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UNITED KINGDOM COUNTRY REPORT

October 2013 / , UK

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I – Key Themes

Changing Channel Mix

The UK’s grocery 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 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 and 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— and in particular. The third growth channel has been convenience stores. While independent stores, symbol groups (, , etc.) and petrol stations are still important components of the convenience sector, most new stores are being opened by the large businesses that are capitalising on the trend for smaller, more frequent shopping trips.

On the flipside, retailers such as have been seeking to reinvent the 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 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

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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 , behind 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).

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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 (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 --Leeds conurbation, the , Newcastle and Glasgow. The least- densely populated parts of the country are northern Scotland, 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.

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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% 4,433 7.2% Wales 2,993 4.9% North East 2,575 4.2% Northern 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.

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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.

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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).

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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).

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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).

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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).

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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, , ), 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 (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).

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Figure 11 Top 10 UK Grocery Retailers (grocery format sales only in GBP millions) Source: Kantar Retail database

2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Tesco 34,417 42,666 47,359 4.4% 2.1% Sainsburys 17,837 23,304 28,071 5.5% 3.8% 16,577 22,114 25,466 5.9% 2.9% Morrisons 12,969 18,053 20,164 6.8% 2.2% Booker 5,466 8,066 10,078 8.1% 4.6% Group 3,668 7,442 7,918 15.2% 1.2% John Lewis 4,010 5,431 8,284 6.3% 8.8% Aldi Süd 1,471 3,447 5,934 18.6% 11.5% Spar UK 2,959 3,163 3,508 1.3% 2.1% Blakemore 2,490 2,975 3,495 3.6% 3.3% Total Grocery 128,928 163,206 196,938 4.8% 3.8%

Tesco

Tesco is not only the leading retailer in the United Kingdom, but, having expanded widely into international markets, is also one of the five largest retailers worldwide. In the United Kingdom, Tesco operates a network of 3,146 stores that generate GBP43.6 billion in sales (Figure 12). Most of Tesco’s revenue comes from its supermarket banners—Tesco Superstore and Tesco Metro—and hypermarket banner—Tesco Extra—followed by its convenience stores—Tesco Express and One Stop. In 2000, Tesco also launched an service—Tesco.com—that has grown rapidly in the last decade and currently contributes almost GBP3 billion to Tesco’s overall sales. This has been augmented by a growing number of sites that offer drive-thru grocery click & collect service.

In addition, since 2005 Tesco has been operating , a small non-food chain of 12 stores (2012), and in 2007 Tesco acquired the garden centre chain Dobbies (32 stores). Finally, Tesco has extensive ancillary businesses operating in the United Kingdom. It has very successful telecoms and businesses that it markets both in-store and via the Internet. More recent moves by Tesco include acquiring stakes in the bakery chain Euphorium and coffee shop business Harris + Hoole, acquiring the family restaurant chain Giraffe. In addition to continuing its standalone operations, Tesco has introduced these three foodservice concepts into its supermarkets, hypermarkets and c-stores, with the Tesco Extra in Watford being the first example of a store that includes all three foodservice concepts.

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Figure 12 Tesco Sales by Channel (in GBP millions) Source: Kantar Retail database

2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Supermarket 17,935 19,190 19,748 1.4% 0.6% Hypermarket 13,129 17,467 18,552 6% 1% Convenience 2,186 3,710 5,121 11.2% 6.7% Non Store Retail 1,481 2,954 5,002 14.8% 11.1% Category Specialist 142 261 251 12.9% -0.7% Total 34,873 43,582 48,675 4.6% 2.2%

The wide range of store formats is a cornerstone in Tesco’s strategy, as the retailer aims to capture all types of shopping trips, from the top-up shop to the large weekly shopping trip. Tesco understands itself as a “broad church” that aspires to satisfy all customers. The second central component of this strategy is a wide product assortment that, put simply, offers shoppers the choice that they want. Given the wide range of store sizes, this means that Tesco adapts its offer to the particular demands at the store level, seeking to find the right mix of value and premium brands, and mainstream and niche products. In order to decide what to stock in each individual store, Tesco relies on shopper data and insights generated by its successful loyalty card—the .

