Executive Summary.Qxd

Executive Summary Retail Logistics 2005

Key Findings

Overview

This year’s retail logistics survey had 11 companies taking part from multiple retailing and wholesaling. There were mix results; some supply chains have stayed quite static while others have changed substantially. Within the businesses themselves there has been change; the acquisition of Safeway by Morrisons, the consolidation of the Convenience chains have all added to the demands placed upon retailers and wholesalers supply chains. The acid test to all this is product availability and only with collaboration between trading partners can the industry solve this most critical issue.

Grocery Market Trends

Market Overview

The grocery retail market in the UK was worth £115.0bn in 2003, up 3.3% on the previous year. IGD forecasts that the value of the market will be around £118.1bn by the end of 2004;this equates to only 2.7% year-on-year growth.The market is dominated by the four largest retailers accounting for over 76% of all grocery sales by value (source:TNS, 2004).

Consolidation - Multiple Retailing

March 2004 saw the end of the long drawn-out struggle to acquire Safeway and Morrisons proved to be the successful bidder. Whilst Safeway was a large company in itself, it lacked scale relative to rivals and its store portfolio was not suited to delivery of the popular mixed food / non-food offer pioneered by Tesco and Asda. Aggressive promotions had not proven to be a long-term solution to this problem.

Strategy for the enlarged Morrisons / Safeway group will be based around the application of the proven Morrisons offer to all Safeway stores that are considered suitable. Stores considered to be too small for this have been sold, all of them going to Somerfield.

It is intended that integration of the two supply chains will be completed within 18 months of the acquisition, with selected Safeway distribution sites being extended and converted to cope with the Morrisons offer and the higher volumes that are anticipated.

Morrisons is unusual amongst the larger grocery retailers in that it benefits from a high degree of vertical integration, operating several food processing and packaging facilities. This capability will be bolstered with the building of a second food factory, 2 more abattoirs and up to 4 new packing houses for fresh produce.

Integration of the two businesses has not proven to be easy so far. The core Morrisons fascia continues to perform well on a like-for-like basis but, on the same basis, the Safeway fascia is still losing sales, mainly because the high-profile promotions that formerly acted as a footfall driver have been withdrawn.

2 www.igd.com/logistics © IGD 2004 Retail Logistics 2005 Executive Summary

Consolidation - Convenience

The pace of consolidation in the sector has increased markedly in the last year and, so far, corporate change has affected 2,637 stores, or about 5% of the total UK portfolio.

This compares with only 1,503 stores over the whole of 2003, the bulk of which were accounted for by Tesco’s acquisition of T&S Stores.

Key acquisitions taking place this year are as follows, with the acquiring company listed first:

• February - Sainsbury’s / Bells (54 stores) • March - Somerfield / Aberness (36 stores, + 5 franchises & 130 client stores) • March - Tesco / Adminstore (45 stores) • May - Co-op Group / Conveco (64 stores) • August - Musgrave Group / Londis (1,896 stores) • August - Scotmid / Morning Noon & Night (50 stores) • August - Sainsbury’s / Jacksons (114 stores) • August - TM Retail / Dillons (180 CTN stores)

The four largest convenience store operators (by store numbers) between them now account for around 7% of stores and 13% of sector sales.

Sainsbury’s - Retailer in Flux

Sainsbury’s,now the UK’s third-largest retailer,has been a victim of changes within the UK grocery market in recent years. As the market has shifted to favour price / volume-led retailers, Sainsbury’s remained dedicated to a more margin-led approach at the expense of investing in its infrastructure for future growth.

The Business Transformation Programme sought to address this lack of investment, although it led to a focus on the business infrastructure at the expense of the customer offer, giving Sainsbury’s some difficulty in achieving a clear point of difference from its rivals.

Sainsbury’s new team announced a revised strategy on 19th October 2004, designed to focus the business on its customers, rather than on its infrastructure. By concentrating on a sales-led improvement, Sainsbury’s is creating the necessary conditions for a sustained recovery, giving stores an opportunity to compete effectively with other operators in the market.

