European Grocery Discounters report Nov. 2015

Transcription

EUROPEAN
GROCERY
DISCOUNTERS:
SMALL
STORES–
BIG
THREATS?
DE BORA H W EI NS WIG
E x e c u t i ve D i r e c t or –
H e a d of G l o b al R e t ai l & Te c h n o l o g y
F u n g Bu s i n es s I n t el l i g e n c e C en tr e
d e b or a h w e i n s w i g @ f u n g 1 9 37 . c o m
U S : 64 6 . 8 3 9. 7 0 1 7
H K : 85 2 . 61 1 9 . 1 7 79
C H N : 8 6 .1 8 6 . 1 4 2 0. 3 0 1 6
• Schwarz Group and Aldi, the two largest discounters, are the third and seventh biggest grocery retailers in the world, respectively. Schwarz Group, owner of Lidl and Kaufland, leapfrogged Tesco to become the world’s third-‐biggest grocer in 2014. • Lidl has been an outstanding performer in recent years, due to its adept mingling of hard discount w ith elements of a softer proposition. • Projections based on historic growth rates suggest the top nine discount chains will grow their annual sales by an extra €79 billion, or 41%, between 2014 and 2020. • Projections suggest Schwarz Group will add around €43 billion to its annual sales in the period 2014-‐20, taking its revenues to €122 billion. Aldi could add an extra €20 billion in annual sales over the same period, taking its revenues to €81 billion. • In markets where discounters will continue to grow share, we think competing retailers face a future of smaller average basket sizes and lower m argins, as consumers split their shopping among different stores and as retailers are forced to compete more aggressively on price. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 1
TABLE OF CONTENTS DEFINING A GROCERY DISCOUNTER ........................................................................................................... 3 EXECUTIVE SUMMARY ................................................................................................................................ 4 PROSPECTS: A SMALLER BASKET, LOWER MARGIN FUTURE? .................................................................... 8 OVERVIEW: THE STATE OF THE SECTOR ................................................................................................... 12 METRICS: THE BIGGEST GROCERY DISCOUNTERS .................................................................................... 19 PROFILE: SCHWARZ GROUP (LIDL AND KAUFLAND) ................................................................................. 25 PROFILE: ALDI (NORD AND SÜD) .............................................................................................................. 33 PROFILES: OTHER MAJOR DISCOUNTERS ................................................................................................. 40 IN SUMMARY ............................................................................................................................................ 49 DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 2
DEFINING A GROCERY DISCOUNTER The grocery discounters that are the focus of this report include the big, limited-‐line, no-‐frills hard discounters, such as Aldi and Lidl, as well as the major soft discounters, such as Penny, whose stores typically stock more brands and more product lines overall. “Discounter” is a slippery concept. Technically, the retailers covered in this report are not usually discounting the products they sell—they are simply selling groceries at an everyday low price. They do this by offering limited choice and focusing on private-‐label ranges, which means they drive large volumes through each product line. This allows them to source in bulk, sometimes from major brand owners, keeping quality levels high and prices low. There are several defining characteristics of a grocery discounter: • Limited ranges—hard discounters have traditionally offered around 600 – 1,000 lines in each store, although this has crept up in some chains. By contrast, SKU counts can be as high as 50,000 in European hypermarkets. •
•
•
•
Private-‐label dominance—hard discounters have traditionally focused almost exclusively on their own brands, although several major players have increased the presence of major brands on their store shelves recently. Smaller stores—limited ranges and limited brand choice typically translate into smaller stores, of around 800 square meters at the likes of Aldi and Lidl. Discount hypermarket Kaufland is the major exception to this, but we include Kaufland as a discounter due to its private-‐label focus and discount proposition; it shares many commonalities with its sister chain, Lidl. Everyday-‐low-‐price proposition—rather than relying on a high/low promotional stance, discounters have traditionally offered everyday low prices. General absence of frills—elements such as in-‐store merchandising and services such as online retailing and loyalty programs tend to be minimal. Germany is the heartland of grocery discounters; it is the home of big names such as Aldi, Lidl, Kaufland, Netto Marken-‐Discount and Penny. These types of stores account for more than 40% of German grocery sector sales, according to multiple sources. Even beyond Germany, these kinds of grocery discounters are predominantly European. The other big players discussed in this report come from Portugal (though it operates stores only in Poland; Biedronka), Spain (DIA), Norway (REMA 1000) and Denmark (Netto). We also cover Trader Joe’s, which operates stores solely in the US but is German owned. Because of Europe’s dominance of the sector, the principal currency we use for retailer data in this report is the euro. Excluded from our definition of grocery discounters are: • Supermarkets, hypermarkets, supercenters and warehouse clubs. Kaufland is the exception to our hypermarket exclusion. • Discount general merchandisers, such as dollar stores/pound shops/euro stores. • Convenience stores. The following discount fascias (and their parents/domiciles) are at the core of our analysis: •
Aldi (Aldi Nord and Aldi Süd, Germany) •
Lidl (Schwarz Group, Germany) •
Kaufland (Schwarz Group, Germany) •
Netto Marken-‐Discount (Edeka, Germany) •
Penny (REWE Group) •
Biedronka (Jerónimo Martins, Portugal) •
DIA (Spain) •
Trader Joe’s (owned by Aldi’s Albrecht family)—
although we view this retailer as borderline discount •
REMA 1000 (Reitan Group, Norway) •
Netto (Dansk Supermarked, Denmark). The Danish Netto is distinct from Netto Marken-‐Discount in Germany and from the French Netto chain. Note: Aldi is comprised of two sister companies, Aldi Nord and Aldi Süd. For operational data, such as revenues, we treat them as one in this report. Abbreviations CAGR Compound annual growth rate Capex Capital expenditure EBITDA Earnings before interest, tax, depreciation and amortization JV Joint venture NRF National Retail Federation SKU Stock-‐keeping unit DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 3
EXECUTIVE SUMMARY WINNERS IN THE FLIGHT TO BUDGET RETAILERS • Small-‐store, limited-‐line grocery discounters have been among the winners in postrecession retail, benefiting from shoppers’ flight to budget stores in Europe, the US and Australia. • International expansion and a newfound flexing of the proposition by discounters have underpinned their outperformance of the grocery sector. • The top nine discount chains that are the focus of this report have grown their aggregate sales by more than the combined total European and US grocery sector average for the past five years. THE WORLD’S TOP GROCERY RETAILERS • Schwarz Group and Aldi are the biggest discounters, and they are among the biggest retailers in the world. Sales figures released by Lidl and Kaufland owner Schwarz Group suggest that it leapfrogged Tesco to become the world’s third-‐biggest grocer in 2014. • Note that Walmart’s revenues include a very substantial element of nongrocery: some 44% of fiscal year 2015 sales were in nongrocery categories. Figure 1. The World’s Biggest Grocery Retailers’ Net Revenues, 2014 and 2013 (€ Billion) 371.1 357.9 Walmart Kroger 81.7 74.1 Schwarz (Lidl and Kaufland) 79.3 74.0 Tesco 78.4 75.1 Carrefour 76.3 76.7 2014 2013 63.9 64.0 Seven & i Holdings 60.8 58.2 Aldi Group (Est.) 0 50 100 150 200 250 300 350 400 Source: Company reports/S&P Capital IQ/Euromonitor/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 4
• Lidl and Aldi operate in a different league than their closest discounter rivals. Both are privately owned and disclosure is limited or negligible. Profit data, for instance, is not available. Figure 2. Top Discounters: Net Revenues, 2014 (€ Billion) 90 79.3 80 Kaufland 20.3 70 60 50 40 Lidl 59.0 30 60.8 8.4 DIA Biedronka 7.1 5.9 5.5 Neto (Est.) 9.4 REMA 1000 10.9 Trader Joe's (Est.) 12.0 Penny Schwarz Group 0 Aldi (Est.) 10 Neto Marken-‐Discount 20 Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology • Europe’s biggest nondiscount grocers are Tesco and Carrefour, and they remain bigger than any single discounter fascia. While these two posted sales declines between 2012 and 2014, major discounters gained ground. • Of the major discounter fascias discussed in this report, just one (soft discounter Penny) turned in revenue growth of under 6% for 2012–14. Figure 3. Top Discounters vs. Tesco and Carrefour: 2014 Revenues and % Change in Revenues, 2012–14 90 Tesco € Billion Revenues, 2014 80 Schwarz (total of Lidl and Kaufland) Carrefour 70 Aldi Lidl 60 50 40 30 Kaufland Neto Penny Marken-‐Discount DIA REMA 1000 20 10 Trader Joe's Biedronka 0 -‐5 0 5 10 15 20 25 30 % Change in Revenues, 2012-‐14 Growth rates are in euro terms, except for Trader Joe’s (which in US dollars), Biedronka (which is in Polish zlotys) and REMA 1000 (which is in Norwegian kroner). Growth rates for DIA strip out the effects of divestitures of operations in Turkey; Beijing, China; and France. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 5