Despite its market-leading position, Tesco has endured a difficult couple of years, with the retailer seeing declining market share after what it admits was a period of underinvestment in stores, staff and products. Under CEO Philip Clarke, the retailer has invested heavily in a store refresh programme, restored in-store staffing levels and overhauled a huge proportion of its private label portfolio.

Marketing has also been revitalised, with Tesco launching a new food-focused advertising campaign under the “Love Every Mouthful” strapline. While continuing its promotional programme and Clubcard loyalty activities, Tesco has launched its Price Promise programme, which provides shoppers with an at- till coupon refunding the difference if a shopping trip at Tesco (including comparable private label products) proves to be more expensive than at Asda, Sainsbury’s or Morrisons.

Mindful of shifting shopper behaviour, Tesco has launched a refresh programme for its Tesco Extra hypermarkets as well, while at the same time shelving plans for opening more of these large stores. Instead, new space will be focused on opening c-stores and building the infrastructure to support eCommerce.

Sainsbury’s

Sainsbury’s reported GBP23.3 billion in revenue in 2012, which is GBP20 billion less than market leader Tesco (Figure 13). The majority of Sainsbury’s sales stem from its 583 supermarket stores, which grew at a CAGR of 4.5% between 2007 and 2012.

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Figure 13 Sainsbury’s Sales by Channel (in GBP millions) Source: Kantar Retail database

2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Supermarket 16,711 20,823 23,153 4.5% 2.1% Convenience 753 1,521 2,996 15% 15% Non Store Retail 374 960 1,922 20.8% 14.9% Total 17,837 23,304 28,071 5.5% 3.8%

In addition to its supermarkets, Sainsbury’s operates approximately 523 convenience stores under the Sainsbury Local banner. Through a rapid store opening programme that saw it opening one to two stores a week in 2012, convenience stores now contribute 6.5% of its total sales (2012), compared to 2.8% in 2009. Kantar Retail estimates that by 2017, the convenience format will contribute over 10% of total sales reaching GPB3 billion. Sainsbury’s market share in the United Kingdom is still weighted to the south of the country, and it will be looking to grow its share in the north of the country through its convenience format.

Sainsbury’s runs an online grocery business, which currently generates around GBP1 billion in sales. With over 50 stores delivering more than 1,000 online orders per week, Kantar Retail forecasts its online platform to remain the fastest-growing part of its business alongside its convenience format. As part of its growth strategy, Sainsbury’s is looking to operate a seamless and complimentary business across channels, because customers shopping across all three channels spend more than twice the average with the retailer.

After marketing successes in recent years such as the “Feed your family for a fiver” campaign and the “Live Well for Less” strapline, Sainsbury’s reaffirmed its value credentials with the launch of its Brand Match scheme. This refunds shoppers if branded items in a shopping basket of GBP20 or more could have been bought cheaper at Tesco or Asda. Other initiatives include participation in the Nectar loyalty card scheme, ongoing improvements to its private brand portfolio and the development of its non-food ranges, including the Tu clothing range.

Asda

Acquired by Walmart in 1999, Asda has been one of the major components of the Walmart International business unit, contributing best practice in private label, eCommerce and systems. In 2012, Asda operated 564 stores across the country, with a strong presence in its heartland of the north of England. Sales totalled GBP22.8 billion in 2012, most of which was generated through Asda’s 500 supermarkets and superstores (Figure 14). Asda acquired Foodstores in May 2010 as a part of its endeavour to operate smaller format stores (supermarkets less than 25,000 square feet in size), thereby expanding its coverage in South and . The rebranding of 147 former UK Netto stores under the Asda name was complete by the end of summer 2011. Competition laws required Asda to sell the

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remaining 47 stores to other companies such as Morrisons, to satisfy the requirements of Office of Fair Trading.

