the longer term. Synergies with Multi-Channel and Mobile Technology Despite these warnings, we see convenience as an outperforming channel in the medium term in those countries where e-commerce, including e- grocery, is gaining share of retail. Small-store formats appear more relevant than ever: • Convenience stores, particularly those with the fresh-heavy formats offered by major chains, are a natural complement to occasional, bulk online grocery shops. • As general merchandise categories such as electronics migrate online, shoppers are less inclined to make a trip to a large, out-of-town superstore laden with nongrocery ranges. • For the more forward-thinking convenience retailers, notably Tesco in the UK, convenience stores are the latest locations to serve as collection points for online, nongrocery click-and-collect orders. In time, we could see small shops function as grocery click-and-collect points, too. Mobile technology may prove E-commerce aside, mobile technology may also prove particularly relevant particularly relevant for for convenience stores, given that mobile urban consumers constitute an convenience stores. important segment for the channel. Many convenience stores already use apps to send promotional offers to customers, including invitations to participate in in-store promotions. For example, in 2012, SPAR in the UK launched an app to send promotion alerts to its customers.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 9 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Meanwhile, Albert Heijn’s AH to Go chain in the Netherlands has evolved into a digitally focused convenience chain, with digital signage and QR codes, and it was an early adopter of a dedicated mobile site.

Convenience stores have adopted other cutting-edge mobile technologies aimed at improving the shopping experience, too. In the UK, for example, SPAR and M&S Simply Food stores already accept Apple Pay, the recently launched mobile payment technology.

City dwellers remain an important consumer base, as urbanization continues to grow even in mature markets.

Source: Wikimedia Commons Serving More Urbanites, Plus Dining to Go A key difference between Many grocery chains have expanded their convenience store channels in order to tap the urban consumer market, a segment that remained the major chains’ underserved by traditional out-of-town superstores. City dwellers remain an convenience stores and important consumer base, as urbanization continues to grow even in independent convenience mature markets. In the UK, for instance, all cities showed positive stores is the breadth of their population growth between 2001 and 2011, reversing a trend of city offerings in meal solutions. shrinkage that had occurred before 2001, according to the Office for National Statistics. It is commonly thought that urban consumers are likely to have busy schedules and, so, less time for chores such as buying groceries. If we accept this impression of urbanites, then smaller local stores with extended DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 10 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

operating hours suit these shoppers. Moreover, they are not likely to be looking for the ambient grocery categories traditionally found in independent convenient stores. They demand more ready-made foods, such as prepared meals to take home to cook and on-the-go foods to eat away from home. Indeed, a key difference between the major chains’ convenience stores and independent convenience stores is the breadth of their offerings in meal solutions such as ready meals and salads that can be taken home. And an increasing number of convenience players are offering grab-and-go foods. Especially in central and transit locations, convenience stores function as food-to-go outlets that compete with specialist food-service outlets. A prime example is the REWE To Go convenience chain launched by REWE Group in Germany in 2011. These convenience stores have a strong focus on foods to go, are located in busy transit areas, and offer freshly brewed coffee, sandwiches, salads and other meal solutions. AH to Go launched in the German market in the same year, with a similar focus on food service.

Premium food-service offering may currently be confined to trendy neighborhoods in big cities, but providing food on the go is likely to prove popular more widely.

Source: fotocommunity.de Other convenience stores have expanded their food service beyond coffee and light meals: a SPAR in East London combines an eat-in pizzeria with a convenience store, and the same operator has recently opened a second store that has a burger bar. This kind of premium food-service offering may currently be confined to trendy neighborhoods in big cities, but providing food on the go is likely to prove popular more widely.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 11 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

UK Summary • With value sales of £35 billion (€43 billion) in 2014, the convenience store sector is substantial in the UK, representing fully 27% of total grocery retailing. • The sector has consistently outperformed total grocery in the UK, with growth in 2014 of around 5%, according to industry research firm IGD. • Along with online and discount (e.g., Aldi and Lidl), the convenience 1.9% sector is a bright spot in a negative-growth grocery sector hit by intense price competition and consequent deflation. • External changes such as more online grocery shopping and greater shopping at a variety of grocery store formats, including discounters, We expect the UK has contributed to sector growth. convenience store market to grow at a much slower • But the push into convenience by big grocers such as Tesco, Sainsbury’s and Marks & Spencer has undoubtedly made the format an attractive pace—1.9% in 2015—given alternative to big-store shopping for some consumers. the deflationary context. • Tesco is the leading player in the convenience store sector in the UK. However, the sector remains somewhat fragmented, so we expect to see consolidation in future years—indeed, the opportunity to consolidate the sector is one reason for big chains to open convenience stores. • We expect the UK convenience store market to grow at a much slower pace—1.9% in 2015—given the deflationary context and the negative growth expected in total grocery this year. The UK Sector in Numbers

The convenience sector is a Figure 6. UK: Convenience Store Sales as % of Total Grocery Sector Sales bright spot in a negative- growth grocery sector hit by intense price competition and consequent deflation.

