uk retail overview october 7 2016 - deborah weinswig€¦ · 07/10/2016 · standards in budget...

1 DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

OCTOBER7,2016

D E B O R A H W E I N S W I G

M a n a g i n g D i r e c t o r , F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m

U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9

C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

This is the fourth in our series of reports analyzing retailtrendsinmajoreconomies.HerearethetoptrendswehaveidentifiedintheUKretailsector:

1) UK shoppers appear to be prioritizing spending onservicesattheexpenseofretail.Apparelstoresappeartohavebeenparticularlyhardhitbythistrend.

2) Discount retailers are now seeing underlying salesgrowth slow, following several years of rapid growth.Futuretop-linegrowthamongdiscounterswilllikelybedrivenbynewstoreopenings.

3) Internet-onlyretailersareoutperformingmulti-channelretailers online, despite brick-and-mortar retailershavingpouredcashintotheironlinepropositions.

4) We think there ismorepotential forsustainedgrowthamong Internetpure plays than there is among store-baseddiscounters.

5) The grocery sector has seen a fragmentation of salesawayfromlargerstores,andthislookssettocontinue.Amazon’s entry into the grocery market adds furtherpressures.

6) Following the UK’s vote to leave the EU, Britishconsumers have displayed resilience, and there hasbeennoperceptiblenegativeeffectonretaildemand.

DEEP DIVE: UK Retail

Overview: Characteristics,

Developments and Prospects


OCTOBER7,2016

TABLEOFCONTENTS

EXECUTIVESUMMARY.....................................................................................................3

1. SPENDINGONSERVICESAPPEARSTOHITRETAIL......................................................5WHYARESHOPPERSSPENDINGONSERVICESINSTEADOFRETAIL?...............................6APPARELRETAILBEARSTHEBRUNT................................................................................7

2. ISTHEDISCOUNTBOOMFADING?............................................................................8LIFEISGETTINGTOUGHERFORDISCOUNTERS................................................................9

3. PUREPLAYSAREWINNINGGREATERSHAREONLINE...............................................11

4. MORE GROWTH POTENTIAL FOR PURE PLAYS THAN FOR STORE-BASEDDISCOUNTERS.................................................................................................................13

5. FRAGMENTATIONHITSGROCERYINCUMBENTS......................................................14ALESSPROFITABLESECTOR...........................................................................................16AMAZONPRESENTSANEWTHREAT..............................................................................17

6. ANDBREXIT?...........................................................................................................18

KEYTAKEAWAYS............................................................................................................19


OCTOBER7,2016

EXECUTIVESUMMARY

TheUK:AFast-ChangingRetailSector

Thisisthefourthinourseriesofreportsanalyzingretailtrendsinmajoreconomies. Our previous reports looked at Germany, France andTurkey, and they can be found on our website,FungGlobalRetailTech.com.

UK retail is dynamic, diverse and innovative. The country leads theWesternworld in termsof e-commercepenetration, its retailershavepioneeredmulti-channel servicessuchasclick-and-collectand it is thehomeof innovative Internet-only retailers suchasASOS,boohoo.com,AOWorldandOcado.TheUKretail sectorhasseenmuchupheaval inrecent years, not only because online sales have boomed, but alsobecause an explosion in the discount segment has resulted in higherstandardsinbudgetretailing.Atthesametime,thesectorhasenjoyedseveral years of solid growth—although, as we discuss below, thisgrowthhassoftenedin2016.

HerearethetopsixtrendswehaveidentifiedinUKretail:

1) A renewed prioritization of services over retail: Nonfoodretailers, and especially apparel stores, are seeing growth slowor even turn negative, and consumers’ increased spending onleisure services appears to be one reason for this.We see thisleisurespendingasbeingdriveninpartbythepressuresofsocialmedia and in part by the greater ease of finding and bookingservicesviamobileappsandonlineaggregators.

Source:Shutterstock

2) Theslowingofthediscountboom:Discountretailersthatmademuch headway in recent years are also now seeing underlyinggrowth slow or turn negative. These include Primark, SportsDirect, B&M and Poundland, and there is speculation thatprivately owned Aldi is now seeing flat comps. In the comingperiod, top-line growth in the discount segment is likely to bedrivenbynew storeopenings rather thanby robustunderlyinggrowth.

3) Internet-only retailers are outperforming multi-channelretailers in e-commerce: Despite brick-and-mortar retailersmakingsubstantialinvestmentsintheire-commercecapabilities,theyarelosingshareintheonlinechanneltoInternetpureplays.

TheUKretailsectorhasseenmuchupheavalinrecentyears,notonlybecauseonlinesaleshaveboomed,butalsobecauseanexplosioninthediscountsegmenthasresultedinhigherstandardsinbudgetretailing.