“SOFT-‐HARD DISCOUNT” IS THE NEW WINNING FORMULA • In the top tier of discounters, Lidl has been a star performer in recent years. We think this retailer’s success principally stems from its adept mingling of hard discount with elements of a softer proposition, such as more SKUs, more brands and more fresh foods. • It is a contradiction in the sector that although shoppers have not been flocking to the softer-‐end discounters, they have been rewarding those hard discounters that have made steps toward the midmarket. • Adaptation of the discount model is in part a necessary reaction to greater internationalization: big players have realized that they need to show greater flexibility in order to grow in newer markets. In some countries, such as France and Italy, these changes have been forced on discounters by shopper indifference to uncompromising hard-‐discount models. • These changes are likely to be piling on extra costs, but the biggest discounters, which are privately owned, seem prepared to make sacrifices on margins to drive top-‐line growth. This is bad news for publicly traded nondiscount rivals whose shareholders may be less accepting of margin depletion as the price for long-‐term growth. PREVIOUS PERFORMANCE SUGGESTS BIG GAINS AHEAD • Discounters’ global expansion continues apace, with Lidl preparing to move into the US and possibly Australia, and Aldi set for Italy and maybe China, too. • Projections based on historic growth rates suggest the top nine discount chains will grow their annual sales by an extra €79 billion, or 41%, between 2014 and 2020. • Sales of the nine biggest chains will climb from €194 billion in 2014 to €273 billion in 2020, meaning these retailers will account for just about 14% of European grocery sector sales in 2020, up from about 12.5% in 2014. • Schwarz Group is expected to add €43 billion to its annual sales in the period 2014-‐20, while Aldi will add an extra €20 billion in annual sales. • These forecasts assume CAGRs seen in the five years to 2014 will be seen in the forecast period. Figure 4. Revenue Projections for Top Discounters, and Schwarz Group and Aldi (€ Billion) 300 273 Top Nine Discounters 258 243 Schwarz Group and Aldi 250 230 217 200 175 155 194 163 150 109 186 205 115 123 132 140 149 203 158 168 179 190 100 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Top discounters = the sum of Lidl, Kaufland, Aldi, Netto Marken-‐Discount, Penny, Biedronka, DIA, Trader Joe’s and REMA 1000. Projections based on CAGR in euro-‐
denominated aggregate revenues, 2009–14. Some data estimated. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 6
WILL GROWTH BE MAINTAINED? • These forecasts take the optimistic assumption that discounter growth will hold steady. This, in turn, assumes that a growing proportion of international consumers will be willing to make the compromises associated with shopping at limited-‐range discounters. • But as shoppers in the West continue to benefit from economic recoveries, and as consumers in emerging markets reap the fruits of economic expansion, we think a big question hanging over discounter growth is: Will shoppers want to switch to an easier path of one-‐stop shopping once they feel better off? • In the medium term, we believe discounters may lose share of some national grocery sectors as consumers switch to more convenient shopping channels such as full-‐range stores and online. In particular, consumers in countries where one-‐stop shopping is traditional may migrate back to more convenient channels. And a boom in grocery e-‐commerce is a particular threat, given the mismatch between the discount model and selling online. A FUTURE OF SMALLER BASKET SIZES AND LOWER MARGINS? • In those markets where discounters will continue to grow share, we think competing retailers face a future of smaller average basket sizes and lower margins. The limited choice at discounters encourages consumers to split their shopping across several types of retailers or channels—they turn to other stores to buy the products and brands they could not get at the discount stores. • The resulting fragmentation of grocery spending is a threat for those retailers—such as big-‐box chains—that have built businesses on serving large-‐basket customers. • Meanwhile, more nondiscount grocery retailers will be forced to accept lower margins, in markets where discounters gain share fast. Evidence from several markets suggests that sharpening prices is the best way to stem loss of share to discounters, but this chips away at profitability. • Margin depletion will not be confined to the nondiscount retailers. As they become engaged in price wars, the likes of Aldi and Lidl will probably see profit margins squeezed. The major difference is that their private ownership gives them greater scope to make further investments in price. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 7
PROSPECTS: A SMALLER BASKET, LOWER MARGIN FUTURE? THE FUNDAMENTAL QUESTION DETERMINING FUTURE GROWTH Shopping at discounters can be a hassle. Given the unusually limited choice at these stores, shoppers have to make do with the products they are offered or buy what they can before going elsewhere to do a top-‐up shop for the brands and products they could not get at the discounter. So, an optimistic forecast for discounters must assume that a growing proportion of shoppers worldwide will be happy to make these compromises. As shoppers in the West continue to benefit from economic recoveries, and as consumers in emerging markets enjoy the rewards of economic growth, the big question hanging over discounter growth is: Will shoppers want to switch to an easier path of one-‐stop shopping, whether from full-‐range stores or online, once they feel better off? We think there is a real medium-‐term possibility that discounters will begin to lose share in regions where consumers choose more convenient options, whether in store or online. In particular, a sustained boom in grocery e-‐
commerce, which fits poorly with the no-‐frills discount model, would be a threat to future growth. €273
billion
The top nine discount chains will generate annual sales of around €273 billion in 2020, we estimate, up 41% from 2014 levels.
We have already seen hypermarkets fight back successfully in France, which strengthens our view that this threat to discounter growth is likely to be greatest in those countries where consumers have traditionally opted for one-‐stop shopping and in those where Internet grocery shopping is proving popular for similar reasons of convenience. FUTURE SECTOR SALES: MARKET SHARE GAINS Despite the clouds we see on the horizon, substantial market share gains look probable on an international level in the short-‐to-‐medium term. Extrapolating from historic growth rates, the top nine discount chains will generate annual sales of around €273 billion in 2020, we estimate, up fully 41%, or €79 billion, from 2014 levels. By 2020, the biggest discounters will account for around 9.5% of European and US grocery sales, up from approximately 8.5% in 2014, these projections suggest. A fairer representation is, perhaps, their share of European grocery retail only, given that the discounters still generate the lion’s share of their revenues in Europe. By this measure, the top discounters will account for nearly 14% of sector sales by 2020, up from 12.5% in 2014. Our forecasts assume that future CAGRs will match those seen in the five years through 2014 and be consistent for the years through 2020. Our data is for the aggregate sales of the top nine discount fascias. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 8
Figure 5. Top Discounters: Total Sales and Sales Represented as Share of Combined US and European Grocery Sectors and Share of European Grocery Sector 400 300 11.1 11.4 € Billion 250 200 7.5 7.7 11.9 8.0 12.3 8.3 12.5 8.5 12.8 8.7 13.1 8.9 13.3 9.0 9.2 155 13.9 16 14 9.4 9.5 12 10 8 150 100 13.7 163 175 186 194 205 217 230 243 258 273 50 % 350 13.5 6 4 2 0 0 2010 2011 € Billion 2012 2013 2014 2015E 2016E Share of US and European Grocery 2017E 2018E 2019E 2020E Share of European Grocery Top discounters = the sum of Lidl, Kaufland, Aldi, Netto Marken-‐Discount, Penny, Biedronka, DIA, Trader Joe’s and REMA 1000. Includes a small element of revenues from outside Europe and the US—for instance, Aldi in Australia and DIA in Brazil. Forecasts based on CAGR2010-‐14 in euro-‐denominated aggregate revenues. Some data estimated. Shares of European and US grocery sectors based on sector sales denominated at constant exchange rates. European grocery sector size includes Russia. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology A market share in the region of 10%–14% may sound marginal, but this is in a relatively fragmented market where national players remain strong. Moreover, as we note elsewhere in this report, discounters have substantially impacted markets such as the UK’s, despite taking a sub-‐10% market share: because grocery retail is highly volume sensitive, even a minor loss of share can have a disproportionate effect on profitability. 10%
Discounters have substantially impacted markets such as the UK’s, despite taking a sub-‐10% market share.
FRAGMENTATION OF SPEND IN GROCERY SHOPPING If discounters continue to gain ground in Western markets such as the US, Australia and the UK, we expect to see a fragmentation of grocery spend as consumers split their shopping among a repertoire of channels. When supermarkets lose market share to discounters, it is not as simple as losing customers: the limited choice at discount stores means they steal share of basket more than they steal shopper numbers. Customers at Aldi and Lidl will typically need to make a trip to a regular supermarket to buy the products and brands they cannot get at the discounters and, in many cases, they will stick with the supermarket that they switched some of their shopping from. And new opportunities open up for specialist stores, such as beauty and personal care specialists, as shoppers look to buy the brands they cannot get at Aldi or Lidl. So, greater shopping at discounters fuels the trend for repertoire shopping that is growing in markets such as the US and the UK. In these countries, consumers are increasingly mixing channels—convenience, superstore and online, as well as discount—and if more shoppers migrate to discounters, this will only increase. This fragmentation is a threat for those nondiscount DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 9
retailers that have built businesses on serving large-‐basket customers, and will potentially dent the profitability of big-‐box retailers. Figure 6. Potential Fragmentation in Mature Grocery Markets PROSPECTS
PREVIOUSLY
Grocery
Discounters
Convenience
Stores
BIG-BASKET SHOPPING
AT BIG-BOX STORES
SUPERSTORES/
SUPERMARKETS
online
NONFOOD
DISCOUNT
STORES
SPECIALTY
STORES
Source: FBIC Global Retail & Technology Slimmer margins are a likely outcome in markets where discounters gain ground.