Source: Association of Convenience Stores/IGD/Office for National Statistics/FBIC Global Retail & Technology

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 12 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Figure 7. UK: Retail Sales Growth and Food-Price Inflation

2015 estimated inflation is the average for January–June. Source: Association of Convenience Stores/IGD/Office for National Statistics/Eurostat/FBIC Global Retail & Technology

Figure 8. UK: Retail Sales Data (Excluding Sales Tax) 2012 2013 2014 2015E Convenience Store 31.2 32.8 34.6 35.2 Sales (£ Bil.)* Annual % Change 5.0 5.2 5.3 1.9 Total Grocery 123.9 127.6 128.9 128.5 Retail Sales (£ Bil.) Annual % Change 3.2 3.0 1.0 (0.3) Convenience Store 25.2 25.7 26.8 27.4 £4.9 Sales as % of Total Grocery Sales BILLION Convenience Store 38.5 38.6 42.9 48.5 Sales (€ Bil.)

The UK sector leader is *Includes convenience stores at filling stations. Tesco, which had groupwide Source: Association of Convenience Stores/IGD/Office for National Statistics/FBIC Global Retail & Technology convenience store sales of £4.9 billion in 2014. The UK sector leader is Tesco, which had groupwide convenience store sales of £4.9 billion in 2014, according to Euromonitor International. Euromonitor says The Co-operative Food was in second position, with 2014 convenience store sales of £3.6 billion. Marks & Spencer’s total UK food sales—through its large general merchandise stores as well as through its stand-alone M&S Simply Food convenience stores—totalled £5.2 billion in 2014. Like most of the big grocery retailers, Marks & Spencer does not split out its food revenues by type of store. But there is a case for arguing that a large majority of Marks & Spencer’s food sales fall into the “top-up” category and, so, are effectively convenience sales.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 13 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

SECTOR ISSUES An Outperforming Convenience Sector Along with online and discount, Convenience stores are a bright spot in a fast-changing and deflationary UK convenience is a growth grocery sector. Along with online and discount, convenience is a growth channel, whereas supermarkets and superstores are, according to various channel. sources, losing share of sector sales. Growth has become more elusive in UK grocery. The rapid expansion of Aldi and Lidl, and the subsequent loss of market share at chains such as Tesco, Morrisons, Asda and Sainsbury’s has prompted strong price competition in the overall grocery sector. We expect this to hit convenience sector sales in 2015—the sector will not be immune to the trickle-down effects of price cuts. The big convenience chains, such as Tesco Express, will lead deflation in the sector. Independents and voluntary/symbol groups are less likely, we think, to take part in strong price competition.

A Deflationary Grocery Sector The sector will not be immune Food-price inflation fell in 2014 before turning negative—and deflation has to the trickle-down effects of deepened in 2015. According to IGD and the Association of Convenience price cuts. The big Stores, the convenience sector continued to grow at 5% in 2014. We use their data in this section, although we believe they may have overestimated convenience chains, such as 2014 growth, given the deflationary context and the numbers reported by Tesco Express, will lead major convenience retailers. deflation in the sector. Traditionally, convenience growth has tracked a couple of percentage points above total grocery sector growth—but an estimate of 5% for 2014 is a full four percentage points higher than overall sector growth last year. Moreover, data from Sainsbury’s and Marks & Spencer showed a slowing of year-over-year growth in 2014, adding further weight to our belief that convenience sector sales may have slowed last year. Fiscal years for both companies end in March and, so, effectively represent the previous calendar year (i.e., fiscal year 2015 equates to calendar year 2014).

Figure 9. Year-over-Year Growth in Sales: Selected Convenience Retailers

*Sainsbury’s provides only rounded figures for its Sainsbury’s Local convenience operations. **M&S Food total includes food halls in its general merchandise stores. Source: Company reports

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 14 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. Our own estimate of 1.9% growth for 2015 assumes that convenience will continue to outpace total grocery by slightly more than two percentage points.

December 2015

So, we use the data from IGD and the Association of Convenience Stores, but we take their 2014 growth rate with a pinch of salt. Our own estimate of 1.9% growth for 2015 assumes that convenience will continue to outpace total grocery by slightly more than two percentage points. Grocery Chains Tap Convenience Store Opportunities The UK has seen major grocery retailers pile into the convenience sector since Tesco pioneered entry with its first Tesco Express convenience store back in 1994. Sainsbury’s, Waitrose, Marks & Spencer and Morrisons joined Tesco in opening small shops on high streets, at filling stations and in transit locations such as railways stations. Between 2010 and 2014, Tesco, Marks & Spencer, Sainsbury’s and Morrisons collectively added 1,319 convenience stores to their operations. During the same period, Sainsbury’s almost doubled the number of its convenience stores and Morrisons entered the sector.

