Market Study

bulwiengesa

MARKET STUDY

Food retail in Germany – market structure data 2016

bulwiengesa AG

Managing Board: Supervisory Board Chair: Headquarters: Berlin HypoVereinsbank München Nymphenburger Straße 5 Member of GCSC e.V. Ralf-Peter Koschny Hartmut Bulwien Legal structure: AG BLZ: 70020270, a/c.: 4410433058 80335 Munich Andreas Schulten [email protected] VAT ID: DE 164508347 BIC: HYVEDEMMXXX Tel. +49 89 23 23 76-0 Member of plan 4 21 Thomas Voßkamp www.bulwiengesa.de Charlottenburg HRB 95407 B IBAN: DE13700202704410433058 Fax +49 89 23 23 76-76

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Produced for: TLG IMMOBILIEN AG Hausvogteiplatz 12 10117 Berlin

Project no.: P1705-3663

Munich, 21 June 2017

bulwiengesa AG Nymphenburger Straße 5 80335 Munich Tel. +49 89 23 23 76-0 Fax +49 89 23 23 76-76

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

CONTENTS

Page

1 MANAGEMENT SUMMARY 1

2 FOOD RETAIL PARAMETERS IN GERMANY 2 2.1 Demographic parameters 2 2.2 Spending power data 4

3 FOOD RETAIL 5 3.1 General structural data 5 3.2 Development of business types 10

4 RENTS AND YIELDS 19 4.1 Rents 19 4.2 Yields 20

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

The findings and calculations presented in this study, and the research we have undertaken, have all been done according to the best of our knowledge and with the necessary care, based on existing sources and other sources accessible during the period in which the study was executed. We can only guarantee the factual accuracy of information and data we have ascertained and produced ourselves, within the scope of normal due diligence. We cannot guarantee the factual accuracy of data and facts obtained from other sources.

Copies of this study remain our property until the agreed fee has been paid in full. The study is protected by copyright and registered by bulwiengesa AG. Only the client is entitled to disseminate the study or excerpts thereof (and if so, only if the source is referenced) for the purpose agreed on in the offer/order. Reproducing, publishing and disseminating its content to third parties, in any form whatsoever, is only permitted with prior written permission from bulwiengesa AG, and then only if the original source is referenced. The exception to this is using the study or parts thereof in publicity brochures, for which prior written permission must be obtained from bulwiengesa AG, but nothing more.

Munich, 21 June 2017

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

1 MANAGEMENT SUMMARY Development of food retail

Initial situation Every type of food retail business is participating in the rising sales of that industry. Small food shops are the only group that is becoming Selling space in Germany’s retail industry currently amounts to around steadily less important. The big winners of recent years have been the 123.7 million sqm (2015); at 1.5 sqm of selling space per capita, supermarkets / large supermarkets and organic grocery shops. This Germany is fourth among European countries. Of that selling space, development reflects a society willing to spend more on higher-quality around 35.6 million sqm is used for food retail. Selling space has food. The discounter business model has overcome a brief period of remained relatively constant in recent years (+1.8% since 2010), weakness and increased its sales once again. The restructuring whereas retail sales have risen by around 13.1% to 483 billion euros process triggered by Germany’s hypermarket operators continues. between 2010 and 2016 (proportion of online retail: 10.9%); the increase has been as much as 16.6% in food retail. The online share of Rents and investment food retail has so far only reached 1.5%. Private households in Germany spent 13.7% of their total consumer Rental levels in food retail properties have risen by over 20% since the outgoings on food, drinks and tobacco products. Since 2005, spending year 2000; selling prices have risen disproportionally across the board, on these goods has risen by 19.6%, from 180.0 billion euros to 215.2 meaning that yields have declined considerably since 2008 (over 100 billion euros. Their share in total consumer spending, however, dropped basis points). Increased interest among investors is because of the high from 14.3% to 13.7%.1 stability and long-term security offered by food retail (restrictive planning policies, good credit ratings among food retailers, long-term Demographic parameters tenancy agreements).

An aging society has forced retailers to think again about how to meet Outlook the needs of this growing age group. Over 65s constitute 21.4% of the population today, but will make up 33.7% by 2060. Urban areas can The concentration process in food retail will continue over the coming expect stable population figures, but many rural regions, and eastern years, and competition offered by online retail will intensify. More Germany in general, can expect a decline in population by 2060, which restructuring will happen at some networks of stores, because their will result in lower demand. operators are having to develop new sales and operating concepts in response to changing market conditions.

1 Source: Federal Statistical Office, HDE, EHI

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

2 FOOD RETAIL PARAMETERS IN In the long-run – leading up to 2060 – according to the Federal GERMANY Statistical Office’s ‘13th Coordinated Population Projection’ in what is from the surveyor’s point of view its most probable version, 1-W1 (“medium” population, lower limit),2 we can expect a decline in 2.1 Demographic parameters population to around 70 million people coupled with a significant rise in over-65s, so that they make up around a third of the population. And An aging society is forcing retailers to consider how to respond to the the proportion of over-75s to the total population will almost double, to numerous changes facing them. The growing proportion of over-65s 20% (2017: approx. 11.3%). coupled with greater spending power is making the older section of the populace more important to retailers. The number of people of working age, however, will continue to decline. People born during the 1960s (Baby-Boomers) will be reaching Basically, retailers are having to respond to a change in population pensionable age from 2030 onwards, changing the population structure structure and the resulting changes in people’s needs by amending and considerably. improving the products and services they offer, and/or the shopping environment. The specific needs of the “65+” customer group Population development/forecast 2015 2060*

