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UK's Second Grocery Discount Boom

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UK's Second Grocery Discount Boom December 2015 • Mixed-goods discounters have grown fast in the UK, and have UK’s Second rapidly grown share in grocery categories. • The six biggest mixed-goods discounters, in total, generate the Grocery majority of their sales from grocery categories, we estimate. Around £3.6 billion of food and beverages, health and beauty Discount Boom products, and household FMCGs will be sold through these retailers in 2015, we estimate, up by approximately £2.1 billion, or more than 140%, in five years. • As a result, we estimate the six big mixed-goods discounters will hold an approximate 13% share in household FMCGs, a 6% share in beauty and personal care products, and a 2% share in food and nonalcoholic beverages in 2015. • The growth in mixed-goods discounters is one element in the fragmentation of grocery spend—other strands include more shopping at convenience stores and at grocery discounters. 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 THE UK’S SECOND GROCERY DISCOUNT BOOM Discount has been the big theme in UK grocery retail for the last couple of years. The growth of no-frills grocery discounters Aldi and Lidl has prompted price wars, deflation and negative comps among the biggest nondiscount grocery retailers. Alongside the rise of Aldi and Lidl has been strong growth in mixed-goods In 2015, the top mixed-goods discount stores such as B&M, Home Bargains, Poundland and 99p Stores. discounters will sell around £3.6 Similar to the dollar chains Dollar General and Family Dollar in the US, these billion in grocery categories. retailers sell a range of goods, from homewares to pet care—but they are carving a significant niche in grocery. As we show in this report, nearly 60% of this sector’s sales are estimated to be in grocery categories, meaning that, in 2015, the top mixed-goods discounters will sell around £3.6 billion in grocery categories. DEFINING A DISCOUNTER This report focuses on six big retailers that may variously be termed “nongrocery discounters,” “discount general merchandisers” and “pound stores.” None of these titles is fully accurate, given that these retailers generate a high proportion of sales from grocery categories and that several of the pound stores do not sell goods at a fixed price of £1. Therefore, we refer to these types of retailers as “mixed-goods discounters” in this report. Inclusions and Exclusions We include the following six retailers in our discussion (in descending order of sales in 2014): B&M (UK only; we strip out the company’s German revenues), Home Bargains, Poundland, Poundworld, Poundstretcher and 99p Stores. We exclude two similar retailers that are often grouped with the six named above: The Original Factory Shop and Wilko. The Original Factory Shop has a very different product mix, with a much more limited presence in grocery categories (it does not sell food or beverages) and a strong skew toward higher-value items such as homewares and apparel. Wilko, on the other hand, is much more of a value-positioned general merchandiser, with a softer positioning than the stores listed above; it also has a negligible food/beverage offering. 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 For the purposes of this report, we consider Poundland and 99p Stores as separate retailers, although the former acquired the latter in September 2015. A £6 BILLION–PLUS CHANNEL The big six will turn over around The six biggest mixed-goods discounters have turned in exceptionally strong £6.15 billion in sales in 2015, we growth over the past five years, helped by major expansion of store estimate. This is an increase of networks. The chains have tapped shoppers’ increased willingness to buy from discount stores, but they have also gained from consolidating the about 135% from the £2.62 previously fragmented discount mixed-goods sector. billion aggregate annual sales figure seen five years earlier. The big six will turn over around £6.15 billion in sales in 2015, we estimate. This is an increase of about 135% from the £2.62 billion aggregate annual sales figure seen five years earlier, representing a compound annual growth rate (CAGR) of 18.6%. Figure 1. Big Six Mixed-Goods Discounters: Total Sales 7 6.15 6 99p Stores 5.36 5 4.63 Poundstretcher 3.93 4 Poundworld 3.28 £ Billion 3 2.62 Poundland 2 Home Bargains 1 B&M 0 