Figure 10. UK: Selected Major Retailers: Number of Convenience Stores Absolute Change, 2010 2011 2012 2013 2014 2010–14 Tesco Express and One Stop 1,806 2,040 2,186 2,394 2,505 699 M&S Simply Food 367 388 419 447 504 137 Sainsbury’s Local 377 440 523 611 707 330 Morrisons M Local N/A 3 12 102 153 153 Total 2,550 2,871 3,140 3,554 3,869 1,319 Source: Company reports/FBIC Global Retail & Technology A big attraction to these retailers is the relative fragmentation of the convenience store market, with its significant presence of small independents: it is the last substantial grocery subsector that the grocery chains can consolidate. For companies such as Tesco, which have substantial big-store estates, convenience has proved to be a growth channel. Repertoire Shopping Boosts Convenience In recent years, the UK convenience sector has benefited as consumers have gradually shifted away from making large, irregular shopping trips to big supermarkets in favor of shopping online or buying from smaller stores, including both convenience stores and discount stores such as Aldi and Lidl. Sainsbury’s has been one retailer to note this trend of repertoire shopping. 1.9% At year-end 2015, the company noted, “The move away from one weekly shop has been supported by the growth of convenience stores, improvements and confidence in the ease and security of shopping online and the rise of discounters.” The push by retailers such as Sainsbury’s into convenience is therefore catering to this demand for smaller-store Our own estimate of 1.9% shopping, but also fueling it. growth for 2015 assumes that Risk of Cannibalization convenience will continue to Since the big retailers are, as Sainsbury’s says, encouraging shoppers to outpace total grocery by switch to convenience stores, a key question is: Are their smaller stores slightly more than two cannibalizing sales from their own supermarkets? Given the highly percentage points. concentrated nature of the UK grocery sector—where just four players account for over 70% of sector sales—we think this is a real possibility. If, for instance, a small Tesco Express store opens close to a shopper’s home,

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 15 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

then that shopper has much less incentive to drive to the large Tesco farther The big chains face a afield. This shopper’s pattern can then be used to justify opening more dilemma: If they pull back on branches of Tesco Express. The end result of such cannibalization, however, is that retailers have spent large sums on expansion for little or no net gain. convenience openings to spare their bigger stores, will In reality, it is probably not so straightforward. We think these convenience their competitors simply step stores will be cannibalizing sales in many areas, but they will also be picking up sales from rivals, including independent convenience stores. Moreover, into those small-store the big chains face a dilemma: If they pull back on convenience openings to spaces? spare their bigger stores, will their competitors simply step into those small- store spaces? Improving Standards For the consumer, the result of this competition has been a radical driving up of standards in the convenience sector. We see the key distinction between “old” (largely independent) convenience formats and “new” (chain store) convenience formats as the choice of fresh foods in the latter. Prepared foods such as chilled ready meals (under known and trusted own brands) and an abundance of fresh fruit, vegetables, meat and fish are common sights in the convenience chains, but independent stores often offer only ambient or frozen alternatives. The likes of Tesco Express and Sainsbury’s Local have brought superstore standards to shoppers’ doorsteps, making the sector more appealing and moving it beyond the traditional distress-purchase mission. Dovetailing with Online Grocery Retailing… The focus on fresh foods in these stores means there is a natural dovetailing between these formats and online grocery retailing. Convenience stores laden with fresh produce, meals for tonight and lunch for the kids offer a natural complement to less frequent Internet purchases; they service a top- up function that complements bulk Internet purchases of more ambient products such as dried and canned foods. So, as all the big grocers push into e-grocery, it is perhaps natural that they offer the counterpart to online shopping—convenience stores. 1,700 …and Offering Synergies with Online Nongrocery Retailing, Too Some convenience stores have benefited from the rise in multi-channel retailing. Smaller independent and branded players have reinvented themselves as collection points for third-party retailers. For example, some Co-operative Food stores host Amazon Lockers, and a large number of Tesco has allowed its online independent stores serve as CollectPlus collection points for retailers that shoppers to pick up non- sell online. grocery orders from its In addition, Tesco has allowed its online shoppers to pick up nongrocery roughly 1,700 Tesco Express orders from its roughly 1,700 Tesco Express convenience stores since 2013. convenience stores since It is likely to be only a matter of time before some rivals follow suit, and we start to see grocery click-and-collect in convenience stores. 2013.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 16 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Not All Smooth Sailing It has not been easy for the big grocery retailers recently. As part of a round of store closures announced in January 2015, Tesco has shuttered 18 unprofitable convenience stores this year, following years of seemingly unstoppable expansion. This was followed by the more dramatic news of Morrisons’ sale of its entire Morrisons looks to have been convenience estate in September 2015. The grocer agreed to sell its 140 pushed into the sale by an convenience stores to Greybull Capital. The announcement followed inability to invest further in the Morrisons’ March 2015 statement that it would close 23 of its small M Local channel and a need to rid itself stores. A number of commentators speculated that Morrisons’ exit from of some loss-making stores. convenience was due in part to a difficulty in finding good locations. We think the ongoing expansion of rivals—including Tesco, Sainsbury’s, Marks & Spencer and Waitrose—into convenience suggests, however, that plenty of good locations are still available. In our view, Morrisons looks to have been pushed into the sale by an inability to invest further in the channel and a need to rid itself of some loss- making stores. In its interim results presentation, management stated that the convenience store operation was a “distraction” that it was “unable to scale.” Morrisons’ exit from convenience appears to have been prompted by circumstances that are largely unique to it, rather than by underlying problems in the convenience channel. But the assortment of announced closures from Tesco and Morrisons, followed by the latter’s sales of its M Local chain, suggests that convenience is not simply a rising tide that lifts all boats. And with more stores from major grocery chains in the market each year, competitive pressure will only increase. Potential Threats from Legislative Developments The big grocery chains’ UK convenience stores have traditionally gained substantially from their ability to trade during all hours. The UK’s Sunday Trading Act prevents convenience stores are based stores larger than 3,000 square feet from opening for more than six hours on much more than simply on Sundays, and this has long given a boost to the convenience store sector. catering to out-of-hours Sunday However, the UK government’s 2015 Budget announced the possibility of shopping. relaxing the Act. If passed, the new regulation would likely heap competitive pressure on convenience stores. The Association of Convenience Stores has already voiced the industry’s concerns, saying the existing law represents a small but crucial advantage for thousands of convenience stores against growing competition from big chains. The demise of the Act would be problematic for convenience retailers that are already operating on a tight margin in a saturated and competitive market. We expect independent stores to be the biggest losers if the Act is relaxed, as traditional convenience store formats are likely to be the option of last resort for Sunday shoppers. The big grocery chains’ convenience stores, as we have already outlined, are based on much more than simply catering to out-of-hours Sunday shopping.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 17 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