Projected population structure*

84 2017 2025 2040 2060 82 < 15 years old 13.2% 13.4% 12.4% 12.1%

million 80 15 to 25 10.5% 9.6% 9.4% 9.0%

in 78 25 to 50 32.2% 31.3% 28.2% 26.4% 76 50 to 65 22.7% 21.8% 19.8% 18.8% 74 65 to 75 10.1% 12.1% 12.8% 13.7% 72 75 and over 11.3% 11.8% 17.3% 20.0% Population Source: Federal Statistical Office, bulwiengesa 70 Rounding differences may occur. 2015 2020 2025 2030 2035 2040 2045 2055 2060 * Forecast based on the 13th Coordinated Population Projection, version 1-W1 (lower limit)

Source: Federal Statistical Office, bulwiengesa * Forecast based on the 13th Coordinated Population Projection, version 1-W1 (lower limit) 2 Assumptions: birth rate approximately constant at 1.4; basic life expectancy assumption; migration balance of 100,000 from 2014

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Many of the things which older people used to criticise have now been resolved in store design and construction. These include wider aisles, lower shelves, bigger product labelling, adequate seating and service- oriented staff. Some providers have even responded to sociodemographic change by launching what is known as ‘Generationenmärkte’ – generation stores. Older consumers differ from younger ones because they are more aware of quality, more loyal to brands and more willing to purchase luxury items, and they shop more frequently and are more critical in what they require, which means more customer orientation is needed.

Population changes vary greatly across Germany. The total population in Germany will decline by 2030, but large cities and their immediate surroundings are likely to become more populous. Growing population is forecast especially for southern Germany and the Top Seven Cities.

Rural regions, on the other hand, are being hit much harder by declining population. For instance, bulwiengesa predicts that large parts of eastern Germany and rural regions in general will see a population shrinkage of up to 20% by 2030, whereas big cities – including those in Demographic forecast eastern Germany – will either maintain a steady population, or grow. 2030 Change 2015-2030 in %

bulwiengesa 2016

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

2.2 Spending power data

Spending power consists of total net income and capital income as well as state subsidies such as unemployment benefits and pensions. Living expenses are not taken into account, which is why regional differences often do not appear as pronounced as we might expect. Spending power also gives no indication of income distribution within an administrative district, or the spending power of individuals, although there is no denying the importance of those factors.

The average calculated per capita spending power for 2017 will be

22,239 euros, representing a nominal increase of 2.9% over the previous year. Regional differences remain pronounced. As in recent years, the administrative districts of Starnberg, Hochtaunuskreis and Munich top the list. The spending power in the Starnberg administrative district is 32,194 euros, which is 44.8% higher than the German average. Six of the ten administrative districts with the greatest spending power are in the vicinity of Munich. Of the ten most populous administrative districts, Munich, Dusseldorf, Frankfurt and Stuttgart all Development in spending possess above-average spending power. The most populous district, power 2013-2016 th Berlin, is right down in 286 place among German districts, making it Change in % the only European capital to be below its country’s average level.

Eastern German districts have grown more rapidly than the German average since the previous year. Saxony, Mecklenburg-Western Pomerania and Thuringia top the growth rate list. Spending power is rising especially quickly in the areas surrounding Leipzig and Dresden. Administrative districts and cities that constitute their own administrations, and which had high spending power before, have grown less by comparison.

bulwiengesa 2016

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

3 FOOD RETAIL and would hand over a number of stores to Rewe, especially in the Berlin region. 3.1 General structural data The second biggest food retailer remains the Schwarz Group which The Edeka Group is by far the biggest food retailer in Germany, increased its sales by a similar amount to Edeka last year. The Rewe followed by the Schwarz, Rewe, Aldi and Metro Groups. These five Group, number three on the German market, posted a significant companies have a far greater turnover than other food retailers and growth of 4.2% last year, allowing it to gain some ground on the two together account for the bulk of food retail in Germany. leaders.

The biggest loser in the rankings was the Metro Group, which had to Who belongs to whom? absorb an 11% drop in sales in 2016. It remains to be seen whether the Company Sales line – food (retail) planned modernisation of its real,- hypermarkets will actually go ahead Edeka Group Marktkauf, Ratio, E-Center, Aktiv Discount, E-Neukauf, and lead to lasting sales improvements. E Reichelt, Edeka, E-Aktiv Markt, Kupsch, Netto, Netto City, NP, Diska, Treff 3000, Prof Top Getränke, Trinkgut, Netto Getränkemarkt, K&U, Wünsche, Büsch, Thürmann, Top ten German retailers (2016) Schäfer's Schwarzwaldhof, Kaiser's Tengelmann (stores reflagged in 2017) Sales 20161 Sales 20151 Change Rewe Group toom, Rewe Center, Akzenta, Rewe, Rewe City, Kaufpark, (billion €) (billion €) 2015-16 Standa, Perfetto, Penny, Nahkauf, Temma, Rewe to go, Edeka Group, Hamburg 53.8 52.5 2.5% toom Getränkemarkt, Kölner Weinkeller, Glocken Schwarz Group, Neckarsulm 37.8 36.9 2.2% Bäckerei, Rothermel, Kaiser's Tengelmann (store 2 35.8 34.3 4.2% reflagging in 2017), Coop (store reflagging planned) Rewe Group, Cologne Aldi Group, Essen, Mühlheim 28.3 27.9 1.5% Schwarz Group Lidl, Kaufland, Kaufmarkt, Handelshof Metro Group, Düsseldorf 26.3 29.5 -11.0% Metro Group real,- Lekkerland, Frechen 9.3 9.1 2.3% Aldi Group Aldi Süd, Aldi Nord Tengelmann, Mülheim 7.6 7.6 0.3% dm-Drogeriemarkt, Karlsruhe 7.5 7.0 6.7% The Edeka Group once again increased its lead in 2016 with a 2.5% Rossmann, Burgwedel 6.1 5.8 5.4% rise in sales. This does not include the successful takeover of Globus, St. Wendel 4.9 4.9 1.0% Tengelmann outlets which took place at the end of 2016 following Source: Lebensmittelzeitung, TradeDimensions, own calculations - March 2017 Rounding differences may occur. lengthy negotiations and a compromise with Rewe. They agreed that 1 Gross turnover in relation to the accounting year concerned; includes all forms of sales incl. Edeka would not take over all the Tengelmann stores, C&C stores and food deliveries, including pharmacy product turnover. 2 Not including tourism, nor the takeover of coop stores

