European Trends and Implications for Portugal By Boris Planer
Planet Retail Ltd | January 2012
Contents 1. Economy & Demography 2. Retail Evolution 3. Trends
3
Economy & Demography 4
Key Framework Trends - Overview Europe continues to be divided economically. Positive outlook for countries benefiting from emerging markets growth and featuring stable domestic economy (e.g. Germany). Difficult outlook for countries struck by public and household debt crises (UK, Ireland, Spain, Greece, Portugal), with most problems coming from the inside. Portugal unlikely to return to pre-crisis output levels until 2015, Greece to follow in 2016/17 (in real terms, today’s forecasts). Structural adaptations in retail will be accordingly deep & fast (unlike Germany, where it is largely business as usual). IMF/ECB/EU bailouts have helped to avoid chaos, but they guarantee that predictably tough times are ahead. Consumer confidence is key in a country like Portugal. But not all structural change is economy-led. Further drivers are demographic trends and technological progress. 5
Portugal is not the worst case in the EU, but it is fairly close to the bottom Consumer Spending: Real Growth, 2000-2015 (%) 6
4
2
0 2000
2002
-2 Greece -4
UK Portugal Germany
-6
6
Source: IMF, Planet Retail
2004
2006
2008
2010
2012
2014
Real growth index shows how deep the crisis really is GDP: Real Growth Index, 2007-2015 (2007 = 100)
110,0
100,0 2007
2008
90,0 Greece UK Portugal Germany 80,0
7
Source: IMF, Planet Retail
2009
2010
2011
2012
2013
2014
2015
Consumer spending will rise in nominal terms Consumer Spending per Capita, 2000-2015 (EUR) 25.000
20.000
15.000
10.000
5.000
UK Germany Spain Portugal
0 2000 8
Source: IMF, Planet Retail
2002
2004
2006
2008
2010
2012
2014
Healthy inflation rates do not equal absence of problems Annual Consumer Price Inflation, 2000-2015 (%) 5,00
4,00
3,00
2,00
1,00
0,00 2000 -1,00
2002
Greece UK
-2,00
9
Source: IMF, Planet Retail
Portugal Germany
2004
2006
2008
2010
2012
2014
Portugal needs positive vision to restore consumer confidence Consumer spending/GDP ratio (%), 2000-2015 75,0 70,0 65,0 60,0 55,0 50,0 45,0 USA
40,0
Portugal UK Germany
35,0
China 30,0 2000 10
Source: IMF, Planet Retail
2002
2004
2006
2008
2010
2012
2014
Unemployment continues to hit confidence – Portugal looking bad but not the worst Unemployment Rate, 2000 – Q3-2011 (%) 25% Spain Portugal EU 27 20%
15%
10%
5%
0% 2000
11
Source: Eurostat
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Dropping petrol sales due to unemployment & income pressure - to affect hypermarkets Portugal: Gasoline Consumption Year-on-Year Change, 2010-2011 (in 1,000 tons) -5.3%
April
-5.7%
May
-6.1%
June
2010
-7.1%
August
-7.7%
September
-8.1%
October
1.250
12
Source: Planet Retail
2011
- 6.7%
July
1.300
1.350
1.400
1.450
1.500
1.550
1.600
Demographic change under way fast – will require more income re-distribution Portugal vs EU 27: Population Structure, 2000-2010 100% 90% 80% 65+
70%
25-64 15-24
60%
0-14 EU 27
50% 40%
30.4% 27.7%
30% 20% 10% 0% 2000 13
Source: Eurostat
2002
2004
2006
2008
2010
Birth rates show this trend will last unless eliminated by immigration Portugal: Birth Rates, 1960-2011 (per 1,000) 30
25
20
15
10
5
0
14
Source: World Bank
Smaller households also reflect modern lifestyles – more shopping close to home Portugal: Average Household Size, 1985-2010 3,5
3,0
2,5
2,0
1,5
1,0 1985 15
Source: Instituto Nacional de EstatĂstica
1990
1995
2000
2005
2010
Retail Evolution 16
Key Retail Evolution Trends - Overview The crisis will continue to cause carnage in vulnerable (non-essential/ deferrable) categories. With Portugal’s retail sector less concentrated than counterparts of northern Europe – and with the economy doing worse – retail shakeout will be stronger here. In the more resistant food category, weakest players will exit (mostly small and independent players). Independent traders most vulnerable due to extra cost in the system. Their exit will make room for city/town centre chain stores. Traditional retail in Portugal should settle at below 10% of market in the long term (30 years?) Concentration process irreversible, but Portugal will emerge with stronger retail sector.
17
Visible concentration trend, accelerated by crisis - Spain most dynamic Grocery Market Shares Top 10 Companies, 2000-2015 (%) 100 90 80
Spain Portugal UK Germany
70 60 50 40 30 20 10 0 2000
18
Source: Planet Retail
2005
2010
2015
Crisis is accelerating shakeout among Portugal’s independents Share of Modern Trade of Grocery Retailing 2000-2020, (%)
2000 UK
2010 2020
2000 Germany
2010 2020
2000 Spain
2010 2020
2000 Portugal
2010 2020
0 19
Source: IMF, Planet Retail
10
20
30
40
50
60
70
80
90
100
Trends 20
Key Retail Sector Trends - Overview Retail shareholders’ interests not necessarily identical with customers’ interests in years ahead (private ownership is what makes German retail strong in hard times). This is a time to follow demand, rather than creating it – as consumer behaviour has become more “professional”. Demand is for good-quality essential products at affordable prices from more easily-accessible store locations – sustainability component also coming, but from low level. Affordability issue reflected through reduced choice, more private label, more targeted ranges and petrol-saving easy access. Accessibility efforts reflected through shift back towards city centres, as well as spread of multi-channel strategies, including e-commerce. Internationalisation remains a selective process, partly moves online. Access to capital to remain difficult. 21
Out-of-town retail is under pressure as town centre locations are on the rise Hypermarkets have been under pressure in both the US and Europe, nearing saturation point. Smaller household sizes and ageing populations favour central shopping – which is a slow shift, a long-term development – but already visible. Non-food at hypermarkets has been hit by economic weakness, new high street specialists / online rivals High petrol prices have made shoppers avoid out-of-town trips. US & European retailers already reacting with roll-out of central formats. Market concentration continues, groups to expand at expense of independents.
