Competitive intelligence by Sutherland Global Services

Competitive Intelligence December, 2012

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Competitive Intelligence Study Client • The client is a leading global retailer based out of the U.S. and desired an understanding of some of the market leaders in the homewares market in the UK

Project Scope • Key objectives of the study were to provide a brief overview of the identified market players, their financials, strategy, business model, capex plans etc

Sutherland’s Solution • SGS conducted extensive secondary research to prepare the intelligence report of the company and further deep dived to understand its business model and future growth strategies • All financial and qualitative databases to which SGS holds subscription, were extensively used to prepare the report • Brief profiles of some of the key market players encompassing all the research areas were made as a final deliverable

• Benefits to the Client • The project provided significant and exclusive intelligence to the client with regards to the operation and strategy of the UK market players, in turn bolstering its assessment and strategy for the UK market

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Consumer behavior (industry-wide)

Selection criteria

Service

Survey results  A nationwide survey done by online interior specialist Wayfair (in 2012, covered over 800 respondents) revealed that 66% of the people look online to purchase items for the home, and most of these are aged 18 to 24 years old

Layout / Facilities Range

Quality

 The first month of moving into a property sees people spend an average of £1,000 to £3,000, while older residents aged 35 to 44 are more like to spend up to £5,000 on items for a new home  48% of women make home decorating decisions as opposed to just 26% of men

Convenience

 36% of the respondents aged 18 - 25 reported that they prefer new furniture to used as against 63% for those aged over 55 Price

 Kitchen was rated as the most important room to decorate while the dining room and hallway were the lowest on the list of priorities of the surveyed customers

Source: Secondary research, Sutherland Research & analysis

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Competitive comparison (1/2) Competitor

 Description

Revenues

John Lewis

 upmarket department stores operating throughout Great Britain

£ 3.3 Bn (does not Include Waitrose)

Employees

Stores

c. 38,100

39 (England, Scotland & Wales)

£ 4.3 Bn

c. 33,000

> 700 (UK and Ireland)

Argos Limited, UK and Ireland

 catalogue merchant based in the United Kingdom and Ireland  largest general-goods retailer in the UK

ASDA Stores Limited, Leeds, UK

 British supermarket chain retailing food, clothing, general merchandise, toys and financial services

£ 21.8 Bn (not entirely homeware)

c. 176,453

523 (2011)

Bhs Limited, London, UK

 department store chain with branches mainly located in high street locations; sells clothing and household items  Part of Arcadia group since 2009

n/a

17,256 (2008)

179

Source: secondary research, Wikipedia, Sutherland Analysis

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Overview of U.K. Homeware Industry UK homewares market

Brief Note

 According to research by Conlumino, (commissioned by Webloyalty), the UK homewares market experienced 8.6% growth in the four years before the recession (20048), while during the main recessionary period of 2008 to 2011 the market shrank by 6.2%

Total: 10.7 Bn GBP

7% 7%

 By 2015, growth is expected to resume, but is expected to be much more moderate at 3.3%

71%

5% 5%

Distributed Small Players

Dunelm Mill

John Lewis

Argos

Tesco

ASDA

Source: Sutherland Research & analysis

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Company profile

About the prospect

Value proposition

Revenue and Income (FY12)

Employee base

Business segments



Was founded in 1965 by Bill, selling curtains on a Leicester market stall. The business developed into a successful chain of high street shops in the Midlands specialising in soft furnishings and other homeware. Today the major focus is out-of-town retailing – with the company's original principle of "Simply Value for Money" firmly in mind



Headquartered in Leicestershire



Listed on LSE



135 superstores and 6 high street stores as of Dec, 2012 (24 new superstores opened in 2011-12 including two relocations)



For each superstore, average sales area is approximately 20,000 square feet



Broad and deep product range: over 10,000 lines / homeware products in a typical superstore

‘Value for Money’ proposition:  Good quality products  Great prices  Industry leading choice  Deep availability  Friendly knowledgeable Service 