Although Asda has and will continue to draw a majority of its revenue from its superstore/supermarket format, in the last few years the retailer has been growing new formats to generate further growth. One key focus area has been non-food—through the launch and development of George (2003), Asda Living (2004) and Asda Direct (2008). While some formats—Asda Essentials and George (both closed in 2008) —failed to deliver the desired results, the retailer has been more successful with its Asda Living and its eCommerce endeavours. Asda has steered clear of operating in the c-store sector as it feels that its operating and pricing model would not make such a venture feasible. However, the retailer now operates a small number of standalone petrol station c-stores. These are intended as pickup points for grocery eCommerce orders rather than full-fledged convenience operations.

Figure 14 Asda Sales by Channel (in GBP millions) Source: Kantar Retail database

2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Supermarket 13,889 18,030 20,226 5.4% 2.3% Hypermarket 2,418 3,250 3,742 6.1% 2.9% Non Store Retail 268 989 1,839 29.9% 13.2% Mass Merch Excluding Supercenter 159 519 814 26.6% 9.4% Apparel 48 - - n/a n/a Discounter 3 - - n/a n/a Total 16,785 22,788 26,621 6.3% 3.2%

The key element in Asda’s strategy is the strong focus on everyday low prices (EDLP). Due to the fact that Asda’s buying power is limited compared to market leader Tesco, Asda claims that its price leadership (frequently supported by independent surveys) is a result of its efficiency. The retailer states that it is the lowest cost to operate supermarket in the country. To back up its EDLP stance, Asda launched the Asda Price Guarantee in 2011. It compares the cost of a shopper’s basket with a similar basket (including private label) at Tesco, Sainsbury’s and Morrisons. If the basket is not 10% cheaper at Asda, the retailer refunds the difference. Although it lacks the immediacy of the schemes at Tesco and Sainsbury’s (shoppers have to submit receipt details online at least three hours after a shopping trip), the retailer claims it to be a popular initiative.

Other areas of activity for Asda include eCommerce growth for both grocery and non-food. Online grocery is growing rapidly, supported by the opening of drive-thru click & collect pickup points, while non-food growth is also seeing strong traction in in-store click & collect. Private label has grown strongly, with Asda’s mainstream brand being relaunched as “Chosen by You” and seeing dramatic growth as a result. In non-food, the George fashion brand remains one of the largest in the country and has been successfully exported to a number of other Walmart markets across the world.

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Morrisons

Britain’s fourth-biggest grocery retailer in terms of sales is Morrisons, which currently operates around 486 supermarkets and a growing number of convenience outlets, with its highest density of outlets in . Morrisons generates approximately GBP18.1 billion in sales. Following a difficult integration of the Safeway business acquired in 2004, Morrisons underwent a comprehensive re- branding programme and invested heavily in store upgrades, supply chain and systems.

Under current CEO Dalton Philips, Morrisons has embarked on a dramatic shift in strategy. Its main store estate is being upgraded to include a radical overhaul of fresh food departments and counters. Other initiatives have included entry into convenience retailing, entry into online retailing (the acquisition of the Kiiddicare eCommerce business and the planned 2014 launch of grocery eCommerce in partnership with Ocado), a relaunch of private label ranges and progress in non-food areas, such as the launch of the Nutmeg clothing brand. In its advertising, Morrisons promotes its fresh food credentials and its vertically-integrated supply chain, which enables it to source and process much of the fresh foods that it sells in-store.

The Co-operative

The Co-operative is the UK’s fifth-biggest food retailer, having integrated the bulk of the acquired business (in 2009). It provides its customers with a wide range of foods, often with an ethical or locally sourced slant. The business, which trades mainly through c-stores and neighbourhood supermarkets, has a food store in every UK postal area, comprising a network of over 2,800 stores across the United Kingdom. Like many other retailers, it is in the process of overhauling its private label range. It is also evaluating a move into grocery eCommerce.

