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PPA Newstrade Forum The Future for Retail 4 th October 2005

PPA Newstrade Forum The Future for Retail 4 th October 2005. Brian Moore EMR-NAMNEWS Ltd . EMR NAMNEWS. CLIENTS. Adams Confectionery Arla Foods (Lurpak, Anchor) BAA (British Airport Authority) Beiersdorf (Nivea) Boots Healthcare International Brita Water Filter BTCellnet O2

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PPA Newstrade Forum The Future for Retail 4 th October 2005

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  1. PPA Newstrade ForumThe Future for Retail4th October 2005 Brian Moore EMR-NAMNEWS Ltd.

  2. EMR NAMNEWS CLIENTS • Adams Confectionery • Arla Foods (Lurpak, Anchor) • BAA (British Airport Authority) • Beiersdorf (Nivea) • Boots Healthcare International • Brita Water Filter • BTCellnet O2 • Cadbury • Coty • Lever Fabergé • EMI Music • Gillette • Health & Beauty Association • Imation (3m computer media) • J&J • LEGO • Marketforce Magazines • Mars M&M • Moy Park (chicken Processor) • Nestlé • Philip Morris • Philips Electronics • Reckitt Benckiser • Sara Lee H’hold & Personal Care • Seagram • Glaxo SmithKline • Warner Lambert Pfizer • Retailers: Tesco, Sainsburys, Dansk Supermkd, Eppco, Emarat, AbuDhabi Coop, Panda Publishing: NAMNEWS - Monthly Global Newsletter for National Account Managers and kamcity www.kamcity.com

  3. Agenda

  4. The Future for Retail • Key Players update and implications • Tesco & Wal-Mart, a 2-horse race • Competing against the Multiples (W-M checklist) • Setting standards in retail, everywhere • Sales growth (CAGR) • Profit growth (margin, shrinkage/wastage, forecasting) • Supply chain efficiency (availability, coke/day, lost margin, consignment, rotation) • Space optimisation • Differentiation to optimise loyalty • Own-Label • Store-level assortment • Consumer-profile / Shopper-profile congruence • Enhanced shopping experience • Category Management (consumer-shopper insight) • Ownership of consumer? • Risk-management • Relative risk • Continuity (buyer-churn) • Action for publishers

  5. Key Players update and implications • Global context, to EU, to UK • Tesco & Wal-Mart, a 2-horse race • Competing against the Multiples (W-M checklist)

  6. Money machines… …that happen to sell groceries…

  7. EMR Worldwide Retailer Ratios Turnover (€bn) Pre-tax Profit (€bn) ROCE % Net Margin % Stockturn (times p.a.) Gearing % Country Retailer US Wal-Mart 2004 228.0 12.8 20.8 5.6 9.7 40.7 Costco 2004 31.8 1.11 15.7 2.9 13.2 13.0 Germany Metro 2004 56.4 1.34 9.7 2.4 9.0 138.7 Rewe 2004 40.8 n/a n/a n/a n/a n/a Aldi 2003 36.3 n/a n/a n/a n/a n/a France Carrefour 2004 72.7 2.81 14.23.9 11.6116.7 Casino 200423.20.948.94.112.1191.1 Auchan 2004 30.1 1.1 9.3 3.5 10.6 102.5 Netherlds Ahold 2004 52.0 (0.5) n/a n/a 20.3 159.7 UK Tesco 2004/5 49.4 2.84 13.7 5.8 26.0 50.0 J Sainsbury 2004/5 22.4 0.37 3.9 1.6 27.6 38.9 Asda 2003 19.3 0.97 16.9 5.0 19.5 15.7 WH Smith 2004 4.1 0.1 15.0 2.4 15.4 23.4 Currency conversion rate:$1 = €0.7916£ = €1.4531 16/05/2005

  8. Gearing • Borrow £1m at 15% • Company’s net worth £1000 • 16% Profit (1 year) • 1% of £1,001,000= £10,010= 1000% • Suppose 14% Profit • 1% loss • = £1000 + £10,000 Borrowing Company’s Net Worth

