UK CHANNEL forecasts 2012-17

1. January 2013 UK CHANNEL forecasts2012-17

2. How to use this presentation • Market forecasts: • Channels summary • Non-food development • Grocery vs total retail • Grocery market structure by store type • Grocery market structure by product type • Channel snapshots: • Convenience • Discount • Smaller Supermarkets • Superstores & hypermarkets • Online Channel Snapshots This Special Analysis outlines IGD’s forecasts for the UK grocery market and principal grocery channels, from 2012 to 2017. It is divided into two sections: Note: This presentation includes market sizes originally published in August 2012, but reviewed in December 2012.

3. 2013-2017 forecast headlines 1 2 3 4 5 Market set for growth of 2.9% in the year to April 2013 – with inflation set to drive much of this uplift as economic pressures cause shoppers to remain focused on value. Convenience, discount and online will drive market growth –accounting for over two thirds of the £29.3bn increase in market size to 2017. Online sales are set to almost double over the next five years as ease of shop is enhanced by mobile ordering and new fulfilment solutions. Larger formats (superstores and hypermarkets) must work hard to show shoppers how they deliver convenient solutions. Investments in customer experience, ranging and the fresh offer are key to achieving outperformance. The ability of stores of all sizes to work in tandem with the online offer will be a key route to growth, as Click & collect permeates deeper across non-food and also food.

4. Market overview Market forecast 2012 £163.2bn 2017 £192.6bn 5 year growth +18.0% CAGR +3.3% • Economic influences • Shoppers continue to be burdened by debt: paying this down will limit discretionary expenditure and cause them to stay focused on value • Slowing broader inflation will provide some relief to hard pressed households, but amidst an expected increase in food inflation there is no sign that living costs will fall and average real wage growth is expected to stay negative until 2014 • Housing costs remain a major influence on spending power with those in rented accommodation presently most vulnerable. Looking ahead, homeowners may be exposed to increases in borrowing costs • The recovery remains subject to international risks, particularly the unresolved Euro Area crisis and weakness of the US economy • Further austerity measures, such as changes to benefits (such as child benefit) and higher rate tax thresholds will limit scope for recovery • Shopper outlook • IGD’s ShopperVistaresearch indicates that shopper confidence remains very fragile: • Bleak expectations: Almost half of all shoppers expect to experience a personal recession and only 15% expect to be better off over the year ahead • Budget control still critical: 6 in 10 shoppers expect saving money to be the main focus of their grocery shopping over the next six months • Expecting inflation: 85% of shoppers expect food to become more expensive over next six months, so helping shoppers to manage their budgets will be ever more important • Getting savvier: 34% of shoppers intend to put more effort into grocery shopping over the next six months, rather than spend more or compromise on quality Source: IGD Research. Market data is for years to April. Shopper outlook statistics from IGD ShopperVista, November 2012.

5. Market overview Online, discount and convenience will outperform Note: 1. Discounters includes all sales of Aldi and Lidl and grocery only sales of principal high street discounters 2. ‘Other retailers’ includes specialist food and drink retailers, food sales from mainly non-food retailers and street markets. It replaces the ‘traditional retailers’ channel in previously published versions of this table and results in a slightly larger total market size Source: IGD Research .

6. Market overview Online, discount and convenience will outperform Convenience, discount and online will drive market growth over the next five years. These channels will increase in value by £20.0bn, over two-thirds of the total market gain. Greater emphasis on getting more from existing stores, less focus on new store openings Benefiting from more focus as retailers scale back large format openings Rapid growth driven by tailored format development and category investment More regular usage by a growing shopper base and format flexibility will ensure further rapid growth Smartphone and tablet ordering, and click & collect will be key to a near doubling of sales Growth among certain food specialists and more non-food retailers targeting food but channel share will fall

7. Market overview UK grocery vs total retail The grocery market will grow at significantly faster rate (18.0%) than total retail (15.5%) due in large measure to the higher inflation in the food sector. That said, growth in both sectors will be modest, as shoppers take advantage of offers to contain grocery expenditure and show restraint intheir non-food purchases. While a recovery may then take hold, growth in non-food may be held in check by fierce price inflation and weak consumer confidence.