Aldi

Aldi Süd currently operates around 500 stores in the United Kingdom. In 2012, sales reached GBP3.4 billion, having grown at a CAGR of 18.6% since 2007. Kantar Retail estimates that by 2017, sales will total GBP6 billion, which corresponds to a CAGR of 11.5%. This makes Aldi one of the fastest-growing retailers in the UK grocery market. Growth will largely be driven by new shoppers as well as an ambitious store opening programme, as Kantar Retail expects Aldi to open 35 stores a year.

As in other markets, in the United Kingdom, Aldi follows the traditional discounter strategy, which revolves around low prices in order to drive volume. However, in recent years Aldi has shifted its marketing strategy to directly compare the quality of its private label with manufactured brands, through an award winning advertising campaign “Like Brands Only Cheaper.” Aldi aims to establish itself as a premium discounter, offering the right balance between price and quality. This has seen Aldi increase the number of ABC1 shoppers by 18% in 2012. Overall, the marketing campaign has been very successful, as consumers’ quality perception of Aldi has improved considerably over the past decade. The retailer recently launched a concept in Kilburn, North London, as part of its strategy to increase its participation in the London market.

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Lidl

Lidl, which is owned by the German Schwarz Group, has also been recording impressive growth figures over the past few years. Between 2007 and 2012, the discounter grew at a CAGR of 10.7%, resulting in estimated sales worth GBP2.9 billion in 2012. Similar to Aldi, the steep growth curve has largely been the product of an aggressive store-opening programme, with an average rate of 40 new stores every year. Lidl currently operates approximately 600 stores in the United Kingdom and, unlike Aldi, also has a presence in .

The retailer has added fresh foods and national brands to its offering, with the latter now accounting for roughly 13–15% of the total assortment (1,700 SKUs). The goal of this strategy is to steal routine shopping trips from traditional supermarkets. Moreover, Lidl has been trying to strengthen its quality reputation among consumers by shifting the focus of its marketing campaign. However, unlike Aldi, Lidl is much more dependent on national brands to bolster its image as a quality retailer and, similar to supermarkets, now runs weekly promotions of brands. Thus, while Aldi aims to position itself as a premium discounter, Lidl is moving toward becoming a discount supermarket that offers a selection wide enough for weekly shopping trips.

Waitrose

Owned by the , Waitrose has been the fastest-growing supermarket in the country, increasing its sales at a CAGR of 7.8% between 2007 and 2012, and boosting its total annual revenue to GBP5.4 billion. Kantar Retail predicts growth to remain fast as a result of its booming online business as well as the development of its convenience concept, little Waitrose. It plans to increase the number of these stores from 40 to 80 by 2017. The retailer sees potential for 300 convenience stores over the next 5 to 10 years. Overall, this means that Waitrose will still be growing considerably faster than more established retailers such as Tesco or Sainsbury’s. In 2012, Waitrose operated 273 supermarkets in the United Kingdom, with a particular geographical focus on southern England, and the store count is likely to grow to 365 by 2017. Since 2009, Waitrose has also been operating an online food delivery service and remains in a partnership with online delivery service, Ocado.

Waitrose’s marketing strategy emphasises the premium quality of the grocery assortment, targeting consumers with the strapline “Everyone deserves good food.” Furthermore, Waitrose has been at the forefront in offering shoppers regional and ethical products, with the aim of building a strong brand identity based on emotional benefits. The ultimate objective of this marketing strategy is to capture bulk shopping trips by higher-income classes. However, as with other grocery retailers, Waitrose has been feeling the effect of the price competition in the grocery market. As a result, in March 2009, Waitrose rebranded its standard private label range to “Essentials” to dissuade consumers from down trading to more mainstream supermarkets. Another measure that has enhanced the retailer’s value proposition is a price-matching scheme that sees it price branded items on a par with Tesco.

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Marks & Spencer

Marks & Spencer stands out in the UK grocery retail market, as it offers a premium assortment that is almost 100% own label. The retailer sells groceries through two store formats: its department stores, with sales split 50/50 between grocery and non-grocery, and its convenience stores under the Simply Food banner. Marks & Spencer currently operates 347 department stores and about 419 convenience outlets, of which 58% are located within BP petrol stations.

