UNITED KINGDOM COUNTRY REPORT October 2013 / London, UK KantarRetail.com KantarRetailIQ.eu I – Key Themes Changing Channel Mix The UK’s grocery retail landscape continues to undergo significant structural change, with online, convenience and discount retailing all registering robust growth. Most noteworthy is the rapid growth of the online channel. In fact, growing at double-digit figures, the United Kingdom is the most dynamic online grocery market in the world. That said, online still represents only 5% of the grocery market. Another noteworthy occurrence in the country has been the rapid expansion of the discount channel, driven not only by the German limited assortment grocery discounters Aldi and Lidl but also by high street value chains. While the online channel has increasingly been attracting bulk shopping trips, discounters have become a popular destination for top-up shopping. The growth of these two channels has been at the expense of other grocery shopping formats—supermarkets and hypermarkets in particular. The third growth channel has been convenience stores. While independent stores, symbol groups (Spar, Londis, etc.) and petrol stations are still important components of the convenience sector, most new stores are being opened by the large supermarket businesses that are capitalising on the trend for smaller, more frequent shopping trips. On the flipside, retailers such as Tesco have been seeking to reinvent the hypermarket experience in the face of mounting shopper apathy for the big box, out-of-town retail experience. Featuring reduced non- food space, enhanced fresh departments and increased foodservice, stores like Tesco Extra Watford are indicative of the changes that need to be made to face up to an increasingly multi-channel future. A Highly Promotional Market The United Kingdom remains the most promotional market in European grocery retailing, with around 40% of grocery items being sold on deal, a proportion that can reach as high as 80–90% in certain categories. Despite retailers and suppliers hinting that this level of intensity cannot be sustained, frequent “price wars” are common among major retailers, particularly around key seasonal events. Price matching has become commonplace in the market, with many major retailers using various technologies to promise to match or beat each other in terms of the overall price for a shopping trip. Private Label Remains Pervasive & Sophisticated The United Kingdom has one of the highest private label penetration rates in the world (nearly 60% volume share), thanks to decades of innovation and marketing that has created highly sophisticated tiers of private label ranges that cater to a wide range of income levels and dietary requirements. Private label development has been equally impressive in non-food ranges too. Retailers typically offer a “good, better, best” private label hierarchy in addition to more niche lines. Virtually all major 1 KantarRetail.com KantarRetailIQ.eu supermarkets in the country have recently overhauled their private brand portfolios and continue to launch innovative new lines to drive differentiation. II – Socio-Economic Background Population The United Kingdom is the third most populous country in Europe, behind Germany and France. In 2011, the UK population reached 63.2 million, growing by 4 million since the beginning of the 2001. Driven by natural growth and immigration, the population is projected to grow to 71.4 million by 2030 (Figure 1). Figure 1 Size of UK Population (in millions) Source: Office for National Statistics 1991 2001 2011 2020E 2025E 2030E 57.4 59.1 63.2 67.2 69.4 71.4 The number of households has also been growing, from 2.42 million in 1996 to 25.4 million in 2012. At the same time, the average household size has been steadily decreasing. While in 1961, each household had 3.1 members on average; the typical household in 2012 had 2.36 members. In particular, one- person households have become much more common, whereas families of more than two people are more exceptional (Figure 2). 2 KantarRetail.com KantarRetailIQ.eu Figure 2 Household Sizes (in %) Source: Office for National Statistics More than one-quarter of the UK population lives in London and the south east of England (Figure 3). The south east also continues to attract the highest inflow of internal migrants, followed by the east and the south west of England. This is indicative of a growing trend of people moving from urban areas— mainly London—to the suburbs and more rural areas. In particular, traditional resorts and retirement areas have gained population from the metropolitan losses. Population density is highest in the Greater London region. Other high-density areas include the Liverpool-Manchester-Leeds conurbation, the West Midlands, Newcastle and Glasgow. The least- densely populated parts of the country are northern Scotland, Wales and the border region between England and Scotland (Figure 4). As with other societies in Europe, the UK population is aging. The percentage of the population aged 65 and over increased from 15% in 1983 to 16.6% in 2011. Over the same period, the percentage of the population aged 15 and under decreased to 17.6%, and this trend is projected to continue. By 2033, 23% of the population will be aged 65 and over, compared to 18% aged 16 or younger. As a result of these increases in the number of older people, the median age of the UK population is increasing. Over the past 25 years, the median age grew from 35 years old in 1983 to 39 in 2011. This is projected to continue to increase over the next 25 years, with the median age rising to 40 by 2033. 