8. Market overview Non-food in grocery retailers 2012 £12.5bn 2017 £14.6bn 5 year growth +17.3% CAGR +3.2% While non-food will recover as shopper confidence gradually improves, annual growth rates will stay below previous rates. Going forward, raising like-for-like sales from existing stores rather than contributions from new hypermarket space will be key. Click & Collect will also be a much more significant sales contributor, given the convenience it offers shoppers but expect much competition here from non-food retailers with the likes of John Lewis, for example, building their own extensive networks. Grocers’ non-food growth dropped to 1.0% in 2012, impacted by shoppers increasingly favouring smaller format stores that lack a full non-food offer in-store and the underlying weakness of the wider non-food market. Retailers such as Tesco have also been rebalancing their larger format stores more towards food. Definition: IGD defines non-food as including non-traditional non-food categories, i.e. excluding categories such as health & beauty that have become part of grocery retailers’ core domain, but including categories such as clothing, entertainment and homewares

9. Market overview Grocery market structure by store type, 2012 Hypermarkets & Superstores1,606 75.6m sq ft £72.3bn Smaller Supermarkets5,104 47.3m sq ft £34.5bn Multiples3,046 6.2m sq ft £5.6bn Co-ops2,6015.1m sq ft £3.9bn Convenience Retailing47,145 54.7m sq ft £33.9bn Symbol Groups16,407 19.6m sq ft £13.6bn Non Affiliated19,237 17.1m sq ft £6.6bn UK Grocery Retail 85,720 211.6m sq ft £163.2bn Forecourts7,953 5.3m sq ft £4.1bn Discounters2,350 13.2m sq ft £7.5bn Other retailers 29,515 20.8m sq ft £9.4bn Online £5.6bn Source: IGD Research. All market data is for year to April. Note forecourt joint ventures are deducted from the convenience total to avoid double counting. Space data is for all space in food led retailers, and food and H&B space only for high street discounters. In the ‘other retailers’ channel space and store numbers refer to food led formats; non-food specialists are excluded, though grocery sales are included in the channel value.

10. Market overview Grocery market structure by product type, 2012 Total Market£163.2bn Non Food £12.5bn e.g. electrical goods Grocery £150.7bn Non-Tobacco £135.6bn Tobacco £15.1bn Grocery Non Food £26.0bn e.g. Health & beauty Food & Drink £109.6bn Source: IGD Research. All market data is for year to April

11. Superstores & hypermarkets Channel overview Slower large format development by leading players as consumers look to shop closer to home will limit growth prospects. Investments in the fresh offer, counters, ranging and the customer experience, together with optimising the breadth of non-food will be key to raising performance. Cash Gain 2012-17 +£4.6bn Growth 2012-17 6.4% Channel share 44.3% 39.9% 2012 2017 • Drivers • Store refurbishments and investments in the fresh food offer • Growing expertise in developing compact and relevant non-food offers should lift channel performance • Ability to work in tandem with online to deliver true cross-channel solutions across food and non-food • Reduction in number of non-food specialists will benefit non-food sales of large format stores • Potential to adapt floorspace to introduce new categories, foodservice and services • Better segmentation of stores: eg in food-to-go and health & beauty • Inhibitors • More cautious approach to space growth to focus investment on faster growth channels, particularly online and convenience • Shift towards driving non-food sales online and via click & collect instead of through large format stores • Slow growth of many areas of non-food, impacted by consumer restraint towards spending on non-essential items • Shoppers’ increasing preference for local and quick to shop stores, in part reflecting fuel price inflation • Dark stores replacing orders fulfilled from stores reduces the role of hypermarkets Source: IGD Research. All market data is for year to April.

12. Superstores & hypermarkets Retailer growth priorities Asdais adopting a more food focused strategy for larger format stores, placing fresh first in flow, supported with authoritative counters and improved merchandising across the offer. The rollout of Asda Direct counters enables stores to provide an extended general merchandise offer while the new click & collect grocery service will drive further footfall to large format stores. Morrisons: Rolling out the new fresh format store to its best performing sites will better enable Morrisons to demonstrate its points of difference, particularly its vertically integrated sourcing strengths and emphasis on in-house craft skills. Sainsbury’s is placing particular emphasis on boosting its estate of 60-70,000 sq ft stores capable of accommodating a 40,000 sq ft food offer and 20-30,000 sq ft of non-food, with many of these stores created by extending smaller existing stores. Larger stores also continue to benefit from the estate-wide rollout of new style counters. Tesco’sdecision to scale back space growth in the UK means much slower expansion for Extra store numbers going forward, though the redirection of investment to improve stores’ fresh offer, enhance the shopper experience and build grocery click & collect should lift LFL performance. The promotion of Tony Hoggett to head up Tesco Extra in the UK signals the retailer’s determination to lift the performance of these stores.