Marks & Spencer targets shoppers who have a preference toward fresh, premium products. The focus is to provide shoppers with a higher-than-average quality product, combined with a quick and convenient shopping trip and high service levels. Marks & Spencer is a secondary top-up shop for most shoppers, with one in two British households buying food from the retailer over the course of a year (12.3 million households). Facing the effects of the economic downturn, Marks & Spencer has been trying to broaden its shopper base. It has done this by increasing its in-store promotions, adding branded grocery products to its assortment and launching an affordable private label range called Simply M&S.

IV – UK Retail Channels

The supermarket channel has traditionally generated the largest share of sales in the UK grocery market, followed by convenience stores and hypermarkets. However, the channel mix is changing dramatically, as both discounters and online retailers are growing rapidly at the expense of other channels— supermarkets in particular. Currently, discounters (including high street discounters) control 14.1% of grocery sales, while online contributes 4.7% to total market sales. By 2017, Kantar Retail expects these figures to grow to 23.1% and 10.6%, respectively (Figure 15).

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Figure 15 Channel Mix in the UK Grocery Retail Market Source: Kantar Retail database

100% 2.2 5.7 10.6 9.0 10.5 90% 12.9 10.5 14.8 23.1 80% 15.8 20.9 70% 22.5

19.6 60% 25.0 Online Grocery 32.6 Cash and Carry 50% Discounter Hypermarket 40% Convenience Supermarket 30% 71.9 86.3 95.2 20%

10%

0% 2007 2012 2017 Note: Sales figures include all categories sold within these channels.

Supermarket Channel

In 2012, the supermarket channel generated sales of GBP86.3 billion, having grown at a CAGR of 3.7% since 2007. The five-largest players were Sainsbury’s, Tesco, Asda, Morrisons and Waitrose. Among these, Waitrose and Asda will be the fastest growing (Figure 16). While Tesco has a store network that is more or less evenly spread across the country, Waitrose (south), Sainsbury’s (south), Asda (north) and Morrisons (north) still have a regional bias. Therefore, there is still space for retailers to grow their store network, with Waitrose and Sainsbury’s expanding north and Morrisons and Asda spreading southwards.

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Figure 16 Top 5 Supermarket Retailers (sales in GBP millions) Source: Kantar Retail database

2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Sainsburys 16,711 20,823 23,153 4.5% 2.1% Tesco 17,935 19,190 19,748 1.4% 0.6% Asda 13,889 18,030 20,226 5.4% 2.3% Morrisons 12,969 18,017 19,467 6.8% 1.6% Waitrose 3,699 5,115 7,378 6.7% 7.6% Total Supermarket 71,881 86,312 95,158 3.7% 2.0%

However, despite this modernization of outlets, Kantar Retail expects the supermarket channel to grow at a CAGR of only 2% between 2012 and 2017—slower than other channels.

Convenience Channel

Independent stores, symbol groups (Spar, Londis etc.) and petrol stations are still important components of the convenience sector, but most new stores are being opened by the large supermarket businesses as they capitalise on the trend for smaller, more frequent shopping trips. The leaders in the sector are Premier (the operated by Booker cash & carry), followed by Tesco (via Tesco Express and standalone c-store unit One Stop), the Cooperative Group, Spar UK and Musgrave (Londis and ). It should be noted that other retailers such as Sainsbury’s, Waitrose and Morrisons are all rapidly expanding their c-store networks.