  9. EMR Worldwide Retailer Ratios Turnover (€bn) Pre-tax Profit (€bn) ROCE % Net Margin % Stockturn (times p.a.) Gearing % Country Retailer US Wal-Mart 2004 228.0 12.8 20.8 5.6 9.7 40.7 Costco 2004 31.8 1.11 15.7 2.9 13.2 13.0 Germany Metro 2004 56.4 1.34 9.7 2.4 9.0 138.7 Rewe 2004 40.8 n/a n/a n/a n/a n/a Aldi 2003 36.3 n/a n/a n/a n/a n/a France Carrefour 2004 72.7 2.81 14.23.9 11.6116.7 Casino 200423.20.948.94.112.1191.1 Auchan 2004 30.1 1.1 9.3 3.5 10.6 102.5 Netherlds Ahold 2004 52.0 (0.5) n/a n/a 20.3 159.7 UK Tesco 2004/5 49.4 2.84 13.7 5.8 26.0 50.0 J Sainsbury 2004/5 22.4 0.37 3.9 1.6 27.6 38.9 Asda 2003 19.3 0.97 16.9 5.0 19.5 15.7 WH Smith 2004 4.1 0.1 15.0 2.4 15.4 23.4 Currency conversion rate:$1 = €0.7916£ = €1.4531 16/05/2005

  10. Market Capitalisation Market Cap (€bn) Latest Turnover (€bn) Wal-Mart 163.1 228.0 Tesco 36.2 49.4 Hutchison Whampoa 34.1 19.1 Carrefour 27.4 72.7 Costco 17.4 31.8 Metro 13.4 56.4 Ahold 11.2 52.0 Morrisons 7.3 17.6 Sainsbury 7.0 22.4 Boots 6.4 7.9 Casino 5.3 23.2 Alliance UniChem 4.4 12.9 WH Smith 0.9 4.1 $1 = €0.7916£ = €1.4531

  11. Competing against the Major Players

  12. Retailing vs. Wal-Mart(Ken Stone) • Differentiate (goods W-M don’t sell) • Sell complementary goods (variety vs fast-moving goods) • Go upmarket • Rationalise slow movers • Exploit customer knowledge • Longer hours • Sharpen pricing skills (KPIs near W-M) • Advertise advantages • Stress service & technical advice • Special order capability • Employee treatment & training • Adopt latest technology & cut costs

  13. Setting standards in retail, everywhere • Retailer strategies for growth • Sales growth (CAGR) • Profit growth (margin, shrinkage/wastage, forecasting) • Supply chain efficiency (availability, coke/day, lost margin, consignment, rotation) • Space optimisation

  14. Retailer Strategies for Growth and Impact upon suppliers

  15. Dismantling ‘restrictive’ legislation • RPM: medicine, books • Restricted distribution: cosmetics, toiletries • PI: clothing, CDs, OTC medicines, cosmetics, toiletries • Shopping hours (24/7)

  16. Entering ‘protected’ Categories • Systematic evaluation of non-grocery categories • Categories ‘protected’ by legislation or tradition • Use of buying power to access the brands and drive down cost • Use of price to exploit efficiencies and scale

  17. Strategies for Growth and Impact upon Suppliers • Dismantling ‘restrictive’ legislation • Entering ‘protected’ categories • Private label • Price pressure on local and regional competition • Exploitation of expertise via knowledge transfer

  18. Key Financials, UK retail

  19. Supermarket Multiples Return on Capital Employed % Latest 2004/05 2003/04 2002/03 Turnover (£bn) Tesco 34.0 13.7 12.4 12.2 Sainsbury 15.2 3.9 7.9 9.2 Asda 13.3 — 16.9 13.0 Morrisons 12.1 5.3 22.6 21.2 Somerfield 4.5 — 5.7 4.4