And Independents? We expect to see independents Given the ongoing encroachment of major grocery chains (with the exception of Morrisons), life is likely to get even tougher for independent lose share and to see more of stores. As we noted earlier, the opportunity for big retailers to consolidate them flock to the relative the convenience sector—in the same way they consolidated the security of voluntary/symbol supermarket sector decades ago—is a big draw. So, we expect to see groups such as SPAR, Londis independents lose share and to see more of them flock to the relative and Nisa. security of voluntary/symbol groups such as SPAR, Londis and Nisa. These groups offer opportunities to drive up store standards and provide own- brand ranges as well as potentially lower prices on big-name brands. FRANCE Summary • France has a small but outperforming convenience store sector. Excluding all filling station shops, convenience store sales will grow by just over 2%, to €6.8 billion, in 2015, according to Euromonitor International. This equates to 3.6% of total grocery sector sales. • Including all filling station shops (which may include small kiosks), the sector will equate to 4.6% of total grocery this year. • The convenience store sector has traditionally been overshadowed by hypermarkets in France. In theory, these two types of stores should be complementary, making the very minor scale of the convenience sector all the more surprising. • But the French grocery sector is gradually reshaping: hypermarkets, in general, look to be underperforming long term as more nongrocery and grocery shopping migrates online. With some consumers favoring smaller-basket, more frequent and closer-to-home shopping, and with big hypermarket names such as Carrefour investing in small stores, the convenience channel looks likely to outperform. • Convenience stores also stand to gain from increased levels of online grocery shopping, which boosts demand for top-up shopping, especially for fresh foods. • One force depressing short-term sector growth is deflation. A price war between the major grocery groups has pushed down both prices and growth for the overall grocery sector.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 18 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

The French Sector in Numbers

Figure 11. France: Convenience Store Sales as % of Total Grocery Sector Sales

Source: Euromonitor International/INSEE/Eurostat/FBIC Global Retail & Technology

Figure 12. France: Country Data, 2014

*Excluding filling station stores. 2015 estimated inflation is the average for January–July. Source: Euromonitor International/INSEE/Eurostat/FBIC Global Retail & Technology

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 19 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Figure 13. France: Retail Sales Data (Excluding Sales Tax) 2012 2013 2014 2015E Convenience Store Sales (€ Bil.) 6.4 6.5 6.7 6.8

Annual % Change 3.5 2.9 2.2 2.3 Filling Station Shop Sales (€ Bil.)* 1.9 1.9 1.9 1.9 Total Incl. Filling Station Shops (€ Bil.)** 8.2 8.4 8.5 8.7

Annual % Change 2.3 2.1 1.6 1.8

Total Grocery Retail Sales (€ Bil.) 192.5 192.8 189.3 189.3 Annual % Change 1.8 0.1 (1.8) 0.0 Convenience Store Sales as % of Total Grocery Sales 3.3 3.4 3.5 3.6

Convenience/Filling Station Stores as % of Total Grocery* 4.3 4.4 4.5 4.6 *Not all filling station shops are full convenience stores—some may be small kiosks. We include the data for completeness. **Total may not sum due to rounding.