Figure 17 Top 5 Convenience Retailers (sales in GBP millions) Source: Kantar Retail database 2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Booker 2,922 3,812 4,666 5.5% 4.1% Tesco 2,186 3,710 5,121 11.2% 6.7% Cooperative Group 2,574 3,647 4,435 7.2% 4.0% Spar UK 2,959 3,125 3,447 1.1% 2.0% Musgrave 2,021 2,031 2,182 0.1% 1.4% Total Convenience 19,617 24,975 32,649 4.9% 5.5%

Hypermarket Channel

The UK hypermarket channel is relatively small compared to other markets, mainly due to strict planning restrictions and space constraints. Only two retailers operate hypermarkets in the traditional sense—

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Tesco and Asda. Growth has been relatively strong in this channel over the past five years (5.8%), driven by aggressive store opening plans (Figure 18). However, Kantar Retail expects growth to slow down. Moreover, with shoppers increasingly shifting their bulk shopping trips online, retailers will be investing more money into the optimisation of their Internet grocery business. The online channel has also become a main distribution platform for non-food products—an important segment in the large assortment of hypermarkets. Large selling space in hypermarkets allocated to categories such as consumer electronics or toys is therefore becoming increasingly unprofitable. Tesco wants to fight back and increase footfall by getting families back in to hypermarkets, enticing them with Giraffe cafés, Euphorium bakeries and Harris + Hoole coffee shops.

Figure 18 Hypermarket Retailers (sales in GBP millions) Source: Kantar Retail database

2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Tesco 13,129 17,467 18,552 5.9% 1.2% Asda 2,418 3,250 3,742 6.1% 2.9% TOTAL 15,547 20,718 22,294 5.9% 1.5%

Discounter Channel

The discounter channel will be the second-fastest growing segment in the UK grocery market over the next five years. Driving this is the current UK phenomenon has been the rise of high street value discounters, such as , B&M Bargains, 99p Stores and (run by TJ Morris). These stores tend to be situated in busy high street locations rather than on the urban periphery. Moreover, the assortment also differs slightly than the likes of Aldi and Lidl, as it is usually characterised by a higher share of non-food products and a greater focus on low-priced branded goods rather than private label.

Between 2007 and 2012, discounters grew at a CAGR of 7.0%, but with the rapid rise of high street discounters, Kantar Retail predicts that growth will accelerate further with a CAGR of 9.4% between now and 2014 (Figure 19). Growth will be driven by the fact that, for an increasing number of shoppers, discounters are becoming the preferred target for top-up shopping trips. The discounter channel is already the second-largest channel for many snacking products and set to become a firm number two in many other categories.

While the discounter channel is currently highly fragmented, Kantar Retail expects the market to consolidate into a few players. While the pan-European discounters Lidl and Aldi will strengthen their leading position, the high street segment of the channel may see mergers and acquisition in the near future.

Figure 19

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Top 10 Discounters (sales in GBP millions) Source: Kantar Retail database

2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Aldi Süd 1,471 3,447 5,934 18.6% 11.5% 1,789 2,721 3,534 8.8% 5.4% Lidl 1,750 2,910 4,615 10.7% 9.7% Wilkinsons 1,364 1,579 1,706 3.0% 1.6% B&M Bargains 147 937 1,734 44.8% 13.1% TJ Morris 383 921 1,978 19.2% 16.5% Poundland 330 880 1,621 21.7% 13.0% Farm Foods 385 634 777 10.5% 4.1% 99p Stores 94 336 770 29.0% 18.0% 315 314 375 -0.1% 3.7% TOTAL (top 10) 8,028 14,680 23,044 12.8% 9.4%

Online Channel

The online retail channel will grow faster than any other channel in the UK grocery market over the next five years (Figure 20). Growth will mainly be driven by consumers trying to save more time on their weekly food shop, people becoming more internet savvy, further advancements in technology and the expansion of the high-speed broadband network. Kantar Retail expects that, by 2017, the online channel will be worth GBP10.6 billion or 5.4% of total grocery sales. In particular, the online channel will attract consumers’ bulk shopping trips, thus stealing market share from supermarkets and hypermarkets.