MARGIN ATTRITION IN A BATTLE FOR SHOPPERS Slimmer margins are a probable outcome in markets where discounters gain ground. Charted below is the kind of effect discounters can have on the margins of nondiscount rivals. Figure 7. Selected UK Grocers’ Operating Margins 7 6 5 % 4 3 2.9 2 1.7 1 Tesco Sainsbury's Morrisons 0 (0.50) (1) 2010 2011 2012 2013 2014 Source: S&P Capital IQ The data above is for three of the big UK grocery retailers; each has posted declining comps, fueled by the rapid growth of Aldi and Lidl in the UK market. This has prompted a spate of price cutting in a bid to capture shoppers. But the combination of lost sales and investment in price has come at considerable cost to margins for Tesco, Sainsbury’s and Morrisons. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 10
It may seem obvious, but sharpening of prices is the key weapon against discounters. As we have seen in countries such as Ireland and France, as well as the UK, attempts at differentiated propositions do not typically help nondiscount retailers regain market share in the way simple price cuts do. Accordingly, we expect to see attrition of margins at established retailers wherever discounters achieve similarly rapid growth. BUT LOWER MARGINS FOR DISCOUNTERS, TOO Margin depletion will not be confined to the nondiscount retailers, we expect. As discounters move to undercut the reduced prices of their rivals, profit margins will probably be squeezed at the likes of Aldi and Lidl. Apparently confirming this, Aldi UK & Ireland’s margins fell from 5.1% in 2013 to 3.8% in 2014. We expect to see attrition of margins at nondiscount retailers where discounters achieve rapid growth.
Moves to soften the discount proposition are a threat to margins in the discount sector.
At the same time, strategic moves to soften the discount proposition are, we think, a threat to margins in the discount sector. A number of discount retailers are compromising their hard-‐end positioning to adapt to increasingly diverse shopper demands. Discounters face squaring these shoppers’ demands with their traditional model of minimizing operating costs. It seems inescapable that expanding ranges and softening the proposition, as well as tailoring offerings to individual markets, will add extra costs to their businesses. The distinction between the discount and nondiscount chains is likely to be the willingness to sacrifice margin for long-‐term growth. Unfortunately for nondiscount rivals, the biggest, privately owned discounters will probably be more ready to make sacrifices in the bottom line in order to drive market share gains. Those nondiscount retailers that answer to shareholders will find it a hard fight. In short, our warning is this: For retailers in countries where discounters will continue to grow share, the future of grocery shopping looks to be one of smaller average basket sizes and lower margins. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 11
OVERVIEW: THE STATE OF THE SECTOR WINNERS IN THE FRAGMENTATION AWAY FROM THE MIDMARKET Across retail sectors worldwide, middle-‐ground stores have been squeezed by shoppers flocking to both budget retailers and more premium names. We have seen off-‐price, budget and upscale retailers flourish and, in a number of markets, grocery discounters have played a part in this fragmentation away from midmarket retail. 33%
The top nine discount chains added an estimated 33% in annual sales over five years.
Major discount retailers seized the opportunity of the downturn to grow their international store networks and steal share of shoppers’ baskets from more established, nondiscount players. A greater willingness among some discounters to tailor their proposition to market further contributed to their success; it is not simply that shoppers have been trading down, but that discounters have been trading up. OUTPACING THE GROCERY SECTOR The biggest discounters have, in aggregate, outpaced grocery sector growth in Europe and the US (combined) in each of the past five years, we estimate. The top nine discount chains, which are the basis for our sector growth rates, generated sales of €194 billion in 2014, having added an estimated €48 billion, or 33%, in annual sales over five years. Figure 8. YoY % Change: Schwarz Group and Aldi Revenues (Est.) vs. All Top Discounters’ Revenues (Est.) vs. Total Europe and US Grocery Retailers’ Sales 7.3 8 6.1 5.3 6 5.5 % 7.0 7.5 6.4 6.0 4.2 5.2 4 2.7 2.7 2.0 2.6 2.1 2 Schwarz Group and Aldi Total Europe & US Grocery 0 2010 2011 2012 Top Nine Discounters 2013 2014 Top discounters = the sum of Lidl, Kaufland, Aldi, Netto Marken-‐Discount, Penny, DIA, Biedronka, Trader Joe’s and REMA 1000. Growth rates for the top discounters denominated in euros. Some data estimated. Total Europe and US grocery growth denominated at constant exchange rates. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology Lower growth was a trend seen across a number of discounters in 2014, resulting in a narrowing of the gap between the discount sector’s growth and total grocery growth. This lower growth was in the context of lower food-‐price inflation, or deeper deflation, in some key markets, such as Germany and Poland. Currency effects were another drag on euro-‐denominated growth, particularly for Norway’s REMA 1000. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 12
Germany’s Aldi is estimated to have dragged down growth in 2014, as sales performance in its domestic market proved sluggish. Aldi Nord, one half of the Aldi Group, turned in meager, 0.4% sales growth in Germany in 2014. NOT A RISING TIDE THAT LIFTS ALL BOATS Despite the sector’s outperformance, discount is not a rising tide that lifts all of the sector’s retailers. It is a mistake to view discounters as an across-‐
the-‐board growth channel, and such a view glosses over the nuances in the sector and what is drawing in shoppers. 2014
In 2014, Biedronka, REMA 1000 and Aldi were among the stronger performers, but Lidl won the day, helped by investment in refurbished stores, portfolio expansion and new store formats. We identify the discount underperformers in more detail elsewhere, but it is worth noting that Penny and DIA have tended to lag their rivals. Both of these chains are at the softer end of the discount scale, operating what are closer to conventional supermarkets than the stores their peers operate. More conventional hard-‐discount players have tended to perform better. In 2014, Biedronka, REMA 1000 and Aldi were among the stronger performers, but Lidl won the day, helped by investment in refurbished stores, portfolio expansion and new store formats. We think Lidl’s success principally stems from its adept mingling of hard discount with elements of a softer proposition, such as more SKUs, more brands and more fresh foods. It is a contradiction in the sector that, while shoppers have not been flocking to the softer-‐end discounters, they have been rewarding those hard discounters that have made steps toward the midmarket. Lidl is the architect of this soft-‐hard discount proposition. Figure 9. Schwarz Group and Aldi: YoY % Change in Revenues 10 9.5 9 7.9 8 7.4 7.2 7 6.7 % 6 6.0 5.1 5 4.5 4.3 4 3 2.9 Schwarz Group 2 Aldi 1 0 2010 2011 2012 2013 2014 Source: Company reports/Euromonitor/FBIC Global Retail & Technology Aldi has made similar adaptations to its offers in recent years, albeit from a harder-‐discount starting position. It has been rewarded with impressive top-‐
line growth in a number of those years, although growth has slowed more recently, according to estimates from Euromonitor and data from Aldi Nord. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 13
SOFT-‐HARD DISCOUNT IS THE NEW WINNER Hard discounters are growing fast, yet hard discount is falling out of fashion. Instead, chains across the discount spectrum are moving toward a more middle-‐ground proposition, and we are seeing the broad emergence of what we term “soft-‐hard discount”. In-‐store bakeries, enhanced fresh foods, more branded lines, more SKUs in total, bigger average store sizes, longer opening hours and more payment options are among the improvements made by chains such as Aldi (Nord and Süd), Lidl, Biedronka, Netto Marken-‐Discount and Penny. And innovations continue apace: Biedronka is planning new urban store formats; Aldi and Lidl have moved into convenience-‐style formats in the UK; and Lidl is opening larger stores in France. Each step toward the midmarket represents a move away from the economies of hard discount.
These changes are in part a necessary reaction to greater internationalization. Big players such as Aldi have realized that they need to show greater flexibility in order to grow in newer markets. Yet hard discount is based on driving down operating costs and passing on the savings to shoppers. So the risk is that each of these steps toward the midmarket represents a move away from the economies of hard discount—and a consequent addition of extra costs. Possibly the biggest risk to the hard-‐discount model is the range creep that we have seen. Lidl, for example, now offers up to 1,700 SKUs. The primary economy that discounters have traditionally enjoyed is funneling shoppers’ purchases through a very narrow range of goods, resulting in very high sales volumes per SKU. A relentless increase in ranges threatens to diminish this advantage, and suggests that the biggest discounters could be counting the cash at some cost to margins. Private ownership of the biggest chains, Aldi and Lidl, and their consequent freedom from the pressures of shareholders, is likely to be making such sacrifices easier. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 14
The operating margins of discounters generally compare well to those of big, nondiscount rivals.