Revenue: GBP 807.7 Mn



EBITDA: GBP 139.9 Mn



Net Income: GBP 51.5 Mn



Selling: 4,580 (FTE: 1,223)



Distribution: 491 (FTE: 263)



Admin: 183 (FTE: 136)



one reportable segment

Source: Company Reports

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Business Model

Choice & Value

One stop homewares destination

 Business model is based on offering customers an industry leading range and choice of over 10,000 different homewares products  Attempts to offer excellent quality merchandise at budget prices (entry-level market) and excellent pricing proposition for branded / quality merchandise (high-end market)  Store makes investment in helpful and knowledgeable staff and also makes sure that inventory is available

Multi-channel

Be present when and where the customers need them  In-store  Website sale (currently accounts for c. 7% of the revenue) :  Mobile website launched in June 2012  First full catalogue distribution during Autumn 2011 (150 pages; meant to reach 600k new customers - 425k to be delivered direct to homes via bundling with Ideal Home and In Style consumer monthly magazines with the remaining copies distributed in-store)

Convenient Locations

Customer accessibility

 Stores are at accessible out-oftown locations with ample customer parking  Format has flexibility to deliver a full customer offer in a range of retail footprints, averaging at 25,000 sq. ft per store

Scalability

Investment ahead of the curve

 New Head Office  Extended distribution capability

 Strong IT platforms (SAP, Retail J) and investment in supply chain to make sure that the group’s growth plans are supported well

Source: Company Reports

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Financial Snapshot Sales (GBP Mn) & Sales Growth (% YoY) 650

LFL* 0.7%

8.5%

1.6%

5.1%

520

EBITDA (GBP Mn) & EBITDA Margin (%) 18.6%

20%

650

16%

520

12%

390

12%

260

130

15.0%

17.1%

16.9%

14.9%

20% 16%

16.3% 390 12.1% 260

10.2%

9.3%

8.2% 130 385.8

403.1

461.2

524.6

FY09 FY10 Sales (GBP Mn)

73.1

84.1

95.6

118.2

599.3

0 FY08

68.6

FY11 FY12 Sales Growth (Y-o-Y %)

0% FY08

FY09 FY10 EBITDA (GBP Mn)

FY11 FY12 EBITDA Margin (%)

Net Income (GBP Mn) & Net Margin (%) 650

20%

520 390

12.8% 8.6%

8.9%

10.0%

11.1%

12%

260 130

16%

8% 31.5

35.7

52.3

60.9

72.4

 The company registered higher growth rate in net income as compared to sales which resulted in improving net margin over the FY08-12 period  Some of the contributing factors are tight cost control, sourcing gains achieved from direct sourcing, lower commodity prices, especially in case of cotton

0% FY08

FY09 FY10 Net Income (GBP Mn)

FY11 FY12 Net Margin (%)

Note: *LFL = Like-for-like sales growth (same store sales growth) Source: Company Reports

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Sales Mix Sales mix by product category Furniture Small 4% electricals 5% Other homeware 16% Crockery & cutlery 6%

In-store Café 3%

Curtains/ window dressings 18%

Sales mix by product type  Seasonal relevance  Price projection  Product innovation

Special Buys 35%

 Constant refreshment of store Regular Ranges 65%

Other home textiles 38%

 Full home coverage  Range authority - depth and choice  Strong availability

 Own brand

Total sales: 599.3 Mn GBP

Source: Deutsche Bank analysis

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CapEx and 2013 CapEx drivers CapEx (Mn GBP) Total: 38.4 Mn GBP

CapEx plan for 2013 Total: 41.6 Mn GBP

 

1.1 1.8 2.1

0.51.0 0.2 5.3

9.0

11.5

 

6.2 4.8

3.5



New stores – average fit out cost £1.2m per store Refits – major (£0.6m per store) / medium (£0.1m per store) Continuing multi-channel development IT investment (hardware and software upgrades) Freehold opportunities