Source: Euromonitor International/INSEE/Eurostat/FBIC Global Retail & Technology

The convenience store sector leader is Carrefour, with French convenience store sales of €3.3 billion in 2014, according to Euromonitor International. Casino is in second place, with convenience store sales of €1.7 billion in 2014. In the filling station shop subsector, Total is the sector leader, according to Euromonitor International, with shop sales of €788 million (excluding fuel sales) in 2014. SECTOR ISSUES A Complement to the Hypermarket By serving demand for top-up shopping closer to home, convenience stores can flourish as a complement to larger grocery stores used for more occasional shopping trips. Given that France is the European home of the hypermarket format, the convenience sector in the country is unexpectedly €3.3 small. BILLION This is perhaps indicative of the long-standing dominance of the hypermarket and supermarket formats—French shoppers have not traditionally done any secondary shopping elsewhere. But it also reflects a relative paucity of big-name grocers in the convenience sector. It is only in The convenience store sector recent years that companies such as Carrefour have moved into leader is Carrefour, with French convenience formats. convenience store sales of €3.3 Accounting for a little under 4% of grocery sector sales, excluding filling billion in 2014. station shops, the convenience store sector in France is nevertheless more than 10 times bigger in relative scale than that of neighboring Germany. This suggests that hypermarket and convenience formats are somewhat complementary in France.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 20 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Figure 14. France: Number of Outlets, Selected Grocery Store Formats

2010 2011 2012 2013 2014

Modern Grocery Retailers Total 27,495 27,683 27,647 27,422 27,276 Including: Convenience Stores 8,838 9,041 9,024 8,935 8,908 Filling Station Stores 4,761 4,644 4,554 4,481 4,427 Hypermarkets 1,607 1,648 1,655 1,683 1,705 Source: Euromonitor International Big Names Using Acquisitions to Push into Convenience Once the epitome of In France, Carrefour has led the charge of big names into convenience hypermarket-focused retail, formats. Once the epitome of hypermarket-focused retail, Carrefour has Carrefour has seen seen underperformance at its biggest stores, prompting the company to underperformance at its biggest ramp up its small-store presence. In fiscal year 2014, for instance, Carrefour stores, prompting the company opened 755 stores worldwide; 518 (or 69%) of these were in the to ramp up its small-store convenience format. In its domestic market, convenience stores are already the dominant format by total number for Carrefour, and they have been the presence. focus of its opening program. Future development of convenience stores will be boosted by the late-2014 acquisition and conversion of the small- store DIA chain. DIA was already part of Carrefour before its spin-off in 2011.

Figure 15. Carrefour France: Number of Stores, Selected Formats (as of Dec. 31)

Absolute Change, 2010 2011 2012 2013 2014 2010–14 Convenience Stores 3,217 3,285 3,342 3,392 3,607 390 Hypermarkets 231 232 220 221 223 (8) Total 5,494* 4,631* 4,635 4,670 4,900 (594)*

*Store numbers fell primarily due to the spinning off of DIA in 2011. Source: Company reports/FBIC Global Retail & Technology

Casino’s development of small stores has been less straightforward, with the franchised, multi-fascia nature of its operations adding complexity. But, as with Carrefour, a large-scale acquisition has boosted Casino’s presence in 2013 proximity formats. In 2013, Casino acquired 100% control of the mixed- goods/grocery chain Monoprix, and the company stated that this “marked the apex of a development strategy focused on convenience outlets and launched in 1996.” The Monoprix store numbers are not included in the convenience segment reported below. In 2013, Casino acquired Figure 16. Casino France: Number of Stores, Selected Formats (as of Dec. 31) 100% control of the mixed- Absolute Change, goods/grocery chain 2010 2011 2012 2013 2014 2010–14 Monoprix, and the company Convenience Stores 6,675 6,561 6,546 7,347 6,825 150 stated that this “marked the Hypermarkets 125 127 125 126 127 2 apex of a development Total 9,461 9,551 9,734 10,649 10,416 955 strategy focused on

convenience outlets and launched in 1996.” Source: Company reports/FBIC Global Retail & Technology Cooperative retail group Système U has also been growing its convenience estate, with convenience store numbers jumping from 368 in 2010 to 426 in 2014, according to Euromonitor International.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 21 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Outperforming Stores, but Risk of Cannibalization For Carrefour, this investment has yielded above-average comps in its convenience stores. Its multi-fascia approach—with brands such as Carrefour City, Carrefour Contact, Carrefour Montagne and Proxi—together with its tailoring of ranges to local catchments, is likely to bolster the convenience segment’s performance: it is not a one-size-fits-all model.