IS DISCOUNT LESS PROFITABLE THAN NONDISCOUNT? Whether compromises to the hard-‐discount ethos are hitting profitability at the largest discounters is a big unknown. The preponderance of private ownership in discount retailing means there is limited reliable data on profitability and margins. We do have some indications from the sector on operating margins, though, including for Netto, DIA and REMA 1000. We also have data for the UK and Ireland subsidiary of Aldi, although since it is a subsidiary, the data should be treated with some caution. Aldi UK & Ireland’s margins slid from 5.1% in 2013 to 3.8% in 2014, in the context of a grocery price war. The operating margins of these discounters generally compare well to those of big, nondiscount rivals such as Walmart, Carrefour and Tesco. Figure 10. Selected Discounters and Nondiscounters: Operating Margins, 2014 6 5 5.3 4.2 4.0 % 4 3.8 3.7 3.0 3 2 1 (0.5) Tesco Carrefour Walmart REMA 1000 Aldi UK & Ireland* DIA Neto/Dansk Supermarked** 0 (1) *Aldi UK & Ireland is a subsidiary company, so operating margins should be treated with caution. **Data is for Dansk Supermarked group; we estimate Netto for the majority of Dansk Supermarked revenues. Source: Company reports/S&P Capital IQ/FBIC Global Retail & Technology The numbers suggest discount retailing is not inherently lower-‐margin than regular grocery retailing, and that price competitiveness is not achieved at the cost of retailers’ own margins. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 15
IMPACTING THE COMPETITION In a number of international markets, discount chains continue to be the scourge of nondiscount grocery retailers. In countries including Ireland and the UK, Aldi and Lidl have hit major domestic players hard, prompting grocery price wars and sector upheavals. Aldi and Lidl are still minor players in the UK, with a combined 2015 (to date) grocery market share of less than 10%, but it is hard to overstate their impact. 10%
Aldi and Lidl are still minor players in the UK, with a combined 2015 (to date) grocery market share of less than 10%, but it is hard to overstate their impact.
These discounters have hobbled grocery market leader Tesco, spurred second-‐place Sainsbury’s into a joint venture with discounter Netto, caused third-‐place Asda to recently post quarterly comps of (5)% and brought fourth-‐biggest grocer Morrisons to its knees. In a state of increasing desperation, Morrisons long ago scrapped future plans for openings of full-‐
size supermarkets, and it now looks to be abandoning its foray into the convenience channel—conventionally considered a growth channel. In the face of attrition of share to Aldi and Lidl, Morrisons is struggling badly. Aldi and Lidl have forced the big British grocers to move much further toward everyday low prices and away from the high/low promotions that traditionally dominated sector pricing. Margin attrition and sector deflation have accompanied falling sales as the big British chains have sought to win back price-‐sensitive shoppers. These are cautionary tales for established grocers in markets such as the US and Australia, which are seeing discounters expand and new names enter their markets. THREATENING A SPIRAL OF DEFLATION Charted below is one effect discounters can have on grocery markets: in the UK, food prices have been in negative territory since mid-‐2014, due principally to price competition among nondiscount supermarkets desperate to win back shoppers from Aldi and Lidl. We have seen similar deflationary effects in Ireland and, to a lesser extent, in France. Figure 11. YoY % Change in Consumer Prices for Food and Nonalcoholic Beverages, Selected Countries, January 2013-‐June 2015 6 UK France Ireland 4 % 2 0 (2) (4) 2013 2014 2015 Source: Office for National Statistics/Eurostat As British shoppers flocked to the discounters, market-‐leading nondiscount competitors, including Tesco and Morrisons, at first insisted they could compete through differentiation. But as the loss of market share to Aldi and DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 16
Lidl only worsened, the British grocery retailers caved in and started competing more aggressively on price. Sector deflation has been the natural result. A grocery price war has ensued in France, too, though the picture is more complex there, with big groups such as Leclerc and Carrefour waging war with each other as much as with the discounters. Yet the presence of Aldi and Lidl—with a combined total of nearly 2,400 stores in France in 2014—
undoubtedly added some fuel to the fevered price competition. Sharper pricing looks to be easing the attrition of share among major nondiscount retailers.
And, in Ireland, nondiscount grocers have been forced to tackle Aldi and Lidl head on, such as through price matching, contributing to deflation in the market. Source: Tesco Ireland As of August 2015, Lidl was present in 28 countries and Aldi in 17.
The deflationary effects of price wars make regaining top-‐line momentum even harder. Yet sharper pricing in these markets does look to be having the desired effect, easing the attrition of share among major nondiscount retailers. The apparent lesson for retailers elsewhere is, in the face of shopper demand for no-‐frills stores, a switch to everyday low prices stands a much better chance of success than claiming value through differentiation. PROSPECTS FOR NEW MARKETS Expansion into new markets has bolstered top-‐line growth at Aldi and Lidl. As we noted above, this global expansion has been a factor driving the flexing of their hard-‐discount model. As of August 2015, Lidl was present in 28 countries and Aldi in 17. Given the disruption Aldi and Lidl have caused in a number of markets, which countries’ retailers should brace for further international ventures by them? Western Markets Lidl is reportedly planning to enter Australia, and it has confirmed an entry into the US by 2018, although press reports rumor an earlier launch. We think Lidl will likely do well in these markets, given that Aldi has already grown rapidly in both. Moreover, both countries are served by Aldi Süd, which has a slightly softer positioning—with bigger stores, more fresh foods and more brands—than its sister company Aldi Nord. Lidl is softer positioned still, so it could attract more Australian and American consumers to the discount channel as well as win some at the expense of Aldi. In the US, Aldi and Trader Joe’s have each been growing market share at roughly 10 basis points or more per year. Extrapolating from this, and DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 17
assuming Lidl enters the market before 2018, suggests that these three discounters could be taking just over 5% of the US grocery sector by 2020. Figure 12. Estimated Share of US Grocery Sector for Aldi, Trader Joe’s and Lidl 6 5 Aldi Trader Joe's Lidl 5%
Assuming Lidl enters the market before 2018, Aldi, Trader Joe’s and Lidl could collectively be taking just over 5% of the US grocery sector by 2020.
% 4 2.2 3 2 1 1.4 1.6 1.7 1.3 1.3 1.4 1.6 1.7 1.8 1.9 2.0 2.1 2010 2011 2012 2013 2014 2015E 2.6 0 2020E Source: NRF/Census Bureau/FBIC Global Retail & Technology Elsewhere, Aldi is reported to have plans to open in Italy. It may find strong demand from hard-‐pressed shoppers in some regions, and it may enjoy an opportunity to help consolidate a relatively fragmented grocery sector. But it will also see strong competition in the discount segment from Lidl and Penny, and it may see tepid demand in some areas, a trend that has prompted Lidl to close some of its Italian stores. Eastern Europe Lidl is scheduled to open in Serbia in 2015, and its sister chain, the discount hypermarket fascia Kaufland, has been rumored to be launching there, too. These moves are indicative of Schwarz Group’s more ambitious European expansion, compared to Aldi’s. From Bulgaria to Slovakia, swathes of fast-‐
developing Eastern Europe have been tapped by Schwarz, while Aldi has ventured into only three Eastern European countries—Poland, Slovenia and Hungary. Aldi Austria is now reportedly looking to extend into neighboring Slovakia, and we think there are a number of markets in this region where there is potential for major discounters such as Aldi and Biedronka to venture beyond their current presence. China Meanwhile, Aldi Süd is reported to be considering an entry into China, with media indicating that Aldi’s company committee has declared a market entry feasible. We expect Aldi Süd to adapt its proposition to regional tastes in any Chinese venture.