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

The pharmacy chains dm-Drogeriemarkt and Rossmann posted good The number of outlets continued to decline in 2015 and 2016, while growth rates and have been expanding fast since Schlecker’s selling space remained largely the same. Sales, however, developed bankruptcy, and this has been reflected in considerable sales very positively, which reflects the rising sales per unit area in food retail. increases. Market shares held by the various business types illustrate the way this The concentration process continuous in food retail with the takeover of industry is developing: the Tengelmann outlets, and Rewe’s takeover of more than 160 stores belonging to Schleswig-Holstein’s coop eG (the Federal Cartel Office – Discounters lost some of their market share in 2015 and 2016, but issued its approval in October 2016), which are now being gradually with a total portion of 45.4%, they remain the foremost supplier integrated. group in food retail.

Germany* The big discounter chains Aldi and Lidl are currently improving their Shown in inde o 2006 = 100 existing networks. Smaller stores are being closed and replaced by bigger ones, and existing stores are being expanded 125 considerably. Lidl and Aldi favour buildings with selling areas of up 120 to approx. 1,500 sqm. Companies like Lidl are now offering 115 additional services such as customer bathrooms and coffee 110 Sales vending machines, as well as offering a more spacious 105 presentation of goods with lower shelves, wider aisles (for 100 Number of outlets customers to pass along), especially in the zone leading up to the 95 90 tills, and by making the retail space more attractive (trading up). 85 Netto and Penny are also investing in upgrading their store image, 80 partly so they can compete favourably against the supermarkets. '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Penny is trying to profile itself as a convenience store.

Source: EHI Retail Institute Cologne, bulwiengesa’s own calculations Rounding differences may occur. * Not including specialised stores and non-organised food retail; incl. non-food selling space

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Development of number of food retailers by business type 2007 - 2016 Market shares n

Year Discounter Supermarket Large Hypermarket Small food 100% 3.1 supermarket retailer 12.3 2007 15,600 9,590 903 877 14,900 80% 8.6 8.7 8.8 9.0 9.3 9.4 9.5 9.6 9.8 9.9 2008 15,970 9,660 931 887 13,900 60% 27.3 26.8 26.6 26.9 27.4 27.7 28.0 28.3 28.8 29.2 2009 16,020 9,700 955 885 12,800 40% 2010 16,240 9,980 985 890 11,193 20% 44.9 45.7 46.2 46.1 45.6 45.8 45.8 45.8 45.6 45.4 2011 16,462 10,148 1,002 893 10,650 2012 16,393 10,505 1,010 894 10,064 0% '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 2013 16,222 10,655 1,054 888 9,781 2014 16,195 10,785 1,070 875 9,600 Discounters * 2015 16,211 10,870 1,098 864 8,900 Supermarkets Other food retailers 2016 16,054 10,900 1,127 851 8,750

'07-'16 2.9% 13.7% 24.8% -3.0% -41.3%

Source: EHI Retail Institute, Cologne * Total values incl. non-food Source: EHI Retail Institute, Cologne, TradeDimensions, bulwiengesa calculations Rounding differences may occur.

– Hypermarkets continue to decline, holding a marginal market share – The winners are the supermarkets and large supermarkets, who of just 12.3%. The number of hypermarkets fell considerably from have been able to expand their market share. The number of 875 in 2014 to 851 in 2016. Selling space, however, has remained stores and their selling space have risen steadily since 2007. The largely constant. number of large supermarkets has risen by around 24.8% since 2007, and supermarkets have also grown rapidly by 13.7%. These – Other, smaller food retailers have also lost market share. The developments have been bolstered by the leading chain store number of them has almost halved since 2007. owners, who have done much to strengthen the provision of services near to residential areas, and who have experimented with new supermarket formats.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