13. Superstores & hypermarkets Innovation that’s driving the channel • Supplier implications: • Can you contribute to retailer initiatives to segment stores to make the offer more relevant to differing shopper missions? • Larger format stores have the space to accommodate events effectively. Can you work with retailers help build on the strong stream of events from 2012? • Does the increased focus on fresh and counters present new opportunities for cross merchandising and product introductions? • With Click & Collect driving different shoppers to stores, how can you target them better? • Are you communicating value in the most relevant way for shoppers and frequently reviewing your approach in line with shopper sentiment shifts? Demonstrating quality through enhanced fresh merchandising Investment in counters to strengthen quality credentials and build shopper engagement Making formats relevant to differing shopper missions through better store segmentation Developing stores as collection points for online grocery and non-food orders

14. Smaller supermarkets Channel overview Shoppers’ growing preference for local, compact and easy-to-shop stores is driving retailers’ investment priorities with multiples increasingly incorporating the full range of facilities once only offered by larger formats, as part of their push to maximise returns on capital investment. Cash Gain 2012-17 +£4.3bn Growth 2012-17 12.5% Channel share 21.1% 20.2% 2012 2017 • Drivers • Shopper enthusiasm for convenient easy-to-shop stores • Lower capital expenditure requirement, higher site availability and potentially higher returns on investment than for larger formats • Retailers are increasingly skilled at tailoring ranges to meet local demand • Click & Collect enables smaller stores to offer full non-food range • Retailer skill at including facilities once only found in larger stores, such as counters • Inhibitors • Competition for investment funds from convenience stores • Lack of recognition of smaller supermarkets as a distinct channel, partly due to the great diversity in store sizes • Competition from discounters for new store sites and for customers • Not seen as a fast growth channel vs online or convenience • Parking availability can impact basket size • Variety of shopper missions makes it hard for promotional approach to be relevant to all customers Source: IGD Research. All market data is for year to April. Note conversion of Netto stores mainly to Asda Supermarket format boosted channel growth in 2012

15. Smaller Supermarkets Retailer growth priorities Following the successful integration of 147 former Netto stores Asda aims to build its Supermarket estate towards a long term target of 250. Getting ranging right will be key to optimising the performance of these stores and Asda is keen to work closely with suppliers to achieve this. Waitrose has ambitions to extend its reach further through infill in the south east and expansion into parts of the countries where it is under-represented with the smaller supermarket being a key format alongside convenience stores. The Co-operative is keen to expand its portfolio of small supermarkets in high street and local community locations. Increasingly The Co-operative is customising its formats according to local shopper missions. Ranging is an important element of this, with a stronger offer of local products a key to enhancing its appeal. Booths is committed to significant, if gradual expansion that would take its store beyond the Northwest and into Yorkshire. Following an encouraging customer response to its new Media City store, its first in a truly urban location, Booths will roll out the concept across its estate. Booths also plans to “stay special” by building local ranging and emphasising customer service.

16. Smaller Supermarkets Innovation that’s driving the channel • Supplier implications: • Is your promotional strategy fully aligned with shopper missions to smaller supermarkets? • Do you have a specific strategy for the smaller supermarket channel? • Does the increased focus on fresh and counters present new opportunities for cross merchandising? • With the growing shopper appetite for local products, are there ways in which you can align your products with this demand? • Are you fully up to speed with retailers’ store refurbishment programmes and how they are aiming to broaden their appeal? Enhancing the shopper experience with more inviting stores and stronger customer service Focus on freshness through in-store bakeries and compact counters Clearly defined food-to-go sections to increase relevance to shopper missions Local sourcing to differentiate from larger competitors and build community ties

17. Convenience Channel overview Shoppers’ increasing preference for shopping locally is being met with major investment from the sector in new look and more relevant retail propositions, centred on fast growth categories and better value. Cash Gain 2012-17 +£9.7bn Growth 2012-17 28.5% Channel share 20.8% 22.6% 2012 2017 • Drivers • Shoppers’ increasing preference to shop ‘little and often’ favours convenience operators • The rising cost of living makes shoppers keen to use local stores where they can to budget more easily • Convenience stores are increasingly driving innovation in store design and merchandising across grocery • Better communication of value through stronger private label ranges and targeted promotions is broadening the customer base • Click & Collect overcomes traditional space constraints and attracts new customers to stores • Inhibitors • Store numbers are in decline, particularly for independents • Store standards vary widely across the sector due to its fragmented nature • Competition, particularly on value from other channels, not least from smaller supermarkets and discounters • Challenges in effectively servicing the full breadth of a relatively unconsolidated channel • Success depends on recognising how shoppers use convenience stores which varies significantly by location. • Government legislation, particularly on tobacco, could limit opportunities Source: IGD Research. All market data is for year to April.