Figure 20 Online Grocery Retailers (sales in GBP millions) Source: Kantar Retail database 2007 2012 2017 CAGR '07-'12 CAGR '12-'17 Tesco 1,167 2,298 3,938 14.5% 11.4% Sainsburys 374 960 1,922 20.8% 14.9% Asda 268 834 1,498 25.5% 12.4% Booker 44 704 1,181 74.1% 10.9% Ocado - 679 1,411 n/a 15.8% John Lewis 311 227 679 -6.1% 24.5% Total (top 6) 2,163 5,701 10,628 21.4% 13.3%

In 2000, Tesco was the first retailer to launch an online grocery retailing business. An estimated quarter of a million grocery deliveries are made by tesco.com per week, making it the undisputed leader of the UK online grocery market with a 40% share of sales. The other three large players are Sainsbury’s, Asda and Ocado. Waitrose started an online delivery service only in 2009, generating about GBP25 million in its first year. Ocado, which sources its supplies from Waitrose, has now signed a co-operation deal with

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Morrisons worth GBP216 million, whereby Morrisons will pay Ocado GBP170 million to buy its new distribution centre in Dordon and license Ocado’s technology for 25 years. Although Waitrose is publically unhappy with the situation, there is no indication as of yet that it will look to end its contract with Ocado, which runs to 2020, and allows Ocado to sell Waitrose products. Waitrose has looked to ramp up its own online business by opening a second “dark” store to fulfil online orders as it attempts to meet demand from shoppers in London.

V – Conclusion

The United Kingdom has been hit hard by the global economic downturn. However, there are signs of recovery, and the grocery retail market is likely to almost regain pre-crisis growth levels over the next five years. This growth will be driven by two channels in particular—discounters and online. Supermarkets, in contrast, have recently been losing market share, to which they have responded with even more aggressive price promotions, preferential treatment of their value private label ranges and refreshes to their retail outlets.

The growth of the discount channel is not only based on aggressive store network expansion but also by retailers that have successfully attracted new shopper groups by enhancing their quality credentials and broadening their product assortment. In particular, the discounter channel will continue to attract a large share of top-up shopping. The online channel, on the other hand, is increasingly becoming a channel for weekly bulk shopping trips. The future growth of online grocery retail will mainly be driven by consumers’ convenience and time considerations, advancements in technology, growth in drive-thru services and the entrance of new players.

Although dominated by a few players, the UK grocery market remains fairly dynamic, offering smaller players opportunities for growth. Retailers that will grow particularly fast over the next five years include the pan-European discounters Aldi and Lidl and premium-positioned Waitrose. This dynamic in the UK retail landscape and the changing channel mix provides suppliers with the exciting opportunity to grow alongside both established and newly emerging retailers and retail channels.

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ABOUT KANTAR RETAIL

Kantar Retail (www.kantarretail.com) is the world’s leading shopper and retail insights and consulting business and is part of the Kantar Group of WPP. The company works with leading branded manufacturers and retailers to help them transform the purchase behavior of consumers, shoppers and retailers through the use of retail insights, consulting, analytics and organisational development services. Kantar Retail tracks and forecasts over 1000 retailers globally, has purchase data on over 200m shoppers and among its market-leading reports are the annual PoweRanking survey (USA and ), and Industry Shopper Study Across Retailers. Kantar Retail works with over 400 clients and has 20 offices in 15 markets around the globe.

INFORMATION AND INSIGHTS

Kantar Retail provides robust, data-driven insight that looks across markets, shopper and customer trends, presenting the most accurate view of the top Global retailers and markets. By transforming this intelligence into insights, Kantar Retail helps clients to understand the trends of today and prepare for the realities of tomorrow.

Kantar Retail Market Insights studies over 1200 of the world’s leading retailers providing invaluable data and insights for the industry and for our clients. Clients access Kantar Retail’s Market Insights through its online platform KRIQ, attending workshops or conferences, through webinars or by having the retail subject matter experts visit client offices. KantarRetailIQ.com KantarRetailIQ.eu KantarRetailIQ.cn

FOR MORE INFORMATION

Contact Amy McCoy +44 (0) 207 450 2609 [email protected]

For a complimentary copy of Kantar Retail’s Breakthrough Insight’s Publication, a semi-annual collection of insights, email us at [email protected].

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