For example, Rewe is busy developing a new supermarket concept Regional distribution – discounters dominate eastern Germany with pilot stores in cities such as Berlin, Munich and Kronberg im Taunus, so as to make their outlets sustainable for the future. Business types in food retail are more or less pronounced, depending on region: These stores aim to focus more on fresh produce, convenience products and catering, giving them more premium components and – Discounters3 are the dominant business type in every region, but an improved ambience. By doing this they aim to position there remains a significant difference between the new and old themselves more successfully in their rivalry with Edeka, and to set Federal states. The share of selling space they hold in the South- themselves apart positively from discounters, more and more of West4 Region is just under 35%, and marginally higher at around whom are incorporating typical supermarket elements. 36% in the North-West5, whereas discounters achieve a share of almost 46% in the eastern Federal states (incl. Berlin) (see diagram below). This means that the discounter segment is far Development of selling space at food retailers by business type, 2007 - 2016 in million sqm more important in eastern Germany, which is partly because of the Year Discounter Supermarket Large Hypermarket Small food lower spending power there. supermarket retailer s 2007 11.1 8.3 3.0 6.1 4.6 – Selling areas belonging to large-format supermarket / large supermarket and hypermarket business types are spread almost 2008 11.4 8.5 3.1 6.1 4.6 evenly across Germany, but there are significant differences in 2009 11.5 9.0 3.2 6.1 3.5 facilities in supermarkets / small supermarkets when comparing 2010 11.7 9.6 3.4 6.3 3.1 eastern and western Germany. In eastern Germany they 2011 11.9 9.7 3.5 6.3 2.8 collectively constitute a selling space share of 26%, in the North- 2012 12.1 10.0 3.5 6.3 2.8 West 36% and in the South-West almost 37%. They represent a 2013 12.1 10.2 3.6 6.3 2.8 major factor in the local provision of groceries in the North-West and South-West. 2014 12.2 10.4 3.7 6.1 2.8 2015 12.5 10.6 3.7 6.1 2.7 2016 12.5 10.7 3.9 6.0 2.7 3 Source: Evaluation of TradeDimensions data '07-'16 12.4% 28.7% 27.1% -2.1% -42.6% 4 Federal states: Hessen, Rheinland-Pfalz, Baden-Württemberg, Bavaria, Saarland Source: EHI Retail Institute, Cologne, TradeDimensions, bulwiengesa calculations Rounding differences may occur. 5 Federal states: Schleswig-Holstein, Hamburg, Lower Saxony, Bremen, North Rhine- Westphalia

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Sales per unit area continue to rise in food retail % Selling space in food retail has developed in a mainly stable fashion over recent years (approx. 4.1% since 2010), and, while expenditure and populations have risen, this has led to a consistently positive development of sales per unit area.

(sales in net sales)

4,500

4,250 4.315 4.228 4,000 4.123 4.165 4.023 3.930 3,750 3.870 3.893 3.907 3.885

3,500 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: EHI Retail Institute, Cologne

According to data published by the EHI Retail Institute, sales per unit

area in food retail steadily rose from 2011 to 2016, leading to a total

growth of almost 10%. This illustrates the way in which the food retail sqm industry has developed positively overall.

sqm

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

3.2 Development of business types Discounters also continue to optimise their existing networks. Smaller stores are being closed and replaced by larger, more modern buildings. Discounters At the same time, existing stores with selling areas of 900 or 1,000 sqm are being expanded to ‘supermarket size’, which means up to 1,500 Discounters have increased their profitability considerably in recent sqm of selling space, especially by market leaders Aldi and Lidl. years. The number of discounters has been declining since 2012, although turnover and sales per unit area have risen significantly. The As part of this restructuring, the average size of discounters has risen number of grocery discounters dropped to 16,054 in 2016, which is by approximately 11%, from 710 sqm of selling space in 2008 to around back down to the level of 2009. Selling space, however, rose to around 780 sqm in 2016. 12.50 million sqm. Primary discounters: an overview of their KPIs* Sales per Development of discounters 2008 to 2016 Name No. of Sales Selling space Average Develop- stores develop- develop- selling sqm of selling ment of ment ment 2015- space space 2016 sales per 2016 2016 2015-2016 2016 unit area in sqm 80 17.6 125 2015-2016

120

Aldi Nord 2,315 1.3% -0.0% 858 6,255 euros 1.4% 76 17.2

115 Aldi Süd 1,871 2.7% 1.4% 833 10,266 euros 1.4%

100

tsd.

72 16.8 110 in Lidl 3,184 2.8% 0.3% 857 7,407 euros 2.6%

2008 billion euros billion 105 Netto (Edeka) 4,144 1.8% 1.1% 777 4,246 euros 0.7%

x: in 68 16.4 100 Netto Nord 348 -0.3% -0.6% 737 4,720 euros 0.3%

nde

I Norma 1,301 3.1% 2.0% 711 3,548 euros 1.2%

Sales 64 16.0 stores No. of 95 Source: TradeDimensions, Lebensmittelzeitung, bulwiengesa calculations 90 * Some of these figures are TradeDimensions estimates 60 15.6 '08 '09 '10 '11 '12 '13 '14 '15 '16 '08 '10 '12 '14 '16 Rounding differences may occur.

Sales (gross)

Sales (gross) Selling space An analysis of the various discounters reveals the following: No. of stores Sales per unit area – Aldi Süd achieves around 10,270 €/sqm of selling space, which is by far the highest average sales per unit area, followed by Lidl with a sales per unit area of approx. 7.410 €/sqm of selling space. This means Lidl has achieved a considerable increase in turnover of 2.6% over last year, a success which has arisen from its considerable ongoing modernisation programme. Source: TradeDimensions, EHI Retail Institute, Cologne, bulwiengesa calculations *Some of these figures are TradeDimensions estimates