19.6 13.4

2011

2012

Store acquisitions

New Office

Store Fit outs

Refits and other store Investments

Stoke fit out

Other

 The company has a Strong IT backbone with the Head office running on ‘SAP’, stores on ‘Retail J’ and the online functionalities being provided by IBM  In 2013, the company intends to improve eCRM, customer review functionalities and SEO base under IT initiatives  The company’s overall IT environment is supported by a disaster recovery strategy designed to ensure continuity of trade

Source: Company Reports

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Strategic Priorities (1/4) Objectives 

grow the competitive advantage in choice and price, supported by quality, service and availability



increasing awareness of the prospect's brand

Enhance Specialist Value proposition Current Focus 

Continuously evolve product ranges



Develop knowledge-based customer service as a point of differentiation



Develop value-added services such as ‘made to measure’

 Company considers itself one-stop Homewares destination with 16 departments (hard & soft lines) and as many as 96 Bedding Collections

made available; especially in high-traffic times. Continuous training is imparted to the staff operating in this section

 About half of products carry prospect’s branding. However, proprietary brands complement the current revenues too  Owned brand re-enforces the quality credentials, particularly in bedding and bathroom categories; Brand developed in-house is doing well too by being present in over 250 products  Company constantly re-invigorates: eg: through two seasonal refreshes, they change approximately 31% of the ranges each year; Special Buys and Miss it Miss Out (‘MIMO’) promotions emphasise prospect’s value credentials and provide a seasonal feel to the store  “Prospect At Home” service (customers can select ‘bespoke, made to measure’ curtains and other window treatments via a free home consultation), is made available in many more stores increasing from an initial outreach of 12 stores  At the “Made to Measure” section, knowledgeable and helpful staff is Source: Company Reports

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Store growth plan Current Superstore locations

New Stores: H1 FY11           

Bury St Edmunds Isle of Wight Dartford Enfield Kidderminster Banbury Grimsby Derby (relocation) Coleraine Newbury Falkirk

New Stores: H2 FY11   

Store openings

Exeter Stafford (relocation) Greenford

New Stores: FY12 to date

10 5 0 FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

   

Telford Cambridge Oxford Barnstaple

Source: Company Reports

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Risks and opportunities Risks  Low national brand awareness for the prospect store and its associated brands  UK consumer environment being stressed by slower economy and overall poor consumer confidence. Unwillingness among shoppers to purchase big ticket items is a common observation

 Slowdown in the new property line likely to affect the new store growth

Opportunities / upsides  Measures to create brand-awareness through additional Media buying and point of sale advertising have been taken by the company. Additionally, o Trial catalogue was also launched for Autumn 2011 o Social media initiatives were launched o Mobile site was launched o Other internet related measures are expected to drive up the LFL sales  Store refit programme launched by the company has also been immensely beneficial; addition of mezzanine floors have further added to the economies. In 2011, 13% of the company’s superstores were either new or had undergone a major / medium refit helping the company address the customer needs better through appropriate SKU storage and enhanced ‘look and feel’ of the shop  Sourcing initiatives have led to gross margin benefits too. The company currently sources heavily from ‘full service vendor’ suppliers in the UK, with just c. 10% of product direct-sourced from country of manufacturing origin (this is in spite of 55% of prospect’s ranges being own-label/exclusive label). In future, the management of company intends to increase the direct sourcing by 3% p.a. Deutsche Bank estimates that every 1% gradual shift to increase direct sourcing could provide a 30bps / annum gross margin tailwind to the company

Source: Company Website, Analyst reports, Sutherland research and analysis

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Customer service initiatives at the Prospect’s organization

Structured approach to improve instore assistance  Tangible in-store task reduction through special initiatives o FY11: Automated ordering

Inspiration & engagement  “be inspired” builds basket size  Focus on linked sales  Communicated expertise

o FY12: Centralised checking, allowing hand Held Terminals

Value added services  “Made to Measure” provides differentiation  “At Home consultation”: initial trial offer extended to be able to serve more customers

o (the above initiatives free the employee time and allow the store to concentrate on identifying what customers need)  Increased labour flexibility  Targeted service re-investment and training programme for the employees

Source: Company Website, secondary research, Sutherland Research & analysis

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End of Presentation