Europe retail industry overview by Sutherland Global Services

European Retail Industry Overview May 2013

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Global Retail Industry Overview 1

Global Retail Sales

USD17.9 Tn (2012)

Europe Retail Sales

USD4.1 Tn (2012)

US Retail Sales

USD3.5 Tn (2012)

4 Region

Market Size (USD Tn) 2012

CAGR (%) – 2010-14E

Key Contributing Countries

Asia and Australasia

7.4

12.2%

China, Indonesia, India, Malaysia

Latin America

1.4

7.7%

Brazil, Uruguay, Chile

North America

3.7

4.3%

Western Europe

2.9

2.1%

UK, France, Germany, Italy

Eastern and Central Europe

1.2

13.6%

Russia, Poland

Major Retail Markets US, Canada, Mexico

“Weak labor market conditions in troubled economies, including Greece, Ireland, Italy, Portugal and Spain, and the recent Cyprus financial crisis are further indications of the fragile state of the European economy, which continue to hinder a full recovery in the region” - Dr. Venkatesh Bala, Chief Economist, The Cambridge Group, a part of Nielsen

Comment on the Future of European Retail

“We see this as a time of significant opportunity in a changing market. Behind the scenes, therefore, there's a quiet revolution underway in our supply chain, IT and support functions. Our investment in these areas is up substantially and that commitment continues into 2013. In recent years, the Partnership has consciously invested to have the right skills, systems and organisational structures to be able to offer customers what they want in a fast-changing market.”–Charlie Mayfield, Chairman of John Lewis

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European Retail Industry Overview Europe Retail Sales (In USD Bn) Europe Retail Sales

3,800

4,200

3,700

4,200

4,100

4,200

4,500

4,700

1.5%

4.7%

8.4%

12.3%

CAGR 2007-12

- 0.7%

2007

2008

2009

2010

Western Europe

2011

2012

2013

2014

CAGR 2012-15

1.1%

2015

Central and Eastern Europe (CEE)

The European retail market is not homogenous, and various countries within Europe are at different stages of retail development

Consumer Confidence Index of Europe remained constant at 71 for the last two quarters, i.e. Q1 2013 and Q4 2012

For example, some European markets like France, the UK and Germany are very mature, while markets like Russia and Turkey are considered to be emerging

In Q4 2012, the Consumer Confidence Index fell in 20 of 29 European markets, whereas in Q1 2013, the opposite trend was reported, when consumer confidence rose in 18 of 29 markets

Fiscal austerity measures, low wage growth and high unemployment across Europe have resulted in erosion of consumer confidence, due to which consumer spending has declined, particularly in case of discretionary products

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Western Europe Retail Landscape Western Europe Retail Sales by Country (%) – 2012

Year-on-Year Retail Sales Growth (%)

Retail Sales – USD XX Bn

7.9%

Germany France 19%

Others 25%

-3.9% 7.9%

Italy

1.4% 4.6% -8.6% 4.1%

Netherlands

Netherlands 4%

Germany 18%

Turkey 6%

-3.9% 8.0%

France

-4.1% 11.5%

Norway Italy 11%

United Kingdom 17%

More than half of the Western European retail sales are dominated by the “Big three” countries – France, Germany and the UK Austerity measures by governments and high unemployment rates have dented consumer confidence, resulting in lower consumer spending

-1.2% -10%

-5% 2011

10%

15%

2012

In 2012, high unemployment rate in France (10.3%) and the UK (7.8%) remained a key concern

Retail industry in Western Europe is fragmented to a great extent, with the 5 largest players accounting for less than ~15% of the overall sales

Consumer confidence of France (52), the UK (79) and Germany (87) in Q4 2012 were low as compared to the global average of 91

Carrefour, Metro Group, the Schwarz Group, Tesco and the Edeka Group are the main players in Western Europe

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Central and Eastern European Retail Landscape CEE Retail Sales by Country (%) – 2012

Year-on-Year Retail Sales Growth (%)

Retail Sales – USD XX Bn

1.9%

Slovakia

4.8% 3.4%

Russia Others 33%

1.6%

Romania Russia 49%

Slovakia 1% Hungary 2% Romania 3% Czech Republic 3%

4.1%

5.9% 3.6%

Poland

4.9% 0.0%

Hungary

3.3% 1.8% 2.1%

Czech Republic Poland 9%

CEE markets are relatively much smaller when compared to Western European markets. Close to half of the CEE retail sales come from Russia alone Russia, Poland and Czech Republic have attracted many new retailers over the last decade and will continue to remain attractive due to their growth potential