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

This programme involves renovating or rebuilding almost all of their transferred to the Netto sales line, since a lot of them do not meet stores over the coming years. The main elements of this concept the requirements of an Edeka supermarket. Most of the smaller include a more attractive, classy look with large glass fronts, as Tengelmann outlets in Berlin are also being reflagged as Netto. well as lots of space and additional services such as customer bathrooms with baby changing rooms, coffee vending machines – Penny - the fourth biggest discounter after Aldi, Lidl and Netto - has and spacious social rooms for the workforce. This conversion work developed very positively in recent years and has completed a will be accompanied by a far-reaching image campaign whose aim turnaround. Sales per unit area have increased by almost 2% over is to convey the image of a quality-oriented, high-end grocery the previous year to around 5,040 €/sqm of selling space, which is retailer. higher than Netto (Edeka). Penny has also improved its store image in an attempt to set itself clearly apart from the two top – Aldi Nord has also progressed very well; its average sales per unit discounters. The basic concept is that of a streamlined area of around 6,260 €/sqm of selling space do not match those of supermarket with discounter prices, a strong focus on fresh Aldi Süd and Lidl, but its profitability has been boosted produce and an image as a local amenity. considerably by comprehensively improving its stocks and closing non-profitable buildings. The average selling space in stores has – Norma is bottom of the list in terms of sales per unit area, but for been increased to around 860 sqm per building as a result of this some years its sales have grown steadily while selling space has work. remained almost constant, and last year it achieved its highest ever sales growth. Unlike its rivals, Norma does not intend to upgrade – Sales at Aldi Nord and Aldi Süd have been affected positively by its store layout. But the store network has been improved by the inclusion of brand items in the product range since 2015; some closing outlets that are no longer up to date and replacing them of these are permanent parts of the range, others are included as with new ones. Logistical processes have also been improved. promotional goods.

– Netto (Edeka) has the biggest network of stores with more than 4,100, but its sales per unit area of around 4,250 €/sqm of selling space is well below that of market leaders Aldi and Lidl. The average selling space in their stores is also less than Aldi and Lidl. Retailer Netto also plans to modernise its network of stores over the next five years, but this work will not be so far-reaching. The conversion scheme involves improving the existing network, closing some stores, extending others and opening replacement sites. The aim for new stores is a selling area of 1,000 sqm. Most of the Tengelmann outlets taken over in the Ruhrgebiet are being

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

– Netto Nord is the smallest grocery discounter with around 350 Grocery shops branches, and limits itself to the market in the north of Germany. It is also the only discounter to have suffered a slight loss of sales The number of small grocers continues to drop. This type of business last year. has also lost a lot of sales. Sales per unit area have risen but at around 1,850 €/sqm of selling space (net), they remain at a very low level. Comparison of d sc ters’ s (2016) a

type (<400 sqm selling space) 2008 2016 12,000 10,000 10,266 6.5 16 150 8,000

6.0 6,000 7,407 125 6,255 14 100

tsd.

4,000 5,040 = 4,720 5.5 in

4,246 2,000 3,548 12 100

2007 5.0 0 x:

Aldi Aldi Lidl Netto Netto Norma Penny nde 75

10 I

Nord Süd (Edeka) Nord euros in billion Sales 4.5

stores No. of

4,0 8 50 Source: TradeDimensions, Lebensmittelzeitung, bulwiengesa calculations '08 '09 '10 '11 '12 '13 '14 '15 '16 * Some of these figures are TradeDimensions estimates '08 '10 '12 '14 '16 Sales (net) Sales (net) Overall we can say that almost all of the discounters are improving their networks of stores and trading up, with concepts borrowed from the No. of stores supermarkets. The number of outlets is likely to keep declining coupled with a trend towards larger selling areas in the stores. Source: EHI Retail Institute, each 31.12.

There is no sign of any reversal in this trend, especially given the background of sustained negative parameters such as problems of demand and competition.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Supermarkets (400 to below 2,500 sqm selling space) The performance of supermarkets has also improved considerably. Sales per unit area are currently at around 4,200 €/sqm of selling space The supermarket business type has steadily and significantly increased (gross), having risen significantly by around 15% since 2008. its sales since 2011, while increasing the number of outlets. The average selling space per store is around 1,100 sqm.

KPIs for supermarkets (400 up to below 2,500 sqm) – an overview* type (400 – 2 499 sqm selling space) 2008 to No. of Sales Selling space Average Sales per Develop- 2016 stores develop- develop- selling sqm of ment of ment ment space selling space sales per 2016 Name 2016 2015-2016 2015-2016 2016 unit area 51.0 11 125 in sqm 2015-2016 48.0 11 0 120 Edeka Group 3,927 10.8% 9.5% 1,096 4,447 euros 1.2%

K+K Markt 209 -0.5% -0.8% 1,084 2,689 euros 0.3%

115

100

45.0 10.5 tsd. 3.311 2.2% 2.3% 1,298 3,879 euros -0.2% Rewe Group

in 110 tegut 239 3.9% 1.6% 1,129 3,736 euros 2.3% 42.0 10,0

2008 Source: TradeDimensions, bulwiengesa calculations, Rounding differences may occur. 105

x: * Some of these figures are TradeDimensions estimates 39.0 9.5

nde 100

Sales in billion euros in billion Sales No. of stores No. of The Edeka Group runs the largest number of supermarkets, and 36,0 9,0 95 '08 '10 '12 '14 '16 achieves the highest sales per unit area at almost 4,450 €/sqm of selling space (gross). Edeka has succeeded in increasing both its overall sales Sales (gross) (approximately 11% growth) and sales per unit area in its stores. Edeka Sales (gross) in million sqm also benefits from the fact that many of its supermarkets are owner- No. of stores managed, and these generally achieve better sales than Edeka Group branches. Source: TradeDimensions, EHI Retail Institute, Cologne, bulwiengesa calculations The Rewe Group, which is the second largest German supermarket * Some of these figures are TradeDimensions estimates operator with around 3,300 stores, did not manage to achieve the same success as the Edeka Group last year. Sales did rise by 2.2%, but the average sales per unit area decreased slightly by 0.2%.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