OCTOBER7,2016

4) Thereismoregrowthpotentialinonlinepureplaysthanthereis in the store-based discount segment: We see moreopportunitiesforsustained,stronggrowthamongInternetpureplays than among store-based discount retailers. And we seediscount demand in categories such as apparel increasinglymigratingtositessuchasboohoo.com,MissguidedandAmazon.We estimate that e-commerce could be capturing roughly 30%ofapparelsalesandaround9–10%ofgrocerysalesinfiveyears’time.

5) The grocery shopping basket has fragmented to multipleretailers and formats: Discounters, convenience stores, localsupermarketsandspecialistshavegainedfromconsumers’shiftto buyingwhen andwhere they need to rather thanmaking asinglebigweeklyshoppingtrip.Meanwhile,nonfoodcategoriesand big-basket grocery retailers continue to migrate online.Thesetrendshavedentedmargins,underminedtheprofitabilityof large grocery stores and left large-store retailers facing anexcessofspace.

6) Brexit: Brits have exhibited resilience following the Brexitreferendumon June 23. Consumers have continued to shop instoresandbuyhouses,whilebusinesseshavecontinuedtohire.We see structural shifts, such as those noted above, as havingmuch more impact than the Brexit vote on retail in the nearterm.

The subsequent sections of this report consider these trends in moredepth.

Figure1.UK:SelectedHeadwindsandTailwindsinRetail

Source:FungGlobalRetail&Technology

ShoppersOpjngtoSpendonServices

SlowinginBudgetSegment ResilientConsumersInternet-OnlyRetailersBoom

Discountretailersthatmademuchheadwayinrecentyearsarealsonowseeingunderlyinggrowthsloworturnnegative.


OCTOBER7,2016

(4)(2)0246810

2014 2015 2016

AllRetail NonfoodRetail

1. SPENDINGONSERVICESAPPEARSTOHITRETAILUKretailenjoyedaperiodofbuoyantgrowthfrom2010through2014.Anoverallhealthyeconomywith lowunemploymentand the returnof realwage growth (albeit slow growth thatwasweighted toward the end ofthisperiod)helpedthesector.Butso,too,didBrits’willingnesstospend:even at points when real wage growth was contracting, retailers wereenjoyingrobustgrowthinsales.

Despite the strengthening health of theUK consumer, the environmentweakened in 2015, and lackluster demand at nonfood retailers draggeddown overall sector growth. This resulted in the lowest reportedDecember retail performance in a quarter of a century—and theweaknesshascontinuedin2016.

Therehavebeensignsofimprovementinthemostrecentmonthlydata,butwesuspectthisispartlybecausethedepreciationoftheBritishpoundhas flattered the overseas sales of major British retailers (in thoseinstanceswheretheyareincludedintheaggregatesectordata).

Figure2.UKRetailSales:YoY%Change

Source:OfficeforNationalStatistics(ONS)

We think one reason for the weakness is that Brits are prioritizingspendingonleisureservicesoverphysicalproducts.Thehotelssectorandthe recreational and sporting services sector—which includes tickets tosports events, visits to theme parks and gym memberships—were thestandout services sectors in the first quarter of 2016 (latest availabledata).

Source:Shutterstock

Therehavebeensignsofimprovementinthemostrecentmonthlydata,butwesuspectthisispartlybecausethedepreciationoftheBritishpoundhasflatteredtheoverseassalesofmajorBritishretailers.


OCTOBER7,2016

Figure3.UKConsumerSpending,bySelectedCategory:YoY%Change(1Q16)

*Suchascinemas,theaters,concerts,galleriesandzoos**Suchassportsevents,sportsfacilities,themeparksandgymsSource:ONS/FungGlobalRetail&Technology

The retail sector captured just 18.6% of the total increase in consumerspending in 2015—a lower share than in any recent year. In 2014, forinstance,retailcapturedmorethanaquarterofthetotalannualgrowthinspending.

Figure4.UKTotalConsumerSpendingvs.TotalRetailSales:AbsoluteAnnualGrowth(GBPMil.)

AnnualGrowthinConsumerSpending

AnnualGrowthinRetailSales

Retail’sShareofSpendingGrowth(%)

2011 36,047 10,255 28.4

2012 38,550 8,080 21.0

2013 43,728 10,255 23.5

2014 45,886 12,120 26.4

2015 33,395 6,215 18.6

Source:ONS/FungGlobalRetail&Technology

WHYARESHOPPERSSPENDINGONSERVICESINSTEADOFRETAIL?

We see two major elements driving consumers to spend on leisureservicesratherthanongoods:

• First, thegrowthof socialmedia—andparticularly theboom inphoto and video content on sites such as Instagram andFacebook—is likely playing a role. Younger consumers tend toenthusiastically document their lives on social media, whicharguablyputspressureon themtobeseen traveling,attendingconcerts and sports events, dining out, and enjoying otherleisure activities. The result is what we call “the Instagrameffect” on consumer spending, with services gaining at theexpenseofretail.

