November 2016 France Grocery Retail Market Profile Innovation and Sustainability Report By: Ray Gaul and Tudor Popa www.kantarretailiq.com Table of Contents Executive Summary ............................................................................................................ 3 Overview ........................................................................................................................... 3 Five Key Facts to Consider When Thinking About Retail in France ................................... 3 France: The Economy and Its Impact on Retailers and Shoppers .................................. 5 Global Recession of 2007: An Inflection Point ................................................................... 5 The Retail Market Outlook: Key Growth Metrics ................................................................ 6 Retail Conditions in 2015/2016 .......................................................................................... 7 Economic Conclusions ...................................................................................................... 7 France: The Modern Retail Landscape, Channel Developments, and Implications for Sustainability Programs ..................................................................................................... 8 Market Consolidation ..................................................................................................... 8 Price Wars ..................................................................................................................... 9 Format Innovation .......................................................................................................... 9 Anti-Competitive Regulations ......................................................................................... 9 Decline of the Mighty Hypermarket .................................................................................... 9 The Rise of Proximity Grocery Formats ........................................................................... 10 The Myth About Discounters ........................................................................................... 11 eCommerce and eGrocery .............................................................................................. 12 Retailers on the Move: Who Is Innovating in France? .................................................... 14 Carrefour ......................................................................................................................... 14 E. Leclerc ........................................................................................................................ 14 Intermarché ..................................................................................................................... 15 Auchan ............................................................................................................................ 15 Système U ....................................................................................................................... 16 Casino ............................................................................................................................. 16 Lidl .................................................................................................................................. 17 Amazon ........................................................................................................................... 17 Conclusion ........................................................................................................................ 18 2 www.kantarretailiq.com Executive Summary Overview As the world’s sixth-largest economy, France has historically been a net exporter of retail innovation. These innovations have included pioneering sustainability programs. French retailers have been extremely proactive in building best practices in efficient store design, investing in sustainable agriculture, and developing virtuous energy cycles. In most instances, leading French retailers have taken these ideas with them when they have invested in other parts of Europe and overseas. This pioneering spirit came under threat beginning in 2007 when the French economy underwent major structural changes. French retailers today face a set of very difficult trading conditions. The result is that many French retailers have scaled back their ambitions outside France and have begun to fight bitter market share wars within France. These market share wars have slowed innovation in sustainable retail innovation. However, French shoppers continue to demand the very best from retailers. This demand has produced an environment in which French retailers are now innovating in sustainable retailing but doing so within tight budgetary restrictions. These constraints have actually produced a sustainable retail model that is easier to export to countries with lower levels of innovation and smaller budgets. In this report, we answer the following questions: ‒ The French market outlook: How will retail develop in the next five years? When will French retailers begin to export innovation in sustainability en masse again? ‒ Channels to watch: Which channels will grow in France and how quickly? Will hypermarkets be the channel to watch or will new channels emerge? ‒ Retailers on the move: Which retailers are winning or changing shape, and what does this mean for innovation in sustainability coming from France? Five Key Facts to Consider When Thinking About Retail in France ‒ In 2016, France’s retail market will exceed EUR500 billion in turnover (sales) for the first time in its history. Implication: France will continue to have capacity to be home to many large-scale retailers that export their business models to other countries. ‒ Hypermarkets — pioneered in France — will continue to be the largest retail channel at over EUR75 billion in annual turnover. Implication: France’s innovations in large-format retailing will be important to watch. ‒ The combination of neighbourhood supermarkets and small-format express and convenience stores in France will generate over EUR50 billion in annual turnover in 2016. 3 www.kantarretailiq.com . Implication: France is quickly becoming the world’s most innovative market for proximity retailing and ultra-urban supply-chain innovation — and it is investing in sustainable supply chains in these growth formats. ‒ France’s Drive landscape has changed shopping expectations considerably, mainly in how shoppers think about the amount of time to invest in shopping. Implication: When looking at France, it is important to realise that Drive is not the same as a classic click-and-collect service and that the Drive supply chain and sustainability formula do not operate in the same fashion. ‒ International retailers — primarily Lidl and Amazon — are likely to be the fastest-growing retail chains in France over the next five years. Implication: While it would be right to say that the French retail market is evolving along similar patterns as other countries in Europe and around the world, how France’s leading chains respond to this challenge will likely be very innovative and unique to France. 4 www.kantarretailiq.com France: The Economy and Its Impact on Retailers and Shoppers Global Recession of 2007: An Inflection Point The most important, and perhaps most confusing, aspect of the French economy relates to housing. Until 2007, households in France invested much of their savings in home ownership and home improvement. In 2015, INSEE, France’s national statistical agency, said, ‘Since the financial crisis of 2008-2009, household investment in construction has fallen continuously. Between 2008 and 2014, this investment fell by 23.9%, while over the same period the number of households grew by 6.2% and household purchasing power shrank by 2.5%’. This trend is in stark contrast to other countries, such as Germany, where investments in homes and home ownership have boosted overall GDP growth and retail consumption. France’s central bank, Banque de France, says that while the roots of the problem connect back to the economic crisis, the overall problem primarily relates to a major change in France’s demographics. France’s 2016-2021 demographic realities are fundamentally different from its 2001- 2006 demographic realities. These differences are: ‒ Rate of population growth: From 2001-2006, the population of France expanded by nearly 500,000 people per year at peak, with many of these new heads related to births. In contrast, 2016-2021 population growth will average just over half the 2001-2006 rate at 283,000 people per year. Much of this population growth will be due to migration rather than births. ‒ Average household size and formation: As opposed to 2001-2006 when the majority of homes being built were designed for families with adults between 30 and 59 owning the property, housing growth from 2016-2021 will largely be for those 60 and older. By some measures, this construction will account for the majority of all housing starts. The fact that the 30-59 age group has not been purchasing homes has been the trend in France since the 2007 recession. The last year France experienced growth in home ownership among the 30-59 age group was 2006. ‒ Relationships and family arrangements: Two trends jump out when looking at the definitions of family. The first trend is happening everywhere — the aging population. In 2016, France’s over-65 population numbered more than 12 million people, 19% of the total. By 2021, France will have an over-65