There are now only a few regional supermarket operators left on the Large supermarkets and hypermarkets market following the takeover of Tengelmann outlets by Edeka and Rewe and of coop by Rewe in 2016. Even tegut is no longer a regionally The number of large supermarkets and the sales they have generated active medium sized retailer. It was taken over by Switzerland’s migros have risen steadily since 2011. Yet things are not all the same among in 2013 and is now run as an independent subsidiary. tegut focuses its the four top operators. Market-leader Kaufland has almost 450 activities on Hessen and North Hessen, but has expanded in the properties and continues to achieve the highest sales per unit area of affluent urban regions of the south (including Rhein-Main, Stuttgart, around 5,100 €/sqm of selling space (gross), although it did not achieve Nürnberg/Erlangen). There has been a comprehensive modernisation the growth levels of Edeka and Rewe last year. of its store network ongoing since 2013, with existing stores renovated and unprofitable branches closed. Development of large supermarket business type (2,500 - 4,999 sqm selling space) 2008 to 2016 At the same time they have been optimising their range (including 24.0 1.30 130 streamlining, incorporating more local products and own brands) and 125 their pricing strategy. The company hopes that this reorientation will 22.5 1.20

120 make it a stronger rival to Edeka, Rewe and the discounters. Its 21.0 1.10

100 115

restructuring activities also appear to be paying off. In 2016, tegut

tsd.

in posted an almost 4% increase in its sales over the previous year, and 110 19.5 1,00 its sales per unit area also rose considerably. Amazon (Amazon 2008 105

in billion euros in billion marketplace) also began to sell tegut products recently, with a focus on 18.0 0.90 x: 100

nde tegut’s own brands. I

Sales Sales 16.5 0.80 stores No. of 95 Bottom of the list is K + K Markt (Klass + Kock) which is regionally active '08 '10 '12 '14 '16 '08 '10 '12 '14 '16 in North Rhine-Westphalia and Lower Saxony, and which saw a decline in its sales in 2016 coupled with very weak sales per unit area, Sales (gross) averaging just under 2,700 €/sqm of selling space (gross). Sales (gross) No. of stores The Rewe and Edeka Group look set to position themselves even more successfully, having taken over other supermarkets. Time will tell to Source: TradeDimensions, EHI Retail Institute, Cologne, bulwiengesa calculations * Some of these figures are TradeDimensions estimates what extent tegut can continue positively as it is now, with the Swiss company migros in the background. The Edeka Group achieved the best sales growth last year, with a growth of 3.1%. Sales per unit area also rose by 0.7%.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

The Rewe Group has also progressed well with 2.3% growth in sales. hypermarket type (selling space ≥ 5 sqm) Edeka and Rewe’s push towards upgrading existing stores and 2008 to 2016 expanding fresh produce areas, integrating additional services and 24.0 1,00 115 catering elements, seems to be paying off.

110 23.0 0.95

100

tsd.

KPIs for large supermarkets (2,500 - 4,999 sqm) – an overview*

= 105

No. of Sales Selling space Average Sales per Develop- 22.0 0.90

selling 2008

sqm of stores develop- develop- ment of 100 ment ment 2015- space selling sales per x: 2016

Name 2016 2015-2016 2016 space unit area nde in sqm 21.0 0.85 I 2016 euros in billion Sales 95 2015-2016 stores No. of Edeka Group 358 3.1% 2.3% 3,243 4,436 0.7% 20.0 0.80 90 Kaufland 446 1.4% 0.9% 3,701 5,093 0.5% real,- 46 -2.5% -2.4% 4,274 4,655 -0.2% Rewe Group 167 2.3% 2.0% 3,080 4,094 0.3% Sales (gross) Source: TradeDimensions, bulwiengesa calculations Rounding differences may occur. Sales (gross) * Some of these figures are TradeDimensions estimates Selling space No. of stores Sales per unit area real,- is the biggest loser by comparison. Its sales declined Source: TradeDimensions, EHI Retail Institute, Cologne, bulwiengesa calculations considerably, both in its large supermarkets and its hypermarkets. * Some of these figures are TradeDimensions estimates Furthermore, it closed nine outlets last year, and many real,- stores are suffering from investment bottlenecks. The hypermarket business type has seen a reduction in the number of stores and in sales since 2012. Sales per unit area developed steadily The rollout of its planned investment programme, in which stores were at first, but then declined in 2016. All of the hypermarkets lost sales last to be renovated on the basis of a pilot outlet in Krefeld, has been year, except from those run by Rewe and Edeka. The Rewe Group took postponed, probably because of the imminent division of Metro into two over outlets previously run by real,- last year, and put in place some independent stock companies, after which real,- and the Metro C&C very high-end concepts there including extensive fresh produce stores will begin to trade under the Metro Group name. counters, catering elements, onsite production, humidors and so on. Rewe and Edeka, however, are far behind the other hypermarket operators in terms of sales per unit area.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Sales dropped especially steeply at real,-, which lost 3.4%. For reasons Nor did Kaufland escape unscathed last year. To revive its German of cost, real,- also changed its online concept and now operates a business and rectify the investment bottleneck that has formed at its Click&Collect scheme with collection stations at the stores. Their stores, Kaufland plans to invest up to one billion euros each year in delivery service has been suspended until further notice. modernising and realigning its network of outlets. It intends to convert its stores on the basis of a pilot shop in Ilsfeld. They are also considering Globus, which operates the biggest hypermarkets with a diverse non- purchasing their properties from their landlords so as to secure the food range and average selling space of around 11,700 sqm, had to stores long-term, and with them their investments. absorb a slight loss of sales of -1.2% last year. Sales per unit area declined even more at -5.5%, but that was a result of the newly opened All in all, it is clear that the two big hypermarket operators real,- and 47th Globus hypermarket in Rüsselsheim, which was not opened until Kaufland lost sales last year, despite good parameters in food retail September 2016. At the same time, Globus is the hypermarket operator overall, and that they will have to realign and modernise their networks with the highest sales per unit area, averaging 6,000 €/sqm of selling of stores if they are to assert themselves over other business types in space. the market. Kaufland is taking steps to counter this development; at real,-, no trend reversal is evident.