  20. Supermarket MultiplesNet Profit Margin % Latest 2004/05 2003/04 2002/03 Turnover (£bn) Tesco 34.0 5.8 5.2 5.2 Sainsbury’s 15.2 1.6 3.6 3.8 Asda 13.3 — 5.0 4.7 Morrisons 12.1 2.5 6.5 6.4 Somerfield 4.5 — 1.2 0.7

  21. Effect of Shrinkage on Customer’s Profit Number of extra units needed to be sold to regain profit for every item ‘lost’: Gross Margin Net Margin 50% 2 units15%7 units 40% 3 units10% 10 units 30% 4 units 8%13 units 20% 5 units5%20 units 10% 10 units3%34 units 5% 20 units1%100 units

  22. Supply Chain efficiency

  23. Supermarket Multiples Stockturn (times p.a.) Latest 2004/05 2003/04 2002/03 Turnover (£bn) Tesco 34.0 26.0 25.7 23.1 Sainsbury’s 15.2 27.6 22.8 21.8 Asda 13.3 — 19.5 19.0 Morrisons 12.1 28.5 32.9 31.4 Somerfield 4.5 — 15.5 16.1

  24. Space Productivity

  25. UK Supermarket Sales Per Sq. Ft. Comparison Of Major Multiples Sales per Sq. ft. (£ p.a.) 2004/05 2003/04 2002/03 Tesco 1,121.41,063.1990.2 Sainsbury’s — 913.3950.1 Somerfield* — 442.4425.1 Morrisons 971.71,092.41,011.2 *Figures includes Somerfield and Kwik Save (not broken down separately). *Tesco figures for 2002/3 affected by inclusion of T&S acquisition.

  26. UK Supermarket Total Selling Area Sq. Ft. Comparison Of Major Multiples Total Selling Area (’000 Sq ft) 2004/05 2003/04 2002/03 Tesco 24,20723,29121,829 Sainsbury’s ― 15,57015,199 Somerfield* ― 10,220 10,549 Morrisons 12,468 4,5264,241 *Figures includes Somerfield and Kwik Save (not broken down separately).

  27. Average sales/sq.ft. Convenience (IGD) • Symbol groups: £501 • Convenience Multiples: £497 • Co-Managed Forecourts: £842 • Coop C-stores: £491

  28. UK Supermarket Operating Profit Per Sq. Ft. Comparison Of Major Multiples Operating Profit per Sq. ft. (£ p.a.) 2004/05 2003/04 2002/03 Tesco 70.065.559.4 Sainsbury’s — 36.235.4 Somerfield* —3.52.1 Morrisons 22.8 63.461.9 *Figures includes Somerfield and Kwik Save (not broken down separately).

  29. The Winning Formula(GSachs) • Supply chain efficiencies • Relentlessly competitive prices • Best international merchandising standards • Marketing intensity • Superlative service

  30. Critical Retailing Variables necessary for success • Strength in systems and logistics • Highly marketing driven • Skill in mining customer data • Ability to range stores efficiently • Ability to generate profit from advanced, high value-added private-label programmes • Relative scarcity of good retailing space drives up sales productivity and operating margins

  31. Key players meeting success criteria • Tesco • Asda Wal-Mart • Morrison-Safeway • AS Watson

  32. Size and value creation • Tesco and Asda have size and critical mass to act as a platform to dominate global retail, head-to-head in UK • Morrison-Safeway may take time to capitalise on scale • AS Watson potential buying power and discount focus • All other players are compromised • Important to have scale and focus in key trade sector to remain competitive • ‘Retailer needs to be big to get bigger’

  33. Key Player Agendas in UK • Tesco: Expand convenience & non-food as platform for overseas development • Asda: focus on Tesco, and Morrison ‘floaters’ • Tesco and Asda head-to-head in UK • Morrisons: integration/disposal issues, preservation of existing customer-base and market share • Sainsburys: new plot, ‘unwanted’ suitors, all-out assault on Safeway customers

  34. Differentiation to optimise loyalty • Own-Label • Store-level assortment • Consumer-profile / Shopper-profile congruence • Enhanced shopping experience • Category Management (consumer-shopper insight) • Ownership of consumer?