Figure 17. Carrefour France: Comparable Sales Growth, by Format

Source: Company reports

There is a case for arguing that A big question for hypermarket players such as Carrefour—as for retailers elsewhere that are pushing into convenience—is the extent to which they retailers are discouraging are cannibalizing their existing stores’ sales by opening large numbers of shoppers from visiting large convenience stores. As we note elsewhere in this report, there is a case for stores by bringing supermarket arguing that retailers are discouraging shoppers from visiting large stores by standards to their doorsteps. bringing supermarket standards to their doorsteps. The robust comps that result can then justify more store openings, potentially creating a spiral of cannibalization. Sector Performance Investment in convenience stores from the likes of Carrefour, Casino and Système U is one factor behind the outperformance of the sector. But there are also signs that these stores resonate with modern French living. First, convenience stores offer a strong complement to online grocery shopping due to the demand for top-up shopping, particularly for fresh foods. Relative to other markets, France has a mature e-grocery sector. While only around 2%–3% of grocery sector sales were generated online in 2014, according to our estimates, all the major players have pushed into e- commerce convincingly, in contrast to markets such as the US and Germany. As more general merchandise Second, the hypermarket appears to be a format in slow decline or, at best, sales move online, and as one seeing low growth. This is not a trend seen purely in France: in the UK, some grocery sales migrate to we have observed a more dramatic decline in hypermarket performance. As the Internet, big out-of-town more general merchandise sales move online, and as some grocery sales migrate to the Internet, big out-of-town stores look to have less relevance stores look to have less for shoppers. This does not mean consumers will simply switch from the relevance for shoppers. largest stores (hypermarkets) to the smallest (convenience stores) for their

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 22 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

main grocery shopping, although convenience stores can certainly gain from the top-up shopping needs associated with big-store shopping. It certainly implies a move among consumers to closer-to-home, more frequent, smaller-basket shopping—and convenience could well benefit from this trend. A Hard-Hit Grocery Sector Convenience stores are a relatively bright spot in a grocery sector impacted by a supermarket price war and consequent deflation. A battle for customers between the big players has led to sector deflation and a struggle to maintain positive top-line momentum. Having lost market leadership in the grocery sector to discount-positioned Leclerc, and facing expansion by hard discounters such as Lidl, Carrefour sought to turn around performance with a renewed emphasis on lower prices. This prompted a full-on price war in France between the leading groups, Leclerc, Carrefour, Auchan and Casino. In turn, this competition led to sectorwide deflation and a significant decline in total grocery sector sales in 2014.

Convenience Store Sector Expected to Continue to Grow The migration to Internet The convenience store sector will continue to outperform total grocery, we predict, even though sector sales will be depressed by deflation in the short shopping over the medium term term. The migration to Internet shopping over the medium term is likely to is likely to bolster demand for bolster demand for the close-to-home, top-up shopping that convenience close-to-home, top-up stores can serve—but the stores that benefit will be those that meet shopping. demand for high-quality fresh foods. So, traditional convenience formats, with their focus on ambient products, are likely to lose out to those that bring supermarket standards in fresh foods into consumers’ neighborhoods. We expect ongoing investment in the channel from the likes of Carrefour, Casino and Système U to drive up standards and support sector growth. Finally, the general perceived migration away from hypermarket shopping is a mixed blessing for convenience stores. These stores benefit from consumer demand for top-up shopping between occasional trips to hypermarkets, so any shift to town-center supermarket shopping could, in theory, hit convenience stores. Nevertheless, on balance, we expect convenience stores to benefit from consumers’ move to more frequent, proximity shopping as convenience stores come to be viewed as a viable alternative to supermarket shopping.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 23 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

GERMANY Summary • In Germany, the convenience store sector is miniscule relative to the total grocery sector. In 2015, convenience store sales (excluding filling station stores) are forecast to be equivalent to just 0.3% of the total grocery sector. Including all filling station shops (which may include small kiosks), the sector will equate to 4.4% of total grocery this year. • Lackluster performance in the filling station shops segment has pulled total growth down into negative territory in recent years. The 0.3% neighborhood convenience store sector has been turning in positive growth. • The preponderance of small-store discounters that have shops in local neighborhoods, together with the strength of the complementary In 2015, convenience store small-supermarket format, has traditionally depressed demand for small convenience stores. sales (excluding filling station stores) are forecast to be • Trading restrictions in Germany prohibit most convenience stores from equivalent to just 0.3% of the opening on Sundays, which means there is also little competitive advantage for the convenience store format. Filling station stores are total grocery sector. an exception to these restrictions, helping to explain the substantial scale of the subsector. • Innovation has come in the form of REWE To Go and AH to Go, both fascias that target on-the-go, urban consumers with ready-made, grab- and-go food. We think these types of formats, particularly in transit locations, could inject greater dynamism into the convenience sector. • Yet overall, we do not forecast major shifts: German grocery is a sector marked by stability and a relative conservatism in terms of consumer shopping habits. The German Sector in Numbers

Figure 18. Germany: Convenience Store Sales as % of Total Grocery Sector Sales

*Not all filling station shops are full convenience stores—some may be small kiosks. We include the data for completeness.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 24 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Source: Euromonitor International/Statistisches Bundesamt/Eurostat/FBIC Global Retail & Technology Figure 19. Germany: Retail Sales Growth and Food-Price Inflation