18. Convenience Retailer growth priorities Adopting a sharper position on value is key to Musgrave’s strategy. The introduction of the SuperValu brand from Ireland and stronger price guarantees are key to improving value perceptions. Developing stronger community links and creating a more distinctive local offer are also priorities for Londis and Budgens stores. The new tie-up with Boots presents a further growth opportunity. Fresh offers Nisa members significant potential for growth which the symbol group is promoting with the nationwide rollout of a new style fresh proposition. Nisa’s new lower cost Loco fascia offers significant potential to extend its scale. The recent separation from Today’s should also help focus the business more on convenience. Costcutteris committed to innovative zoning of stores so that they better meet shopper needs. Store segmentation is also a priority for Costcutter with rollout potential for its new myCostcutter premium formats and Kwiksave value fascia. Morrisonshas big ambitions for its new M Local fascia. With its focus on fresh and food-to-go, the new format is a distinctive addition to convenience retailing. Sainsbury’s meanwhile continues to steadily grow its Local store estate while Express now accounts for almost a quarter of Tesco’s new space in 2012/13.

19. Convenience Innovation that’s driving the channel • Supplier implications: • Retailers are keen to bring categories to life – how can you support this drive? • With retailers keen to build local connections, how can you help show local relevance? • Besides creating opportunities for private label manufacturers, the focus on own brand will aid differentiation, boost value perceptions and drive broader channel growth. • Innovation in formats remains a focus across the channel – how can this encourage new shopper missions and create new opportunities for growth for you in the sector? • If you haven’t already, is it time for you to consider a convenience specific strategy across pack sizes and marketing? Developing multi-format propositions to maximise relevance to local shoppers and shopper missions Private label ranges are becoming deeper and broader and being used more to signpost value Category development is key to remaining competitive by identifying opportunities based on local demand and competitors Initiatives that connect retailers to local communities are an important route to differentiation

20. Discount Channel overview While shoppers’ continuing desire for value is central to discounters’ growth, their drive to compete on quality has also bolstered appeal. Ongoing improvements to fresh and premium offers are likely to drive market share further at Aldi and Lidl while high street discounters will also increasingly target grocery. Cash Gain 2012-17 +£4.9bn Growth 2012-17 64.7% Channel share 4.6% 6.4% 2012 2017 • Drivers • Continuing shopper focus on value, driven by the rising cost of living and weak income growth will encourage more shoppers to use discount stores and drive further growth • Enhancements to ranging by discounters – with stronger fresh offers, more premium products and a stronger focus on quality • Effective advertising to enhance shopper perceptions of discounters and communicate quality comparability with mainstream retailers • Further store openings as increasing sales densities make more store locations viable • Inhibitors • Range lacks the breadth of the major multiples • No loyalty mechanics to drive their customer insight • Lack of involvement in the fast growing online channel • Rigidity in store location requirements • Limited SKU ranges and restricted choice of brands hinder shoppers ability to do fuller shops (most use the channel as part of their repertoire rather than as their main shop) Source: IGD Research. All market data is for year to April. Note channel value reduced in 2012 by UK market exit of Netto.

21. Discount Retailer growth priorities Aldiis keen to build on recent progress in broadening its appeal to more affluent customers. Expect further investment in NPD to create more in-store interest and higher basket sizes, and increased tiering within private label to encourage trading up. A more flexible approach to store requirements is also emerging, particularly to reach shoppers in London. Lidlis committed to expanding its store network and reportedly sees potential for 1,400 stores in the UK. Investments in quality to expand its appeal such as its new premium wine range and expanded Deluxe ranges, and also category innovations such as its new trial of ‘healthy checkouts’, will be key to expanding customer appeal further. Poundland is committed to expanding its offer, with food an increasingly important part of the proposition. Including ‘Top brands’ is seen as key to driving footfall and building confidence in the offer. Backed by supportive investors, Poundland has the ability to expand rapidly and is flexing its format to take it to new and often more affluent areas. B&M Bargains. Recently acquired by US private equity firm Clayton Dubilier & Rice, the fast growing 315 store discounter is now poised for further growth and possible international expansion.