2% 2011

Russia is expected to grow at about ~3-4% y-o-y for the next three years, whereas Poland is expected to grow ~1-3% y-o-y for the same period For 2012, both Russia and Poland recorded a decrease in FDI inflows. Russia reported a 15.2% y-o-y decrease in FDI inflows, whereas Poland reported 82% decrease

2012

Metro Group, the Schwarz Group, Carrefour, Tesco and X5 are the biggest retailers in the Central and Eastern Europe

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Key Challenges Faced by Retailers (1/2) Rapidly-changing business environment • A global phenomenon such as the economic recession and its impact on consumers' purchasing power, rising commodity prices, demographic trends pose significant challenges for existing retail business models and processes • Moreover, there are various regulatory barriers that hinder the proper functioning of the single market in retail, and obstruct processes such as cross-border sourcing, consumer access to cross-border retail services, and even market entry by retailers themselves • Also, the consumers are becoming increasingly receptive to innovative retailing concepts such as virtual make-up mirrors or dressing rooms. However, these innovative concepts are relatively new and limited, and have not yet been able to cut through the complexity of the retailing world

Fraud management • Fraud is fast becoming an area of concern for retailers across Europe as they expand their online commerce platforms. According to a report published by Merchant Risk Council (MRC) Europe and Cyber Source, the average annual revenue loss rate from fraud among European firms rose to 1.63% in 2012 from 1.59% in 2010 • Turkey reported the highest fraud rate among European firms, with 4.5% of transactions being fraudulent, compared with a European average of 1.2%. UK reported a 1.4% fraud rate as against 1.1% rate in France and Germany • Moreover, in 2012 more European firms, i.e. 53% reported loss of less than 1% of online revenue to fraud in 2012, compared to 48% in 2010

Changing consumer behavior • Consumer behavior is changing rapidly with the rise of internet and smartphones, as they now demand an omni-channel approach. Consumers have started to shift from the high street towards online purchases • Though some retailers have responded well to such a change, others have fallen victim to the high street's decline

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Key Challenges Faced by Retailers (2/2) Control over stock levels • One of the other key challenges that European retailers face is to keep an accurate gauge of demand • Increasingly sophisticated demands from customers have evolved over the years with the changing consumer behavior. Therefore, keeping a control over the stock levels becomes real critical for retail planners and merchandisers, who have to ensure that the right number of products are being supplied at the right time and in the right stores • Moreover, being overly cautious and buying too little can significantly damage a retailer’s sales. For example, in 2012 lack of proper supply of meek knitwear at M&S contributed to their abysmal sales • There is a reason to believe that efficient inventory rotation and management is a key business expertise that is generally lacked

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Key Trends in the European Retail Industry (1/2) •

Continued Adoption of Supply Chain Technologies

• •

•

Growing Online Retail

• •

•

Many retailers have been skeptical about technology-related issues such as the use of automatic picking & packing and Radio Frequency Identification (RFID), but they have adopted them to enhance their supply chain efficiencies Adoption of supply chain technologies help retailers remain flexible to seasonal demands, changing partners and complex inventory requirements For example, recently Ahold has tested a new supply chain model for its online operation to cut costs associated with transportation and give their online sales a boost. Ahold’s new supply chain initiative, the so-called ‘fulfillment factories’ and ‘pick up points’, will provide customers an option to pick up their groceries purchased online, which will help the retailer to save considerable distribution cost According to Forrester’s European Online Retail Forecast that covers the growth rate of online sales across 17 European countries and 22 categories, European online retail will reach USD246.4 Bn (EUR191 Bn) by 2017, up from USD144.5 Bn (EUR112 Bn) in 2012 – with a CAGR of 11% over the next five years Despite poor economic forecast, Forrester predicts that most of the growth will be attributed to Southern Europe. Spain is expected to hit USD11.7 Bn (EUR9.1 Bn) in 2017, equal to 18% of annual growth, while Italy will reach USD10.7 Bn (EUR8.3 Bn), with 16% growth On the other hand, the UK online retail market will grow by 10% yearly, from a base of USD51.7 Bn (EUR40.1 Bn) in 2012 – a sales figure that is more than ten times that of Italy or Spain A report from Forrester shows that by 2017, online retail will represent 15% of the UK’s economy, up from 13% in 2013. Germany will rise to 10% – up from 7%. Moreover, France and the Netherlands will hit 7% by 2017 Such a trend is already being felicitated by supermarkets such as Carrefour in France, which is integrating NFC-enabled mobile kiosks into its physical stores – thereby providing a link between its online and brick-and-mortar offerings

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Key Trends in the European Retail Industry (2/2) •