*Excluding filling station shops. 2015 estimated inflation is the average for January–July. Source: Euromonitor International/Statistisches Bundesamt/Eurostat/FBIC Global Retail & Technology

Figure 20. Germany: Retail Sales Data (Excluding Sales Tax) 2012 2013 2014 2015E

Convenience Store Sales (€ Bil.) 0.6 0.6 0.7 0.7 Annual % Change 5.3 6.4 2.4 4.1 Filling Station Shop Sales (€ Bil.)* 8.5 8.5 8.4 8.4 Total Incl. Filling Station Shops (€ Bil.)** 9.1 9.1 9.0 9.1 Annual % Change (0.3) (0.3) (0.7) 0.8 Total Grocery Retailer Sales (€ Bil.) 189.8 196.7 200.9 205.1 Annual % Change 3.3 3.6 2.1 2.1 Convenience Store Sales as % of Total 0.3 0.3 0.3 0.3 Grocery

Convenience/Filling Station Store Sales 4.8 4.6 4.5 4.4 as % of Total Grocery*

*Not all filling station shops are full convenience stores—some may be small kiosks. We include the data for completeness. **Total may not sum due to rounding.

Source: Euromonitor International/Statistisches Bundesamt/Eurostat/FBIC Global Retail & Technology

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 25 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

In Germany, the convenience store sector leader is SPAR, which had convenience store sales of €182 million in 2014, according to Euromonitor International. Lagardère, a travel retail specialist, is in second place, with convenience store sales of €64 million in 2014. In the filling station shops subsector, BP is the sector leader, according to Euromonitor International, with shop sales of €1.5 billion (excluding fuel sales) in 2014. SECTOR ISSUES A Small Convenience Store Sector €182 Stripping out filling station stores to look only at neighborhood convenience stores, the convenience sector accounts for a very small and stable share of MILLION German grocery. At just 0.3% of all grocery retail, convenience stores excluding filling stations represent a much smaller share of market in Germany than they do in the UK or France, as a result of the unique characteristics of the German grocery sector. The filling station subsector In Germany, the convenience boosts the total convenience sector substantially. store sector leader is SPAR, Convenience stores are typically used as a complement to big-store or which had convenience store online shopping, but the preponderance of small-store, offline grocery sales of €182 million in 2014. shopping in Germany makes these functions redundant. As a result, there are only about 1,000 convenience stores in the country, according to Euromonitor International. In contrast, in the UK, Tesco alone operates more than 1,700 convenience stores.

Figure 21. Germany: Number of Outlets, Selected Grocery Store Formats 2010 2011 2012 2013 2014

Modern Grocery Retailers Total 47,799 47,915 48,075 47,639 47,656 Including: Convenience Stores 888 935 981 1,032 1,039 Filling Station Stores 14,731 14,688 14,623 14,655 14,722 Discounters 15,487 15,638 15,804 15,494 15,615

Source: Euromonitor International Nevertheless, the convenience sector, excluding filling stations, has tended to outpace the overall grocery sector, according to Euromonitor International, attributable in part to increasingly busy consumers and the stores’ appeal to young urban consumers. Discounter Dominance Local, small-store discounters Germany is the heartland of grocery discounters. The country is home to already serve many of the hard-discount heavyweights Aldi and Lidl as well as to smaller players such purposes of convenience as Penny and Norma, and the discount segment accounts for more than stores. 40% of all grocery sector sales. The popularity of discounters has four effects on the remainder of the grocery sector: • Local, small-store discounters already serve many of the purposes of convenience stores.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 26 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

• Discounters have ingrained frugal habits in shoppers, meaning that many are reluctant to pay the higher prices typically seen at convenience stores. • There is little demand for nondiscount hypermarkets due to larger- store formats’ relative lack of appeal. This pushes down demand for convenience stores, which in other countries are used for top-up shopping between occasional trips to large out-of-town hypermarkets. • Finally, discounters boost demand for smaller, nondiscount supermarket formats, which serve as top-up shopping destinations for the products shoppers cannot find at discount stores. The preponderance of these smaller, local supermarkets further depresses demand for convenience stores. The small discount stores and Moreover, German shoppers still tend to frequent local, specialist stores supermarkets are not, such as bakeries more often than shoppers do in some other Western technically, convenience European countries. This kind of repertoire shopping at competing small stores, but they serve as such stores further decreases demand for convenience stores. and make “conventional” So, neighborhood convenience stores are a relative rarity in Germany, but convenience stores redundant. other smaller-store grocery formats are commonplace. The small discount stores and supermarkets are not, technically, convenience stores, but they serve as such and make “conventional” convenience stores redundant. Few Big Names The relative absence of big grocery names among the top tier of convenience operators reflects the almost unnecessary nature of convenience stores in Germany. SPAR is a name familiar across the Continent, but it is a convenience-focused symbol group. Major German grocery retail groups such as Edeka and Metro have little or no presence in the convenience segment, and they have not pushed into convenience formats. Edeka, for instance, is the grocery market leader, operating across hypermarket, superstore, discount and neighborhood supermarket formats—but not the convenience format. Its small, local supermarkets are the principal reason for the near absence of convenience stores in Germany. Scope for More Innovation We see opportunities for food Convenience is a tiny subsector of a stable, relatively conservative grocery sector in Germany. This means there has been little innovation on a service to be a springboard for substantial scale. One of the more innovative ventures in the recent past growth in the sector. has been the launch and growth of REWE Group’s REWE To Go chain. Launched in 2011, the chain has an urban focus, a modern look and a strong food-to-go offering. The company has opened REWE To Go stores in transit locations such as railway stations and filling stations—the types of places where there is demand for prepared food from on-the-go consumers. AH to Go, operated by Ahold from the Netherlands, opened its first German store in 2012. Like REWE To Go, AH to Go focuses on serving urban customers with freshly prepared, grab-and-go snacks and meals. This food service/food-to-go element is one that had previously been underserved in German convenience retailing. Possibly because of ingrained German frugality with regard to grocery shopping, we have not seen food to go become as prominent in the country’s convenience subsector as it has in some neighboring countries. Given this, we see opportunities for food DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 27 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