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015E Source: S&P Capital IQ/company reports/FBIC Global Retail & Technology B&M overtook Home Bargains to capture the first position in 2014. Poundland’s acquisition of 99p Stores, completed in September 2015, will immediately boost the former’s revenue by around 36%, we calculate. Here are the top six ranked by revenue: Figure 2. Big Six Mixed-Goods Discounters: Revenues (£ Mil., Excl. VAT) 2010 2011 2012 2013 2014 B&M UK 538* 764 989 1,247 1,526 Home Bargains 721 915 1,058 1,277 1,472 Poundland 691 780 880 998 1,117 Poundstretcher 308 348 368 395 421E Poundworld 133 207 294 345 422 99p Stores 231 270 342 370 402E Total 2,622 3,284 3,931 4,632 5,360 *2010 data are for B&M Retail Ltd. All other years are for B&M European Value Retail. Totals may not sum due to rounding. Source: S&P Capital IQ/company reports/FBIC Global Retail & Technology 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 Carving Share in GrocerY The real story, we think, is how much share these discount stores have carved in core grocery categories—food and beverages; health, beauty and personal care; and household fast-moving consumer goods (FMCGs). In 2015, we estimate the big six mixed-goods discounters will sell approximately £3.6 billion worth of goods across these categories. In 2015, we estimate the big six mixed-goods discounters will sell approximately £3.6 billion worth of goods across grocery categories. This represents around 59% of the total sales of these six chains in 2015. By this measure, these retailers should perhaps be categorized as grocery retailers, even though the contribution from food and beverages is below what a regular grocer would see. Based on company filings and FBIC store visits, this is how we think the big six chains’ estimated £6.15 billion of total revenues for calendar year 2015 will be split: Figure 3. Big Six Mixed-Goods Discounters: Estimated Aggregate Sales Mix, 2015 Other, Incl. Food and General Beverages Merchandise £1.9 Bil. (32%) £2.5 Bil. (41%) Health and Household Beauty FMCGs £1.0 Bil. (17%) £0.65 Bil. (11%) Totals do not sum due to rounding. Source: Company reports/FBIC Global Retail & Technology Grocery’s share of sales varies between the big six mixed-goods discounters. We estimate grocery categories contribute the greatest share of sales at Poundland (approximately 64%), Poundworld (64%) and 99p Stores (64%) and the smallest share at Poundstretcher (48%) and B&M (54%). 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 Discounters’ Market Shares in GrocerY Categories Below, we show the approximate estimated market share of the big six mixed-goods discount stores in grocery categories, based on market-size data from Mintel and Statista. Across the three grocery categories we focus on here, these stores took a near-3% share last year, we estimate. This grocery total was depressed by the minor (<2%) share of spending on food and nonalcoholic beverages, due to discounters’ mainly ambient food offering. These retailers’ total share of household FMCGs and beauty was much more significant, we estimate. We estimate the big six mixed- Figure 4. Big Six Mixed-Goods Discounters: Estimated Aggregate Share of Selected Market Sizes (%) goods discounters will sell approximately £2.1 billion more per year in grocery categories in Household FMCGs 12.7 2015 than they did in 2010. Health and Beauty* 6.4 Food and Nonalcoholic Beverages 1.9 Grocery Categories in Aggregate** 2.9 0 5 10 15 % *Market size used is for beauty and personal care products, excluding over-the- counter (OTC) healthcare. Discounters’ sales include a very small element of OTC healthcare, such as painkillers. **Total of food and nonalcoholic beverages, health and beauty and household FMCGs. Source: Company reports/Mintel/Statista/FBIC Global Retail & Technology Selling £2 Billion More in Groceries than Five Years Ago We estimate the big six mixed-goods discounters will sell approximately £2.1 billion more per year in grocery categories in 2015 than they did in 2010. This is an increase of well over 140% in annual grocery sales over five years—above the 135% increase in total sales and reflecting an outperformance of categories such as food and beverages and beauty and personal care at these stores. Of that approximate £2.1 billion projected increase, we estimate that more than £1 billion will be in food and beverages, and approximately £600 million will be in beauty and personal care.
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