KPIs for major hypermarkets (≥ 5,000 sqm selling space) – an overview* Rewe and Edeka, on the other hand – because they have already No. of Sales Selling space Average Sales per Develop- modernised their existing stores, established a higher quality set-up and stores develop- develop- selling sqm of ment of expanded their fresh produce areas, convenience services and catering ment ment 2015- space selling space sales per 2016 elements – are now setting the trend and growing their sales. Name 2016 2015-2016 2016 2016 unit area in sqm 2015-2016

Edeka Group 107 2.4% 2.3% 6,753 3,869 euros 0.1% Source: TradeDimensions, bulwiengesa calculations Globus 47 -1.2% 4.6% 11,675 6,052 euros -5.5% Rounding differences may occur. *Kau Somefland of these figures183 are TradeDimensions-1.2% estimates-0.6% 6,204 4,671 euros -0.6% real,- 239 -3.4% -2.5% 7,503 4,208 euros -0.9% Rewe Group 38 2.6% -0.3% 6,371 3,946 euros 2.9%

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Organic grocery shops The main generator of sales in organic grocery is food retail (including pharmacies). Around 58% of sales in organic grocery were generated The organic grocery segment has enjoyed exceedingly dynamic there. Food retailers were able to increase their share of this by around growth. Sales of organic grocery between 2012 and 2016 rose by 4% over time. Wholefood shops also increased their sales, but not as around 35% – an enormous leap. A total of around 9.5 billion euros was much as food retailers. generated by selling organic grocery in Germany in 2016. Food retailers Of all the organic supermarket chains, denn's Biomarkt (Denree) has (including pharmacies) have benefited from this growth more than the most branches. denn's Biomarkt is now present across Germany anybody; they succeeded in boosting their sales by around 44% during and almost doubled its network of outlets between 2012 and 2016, as the period under review. well as increasing its sales by almost 78%.

Biggest four organic grocery shop chains in Germany Development of organic grocery sales by sales channel, 2012-2016 Sales 2015 Change from Branches Branches million euros 2012 2012 2016

denn's bio (Denree)* 247 77.7% 113 215

Alnatura** 418 40.7% 74 107

Basic 130 16.1% 25 32

BioCompany 134 66.5% 30 51

Sales inSales billion euros Source: TradeDimensions, Some of these figures are TradeDimensions estimates, Rounding may occur. * Exclusively sales from Denn's Bio stores, excluding sales generated by independent retailers belonging to Verbundgruppe Biomarkt

Total Wholefood shops** Alnatura generated the highest sales; it occupies the lowest price range Food retail* Others*** in the organic grocery segment. As well as dedicated

Alnatura stores, which generated only around half of total sales, retail partners are major turnover contributors. dm Drogeriemarkt, a long- * Including pharmacies standing ally, began to discontinue Alnatura products in 2015 ** incl. farm shops which buy goods worth 50,000 euros net p. a. and build up its own organic grocery line. New business partners then *** Bakeries/butchers, fruit and vegetable retailers, weekly markets, food boxes, mail order companies, petrol stations had to be found. These have included coop, Müller Drogerie, Rossmann und Edeka; the alliance with Edeka has fulfilled Alnatura’s Source: BÖLW Bund ökologische Lebensmittelwirtschaft e.V.; sales by sales channel in 2012/2013 cannot be compared with the previous year because of a change of method expectations.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

As a result of all this, Alnatura managed to maintain its sales at a stable Summary level. Rossmann now offers all of Alnatura’s products at its online shop and is trying out the Alnatura range in some of its pharmacies. Alnatura The concentration process in food retail continues and the five big is also pushing ahead with the expansion of its own network of stores. companies are consolidating their power in the market.

Basic and Bio Company have much smaller networks of stores by Small food retailers are posting declining sales figures which are the comparison; Bio Company is the market leader in the Berlin region and result of a huge loss of stores and selling space. This trend is set to has grown rapidly over recent years. Bio Company has benefited from continue; we cannot expect a turnaround in the fortunes of this business the organic grocery manufacturer Havelland, which it took over in 2013 type, given the problems of demand and competition. and which offers a lot of local products as well as an attractive shop concept. Discounters have been losing a little of their market share for years, but in absolute terms they managed to overcome a period of weakness in Basic is working to expand its alliance with online retailer Amazon. 2011 and 2012, and sales figures began to rise in 2013. In the long term, the big discounter chains will continue to focus mainly on Pharmacy chains Rossmann and dm also intend to reinforce and build improving their store networks, with larger selling areas and slight upon their expanding organic grocery ranges. expansion.

Overall it can be said that organic grocery retail will continue to grow The biggest winners of recent years are the supermarket and large rapidly. The number of organic grocery shops will continue to rise, and supermarket business types; their sales have grown rapidly since 2012. pharmacies and grocery suppliers will want to benefit from this positive Like the development of organic grocery sales, this reflects the greater development and will continue to build up their own organic grocery spending seen among consumers. ranges. Hypermarkets have not been able to escape the negative trend which they have been suffering for several years. This business type has lost sales as well as selling space and the number of stores. Hypermarket operator real,- will inevitably have to execute the modernisation of its store network as announced, but this has not yet started to happen.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

4 RENTALS AND YIELDS At 25.5% in western Germany and 24.9% in eastern Germany, both areas demonstrate similar rental increase rates since the year 2000 in 4.1 Rentals food retail.