service to be a springboard for growth in the sector. Grab-and-go food, fresh-food counters and collaborations with food-service players such as Subway suggest new opportunities to pull consumers into the convenience segment. Sunday Shutdowns The forced closure of German retail shuts down on Sundays. The sector is far less liberalized in Germany than it is in countries such as the UK and (very soon, given new convenience stores on Sundays legislation there) France, where limited opening hours are permitted. The means there is much less only major exemptions are small bakeries and convenience stores located competitive advantage for the inside filling stations, railway stations and airports. The filling station sector than in other countries. exemption is a contributory factor to the disproportionate scale of the filling station store subsector relative to neighborhood convenience stores in Germany. The forced closure of all other convenience stores on Sundays means there is much less competitive advantage for the sector than in other countries, where daylong Sunday operating hours are an important driver of weekend sales. This is yet another factor that has suppressed the development of a significant convenience sector in Germany. Convenience Store Sector Expected to Remain Small Transit location stores have German grocery is a sector of exceptional stability and continuity. So, we do greater scope to differentiate not expect any rapid growth in the tiny German convenience sector. The characteristics of German retail mean that small-store demand is served themselves from competing through discounters and local supermarkets, and most convenience stores grocery formats. have no opportunity to gain an advantage by opening on Sundays. What opportunities there are lie mainly in transit retail and in focusing more on food-to-go options, we think. Transit locations are exempt from Sunday trading restrictions, meaning they can tap demand for out-of-hours shopping. Moreover, these locations are likely to see demand for grab-and- go food from on-the-go consumers. So, transit location stores have greater scope to differentiate themselves from competing grocery formats. REWE To Go and AH to Go are innovators here, and we think others are likely to follow their lead.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 28 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

KEY TAKEAWAYS Convenience stores stand to benefit from shifts in shopping patterns in More fresh foods and greater markets where online grocery or discounters such as Aldi and Lidl are food-service propositions put gaining share. When shopping fragments from the traditional big-store clear blue water between shopping trip, it fuels demand for top-up shopping, and many consumers modern convenience retailers turn to convenience stores for those kinds of shops. and their traditional The UK is likely to continue to lead growth in convenience: it is Europe’s counterparts. most developed e-grocery market and Aldi and Lidl are rapidly gaining share in the country. In time, we may see strong demand in other countries that experience similar changes to their grocery sector, including countries outside Europe, such as the US. But convenience retailers cannot expect to naturally be lifted by a rising tide. More fresh foods and greater food-service propositions will cater to the needs of repertoire shoppers and put clear blue water between modern convenience retailers and their traditional counterparts. In countries such as Germany, a food-service proposition could also provide convenience retailers a way to more clearly differentiate themselves from “conventional” smaller-store grocers. Small, local stores can serve as Integration with e-commerce—both grocery and nongrocery—is likely to be useful click-and-collect points, more commonly used to drive footfall in the sector. Small, local stores can initially for nongrocery orders, serve as useful click-and-collect points, initially for nongrocery orders, but, longer term, also for groceries. These services allow the sector to dovetail but, longer term, also for with the fast-growing online channel, complementing the natural boost that groceries. convenience is likely to enjoy as a result of increased online grocery shopping.

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 29 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

Deborah Weinswig, CPA Executive Director—Head of Global Retail & Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected]

Filippo Battaini [email protected] Marie Driscoll, CFA [email protected] John Harmon, CFA [email protected] Aragorn Ho [email protected] John Mercer [email protected] Shoshana Pollack [email protected] Kiril Popov [email protected] Jing Wang [email protected] Steven Winnick [email protected]

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NEW YORK: 1359 Broadway, 9th Floor New York, NY 10018 Tel: 646 839 7017

FBICGROUP.COM

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY 30 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.