• Second,mobileconnectivityismakingiteasiertofindandbookleisure services, includingweekend getaways, salon treatmentsand last-minute dinner reservations. Apps such as YPlan allow

3.2%

1.4%

5.4%6.8%

8.1%9.1%

TotalSpending

Retail DiningOut CulturalServices*

RecreajonalandSporjngServices**

Hotels

Britsareprioritizingspendingonleisureservicesoverphysicalproducts.


OCTOBER7,2016

consumers todiscover leisureeventsandactivities in theircity,andonlineandapp-basedbooking intermediaries—suchas JustEat, Deliveroo, UberEATS and Amazon Restaurants in foodservice—are making it easier to spend on services. This isparticularly important in sectors where fragmentation hastraditionallymadeitdifficulttofindandbookservices.

APPARELRETAILBEARSTHEBRUNT

Some sectors have proven resilient: themixed-goods/department storesector, for instance,hasbeenboostedby theexpansionofmixed-goodsdiscountersaswellasbythestrengthofJohnLewis’stopline.

Two sectors that have taken hits are apparel specialists and householdgoodsstores.Thedownturnhasbeenespeciallysharpattheformer,withthesectorsqueezednotonlybyweaknessincategoryspending,butalsoby the sustained rapid growthof pure plays such asASOS, boohoo.comand, probably, Amazon Apparel and Zalando (although we do not haveconfirmedUKdataforthelasttwo).

The UK’s second-biggest apparel retailer, Next, flagged the hit to theapparelsectorearlierthisyear,whenitnoted:

There may be a cyclical move away from spending onclothingbackintoareasthatsufferedthemostduringthecreditcrunch…travel,recreationandgoingout.

Figure5.UKRetailSales,SelectedSectors(YoY%Change)

*Furniturespecialists,electricalgoodsretailers,DIYandhardwarestores,andmusicandvideoretailersSource:ONS/FungGlobalRetail&Technology

• Formore details, see our reportUK ApparelMalaise Signals aShiftinConsumerSpendingPrioritiesatbit.ly/FungUKApparel.

(10)(8)(6)(4)(2)0246810

2015 2016

ApparelStores HouseholdGoodsStores*

Twosectorsthathavetakenhitsareapparelspecialistsandhouseholdgoodsstores.


OCTOBER7,2016

2. ISTHEDISCOUNTBOOMFADING?Fragmentationaway frommiddle-groundgeneralists in favorof retailerswith a more specialized positioning has been seen across various retailsectorsinrecentyears.Wethinkitisnosurprisethattheperiodfromthestartoftherecessiontotodayisbookendedbytwomajorretailfailures—and that both retailerswere characterized by their generalized,middle-groundpropositions:

• Mixed-goods chain Woolworths, perhaps the epitome ofgeneralizedretail,shutdowninJanuary2009.

• BHS, an undistinguished, lower-midmarket department storechain,closeditsdoorsforthelasttimeinAugust2016.

Middle-groundgeneralists—fromTesco,AsdaandMorrisonsingrocerytoMarks&Spencer(M&S)andDebenhamsinapparel—continuetoturn inunderwhelminggrowthasconsumersenjoyanabundanceofchoicefrommorespecializedstoresandInternet-onlyretailers.

Thegrowthofdiscount(orbudget),pure-playandpremiumretailershasbeenatrendseenacrossbothfoodandnonfoodretail.Budgetretailers,inparticular,havebeenwinners,inpartbecausemajorplayers,fromAldiin grocery to Primark in apparel, have raised the standards of discountretailing.

Source:Shutterstock

Here are some of the success stories in British retail over the last fewyears:

• AldiandLidl ingrocery:AldiUK&Irelandposteda29.3%CAGRinrevenuesfor fiscalyears2010–2015.NoUK-specificaccountsare available for Lidl, but market-measurement service KantarWorldpanel has recorded broadly similar, storming growth forbothLidlandAldi.

• PrimarkandSportsDirectinapparel:Primark’sUKdivisiongrewrevenues at a 7.8% CAGR for fiscal years 2010–2015. SportsDirect turned in a revenue CAGR of 12.7% in the five yearsthroughfiscal2016.

• B&MandPoundland in themixed-goods discount sector: B&MsawaCAGRof27.7%inrevenuesinthefouryearsthroughfiscal

Thegrowthofdiscount(orbudget),pure-playandpremiumretailershasbeenatrendseenacrossbothfoodandnonfoodretail.


OCTOBER7,2016

2016,whilePoundland’s revenues grewbyaCAGRof 12.7% inthefouryearsthroughfiscal2015.