  35. Degree of ‘Localisation’ of the Superstore Offer Core Local 70 30 Pre-loyalty cards Core Local 30 70 Post-loyalty cards ‘Typical’ Superstore:Size: 50,000 sq. ft Sales: £70m p.a. Employees: 400 = Medium-sized business enterprise

  36. Implications for suppliers • Need to resource down to superstore level with kam-grade people • Distil customer strategies/category management to branch level • Tailor promos to branch level • Business Account Management at local level

  37. Joint Planning Framework Company Business Strategy Appeal to Distributive Trade (Selling Strategy) Appeal to consumers (Marketing Strategy) Joint Planning Strategy per trade group or customer Strategy per Product Consumer

  38. Risk-management • Relative risk (Seeking, Neutral, Averse) • Continuity (buyer churn)

  39. The Future…

  40. Consumer calling the shots • Technology is changing role of buyer-seller relationship • Consumer more in control of shopping process • Consumers do more for themselves • Less reliant on manufacturers and retailers for information, advice or recommendations • Accustomed to many choices • Will take initiative to get what they want, how, why when where and when they want it • They will seek to dictate the future and pace of their own shopping experience • They will expect rewards for their patronage

  41. Suppliers becoming retailers • More proactive participant in relationship with consumer-shoppers • Handful of lines means too small to offer full range or critical mass in share of spending • Dilemma of selling direct to consumer without cannibalising customer’s sales or alienating retailer • Who owns the consumer, and the knowledge that each transaction generates?

  42. Suppliers taking on retailer functions(How to add value) • Key suppliers as category consultants • Setting strategy for the category and managing space and inventory, by location • Retailers expect suppliers to retain ownership of goods even on shop floor (Aisle-based shopper-management) • Suppliers focus on smaller number of power brands • Closer cooperation with retailer-partners on customer-specific private brands, exclusive brands and co-branded programmes to maintain influence over retail space • Acceleration of move from sell-in to sell-through

  43. Retailers act like suppliers • Retailers want more control over supply/procurement • Seeking alternative, lower cost sources of supply, overseas • Growing complexity of supply chain • Retailers need to influence freight, clearance, consolidation and supplier relations to gain greater visibility and control of inbound product • Big retailers will stretch into their key suppliers organisations, influencing design and production to better meet consumer-shopper needs

  44. Driving standards in retailing Key retailers as leaders in performance

  45. Driving standards in retailing • ROCE (Return on Capital Employed) • Price leadership (EDLP, Hi-Lo, selective, by category) • Supply Chain (rotation, accuracy) • Space (utilisation, merchandising) • Private label (differentiation, profit) • ROCE

  46. Action for Publishers • Decide balance of Traditional/Supermarket business • Set limits on traditional trade investment • Follow supermarket lead (standards) • Agree trade partnerships (invest, maintain, divest) • Explore and optimise consumer-shopper insights • Demonstrate financial benefits of the category (Sales, Margin, GMROII, Space-utilisation, SOR, basket impact) • Business-manage key customers…

  47. Personal Follow-up • Use www.kamcity.com/libraryfor papers on key ideas/issues in the presentation • See Kamwords section of Kamcity for definitions of financial terms www.kamcity.com/kamwords/ • See Namcalc building for financial calculations www.kamcity.com/kamfinance/ • See NAMNEWS archives in Kamcity for background news on customers www.kamcity.com/namnews/newsarchive.htm • See World-of-Retail in Kamcity for customer factfiles UK, EU and global www.kamcity.com/WOR/ • Latest details of our training? See www.kamcity.com/emr-namnews/ • Need a laugh? See www.kamcity.com/KamKartoons/ • Any problems, contact Brian Moore on bmoore@namnews.com

  48. EMR-NAMNEWS Ltd.Venture House2 Arlington SquareDownshire WayBracknell, BerkshireRG12 1WATel: +44 (0)1344 742816Email: mailbox@namnews.com

  49. Appendices Trade Funding Criteria for trade partnership

  50. Trade funding: Use & abuse

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