A number of global grocery chains have found China a tough market to crack. In large part, this is because the big-‐box format holds limited appeal for Chinese shoppers who live in small, urban homes and, therefore, prefer to shop frequently for small quantities of groceries. The smaller-‐store format of Aldi could well accommodate this demand, although Aldi would still need to cater to local demands, such as by providing greater selections of fresh foods. Elsewhere in the world, Aldi Süd has already shown a willingness to adapt its proposition to regional tastes, so we expect to see similar flexibility in any Chinese venture. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 18
METRICS: THE BIGGEST GROCERY DISCOUNTERS REVENUES AND GROWTH Figure 13. Top Discounters: Net Revenues (€ Billion) 2012 2013 2014 % Chg., 2012–14 Schwarz Group 67.60 74.00 79.30 17.3 Lidl 48.90 54.30 59.00 20.7 Kaufland 18.70 19.70 20.30 8.6 Aldi (Est.) 55.34 58.17 60.78 9.8 Netto Marken-‐Discount 11.26 11.76 12.02 6.4 Penny 10.67 10.83 10.86 1.8 DIA* 11.68 11.48 9.40 -‐19.5 Biedronka 6.73 7.70 8.43 25.3 Trader Joe’s (Est.) 6.10 6.29 7.07 15.9 REMA 1000 5.52 5.85 5.94 7.7 Netto (Est.) N/A N/A 5.50 N/A 174.90 186.08 193.80 10.8 Total of the Above** *DIA figures are unadjusted, and so include the effects of its divestiture of Turkish and Beijing operations in 2013 and French operations in 2014. **Excluding Netto, for year-‐over-‐year comparability. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology In growth terms, Lidl has far outpaced Aldi in recent years. Secretive Aldi tends to disclose some sales figures for its home market of Germany, but does not release global revenue data. Our figures for Aldi are based on Euromonitor estimates. We estimate that the major European discount groups grew aggregate s ales by nearly 11%, to €194 billion, in 2014. Exchange rates can distort euro-‐denominated growth at some retailers—notably Biedronka, Trader Joe’s and REMA 1000. Figure 14. Top Discounters: YoY % Change in Net Revenues, 2014 Trader Joe's (Est.) 12.4 Biedronka 9.1 REMA 1000 8.8 Lidl (Schwarz) 8.7 Aldi Group (Est.) 4.5 Kaufland (Schwarz) 3.0 Neto Marken-‐Discount 2.2 -‐18.1 DIA (unadjusted)* DIA (adjusted)* 1.1 Neto/Dansk Supermarked** 0.4 Penny 0.2 -‐20 -‐15 -‐10 -‐5 % 0 5 10 15 Growth rates are in euro terms, except for Trader Joe’s (which in US dollars), Biedronka (which is in Polish zlotys), REMA 1000 (which is in Norwegian kroner) and Netto/Dansk Supermarked (which is in Danish kroner). *DIA unadjusted figures include the effects of its divestiture of Turkish and Beijing operations in 2013 and French operations in 2014. DIA adjusted figures strip out divested businesses to present growth on a pro-‐forma basis. **Figures are for Dansk Supermarked in total, although Netto is estimated to account for a large majority of Dansk Supermarked total revenues. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 19
Soft-‐hard discount has appeared to win shoppers in the recent past. Lidl pioneered this model, with more brands, more SKUs overall and larger stores, and it looks to have won over shoppers. Given Lidl’s forthcoming entry into the US market and its reported consideration of a launch in Australia, established retailers in those markets must be ready to fight for market share. Relative to Lidl, Aldi’s growth disappointed in 2014, according to estimates, pulled down by softer growth in its domestic market. But this came after a stronger 2013, when Aldi grew total sales by 5.1% as store refits and replacements, more brands, and broader fresh food ranges at Aldi Nord helped bolster its performance. Our growth figures for Trader Joe’s are based on revenue estimates from the National Retail Federation. Figure 15. Schwarz Group and Aldi: Estimated Growth (€ Billion) 140 122.0 113.5 120 100 80 59.8 63.3 79.3 74.0 67.6 85.2 60 40 49.4 51.5 2010 2011 55.3 58.2 60.8 2012 2013 2014 63.7 91.5 66.8 98.3 105.7 73.4 70.0 76.9 80.6 20 2015E 2016E 2017E 2018E 2019E 2020E Schwarz Group Aldi Estimates for the period 2015-‐20 are based on estimated CAGRs 2010-‐14 Source: Company reports/S&P Capital IQ/Euromonitor/FBIC Global Retail & Technology Based on estimated average annual growth rates for the five years to 2014, Schwarz Group is expected to add €43 billion to its annual sales in the period 2014-‐20, while Aldi will add an extra €20 billion in annual sales. To place the figures in context, in 2014, Carrefour posted revenues of €76 billion, Tesco reported turnover of €78 billion and Kroger saw sales of €82 billion. Figure 16. Top European Discounters: Sales Represented as Share of European G rocery Retail Sales, 2014 6 5.1 5 % 4 Kaufland 1.3 3 2 Lidl 3.8 3.9 1 0 Schwarz Group Aldi (Est.) 0.8 0.7 0.6 0.5 0.4 0.4 Neto Marken-‐Discount Penny DIA Biedronka REMA 1000 Neto (Est.) European grocery sector size includes Russia. Source: Company reports/S&P Capital IQ/Euromonitor/FBIC Global Retail & Technology On a continent-‐wide basis, European grocery is still relatively fragmented, which is why even big discounters such as Schwarz Group take only a few percentage points of European market share. All of the biggest discounters originate from Europe, and the lion’s share of their sales continue to be generated there, despite ventures into the US, Australia, Brazil, Argentina and China. So, European grocery sector sales are the most relevant benchmark for market-‐share estimates. We exclude Trader Joe’s here as it trades solely in the US. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 20
Figure 17. Top Discounters: Est. Share of National Grocery Sector Sales, Selected Countries (%) Germany—Aldi 2012 2013 2014 13.5 13.6 13.5 Figure 18. Top Discounters: Store Numbers Absolute Change, 2014 2012–14 2012 2013 11,082 11,014 11,185 10,003 9,876 10,006 3 1,079 1,138 1,179 100 Aldi 9,694 9,778 9,937 243 Netto Marken-‐Discount 4,106 4,150 4,168 62 Schwarz Group Lidl 103 Germany—Lidl 8.9 9.2 9.3 France—Aldi 1.7 1.7 1.7 France—Lidl 3.6 3.5 3.5 UK—Aldi* 3.1 4.1 5.3 Penny 3,561 3,544 3,540 -‐21 UK—Lidl 2.2 2.6 3.1 DIA 6,914 7,328 7,306 392 US—Aldi 1.8 1.9 2.0 Biedronka Kaufland US—Trader Joe’s 1.4 1.4 1.6 *Market share is slightly overstated, as it is based on revenues that include Ireland. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/national statistics offices/FBIC Global Retail & Technology 2,393 2,587 462 395 410 447 52 REMA 1000 737 776 800 63 1,210 1,271 1,304 94 Netto Source: Company reports/Euromonitor/NRF/FBIC Global Retail & Technology Aldi is marginal in France. We think this is in part because the country is served by Aldi Nord, whose traditional stance has been uncompromising hard discount (although this is now evolving). This appears not to have resonated with French shoppers. French indifference to discounters has also prompted Lidl to start opening bigger stores in the country, in order to serve more conventional, bigger-‐basket shopping. 2,125 Trader Joe’s Total store portfolio growth has actually been very modest at Lidl, according to Euromonitor data. France, Italy and Germany have seen some Lidl store closures in response to pockets of weak demand. DIA’s store numbers have increased despite the company having offloaded its networks in Turkey and Beijing in 2013 and in France in 2014. The acquisition of a tranche of former Schlecker drugstores in Spain and Portugal in late 2012 boosted store numbers. Figure 19. Top Discounters: YoY % Change in Annual Sales per Store, 2014 Major portfolio expansion can bolster top-‐line performance. Sales per store can be a better guide to underlying growth, and this metric confirms the buoyant demand for Lidl and Aldi. The data also suggest the extent to which Biedronka’s impressive sales growth has been driven by new store openings. With Biedronka’s comps turning negative in 2014, the company is now focusing on improving same-‐store sales growth. Trader Joe's Aldi Nord has been replacing some smaller stores with larger stores. Lidl, too, has been opening some larger stores in France, Italy and the UK. These bigger outlets should bolster the average s ales-‐per-‐store metric. 3.2 Neto Marken-‐Discount 1.5 0.5 Penny -‐0.9 Biedronka Kaufland -‐1.4 DIA* -‐20.3 -‐16 under -‐12 banner. -‐8 -‐4 0 4 8 *DIA using g-‐20 ross sales figures were calculated -‐24 Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology 20. Top Discounters: Annual Sales per Store (€ Thou.) Figure 2012 2013 2014 % Change, 2012–14 4,964 5,463 5,935 19.6 Kaufland 17,642 17,772 17,523 -‐0.7 Aldi (Est.) 5,767 5,975 6,166 6.9 Netto Marken-‐Discount 2,768 2,848 2,890 4.4 Penny 2,945 3,049 3,065 4.1 DIA* 1,699 1,612 1,285 -‐24.4 0.6 Lidl Biedronka This metric highlights the extent to which Kaufland and Trader Joe’s are outliers in the world of discounters. 4.4 Aldi Underlying growth at Lidl has been extraordinary, with a jump of nearly 20% in average sales per store in two years. 5.6 REMA 1000 Although we have used sales data and store data that are consistent with each other, the figures for DIA have been skewed by its recent disposal of its Turkish, Beijing and French stores. Growth rates are in euro terms, except for Trader Joe’s (which is in US dollars), Biedronka (which is in Polish zlotys) and REMA 1000 (which is in Norwegian kroner). 8.6 Lidl 3,367 3,410 3,386 15,832 15,625 16,504 4.2 REMA 1000 7,619 7,735 7,543 -‐1.0 Netto (Est.) N/A N/A 4,250 N/A Trader Joe’s (Est.) *DIA figures calculated using gross sales under banner. Source: Company reports/S&P Capital IQ/Euromonitor/NRF/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 21
SALES PER SKU Channeling high volumes through a narrow range of SKUs is at the heart of discount retailing. As SKU counts have crept up across the board, from hard-‐
end Aldi Nord to softer-‐positioned DIA, there has been some compromise in this ethos. The introduction of multiple tiers of own brands as well as third-‐
party brands has diluted the channeling of volumes. Yet, relative to nondiscounters, the ranges are still highly limited, and this continues to result in very high sales per SKU. €51
million
Aldi saw annual sales of around €51 million per SKU (based on an average 1,200 SKUs)
Based on average estimated SKUs per store in 2014, we offer the basic calculations that: • Aldi saw annual sales of around €51 million per SKU (based on an average 1,200 SKUs) • Lidl generated sales of around €35 million per SKU (based on an average 1,700 SKUs). Note that these figures are based on SKUs per store at any one time, and are not adjusted for the substantial number of rotating special deals offered, which, over the course of a year, push up total annual SKU numbers. We also have included Aldi’s typical SKU count only once: we did not split out Aldi Nord’s and Aldi Süd’s distinct own brands separately, largely because these appear to be sourced in aggregate and so are fundamentally the same products. GLOBAL PRESENCE Germany is the heartland of grocery discounters. It is the home of the majority of the discounter groups we cover in this report, including the very largest Schwarz Group and Aldi. Such is the scale of the German sector that Netto Marken-‐Discount has become the world’s third-‐largest discounter, with a presence only in Germany. Elsewhere: Aldi Süd has been more internationally ambitious than Aldi Nord.