Formoreondiscountchannels,seeourprevious,in-depthreports:

• UK’sSecondGroceryDiscountBoomatbit.ly/FungUKDiscount.

• European Grocery Discounters: Small Stores, Big Threats? atbit.ly/FungGroceryDiscounters.

• Primark:PrimedfortheUSatbit.ly/FungPrimarkUS.

LIFEISGETTINGTOUGHERFORDISCOUNTERS

Despite the discounters’ success in recent years, we are now seeing asignificantslowinginthesegment.

Aldi and Lidl’s sales are slowing. KantarWorldpanelmeasures sales ofmajorgrocerystoresandithasrecordedasteadyslowingofgrowthatthediscounters. Inthe12weeksendedSeptember14,2014,Aldigrewsalesby29.1%,whileLidlgrewsalesby17.7%.Fast-forwardtwoyearstothe12weeksendedSeptember13,2016,andAldigrewsalesby11.6%andLidlby9.5%.

Moreover,thisgrowthisinthecontextofaggressivestore-openingplans.Sanford C. Bernstein analyst Bruno Monteyne suggested this year thatAldi’s comparable sales had reached zero. Aldi’s UK boss, MatthewBarnes,recentlydismissedthe“bizarrefascinationwithlike-for-likesales”in an interviewwith The Telegraph, indicating that the privately ownedGerman discounters are much less concerned with comparable salesgrowththantheirpubliclytradedpeersare.

Primark’scompshaveturnednegative.Primarkrecentlyreporteditspre-closestatementfortheyearendedSeptember17anditestimatesthatitscomparable salesduring the year turnednegative, to theorderof (2)%.This includeda sequentialweakening fromflat comps in the firsthalfoffiscal 2016 and is reportedly the first time Primark has posted negativeunderlyingsalesgrowthin16years.Whilethisisagroupwidefigure,andso includes internationaloperations,wethinktheUKsegmentmayhaveperformed even worse, given the sharp downturn in the UK apparelmarketthisyear.

Source:Shutterstock

Despitethediscounters’successinrecentyears,wearenowseeingasignificantslowinginthesegment.


OCTOBER7,2016

Sports Direct has slumped. Discount-positioned sportswear and casualapparelretailerSportsDirecthaspostedsubstantiallyslowingunderlyinggrowth and a slump in investor confidence. In the year ended April 24,2016, the company’s core sports retail segmentposted compsof (0.8)%versus7.4%compgrowthinthepriorfiscalyear.

Source:Shutterstock

Mixed-goods discounters are slowing. The leading listed mixed-goodsdiscounters,B&MandPoundland,havereportedsimilarslowingtrends:

• B&M’s latest results, covering the 13 weeks ended June 25,2016, show thatUK compswere flat in the period. In the yearendedMarch26,UKcompswere just0.3%,downfrom4.4%intheprioryear.

• FortheyearendedMarch27,2016,Poundlandpostedcompsof(3.9)%, down from 2.4% in the prior year. (Poundland wasrecently acquiredby retail group Steinhoff International, sowedonothavesubsequentdisclosures.)

ISTHISTHEENDOFTHEDISCOUNTBOOM?

Opportunitiesremainandanumberofdiscountretailerswillcontinuetotakesharefrommiddle-groundretailers—butingeneralthesegainslooklike they will be driven more by new store openings than by robustunderlying growth. The low-hanging fruit has now been picked and theeraofunderlyingoutperformanceforthediscountsegmentappearstobedrawing to a close. A maturing discount segment with constraints onphysical capacity, heightened competition from Internet pure plays incategories such as apparel anddemanding comparatives are among theheadwindsthediscountersface.

Aslowinginthediscountsegmentdoesnot,however,meanthehard-hitgeneralist, middle-ground segment will recover lost ground: we expectthe very middle of the market to continue to find trading tough, withInternet-only retailers among those likely to steal share from legacychains.

• Formoreonthechallengesofthemidmarketinthedepartment-store sector, see our report European Department StoresUpdate: Reviewing Trends and Performance atbit.ly/FungDeptStoresEurope.

Thelow-hangingfruithasnowbeenpickedandtheeraofunderlyingoutperformanceforthediscountsegmentappearstobedrawingtoaclose.


OCTOBER7,2016

3. PUREPLAYSAREWINNINGGREATERSHAREONLINEInternet-only retailers comprise one segment that has consistentlybenefitedfromthefragmentationofshoppingawayfrommiddle-groundgeneralists. While discount brick-and-mortar retailers may be graduallyrunningoutofsteam,Internetpureplaysremainahigh-growththreattoestablishedbrick-and-mortarchains.Theoutperformanceismostevidentatthemajorapparelpureplays,ASOSandboohoo.com,whichappeartobeimmunetothecurrentslowdowninapparel; infact,boohoo.comhaspostedacceleratingUKsalesgrowththisyear.