3 KantarRetail.com KantarRetailIQ.eu Figure 3 Figure 4 Population Distribution Population Density Source: Office for National Statistics Source: University of Portsmouth Region Population Share South East 8,380 13.7% London 7,620 12.4% North West 6,876 11.2% East 5,729 9.3% West Midlands 5,411 8.8% Yorkshire and the Humber 5,213 8.5% South West 5,209 8.5% Scotland 5,169 8.4% East Midlands 4,433 7.2% Wales 2,993 4.9% North East 2,575 4.2% Northern Ireland 1,775 2.9% Overall Measures of the Economy The UK economy stagnated during 2012 and has had a difficult time over the last few years. However, there are indications that there is a more positive outlook ahead (Figure 5). Growth prospects are mixed. In the short term, better investment trends, if they are sustained, should be followed by a turnaround in jobs and income. In the long term, however, growth prospects should improve, but will be tempered by the persisting impact of austerity measures. 4 KantarRetail.com KantarRetailIQ.eu Figure 5 GDP Improvement United Kingdom Source: Eurostat Consumer Spending Driving Economic Recovery Expenditure was somewhat stronger in 2012, with households and government consumption providing the 0.7% rise in total domestic spending. • Between April and June 2013, consumer spending rose by GBP661 million, an increase of 0.3%. • On a year-to-year basis, consumer spending on food has recovered (Figure 6). This upward trend is an indication that UK consumers might slowly be growing their spending on premium products on a sustained basis. 5 KantarRetail.com KantarRetailIQ.eu Figure 6 Consumer Spending on Food and Alcohol Source: Office for National Statistics Job Market Measures There has been a sustained resilience of the labour market and growth in employment since 2010, meaning the number of people out of work in the United Kingdom has continued to decline. This has been achieved through a combination of more jobs being created and more people entering the workforce (Figure 7). 6 KantarRetail.com KantarRetailIQ.eu Figure 7 UK Job Market Measures Source: Office for National Statistics Consumer Confidence Measures Confidence Relatively Strong British consumer confidence rose to its highest in almost six years in 2013, two years after hitting a record low in 2011. This has been driven by stronger job security and workplace activity. Confidence has rebounded more strongly than the European Union overall (Figure 8). 7 KantarRetail.com KantarRetailIQ.eu Figure 8 Consumer Confidence Measures Source: Eurostat Price Trends The United Kingdom has experienced persisting inflationary pressure as a result of higher fuel prices, a weaker pound sterling and the government’s monetary expansion. In the longer term, the pressures will abate, assuming the pound sterling does not weaken much further and the government begins to reverse its monetary expansion. However, inflation focused in food is a troubling sign amid otherwise more positive conditions (Figure 9). 8 KantarRetail.com KantarRetailIQ.eu Figure 9 Food Price Inflation (Year-to-Year Percent Change) Source: Eurostat Retail Sales Trends Retail sales increased in 2012, and compared to the previous two years, the overall picture in 2013 is significantly better. In 2012, annual retail sales values increased 2.8% compared to 2011, and retail sales volumes rose 1.4% (Figure 10). 9 KantarRetail.com KantarRetailIQ.eu Figure 10 United Kingdom Retail Sales YOY Source: ONS – Trading Economics III – Key Players in the UK Retail Market The UK grocery market is characterised by a concentration level comparable to other Western European markets, with the top five retailers generating around 70% of total sector sales (the average in Western Europe is more or less 70%). Although dominated by a few players, the market remains fairly dynamic, offering smaller players opportunities for growth. Therefore, it’s important to examine not only the four biggest grocery retailers in the market (Tesco, Sainsbury’s, Asda, Morrisons), but also to explore why retailers with low price perception like Aldi can thrive at the same time as retailers with a high price perception like Waitrose (John Lewis). Kantar Retail expects these retailers to be amongst the fastest- growing retailers over the next five years amongst the United Kingdom’s top 10 retailers/wholesalers/symbol groups (Figure 11).