• Schwarz Group has expanded more aggressively into Eastern European markets than rival Aldi has. Lidl is planning a US venture, and is reportedly considering a move into Australia. The chain is expected to open its first Serbian stores in 2015. Lidl’s sister chain, Kaufland, has reportedly been considering a launch in the Serbian market, too. • Aldi Süd has been more internationally ambitious than sister company Aldi Nord has. Only Aldi Süd has ventured beyond Europe; it is said to be planning entries into China and Italy, and rumoured to be moving into Slovakia, too. • DIA is the only one of the big discounters tapping emerging markets outside Europe. Its retreats from Turkey and France have allowed it to focus on its core regions of Iberia and South America, along with its presence in China. • Biedronka has grown fast, but it has recently found trading tougher in its sole market of Poland. So will we see this retailer explore opportunities elsewhere in Europe? It certainly looks like it, especially if it can gain a foothold in some Eastern European markets ahead of Aldi. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 22
Figure 21. Top Discounters: Geographical Presence Retailer No. of Countries Countries Domicile 28 Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Lithuania, Germany Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, UK Lidl 28 Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Lithuania, Germany Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, UK Kaufland 7 Bulgaria, Croatia, Czech Republic, Germany, Poland, Romania, Slovakia Germany 17 Australia, Austria, Belgium, Denmark, France, Germany, Hungary, Ireland, Luxembourg, Netherlands, Poland, Portugal, Slovenia, Spain, Switzerland, UK, US Germany Aldi Nord 9 Belgium, Denmark, France, Germany, Luxembourg, Netherlands, Poland, Portugal, Spain Germany Aldi Süd/Hofer 9 Australia, Austria, Germany, Hungary, Ireland, Slovenia, Switzerland, UK, US Germany Netto Marken-‐Discount 1 Germany Germany Penny 7 Austria, Bulgaria, Czech Republic, Germany, Hungary, Italy, Romania Germany DIA 5 Argentina, Brazil, China, Portugal, Spain Spain Biedronka 1 Poland Portugal Trader Joe’s 1 US Germany REMA 1000 2 Denmark, Norway Norway Netto 5 Denmark, Germany, Poland, Sweden, UK (JV) Denmark Schwarz Group Aldi Source: Company reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 23
The table below presents the same data, but ranked by country rather than by retailer. Figure 22. Countries Served by Top Discounters Country Top Discounters Present Selected Rival Discounters Argentina DIA Australia Aldi Süd Austria Aldi Süd, Lidl, Penny Belgium Aldi Nord, Lidl Colruyt Brazil DIA Bulgaria Lidl, Kaufland, Penny China DIA Croatia Lidl, Kaufland Cyprus Lidl Czech Republic Lidl, Kaufland, Penny Denmark Aldi Nord, Lidl, REMA 1000, Netto Finland Lidl France Aldi Nord, Lidl Leader Price, Netto France*, Norma Germany Aldi Nord, Aldi Süd, Lidl, Kaufland, Netto Marken-‐Discount, Penny, Netto Norma Greece Lidl Hungary Aldi Süd, Lidl, Penny Ireland Aldi Süd, Lidl Italy Lidl, Penny Lithuania Lidl Luxembourg Aldi Nord, Lidl Malta Lidl Netherlands Aldi Nord, Lidl Norway REMA 1000 Kiwi, Coop Prix Poland Aldi Nord, Lidl, Kaufland, Biedronka, Netto Portugal Aldi Nord, Lidl, DIA Romania Lidl, Kaufland, Penny Serbia Lidl Slovakia Lidl, Kaufland Slovenia Aldi Süd, Lidl, Kaufland Spain Aldi Nord, Lidl, DIA Sweden Lidl, Netto Willys Switzerland Aldi Süd, Lidl Denner UK Aldi Süd, Lidl, Netto US Aldi Süd, Trader Joe’s Fakta, Kiwi *Netto France is separate from both Netto of Denmark and Netto Marken-‐Discount. Source: Company reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 24
PROFILE: SCHWARZ GROUP (LIDL AND KAUFLAND) Source: KrejZii, Wikimedia Commons AT A GLANCE: SCHWARZ GROUP FY2015 Summary Schwarz Group is the world’s largest grocery discounter. It is best known globally for its hard-‐
discount fascia Lidl, but it also operates more than 1,000 stores under its discounter/hypermarket hybrid fascia, Kaufland. Revenues €79 billion/US$105 billion YoY Growth in Revenues (in €) 7.2% Number of Stores 11,115 Number of Countries 28 Countries of Operation Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, UK. Global Grocery Ranking 3 Source: Company reports/FBIC Global Retail & Technology STRATEGIC ASSESSMENT Lidl is Schwarz Group’s core fascia, accounting for 74% of group revenues in FY2015 and driving group-‐level sales growth. With sales up by around 9% in FY2015, Lidl has outpaced rival Aldi in recent years, prompting the latter to adapt its proposition (see our Aldi profile). Lidl has achieved this not simply by riding the recession-‐driven discount wave; it has pursued growth through investment and by leading the charge to a softer discount proposition. Lidl’s strategy has two main things working in its favor: DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 25
• The company has invested heavily in expanding and overhauling store networks internationally. The fact that it is privately owned and therefore able to avoid financial scrutiny (arguably) underpins Lidl’s willingness to invest for the longer term. • Lidl is clearly willing to retreat from the harder element of discounting. Lidl was ahead of Aldi in offering big-‐name brands in its stores, and it has more recently invested in in-‐store bakeries, larger stores and premium own-‐brand ranges. Each of these marks a shift away from the uncompromising, no-‐frills proposition on which hard discount was built. Expansion continues apace. The US is set to see the arrival of Lidl and an Australia launch is also reportedly in the pipeline. Aldi has already made headway in these markets, so we see softer-‐positioned Lidl as likely to be a strong performer. Willingness to tailor its proposition by market will strengthen Lidl’s prospects in new markets.