Figure6.ASOSandboohoo.comUKRevenueGrowth,YoY%Change

Data are for nearest periods to calendar quarters. Neither company reportsconsistentlybystandardquarters;reportingperiodsrangefromtwomonthstofourmonths.Source:Companyreports

Below, we bring together recent online sales growth figures for majorstore-based and Internet-only retailers. These figures imply that pureplays are continuing to outpace their multi-channel rivals—even JohnLewis, which has long been lauded as the epitome of multi-channelsuccess.

Figure7.SelectedRetailers’LatestReportedOnlineSalesGrowth

Retailer OnlineSales(YoY%Change) Period

M&S 0.5 13weeksendedJuly2

Debenhams 7.0 15weeksendedJune11

NextDirectory 7.1 1HendedJuly30

JohnLewis 17.0 1HendedJuly30(Est.)

ASOSUK 28.0 FourmonthsendedJune30

boohoo.comUK 38.0 SixmonthsendedAugust31

AmazonUK 16.7 2015*

TotalOnlineRetailSales 17.1 ThreemonthsendedAugust

*Amazonbreaksoutitsperformanceinnationalmarketsonlyonceperyear.Source:Companyreports/ONS/FungGlobalRetail&Technology

0

10

20

30

40

50

60

2014 2015 2016

ASOS boohoo.com

Whilediscountbrick-and-mortarretailersmaybegraduallyrunningoutofsteam,Internetpureplaysremainahigh-growththreattoestablishedbrick-and-mortarchains.


OCTOBER7,2016

This isnot justa recent trend.Themedium-termpattern is for Internet-onlyretailerstogainshareofonlinesalesattheexpenseofmulti-channelplayers.

Figure8.UKInternet-OnlyRetailers’Salesas%ofTotalInternetRetailSales

Source:EuromonitorInternational/FungGlobalRetail&Technology

WerecentlyexploredthistrendinmoredetailinourreportIdentifyingE-CommerceWinners:OurRanking forWesternEurope. In that report,weanalyzedtheperformanceofWesternEurope’stop20onlineretailers,asubstantial number of which are UK companies, and our analysisconfirmed that pure plays are tending to outperform their brick-and-mortarrivalsintheonlinechannel.

Takenfromthatreport,thetablebelowrankstheaverageperformanceofthe top pure plays against the average performance of multi-channelretailers on five selected metrics, including growth in online sales andchange in online market share. This averaged data provides furtherevidence of the lead enjoyed by Internet-only retailers on a number ofmetricsofsuccess.AlthoughthedataareforWesternEuropeasawhole,theyareindicativeofthetrendsweseeintheUKmarket.

Figure9.RankingofWesternEuropeanInternetRetailers:AverageofIndicators,byTypeofRetailer

TypeofRetailer InternetSalesinW.Eur.,2015(€Bil.)

ChangeinInternetSales

inW.Eur.,2012–2015

(CAGR)

ChangeinInternetSales

inCoreEuropeanMkt.,

2012–2015(CAGR)

ChangeinShareofAllInternetRetailSalesinCoreEuropean

Mkt.,2012–2015(%)

ChangeinOperatingMargin,

FY2012/2013–FY2015/2016*(%)

PurePlay 7.8 23.5 22.7 1.7 1.3

Multi-Channel 2.5 15.8 12.0 (0.5) (0.8)

AllCompanies 4.1 18.1 15.2 0.1 (0.2)

*Theclosestfiscalyearsto2012and2015wereused.Source:FungGlobalRetail&Technology

• Formoreinformation,seeourreportIdentifyingE-CommerceWinners:OurRankingforWesternEuropeatbit.ly/FungInternetEurope.

47.8

49.8

51.9

53.8 54.255.3

2010 2011 2012 2013 2014 2015

Themedium-termpatternisforInternet-onlyretailerstogainshareofonlinesalesattheexpenseofmulti-channelplayers.


OCTOBER7,2016

4. MOREGROWTHPOTENTIALFORPUREPLAYSTHANFORSTORE-BASEDDISCOUNTERS

Internet-only retailers are a sustained and major threat to brick-and-mortar players. There is a case to be made that online pure plays willdisplacediscountstoresas theprincipal threat to themajor store-basedgroups in the coming years—although this will vary by sector and byretailer.

Brick-and-mortar discount will see a natural cap on its growth as themarketforphysicalstoresnearssaturation.Pureplays,bycontrast,seenosuch physical constraint and therefore look to have room for sustainedgrowthacrossmultiplecategories.

Incategoriessuchasapparel,weseescopefore-commercepureplaystocapture an ever-greater share of discount spend. Sites such asboohoo.com,Missguided andAmazon (which has long established itselfasadefactooff-priceapparelstore)lookwellplacedtocaptureshareattheexpenseofstore-basedbudgetrivals.