Rentals in food retail have developed positively since the year 2000. In Compared with rentals at 1A locations in 127 RIWIS cities, rentals for previous periods from 2000 to 2014, rental growth in western Germany food retail in Germany have since the year 2000 risen faster than top was always stronger than in eastern Germany over the same periods. rentals in top locations in B, C and D cities. Only rental growth in A cities Rentals remained stable in western Germany in the most recent period was higher, at 69.1%. (2015 - 2017), while in eastern Germany they rose by 10.8% from 10.60 €/sqm to 11.70 €/sqm compared with the previous period. Despite this ‘catch-up’ effect, the absolute rental level in western Germany is still Rental growth in German retail 2000 - 2016 9.4% higher than in eastern Germany. Change – Regional unit 2000 2016 2016 to 2000 Development of average rents for selected Top rent, A cities 175.90 €/sqm 297.40 €/sqm 69.1% food retail business types, 2000 - 2017* Top rent, B cities 115.70 €/sqm 136.50 €/sqm 18.0% Regional unit 2000-2004 2005-2009 2010-2014 2015-2017 Top rent, C cities 79.10 €/sqm 93.80 €/sqm 18.6% New Federal states 9.40 €/sqm 9.80 €/sqm 10.60 €/sqm 11.70 €/sqm Top rent, D cities 52.30 €/sqm 55.20 €/sqm 5.5% Food retail eastern 9.40 €/sqm 11.70 €/sqm 24.9% Old Federal states 10.20 €/sqm 11.40 €/sqm 12.90 €/sqm 12.80 €/sqm Germany Food retail western 10.20 €/sqm 12.80 €/sqm 25.5% * The data sample for this calculation relates to rental information from the internal bulwiengesa Germany database for the period 2000-2017. In order to achieve a statistically relevant number of cases, averages were measured for 5/3-year intervals. Information was located using the municipality Source: bulwiengesa AG, rents rounded off Rounding differences may occur. codes belonging to addresses in eastern/western Germany. It should be noted that the real * Each period-average was used to calculate growth rates in food retail. sample cannot reproduce an even distribution across the full geographic market area. Source: bulwiengesa AG, rents rounded off Rounding differences may occur.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

4.2 Yields – Net initial yields 2008 - 2016 retail – % (127 R S cities) The development of yields over recent years reflects intense investor interest in retail properties at non-central locations. An increasing 8.0% number of investors are turning to retail property in non-central locations (specialist retailers, supermarkets, discounters) because of 7.5% higher purchase prices and less availability in the premium segments 7.0% business premises and shopping centres. C D 6.5%

Yields for every RIWIS category of city have steadily declined since 6.0% 2008. Yields in western German A/B cities have dropped by 161 basis 5.5% C D points and in Berlin by 127 basis points since 2008. Yields in city-centre BERL N locations in A cities are approaching the 3% mark, but they are still 5.0% above the 5% mark in non-central locations in western German A/B '08 '09 '10 '11 '12 '13 '14 '15 '16 cities and Berlin. There has been a 138 basis point decline in yields in C/D cities in western Germany since 2008. * In its annual RIWIS survey, bulwiengesa determines the property industry indicator net initial yields for non-central locations in a 127 cities. Because there is no statistically sound way of Yields in eastern Germany are higher in similar categories of city, but ascertaining regional yields for the local amenities segment and specialist store locations, this indicator is used as the best approximation of such a figure. RIWIS city categories have been investor interest is intensifying there and yields have dropped sharply. allocated to EASTERN/WESTERN GERMANY and divided up into A/B and C/D cities; The downturn in A/B cities and C/D cities has been similarly severe at average yields for each year have been calculated for those groups. 116 and 117 basis points, but was still somewhat less than figures in Source: bulwiengesa AG western German cities.

Market study – Food retail in Germany - market structure data 2016 bulwiengesa

Local amenity investments offer high stability and long-term security. Summary

Local amenity property represents an attractive investment category for The rental level in the local amenities segment has risen considerably three reasons. Firstly, Germany’s restrictive construction laws protect since the year 2000 for good properties in both western and eastern existing retail areas comprehensively against competitors, especially in Germany. Yields are also attractive, especially in C and D cities. central supply areas; secondly, tenancy agreements are generally very Investments in modern local amenity properties offer high stability and long and are partially indexed, which provides security. Thirdly, food long-term security. This is because tenancy agreements in this asset retail mainly involves anchor tenants with good credit ratings. category are usually long-running and normally include index arrangements. Tenancy agreements that last for 15 years and are therefore very long- term are common practice at Germany’s food retail chain stores. The reason for this is that companies wish to obtain long-term security over their locations, to which they are closely tied. Options are also available that generally run for 2 x 5 years. The tenancy agreements usually include three raise-free years followed by indexing which adjusts them in line with the cost of living index, providing security even if inflation rises. Tenancy agreements for supplementary suppliers usually vary between approximately ten years for pharmacies and approximately five to ten years for non-food discounters and home interiors stores. The flexibility this provides allows for a response to changes in the market and for the industry/tenant mix to be adapted.

All things considered, local amenity locations offer secure, long-term rental income and represent a stable, long-term investment.