22. Discount Innovation that’s driving the channel • Supplier implications: • Do you have a clear strategy for working with the discount channel and is your business open to new ways of working in the channel? • What opportunities arise for your products from increasing sales of fresh and chilled products? • How can you support discounters’ ongoing push to build their position in premium products? • With strict controls on SKU count, a trial or one-off promotion may be an effective way to test demand for new product variants. • Can you provide advice and expertise to discounters to support their push into new categories and ranges? • Are you up to date with discounters’ latest small format store concepts? Highlighting improvements in fresh and private label quality Increasing emphasis on product innovation and local sourcing Format evolution blurs channel boundaries with more focus on food-to-go and greater flexibility in store requirements Refreshing value messaging to reassert pricing authority and drive engagement

23. Online Channel overview Online sales are forecast to almost double as ease of shop is enhanced with mobile ordering and new fulfilment services including click & collect driving customer uptake and shopping frequency. Cash Gain 2012-17 +£5.5bn Growth 2012-17 97.7% Channel share 3.5% 5.8% 2012 2017 • Drivers • More widespread ownership and heavier usage of smartphones, and tablets boosted by 4G service launches • Retailer development of mobile centric online strategies • Driving transactions across the web through better alignment of marketing and sales activities, including greater use of social media • Investment in new dark store capacity to deliver superior service • Potential entry of Morrisons into the online grocery market, investment by M&S and development of click & collect services • Greater understanding of shopper behaviourand use of analytics • Increased use of manufacturer sites to drive online sales • Inhibitors • The channel may need to change focus to build appeal beyond current core young family shopper group • Any move by the sector to increase delivery charges to make online more profitable • Any shortfall in investment by suppliers and retailers in resourcing their online development strategies • Online service standards falling short of shopper expectations could slow migration online • The continuing preference of many shoppers to shop in-store for at least some shopping missions Source: IGD Research. All market data is for year to April.

24. Online Retailer growth priorities Tesco: Click & Collect grocery is a major growth opportunity for Tesco, providing new momentum for its online sales growth. Expanding TescoDirect’s range through distribution agreements with third party suppliers is also key. Developing social media and building the digital functionality of Clubcard should further build Tesco’s position. Asda: Priorities include the expansion of grocery click & collect to new locations, opening further dark stores, and potentially same day deliveries. Asda expects 4G service launches to drive m-commerce and will look to integrate the smartphone more into the in-store shopping experience. Ocado: With the opening of its second customer fulfilment centre in Warwickshire, Ocado will increase both the reach and reliability of service. Range expansion will see Ocado move from ‘supermarket’ to ‘hypermarket’ status, with opportunities for suppliers to build their branded presence across the webstore. Morrisons is building knowledge of the online market from Kiddicare, the new Morrisons Wine Cellar transactional site and its investment in New York-based Fresh Direct, but will only launch a full grocery online site if it can develop a profitable business model.

25. Online Innovation that’s driving the channel • Supplier implications: • Do you have dedicated resource to drive sales through the online channel? • Do you know your sales online versus other channels? • Are your initiatives joined up to target the multi-screen shopper? • Have you considered the implications of a click and collect roll out for food? • Are you ready for a time when you can tailor promotions more? • Are you on top of and satisfied with the onscreen appearance of your products? Dark stores will provide more flexible fulfilment solutions in high demand areas Expanding click & collect to more locations will make online a more convenient option for shoppers The expected popularity of 4Gsmartphones will make mobile ordering faster and easier Greater shopper understanding leading to better product imagery will overcome a key barrier

26. Next steps..... 1 Join our webinar“2013 and beyond: the way forward in UK Grocery” at 1000 on January 17th >> Click here to book your place now 2 For retailers’ latest strategy and news in brief: >> Visit the Snapshots page on Retail Analysis This Special Analysis report was written by Nick Gladding, Senior Business Analyst nick.gladding@igd.com Need something else? Email askIGD.com or call +44 (0) 1923 851954 For retailers‘ latest strategy and news in brief: 3 For our selection of must see stores: >> Visit the Store Visits page on Retail Analysis For retailers‘ latest strategy and news in brief: Follow us on Twitter @RetailAnalysis