Herearesomefiguresthatwethinkunderlinetherobustprospectsfore-commercegenerally:

• Despite the online channel maturing, UK Internet retail saleshavebeenaccelerating,accordingtorecentdatafromtheONS.From January through August 2015, total Internet retail salesgrowth averaged 12.8%; for the same period in 2016, suchgrowthaveraged15.1%.

• E-commercecurrentlyaccountsfor23%ofUKapparelsales,upfrom 21% last year, according to Kantar Worldpanel. Weestimatethattheproportionofapparelsalesmadeonlinecouldreach 30% in five years, assuming the annual increase in thepenetrationrateslowstoanaverage1.5%peryear.

Source:Shutterstock

• Similarly,weseesubstantialscopefore-commercetowinsharein grocery, given that just 6% of category sales are currentlymade online but that 48% of consumers are buying groceriesonline,accordingtoMintel.Webelievee-commercecouldgrowto account for about 9–10% of total grocery sales within fiveyears as the substantial number of occasional online buyersbecomemoreregularonlinebuyers.

Thereisacasetobemadethatonlinepureplayswilldisplacediscountstoresastheprincipalthreattothemajorstore-basedgroupsinthecomingyears.


OCTOBER7,2016

• Just 8% of UK furniture sales were made online in 2015,according toMintel, comparedwith fully 48% of electrical andelectronic goods sales. Given that both categories arepredominantly made up of big-ticket, cumbersome, hardlinegoodspurchasedprimarilybasedonspecifications,weseemajorscope for online furniture sales to grow rapidly and for e-commercetogainsignificantshareoftotalcategorysalesinthecoming years. We see the near-50% share captured by e-commerce inelectrical andelectronicgoodsasapossible long-termtargetforthefurniturecategory.

Ineachofthesesegments,weexpectwell-positionedpureplays,suchasASOS in fashion, Ocado in grocery and Made.com in furniture, tooutperformtheirstore-basedcounterparts.

We also see opportunities in the UK market for sharply positionedinternational pure plays to build share. Companies that currently haverelatively small positions in theUKmarket include Zalando (in apparel),AmazonFresh(ingrocery)andWayfair(infurniture),buttheseandotherscouldtapdemandforshoppingatonline-onlyretailers.

5. FRAGMENTATIONHITSGROCERYINCUMBENTSThe grocery sector has its own dynamics and its own difficulties. Theunderlying theme of the past few years has been fragmentation awayfrom the long-standing tradition of weekly or fortnightly major groceryshopscomplementedbyoccasionaltop-upshoppingtrips. Instead,therehas been a clear trend toward shoppers buying only when they needsomethingandoftenatsmallerstoresclosertohome.

Source:Shutterstock

• GrocerydiscountersAldiandLidlhavegrownfast,spurredbytheingrainingofrecession-inducedshoppingbehaviorsandenabledby thenoticeable softeningof theirharddiscount formats.Thelimited ranges at discounters have boosted demand for top-upshopsfromotherformats.

WeseeopportunitiesintheUKmarketforsharplypositionedinternationalpureplaystobuildshare.


OCTOBER7,2016

• Mixed-goods discounters such as B&M and Poundland havemade similar headway, expanding fast and raising standards inthe discount sector with a brand-heavy offering thatcomplements Aldi’s and Lidl’s predominantly private-labeloffering. However, as noted above, growth has slowed atdiscountstores.

• Major nondiscount grocers Tesco, Sainsbury’s, Co-op Food,WaitroseandM&Shavepushedaggressively into convenience-store formats to cater to the demands of faster-livingconsumers.

At the same time, Internet grocery retailing has skimmed off someshoppers’ residual big-basket shopping trips. Big-store, nondiscountgrocery formats, long the default destination for traditional weeklyshoppingtrips,havebeenhardesthitbythesplinteringofshopping intootherformats.

Figure10.UK:FragmentationofGrocerySpend

Source:FungGlobalRetail&Technology

Meanwhile,superstoreshavebeenfurtherhitbythemigrationonlineofnongrocery categories such as electronics, entertainment media andapparel.

We calculate that these changes left the average UK hypermarketgeneratingsome£2.6million(US$3.4million) less inrevenueperyear in2015 compared to2010; this is equivalent toa5.5%drop in theannualturnoverofeachhypermarket.

Big-store,nondiscountgroceryformatshavebeenhardesthitbythesplinteringofshoppingintootherformats.

WecalculatethatthesechangeslefttheaverageUKhypermarketgeneratingsome£2.6million(US$3.4million)lessinrevenueperyear.


OCTOBER7,2016

Figure11.UK:AverageAnnualSalesperHypermarket(GBPMil.)