It is notable that these markets are being served by softer-‐format Aldi Süd, rather than by its harder-‐end sibling, Aldi Nord. Lidl is softer still, so it is increasingly competing with Aldi Süd—and may well capture demand for a more brand-‐heavy discounter proposition from it. We think Lidl’s prospects in new markets will be strengthened by the willingness it has shown in recent years to tailor its proposition by market. Discounting is no longer one size fits all. Kaufland: A Hybrid Discounter Lidl’s sister chain, Kaufland, is a hybrid discounter/hypermarket that brings the no-‐frills, predominantly private-‐label approach to a larger store format. This format has been deployed selectively, as a kind of category killer in markets where there is unusually strong demand for discount formats, such as Poland, the Czech Republic, Romania, Bulgaria and Germany (including regions of East Germany, which Kaufland piled into following reunification). Consequently, there is little prospect of Kaufland following Lidl into many international markets, but there are likely some countries—notably in Eastern Europe—where there are still opportunities to be tapped, and Serbia is reported to be the next country on its list. For high-‐demand markets, the Kaufland format is one more competitive advantage Schwarz Group has over rivals such as Aldi. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 26
KEY DEVELOPMENTS OF THE LAST FIVE YEARS 2015 Lidl is set to open in Serbia. August 2015 Lidl UK launches a loyalty card-‐type promotion for a limited period in Scotland. Called Smarter Shopping, the card allows customers to take advantage of a different promotion each week for ten weeks. July 2015 Lidl UK is reported to be considering opening an online wine store. June 2015 Lidl is reported to be planning an entry into Australia. May 2015 Lidl Austria announces that it will invest around €100 million (US$111 million) in renovating stores, including rebuilding 12 stores, by the end of 2016; it reveals that Austrian revenues grew by more than 10% in 2014–15. April 2015 Lidl Italy announces a five-‐year investment plan totaling more than €1 billion (US$1.1 billion). It begins testing a new store model in Italy, with more natural light and wider aisles across 1,300 square meters of sales area. March 2015 Lidl Croatia announces a €32.7 million (US$36.4 million) investment in 2015. February 2015 Lidl Spain announces a €70 million (US$78 million) investment in what it calls “Europe’s biggest distribution centre.” February 2015 Lidl France opens its largest-‐ever French store, a 1,600 square-‐meter supermarket in Rousset. February 2015 Lidl UK announces it will open its largest-‐ever British store, a 1,400 square-‐meter supermarket in Cumbria. November 2014 Lidl France announces a €250 million (US$332 million) investment to remodel existing stores, to grow its average store size from 850 square meters to 1,200 square meters. June 2014 Lidl UK announces plans to invest £220 million (€273 million; US$363 million) in UK stores, including installation of in-‐
store bakeries and new store openings. The retailer says it plans to open 20 new UK stores over the next nine months. June 2014 Lidl launches an online grocery store, offering delivery of a limited range of food and nonfood grocery products. April 2014 Schwarz Group CEO Klaus Gehrig says Lidl will not launch in the US until 2018. Gehrig says the company will invest €4 billion (US$5.3 billion) in its international operations, including the US venture. March 2014 Lidl’s CEO in Germany, Karl-‐Heinz Holland, is removed from his role over “unbridgeable” differences over future strategy. March 2014 Lidl Spain announces it will invest €180 million (US$239 million) in revamping 50 Spanish stores and opening a further 20 in 2014. February 2014 German press reports suggest Kaufland will move into the Serbian market. Lidl is already scheduled to open there in 2015. January 2014 Lidl destocks Coca-‐Cola amid a price war with Aldi. Price cutting between the discounters began when Aldi started to stock Coca-‐Cola. December 2013 Lidl UK announces it intends to double its number of British stores, from around 600 to around 1,200. November 2013 Lidl Finland announces plans to invest more than €100 million in its Finnish operations in 2014. November 2013 Lidl Italy says it plans to invest €500 million (US$664 million) in growing and modernizing its store network over five years. August 2013 Lidl UK starts offering contactless card payment options. June 2013 Kaufland announces plans to launch an online shop within the following two years. (As of August 2015, no online store was evident.) June 2013 Lidl UK opens its first franchised Subway sandwich outlet, within a store in Norfolk. February 2013 Lidl UK launches an economy private label called Simply to complement its standard private labels and its premium Gourmet own brand. December 2012 Lidl Greece announces plans to invest €100 million (US$129 million) in opening new outlets, renovating existing stores and launching new promotions over the next three years. November 2012 Lidl Finland starts to offer state-‐owned alcohol outlets in its stores. February 2012 Lidl Romania says it wants to open 66 stores in 2012. October 2011 Lidl Germany reportedly sets more ambitious sales targets for its stores. The new targets are coupled with an increase in catchment areas per store in Germany, rising from a catchment of 22,000 inhabitants to between 25,000 and 30,000. October 2011 Lidl begins scouting Serbia for sites as part of a planned entry into the market. 2011 Lidl starts installing in-‐store bakeries worldwide as part of an increased focus on fresh foods. November 2010 Lidl enters Cyprus. February 2010 Lidl announces plans to buy the Plus chain of stores in Bulgaria and Romania from Tengelmann; the stores are converted to Lidl. Source: Company reports/press reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 27
KEY FIGURES Main Takeaways • Small-‐store Lidl has driven top-‐line growth, according to company data, with sales up nearly 9% in FY2015. • Schwarz Group reportedly saw a strong FY2014 in Germany (with sales up an estimated 8.7%) before facing a more challenging market in FY2015. The international segment has tended to drive growth (which was up an estimated 10.6% in FY2015). • Sales densities at Lidl rose by more than 15% between FY2013 and FY2015, we estimate, indicating that growth is not being driven simply by store openings. 9%
• Lidl stores are getting bigger, with the average store size increasing by 3.4% between FY2013 and FY2015, according to Euromonitor. • As a private company, Schwarz Group reports no profit data and reports total group revenues only at a rounded level. It is only in recent years that the company has begun releasing top-‐line global sales figures. Schwarz Group confirmed to us that its reported sales figures are net of sales tax. Small-‐store Lidl has driven top-‐
line growth, according to company data, with sales up nearly 9% in FY2015.
Figure 23. Schwarz Group: Net Revenues (Fiscal Year Ending Feb.) 2013 2014 2015 Schwarz Group (€ Mil.) 67,600 74,000 79,300 Lidl (€ Mil.) 48,900 54,300 59,000 Kaufland (€ Mil.) 18,700 19,700 20,300 Schwarz Group (US$ Mil.) 86,907 98,272 105,390 Source: Company reports/FBIC Global Retail & Technology Figure 24. Schwarz Group: Estimated Geographic Revenue Split (Fiscal Year Ending Feb.) (€ Mil.) Germany 2013 2014 2015 28,722 31,228 32,000 International 38,878 42,772 47,300 Total 67,600 74,000 79,300 Source: TradeDimensions/Statista/company reports/FBIC Global Retail & Technology Figure 25. Lidl: Estimated Revenues for Selected Regions (Fiscal Year Ending Feb.) (€ Mil.) 2013 2014 2015 16,900 18,000 18,600 France 6,900 6,793 6,613 UK 3,396 3,893 4,962 Germany Source: Press reports/Euromonitor/FBIC Global Retail & Technology Figure 26. Schwarz Group: Store Numbers (Fiscal Year Ending Feb.) Schwarz Group Lidl Kaufland 2013 2014 2015 11,082 11,014 11,185 10,003 9,876 10,006 1,079 1,138 1,179 Source: Euromonitor DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 28
Figure 27. Lidl: Store Numbers, Selected Countries (Fiscal Year Ending Feb.) 2013 2014 2015 Germany 3,400 3,250 3,225 France 1,616 1,533 1,476 590 608 650+ UK (Est.) Source: Company reports/press reports/Euromonitor/FBIC Global Retail & Technology Figure 28. Schwarz Group: Annual Sales per Outlet (Fiscal Year Ending Feb.) 2013 2014 6,196 6,698 7,144 4,964 5,463 5,935 17,642 17,772 17,523 7,966 8,895 9,495 Schwarz Group (€ Thou.) Lidl (€ Thou.) Kaufland (€ Thou.) Schwarz Group (US$ Thou.) 2015 Calculated using average annual store numbers Source: Company reports/Euromonitor/FBIC Global Retail & Technology Figure 29. Schwarz Group: Sales Area (Fiscal Year Ending Feb.) (Thou. Square Meters) 2013 2014 2015 12,292 12,621 12,961 Lidl 7,960 8,056 8,233 Kaufland 4,332 4,565 4,727 Schwarz Group Source: Euromonitor/FBIC Global Retail & Technology Figure 30. Schwarz Group: Annual Sales per Square Meter (Fiscal Year Ending Feb.) 2013 2014 2015 5,610 5,941 6,200 Lidl (€) 6,296 6,781 7,244 Kaufland (€) 4,367 4,429 4,369 Schwarz Group (US$ Mil.) 7,212 7,889 8,239 Schwarz Group (€) Source: Company reports/Euromonitor/FBIC Global Retail & Technology Figure 31. Schwarz Group: Average Store Size (Fiscal Year Ending Feb.) (Square Meters) Schwarz Group Lidl Kaufland 2013 2014 2015 1,109 1,146 1,164 796 816 823 4,015 4,011 4,010 Source: Company reports/Euromonitor/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 29
PROPOSITION Figure 32. Lidl: Proposition Positioning A discounter with a slightly softer edge, Lidl has long strayed from the basic hard-‐discount proposition. It tends to have slightly larger stores, stock more branded products and have a more promotional stance than rival Aldi does. It has continued to lead the move toward softening, opening larger stores in France and launching an online grocery service in Germany. Store formats Lidl’s small stores are often located on edge-‐of-‐town spaces, where there is plenty of room for car parking. Store sizes averaged 823 square meters in 2014, and average store sizes have been increasing steadily; newer stores tend to have larger footprints, up to 1,200 square meters. Average SKUs For many years, the number of product lines was kept at around (or less than) 1,000. As the retailer has sought to attract new customers in new markets, this has been pushed up considerably. In the UK, the SKU count was around 1,450 in 2012; 1,600 in 2013; and 1,700 in 2014. In Italy, the SKU count was 1,650 in April 2015. Nongrocery As at Aldi, short-‐lived special deals on general merchandise change weekly at Lidl. Some 82% of Lidl Germany’s sales are from grocery, according to Euromonitor. Source: Company reports/FBIC Global Retail & Technology Price promotions on core groceries are indicative of Lidl’s compromise on the hard-‐discount ethos of everyday low prices: 1,700
Lidl UK’s SKU count: 1,700 in 2014.
Source: Lidl.co.uk DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 30
Lidl has couponed extensively in its battle against Aldi in the UK, offering £5 off purchases of £30 or, more commonly, £5 off purchases of £40. Source: Facebook/Lidl Figure 33. Kaufland: Proposition Positioning Kaufland is a discount/hypermarket hybrid. Its budget positioning means it is the only truly successful hypermarket in Germany. In line with its hybrid status, Kaufland offers more branded products than sister chain Lidl, but fewer than typical nondiscount hypermarkets. Store formats Stores are bigger than those of regular hard discounters, but modestly sized for the hypermarket format. Average store size Average store sizes have remained steady at around 4,000 square meters, according to Euromonitor. Nongrocery Nongrocery makes up some 20% of Kaufland’s total sales, according to Euromonitor. The main K-‐Classic own brand has been extended to nonfood lines such as electronics, stationery and automotive accessories. Source: Company reports/FBIC Global Retail & Technology 20%
Nongrocery makes up 20% of Kaufland’s total sales.