The improvement of on-shelf availability is one of the pivotal factors in the success of the recovery programme and Justin King believes that 50% of the availability issues need to be solved at store level. A number of short-term actions have therefore already been put into place, such as reducing complexity, driving greater volume into stores and the trialling of improved in-store processes. If these are successful they will be quickly rolled out to the rest of the chain.

Availability Under the Spotlight

Availability is a major issue for the grocery retail industry. ECR Europe research (2002/03) found that the average levels of out-of-stocks in Europe ranged from 7% to 10%. This indicates that manufacturers and retailers forfeit approximately €4 billion in sales annually.

ECR UK wished to build on the ECR Europe work to provide UK findings and direction. In 2003 it launched the ECR UK Availability workgroup and the group has undertaken several key initiatives within the past year to raise awareness of availability as an issue within the UK.

What Next for ECR?

The final 2004 quarter survey will take place week commencing 13th December and will run from Monday to Saturday inclusive. In addition to the 200 core lines an additional 45 Christmas focussed products will be surveyed.

This survey will provide a unique insight into availability performance during the crucial Christmas trading period and highlight how both standard and seasonal lines have faired. Results will be released in January 2005.

In addition to raising awareness through its survey, ECR UK was keen to show case work that demonstrates thought leadership regarding availability. To this aim, as part of IGD’s Food Industry Awards, ECR UK launched its On-shelf Availability Award, sponsored by the Hartington Group.

The awards received was a similar level of entries to long standing awards,with all entries of a high quality. The award was extremely close run with Asda and Walkers Merchandising Unit solution to on-shelf availabilability of crisps entry winning the 2004 award, due to its outstanding performance in all criteria areas.

1.4.14 IT Systems

Retailer’s Use of IT Systems

Retailer Transport Warehouse Inventory Other

Asda • Transport Planning • Inhouse (GDS Wal-Mart • Inhouse (Retail Link) • Wal-Mart Asset Manager System (TPS) System) • Inforem • DSM Statistical Data • CAST - Modelling System • Siemens DAI System • Gentron Management • Microsoft Excel • R-Log Reverse Logistics • Kronos

Booker N/a N/a N/a N/a

The Co-op Group • Paragon • WWCS (AS400) • SMART • JDA Marketplace (for 15 • Autoroute • Inhouse (Cordis) • JDA/E3 Trim suppliers) • Cab Phones • Handshake • EDI Network (Antrix & • Microlise (trial) • Labour scheduling Tradanet) • Didos • OLAS • OLAS Coda

Iceland • In-house • Exceed 2000/Locator • IBM SA • In-house • Paragon • In-house • JDA ASR/AWR • 954 Synchronise Systems • VEMIS (In-cab system) • ETS/400

Nisa-Todays • Paragon • SC manager/Locator • AS400 Robot Client • Inhouse (Pallet System) • BT Tracker • Teklofix • Traderman • AS400 Robot Client • Voiteq (Voice picking) • World Wide Chain Stores

Palmer & Harvey • Roadshow • In-house • In-house • Roadnet • Kronos • Reims • Mobile phones

Sainsbury's • Isotrak • DISCO • Retek • Inhouse (SID, CPS) • Paragon • PKMS • SCION • TOPS • SAE • Retek store ordering • CAST • People Soft • ECR Scorecards • Yard Mgt System • ASN Infolink • T&A

Somerfield • Cab Phones • Dallas 4.6 • IBM • FTP • Paragon • DCS2000 • NK • Cast • GEIS • Datalogger • In-house (Data)

Tesco • Isotrak • Denver • SBO • MM • Paragon • Paperless assembly • CR • Inhouse (TIE) • Traffic master • GI Scanning • LM • GC3 • DASP • CAST • Labmon • DDSM • Siemens • Agis

United • Paragon • Triceps • Biceps • Agresso (Asset manage- Cooperatives • Triceps • Global store ment) • Biceps

Waitrose • In-house • DCS2000 • ICL • Waitrose connect • Site control & load plan- • SP2000 RDT • Tradanet ning • Microlise Optus • Traffic master • Voxware (pick by voice) • In cab phones

Source: IGD Research 2004