Source:EuromonitorInternational/FungGlobalRetail&Technology

The incessant chipping away of big-store sales threatens theirprofitability:withhigh fixed costs, retail is volume sensitive and groceryoperators,inparticular,haveveryslimmargins.Inthecomingyears,iftheonline channel continues to steadily increase its share of total grocerysales like we expect it will, it will represent a sustained threat to theviabilityoflargesuperstores.

Shoppers’ migration online, coupled with ongoing store openings indiscountandconvenienceformats,willonlyworsenthecapacityproblemfor UK grocery retail. Major chains such as Tesco and Morrisons arealready closing some stores and Tesco, Sainsbury’s and Waitrose havebooked write-downs on property pipelines that will no longer bedeveloped.Weexpectthatretreat fromexcessspacewillbeanongoingissueforbrick-and-mortargrocersinthecomingyears.

ALESSPROFITABLESECTOR

Marginsatthemajorgrocershavealreadycomeunderthreat,principallyfromstrongpricecompetitioninthesector.Thegrowthofdiscountstoresspurred the big grocers to cut prices and shift pricing strategies frompromotions to everyday low prices in order to appeal price-sensitiveconsumers. This resulted in food-price deflation and a deterioration ofnondiscounters’ margins, and exacerbated the tumbling of top lines atmajorgrocerychains.

But even if their market-share gains slow radically, the discounters willcontinue to exert pricing pressures. Meanwhile, the growth of e-commercewilllikelyaddcostsoverthemediumterm.Inshort,themainimpactsonmarginsarenotatemporaryeffectthatcanbebattedawaybysimply supporting market share: the big grocery retailers are likely toexperiencesustaineddownwardpressuresontheirmargins.

48.2

47.547.0

46.2

45.6

2011 2012 2013 2014 2015

Iftheonlinechannelcontinuestosteadilyincreaseitsshareoftotalgrocerysaleslikeweexpectitwill,itwillrepresentasustainedthreattotheviabilityoflargesuperstores.


OCTOBER7,2016

Figure12.SelectedUKGrocers’EBITMargins(%)

FY14 FY16

Tesco 4.7 1.4

Sainsbury’s 3.4 2.9

Morrisons 2.5 1.3

Source:S&PCapitalIQ

Decreasingprofitabilityhasforcedlargegroceryretailerstorefocustheirbusinessaroundtheircoreactivities.Forinstance,Morrisonsdivesteditsshort-lived convenience-store chain to concentrate on its core estate,while Tesco sold a number of its non-UK grocery operations, includingrestaurantchainGiraffe,coffeeshopchainHarris+Hoole,TurkishretailerKipaandDobbiesGardenCentres.

AMAZONPRESENTSANEWTHREAT

Heaping further pressures on an already hard-hit sector was the June2016UKlaunchofAmazon’sgroceryshoppingservice,AmazonFresh.Theservice launched in a number of London postcodes, and has since beenexpanded, offering Amazon Prime members same-day delivery in one-hourslotsforordersplacedbefore1pm.

Source:Shutterstock

Amazon pressures competitors not only through the immediacy of itsfulfillment,butalsoonprices,andAmazon’scurrently looktobeamongthelowestinthemarket.Wecomparedthepricesofahandfulofpopularbranded grocery products from AmazonFresh and four other onlinesupermarkets. A consumer shopping for the basket at AmazonFreshwouldsave£1.91(US$2.49)versuspurchasingthesameitemsviaAsda’ssiteand£3.12(US$4.06)versuspurchasingthebasketthroughOcado.

Heapingfurtherpressuresonanalreadyhard-hitsectorwastheJune2016UKlaunchofAmazon’sgroceryshoppingservice,AmazonFresh.


OCTOBER7,2016

Figure13.CostofaSampleShoppingBasketatSelectedOnlineGroceryRetailers

AmazonFresh Ocado Tesco Sainsbury’s Asda

Total £8.32 £11.44 £10.60 £10.40 £10.23

ProductscomparedwereKingsmillTastyWholemealMediumBread,800g;CravendalePureSemi-SkimmedMilk,2L;HappyEggFreeRangeLargeEggs,6eggs;CountryLifeUnsaltedBritishButter,250g;HeinzBakedBeansinTomatoSauce,4x415g;andQuakerOatSoSimpleOriginalPorridge,12x27g.PriceswerecheckedonSeptember5,2016.Onlyfull-priceditemswereconsidered;promotionsanddeliveryfeeswereexcluded.Source:Companywebsites/FungGlobalRetail&Technology

Forprivate-labelandfreshproducts,meanwhile,Amazonhasthesecurityof a supply dealwith theUK’s fourth-largest grocery retailer,Morrisons.ThisgivesAmazonajump-startinthesecategories,removingtheneedforittobuilditsownprivate-labelofferinginthenearterm.