Increased Importance of Health and Wellbeing

•

Demographic Shifts •

Concerns related to health, safety and well-being have always been an important factor for European consumers and will continue to be more important in future due to the increase of ‘lifestyle diseases’ such as cancer, diabetes, heart diseases, asthma, obesity and depression As a result, European consumers have adjusted their lifestyle and diet, leading to an increase in demand for healthier products such as probiotics, neutraceuticals, beauty and mood products, technology-advanced products and easy-to-use consumer solutions (e.g. assisted living products for older people) This change has brought in perspective design and innovation that has become an important competitive differentiator for some market segments as well as other marketing aspects such as product information and product labeling Demographic shifts have played a significant role in retail as they result in changed consumer needs and demands. This development also opens up new niche markets and helps retailers expand their product offerings European aging population, coupled with its increasing life expectancy and low fertility rate, is having a significant impact on the region’s retail industry. This group has a high purchasing power and is brand loyal, making it an interesting niche target for the retailers. Also, quality is an important parameter while defining consumer behavior of such a group Continued inflow of immigrants in Europe from various other geographies also creates a demand for ‘ethnic’ and exotic products. Moreover, growing urbanization leads to increase in demand of new products, as urban consumers always look to try new products and services

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Europe Retail â&#x20AC;&#x201C; Top 50 Companies

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Distribution of Top 50 Retailers across Various Operational Formats

Total Retail Industry USD4.1 Tn (2012)

Top 50 Retail Companies USD1.32 Tn (2012)

No. of Companies

Collective Revenue (USD Mn)

Collective Revenue as % of Top 50 Retailers Revenue

Apparel/Footwear

24,361

1.8%

Cash & Carry/Warehouse Club

108,883

8.1%

Department Store

33,968

2.5%

Discount Store

173,851

13.0%

Drug Store

12,111

0.9%

Electronics & Entertainment

25,614

1.9%

Home Improvement

77,452

5.8%

Hypermarket/Supercenter

355,545

26.7%

Non-Stores

46,781

3.5%

Specialty

10,328

0.7%

Supermarket

463,150

34.8%

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Europe Retail – Top 50 Companies (1/5) Apparel/Footwear Sr. No.

European Retail Rank

1 2

32 47

Company H & M Hennes & Mauritz AB C&A Mode

Type of Company Public Private

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Sweden Germany

14,488 9,874

2,096 1,571

8% 6%

5% 4%

18% 11%

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

83,682 11,405 9,796

2,150 2,486 3,561

0% -2% 1%

2% 5% 3%

5% 0% 0%

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

654 956

-1% -1%

2% 5%

0% 2%

Cash & Carry/Warehouse Club Sr. No.

European Retail Rank

1 2 3

2 44 49

Company Metro AG Booker Musgrave

Type of Company Public Public Private

Germany United Kingdom Ireland

Department Store Sr. No.

European Retail Rank

1 2

25 31

Company El Corte Inglés, S.A. Marks & Spencer Group Plc

Type of Company

Country of Origin

2012 European Retail Sales (USD Mn)

Private Public

Spain United Kingdom

18,421 15,547

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Europe Retail – Top 50 Companies (2/5) Discount Store Sr. No.

European Retail Rank

1 2 3 4 5

1 14 16 22 33

Company Schwarz Group Aldi Süd Aldi Nord X5 Retail Group Jeronimo Martins SGPS SA

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Germany Germany Germany Russia Portugal

85,562 29,084 23,785 20,990 14,430

11,365 3,280 5,053 4,503 2,536

6% 5% 2% 29% 15%

3% 3% 1% 11% 9%

0% 31% 24% 0% 0%

Type of Company

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Private

United Kingdom

12,111

3,356

-1%

Type of Company

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Type of Company Private Private Private Private Public

Drug Store Sr. No.

European Retail Rank

Company Alliance-Boots

Electronics & Entertainment Sr. No.

European Retail Rank

Euronics International

Private

Netherlands

12,028

7,429

-3%

Dixons Retail Plc

Public

United Kingdom

13,586

1,323

-3%

Company

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Europe Retail – Top 50 Companies (3/5) Home Improvement Sr. No.

European Retail Rank

2 3

26 28

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Private

Sweden

17,495

934

91%

Private Public

France United Kingdom

27,634 16,462

252 719

4% 0%

4% 3%

24% 3%

Private

Germany

15,861

5,933

-8%

Type of Company

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Type of Company

The IKEA Group Groupe Adeo SA Kingfisher Plc Tengelmann Warenhandelsgesellschaf KG

Company

Hypermarket/Supercenter Sr. No.

European Retail Rank

Carrefour S.A.

Public

France

80,895

7,054

-3%

31%

Tesco Plc

Public

United Kingdom

82,542

4,383

20%

Groupe Auchan SA

Private

France

57,246

2,685

Centres Distributeurs E. Leclerc

Private

France

44,821

733

Walmart

Public

USA

33,250

555

93%

Casino Guichard-Perrachon S.A.