22
Carrefour Express, Belgium
Tesco Express, UK
Sainsbury’s Local, UK
Portuguese not deserting hypermarkets as fast as US and German consumers Hypermarket Operators: Like-for-like Growth, Q1-2008 – Q3-2011, (%) 6,0 5,0 4,0 3,0 2,0 1,0 0,0 -1,0
Q1 2008
-2,0 -3,0
Q2
Q3
Walmart US Metro Group Real Sonae MC
-4,0
23
Source: Planet Retail
Q4
Q1 2009
Q2
Q3
Q4
Q1 2010
Q2
Q3
Q4
Q1 2011
Q2
Q3
Consumers will remember retailers who offer what they need Shopping behaviour is now more “professional” (shopping lists, better fridge management). Mass market needs good-quality essential products with late date of expiry at affordable prices. Crisis cannot be waited out, product offer needs to adapt. Non-essential, deferrable and many added-value lines of less importance, double-digit decreases in some non-food categories. A more streamlined product offer will help take cost out of distribution (independent sector at disadvantage).
24
Significant expansion potential for private label lines Private label will move more into focus of attention (disadvantage for small and independent grocers). Nielsen 2010: number of Portuguese consumers buying more PL +74%. Nielsen 2011: PL share Portugal 25% (Switzerland: 46%, UK 43%, Germany 32%). Opportunities for upmarket ready meals as foodservice sector suffers. Interesting projects on private label endorsement (Carrefour France, Walmart/ Asda UK, Migros Switzerland – www.migipedia.ch).
25
Internationalisation has gone careful... The area of wild flag-planting is definitely over. For around 10 years, the ideal has been to operate in a comparatively small number of markets while achieving strong market positions. Famous market exits: Walmart from Germany and South Korea; Carrefour from South Korea, the Czech Republic and Slovakia; and Ahold from all of Asia and Latin America. Carrefour and Tengelmann have withdrawn from Portugal... Main investment stream now to Asia and Latin America, requires strong localisation in store formats and product offer. Requires strong home market operation to cross-finance start-up-losses.
26
Internationalisation: Ahold
Active Reduced (2000-2011) Inactive 27
Internationalisation: Carrefour
Active Inactive
28
...and globalisation is increasingly moving online As a lower-risk route to market, globalisation is going increasingly online/ global shipping services (M&S online now in over 80 markets). Next step: offering local language sites beyond global top markets, plus local currency options and delivery services. Even small retailers can go global now, and with product offers far beyond what they sell instore (Schlecker). Don’t expect any large-scale grocery bricks and mortar market entries for Portugal, but international e-commerce sites could put pressure on domestic non-food sector.
29
Online grocery retail is yet to take off... ...as e-commerce largely remains in the non-food domain Grocery online is difficult to do profitably in a mass-market without delivery fees. Germany is not ready for it, the UK and Switzerland are (traditional priorities in shopping behaviour). Click & collect emerging as sensible compromise approach, offering convenience to client while saving the retailer delivery charges – danger to pure-play grocery e-commerce. E- and m-commerce will advance as the crisis passes, a stronger retail sector emerges, broadband grows, smartphones spread and – importantly – a very different generation (post-95) grows up. Tesco working hard to make model viable in emerging markets. This is not about eliminating bricks and mortar shopping, which has significant sensual rewards, but about giving customers the options they will increasingly expect. 30
Go where the customers are: the future will look more multi-channel As US and European shoppers get more selective, they expect the comfort of buying in different ways: out-of-town, near the home, near the job, online... increasingly online shopping is also moving mobile... Most of Europe’s leading grocers already operate mixed portfolios of hypermarkets, superstores, supermarkets, neighbourhood stores, convenience stores, discount stores and online channels – these are often complemented by non-food banners. Small-format expertise will be key for expansion in emerging markets’ less urbanised areas, as well as in a consolidating market like Portugal.
Biedronka, Poland
31
Summary Outlook of extended economic crisis will lead to continued shakeout in retail sector. Weakest players in most vulnerable categories to go first. European retail sector will emerge stronger from the crisis if it adapts to changed demand. Demand is for good-quality essential products at affordable prices from more easily-accessible store locations. Consumers will emerge from crisis more careful and selective. Private label still with significant potential in Portugal, with new opportunities to get customers involved.
Cont... 32
Summary Demographic and technological change to support focus of retail investment on neighbourhood areas and online. Multi-channel approach as strategy of leading players as they will allow customers to buy how, when and where they want. Multi-channel also to involve e- and m-commerce opportunities as a very different new generation grows up. In grocery e-commerce, bricks and mortar players are at an advantage due to their ability to offer click & collect as a more viable approach. Bricks and mortar retail internationalisation will continue to be prudent and selective – no large grocery market entries expected for Portugal.
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