While Amazon’s presence in UK grocery is currently negligible, thecoupling of its strong price proposition with rapid fulfillment will onlyintensifythemarginpressuresonlong-establishedchains.

6. ANDBREXIT?

Source:Shutterstock

Finally,we turn to the issueofBrexit.There isonereasonwhywehaveleftthisthemeuntillast:thecountry’sdecisiontoleavetheEUhassofarhadnoapparent impactontheconsumereconomy.Britshaveexhibitedtremendous resilience following the referendumof June 23. Consumershavecontinuedtoshop instoresandbuyhouses,whilebusinesseshavecontinuedtohire.

Retail sales, in particular, have strengthened in the months since thereferendum.Somecommentatorshave speculated that tourist shoppersaredrivingthisgrowth,duetothedevaluedpound.However, inAugust,two sectors that saw substantial improvements in sales growth weregrocery stores and Internet pure plays—and neither of these is asignificantdestinationfortouristspending.

Retailsaleshavestrengthenedinthemonthssincethereferendum.


OCTOBER7,2016

The immediate postreferendum period did see a decline in consumerconfidence. However, thiswas unsurprising given the volley of negativestatistics with which Brits were bombarded by the “Remain” campaignduring the run-up to the referendum. Brits were warned of recession,fallinghouseprices,highershopprices,massjoblosses,lowerpensions,aweakened National Health Service, “a decade of uncertainty” and evenworld war, should they vote for Brexit. But the consumer confidenceindexreturnedtoanupwardtrendinAugust(latestavailable).

Figure14.UK:ConsumerConfidenceIndicator

Source:Eurostat

Theminimalshort-termeffectsofthereferendumhaveresultedinaraftofupwardrevisionstoestimatedeconomicgrowthfor2016and2017;intheimmediateaftermathofthevote,economistshadissueddoom-ladenforecasts.BodiessuchastheOrganisationforEconomicCo-operationandDevelopmenthavebeen forced to rowbackon theirpreviouseconomicdowngrades.

TheUK’sexitfromtheEUis likelytobeacoupleofyearsaway,andtheshapeoftheagreementnegotiatedbetweennowandthenwilldetermineits economic and consumer effects. Given that there are so manyunknowns, there is little value in attempting to forecast specific effectsfrom theexit—not leastbecausewehave recently seenhow inaccurateeconomists’forecastscanbeeveninthenearterm.Fornow,consumersarewilling to spend, and this is reassuring news for retailers and otherconsumer-facingcompanies.

• WehavepublishedaseriesofBrexitreports,whichcanbefoundonourwebsite,FungGlobalRetailTech.com.

KEYTAKEAWAYSHereareourmaintakeawaysontheUK’sfast-changingretailsector:

• UKretailenjoyedrobustgrowth inthepostrecessionyears,but2016hasseenadownturninnonfoodretailing,ledbyadeclinein sales at apparel stores. Consumers appear to be prioritizingspendingonleisureservices.

(7.5)

BodiessuchastheOrganisationforEconomicCo-operationandDevelopmenthavebeenforcedtorowbackontheirpreviouseconomicdowngrades.

Internetpureplaysaregainingshareoftotalonlineretailsales.


OCTOBER7,2016

• Middle-groundretailershavesufferedfromtherapidgrowthofmoresharplypositionedcompetitors.Thesecompetitorsincludegrocerydiscounters,mixed-goodsdiscounters,low-priceapparelstoresandInternetpureplays.

• However,theboominbudgetstoresisslowingnoticeably.Inthecoming years, we expect the market-share gains made bydiscountretailerstobedrivenbynewstoreopeningsratherthanbyunderlyinggrowth.

• This does not mean life will get much easier for midmarketgeneralist retailers, in part because Internet-only retailerspresentasustainedthreattoestablishedchains.

• Internetpureplaysaregainingshareoftotalonlineretailsales,despite brick-and-mortar chains pouring money into multi-channel propositions. We expect online pure plays to drive e-commerce’s increasing share of sales in categories such asapparel, grocery and furniture. And we see opportunities forinternational pure-play retailers to tap this British demand foronlineshopping.

Source:Shutterstock

• Brexit is having surprisingly little near-term impact. The mostimportantfactors inretailarestructuralshiftssuchasthoseweoutlinedabove.


OCTOBER7,2016

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:[email protected]

JohnMercerSeniorAnalystFilippoBattainiResearchAssociate

HONGKONG:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKong Tel:85223004406LONDON:242-246MaryleboneRoad London,NW16JQUnitedKingdomTel:44(0)2076168988NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017FungGlobalRetailTech.com

uk retail overview october 7 2016 - deborah weinswig€¦ · 07/10/2016 · standards in budget...

Documents