Public

France

27,580

6,217

58%

Louis Delhaize S.A.

Private

Belgium

13,572

1,118

-1%

Magnit

Public

Russia

15,639

6,706

36%

19%

Company

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Europe Retail – Top 50 Companies (4/5) Non-Stores Sr. No.

European Retail Rank

1 2

15 24

Company Otto Group Amazon.com

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Germany USA

27,736 19,044

597 N/A

10% 33%

5% 17%

8% 69%

Type of Company

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Public

France

10,328

170

-7%

13%

Type of Company Private Public

Specialty Sr. No.

European Retail Rank

Company PPR S.A.

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Europe Retail – Top 50 Companies (5/5) Supermarket Sr. No.

European Retail Rank

1 2

42 11

4 5 6 7 8

27 19 34 7 46

10 11 12 13 14 15 16 17 18 19 20

21 20 29 33 48 5 43 10 23 50 41

Company Delhaize Koninklijke Ahold N.V Conad Consorzio Nazionale, Dettaglianti Soc. Coop. a.r.l. Coop Italia Coop Schweiz Cooperative Group Edeka Zentrale AG & Co. KG Grupo Eroski ITM Développement International (Intermarché ) John Lewis Partnership Plc Mercadona, S.A. Migros-Genossenschafts Bund WM Morrison Supermarkets Plc Norges Gruppen Rewe Group S Group J Sainsbury Plc Système U, Centrale Nationale Kesko Corporation Van Eerd

Country of Origin

2012 European Retail Sales (USD Mn)

2012 European Retail Stores

Sales CAGR (‘07-’12)

Sales CAGR (‘12-’17E)

Europe Sales as % of Total

Public Public

Belgium Netherlands

11,714 35,896

1,728 4,623

10% 2%

4% 2%

61% 41%

Cooperative

Italy

12,805

2,825

Cooperative Cooperative Cooperative Private Private

Italy Switzerland United Kingdom Germany Spain

17,120 23,386 14,177 51,962 9,906

1,669 2,833 3,813 15,117 1,887

1% 17% 12% 4% 2%

1% 1% 6% 1% 1%

0% 0% 0% 0% 0%

Private

France

41,319

3,877

Private Private Private Public Private Private Cooperative Public Cooperative Public Private

United Kingdom Spain Switzerland United Kingdom Norway Germany Finland United Kingdom France Finland Netherlands

13,135 21,846 21,720 29,540 9,850 58,112 11,640 36,806 20,621 9,716 11,880

334 1,375 1,954 506 2,516 14,005 1,205 970 1,442 1,725 844

1% 6% 8% 4% 4% 3% 2% 2% 4% 3% 51%

6% 4% 0% 5% 2% 2% 4% 4% 2% 4% 2%

1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Type of Company

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Appendix

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Macroeconomic Indicators of Key European Retail Markets

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

Western Europe

Eastern and Central Europe

France

Russia

2009 2,626.5 -3.1 9.5

2010 2,570.6 1.7 9.7

2011 2,778.1 1.7 9.6

2012 2,608.7 0 10.2

-28.4

-18.7

-22.5

-24.4

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

Germany GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

2010 1,525.4 4.5 7.5 -10

2011 1,899.1 4.3 6.6 -9.5

2012 2,022 3.4 6 -5.9

Poland

2009 3,307.2 -5.1 7.7

2010 3,312.2 4 7.1

2011 3,607.4 3.1 6

2012 3,400.6 0.9 5.5

-25.2

-3.2

4.3

-4.8

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

United Kingdom GDP (USD Bn)

2009 1,222.7 -7.8 8.4 -20

2009 430.9 1.6 8.2

2010 469.8 3.9 9.6

2011 514 4.3 9.6

2012 487.7 2 10.3

-26.2

-18.8

-23.7

-29.3

Czech Republic

2009

2010

2011

2012

2,193.2

2,267.5

2,431.5

2,440.5

-4 7.5

1.8 7.9

0.9 8

0.2 8

-18.4

-11.6

-21.4

-20.1

2009 2,116.6 -5.5 7.8

2010 2,059.2 1.7 8.4

2011 2,196.3 0.4 8.4

2012 2,014.1 -2.4 10.6

-21.0

-21.6

-27.7

-36.7

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

2009 197.2 -4.5 6.7

2010 198.9 2.5 7.3

2011 217.1 1.9 6.7

2012 196.1 -1.2 7

-16.6

-10.5

-20.9

-27.7

Italy GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence Source: Sutherland Research

* Consumer Confidence is average of 12 months

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