PRIVATE LABEL The hard discounters are based on an offering dominated by their private labels. Lidl has, however, long been ahead of Aldi in stocking major, third-‐
party brands. Lidl has long stocked Coca-‐Cola, for instance; Aldi began stocking Coca-‐Cola only in 2012, prompting a price war and a temporary delisting of the product at Lidl. Among other brands stocked by Lidl in Germany are Axe, Rexona, Garnier, Pampers, Durex and Persil. Like Aldi, Lidl’s multitude of private labels are designed to look like brands, often like leading brands. They do not bear the Lidl name on the front. Also like Aldi, Lidl has moved beyond its traditional offering of a single SKU per product; like nondiscount grocers, it has developed a premium umbrella own-‐brand called Deluxe. Figure 34. Lidl: Examples of Umbrella Own Brands, Germany Private Label Range Biotrend Organic foods Deluxe Premium range Cien Beauty and personal care Lord Nelson Teas Dentalux Oral care Toujours Nappies/diapers W5 Household cleaning products Source: Company reports DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 31
Lidl Spain charts the evolution of its offering, from ambient and chilled products to fresh meat, in-‐store bakeries and fresh fish: Lidl launched an e-‐grocery service in Germany in 2014.
ONLINE Hard discount and online retailing of groceries are a poor match. Discount is all about low overheads and few frills. Online grocery retailing demands heavy investment in service to pick and deliver orders. So, it was a surprise when Lidl launched an e-‐grocery service in Germany in 2014. This online grocery service could well be a trial. So far, the product offering is very limited and, most importantly, it is restricted to ambient products—this means there is no need for costly, time-‐sensitive delivery methods that rely on dedicated fleets of delivery trucks. Online orders can be sent via regular mail, and Lidl charges a €4.95 flat delivery fee. In 2015, Lidl UK was reported to be considering a launch of an online wine service in the UK. We do not think such a service should be viewed as a stepping-‐stone to a full online grocery service, however. The high value and ambient nature of wine means it is a cost-‐effective product to sell online. This is confirmed by some German discounters, such as smaller player Norma, that already sell wine on their websites. INTERNATIONAL PRESENCE The table below shows countries where Schwarz Group has more than 200 stores. Figure 35. Schwarz Group: Major Markets, 2014–15 Country Approx. Number of Stores* Key Competitors Fascia(s) Germany 3,875 (3,225 Lidl, 650 Kaufland) Aldi, Netto, Edeka, REWE, Penny, Norma Lidl, Kaufland France 1,476 Aldi, Norma, Leclerc, Carrefour, Casino, Auchan, Système U, Picard, DIA Lidl Poland 715 (525 Lidl, 190 Kaufland) Biedronka, Aldi Lidl, Kaufland UK 650+ Tesco, Asda, Morrisons, Sainsbury’s, Aldi, Iceland, Co-‐operative Lidl Italy 570 Conad, Esselunga, Auchan, Carrefour, Billa, Penny Lidl Spain 525 DIA, Aldi, Mercadona, Carrefour Lidl Netherlands 400+ Albert Heijn, Jumbo, Aldi Lidl Czech Republic 339 (220 Lidl, 119 Kaufland) Penny, Billa, Tesco Lidl, Kaufland Belgium 300 Aldi, Colruyt, Carrefour, Delhaize Lidl Portugal 240 Pingo Doce, Continente, Aldi Lidl Greece 220 Carrefour, Alfa-‐Beta Vassilopoulous Lidl Austria 200+ Hofer (Aldi), Billa, Penny Lidl *At closest available date to year-‐end FY2015. Source: Company reports/Euromonitor/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 32
PROFILE: ALDI (NORD AND SÜD) Source: Bidgee, Wikimedia Commons AT A GLANCE: ALDI Aldi’s most successful international markets have been those served by softer-‐
end Aldi Süd.
2014 Summary Aldi Group comprises two companies: Aldi Nord and Aldi Süd. The companies are separate, although they have their roots in the same firm and there are indications of substantial and growing collaboration (for instance, in promotions). Aldi Süd is bigger by revenue, and has expanded beyond Europe (to Australia and the US), whereas Aldi Nord has not. Together, they form the world’s second-‐biggest grocery discounter, after Schwarz Group. Revenues (Est.) €61 billion/US$81 billion YoY % Growth in Revenues (in € Terms, Est.) 4.5% Number of Stores 9,937 Number of Countries 17 Countries of Operation Australia, Austria, Belgium, Denmark, France, Germany, Hungary, Ireland, Luxembourg, Netherlands, Poland, Portugal, Slovenia, Spain, Switzerland, UK, US Global Grocery Ranking 6 Source: Company reports DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 33
STRATEGIC ASSESSMENT Developments at Aldi make it apparent that the era of hardest-‐of-‐hard discounting is coming to a close. Globally, Aldi’s most successful markets have been those served by softer-‐end Aldi Süd, with its larger stores, wider fresh offering and greater brand presence. These include Australia, the US and the UK, where Aldi has roared ahead and rapidly climbed the rankings of the top grocery retailers. Aldi has found it more difficult to gain traction in those countries served by harder-‐end Aldi Nord. This includes markets such as France and Denmark, where growth has reportedly been slow, or negative, in the face of softer competition—for instance, from Lidl in France. But Aldi Nord, previously an uncompromisingly hard discounter, has realized the need to change. It has broadened its fresh food ranges and poured money into store refits and replacements. In Germany, Aldi Nord has been culling store numbers as it focuses on fewer, better shops. And, like Aldi Süd, it has been enhancing its branded offering to compete with brand-‐
heavy Lidl, which has powered ahead. Aldi Nord still lags Aldi Süd and Lidl in the softness of its proposition, with a more limited offering, but it is making headway. Its retreat from an ultrahard proposition, however, is effectively a recognition that traditional discounting is no longer enough, particularly as it caters to a more diverse customer base in more regions of the world. An ongoing softening of the proposition could result in higher prices for shoppers or an erosion of margins.
Of course, the real question for Aldi, and for others, is: At what point does the extra cost added by stocking premium ranges, greater fresh food ranges (with their higher potential wastage) and more brands begin to chip away at the everyday-‐low-‐cost model of discounting? It is possibly a greater prioritization of maintaining margins that is keeping Aldi Nord’s proposition more traditional than Aldi Süd’s and Lidl’s. The preponderance of private ownership means we have few indicators of the companies’ operating margins or bottom lines. But it is hard to see an ongoing softening of the proposition not resulting in either higher prices for shoppers or an erosion of margins. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 34
KEY DEVELOPMENTS OF THE LAST FIVE YEARS September 2015 Aldi UK & Ireland reveals sales grew by approximately 31% in 2014, and announces plans to sell cases of wine and nongrocery items online in the UK. August 2015 Aldi Australia announces plans to open its first stores in South Australia and West Australia, with up to 50 stores opening beginning in early 2016. August 2015 Aldi Süd in Germany is set to list a further 50 major brands by the end of 2015 “to attack Lidl,” media report. August 2015 Aldi UK announces plans to invest £600 million (US$989 million; €719 million) in opening 130 new stores and to recruit 8,000 more staff over two years. The company aims to open 1,000 stores by 2022, up from 560 in 2015. May 2015 Aldi Süd confirms plans to open in Italy, according to trade newspaper Lebensmittel Zeitung. March 2015 Aldi US announces plans to reopen 30 of the 66 former Bottom Dollar stores that it acquired from Delhaize Group. March 2015 Hofer (Aldi in Austria) is reported to be looking to extend into neighboring Slovakia. March 2015 Aldi UK dismisses suggestions that it is set to launch an online grocery service in the UK, saying it is “not an immediate focus for Aldi.” November 2014 Aldi Süd is reported to be examining a potential entry into China. Press reports state that Aldi’s company committee concluded that a market entry would be feasible. In exchange for allowing Aldi Süd to launch in China, Aldi Nord would reportedly be allowed to pick its next two international markets. November 2014 Aldi UK says it will create 35,000 new jobs by 2022. It plans to have 1,000 UK stores by then, as a result of a £600 million (€744 million; $989 million) investment. September 2014 Aldi UK says it will double store numbers to around 1,000 by 2021 and expand its central England headquarters. August 2014 Aldi UK introduces healthier register offerings at all its British stores, replacing confectionery with options such as nuts and dried fruit. July 2014 Karl Albrecht, cofounder of Aldi, dies at the age of 94. Albrecht was said to be the second-‐richest person in Germany. Together with his brother Theo, who died in 2010, Karl Albrecht took over their mother’s store in 1946 and turned it into a grocery network before splitting the company into Aldi Nord and Aldi Süd in the 1960s. May 2014 Aldi Nord reportedly extends its fresh fruit and vegetable range from 50 SKUs to 70 SKUs, but this is still less than the reported 90 SKUs at Aldi Süd and 120 at Lidl. May 2014 Aldi US launches a gluten-‐free range. April 2014 Aldi announces plans to open its first store in Majorca. February 2014 Aldi Denmark boosts its organic food and eco-‐cleaning ranges. February 2014 Aldi Nord switches to a new central merchandising system from SAP. December 2013 Aldi UK launches a tablet computer selling for £79.99 (€94; $125). The product reportedly sells out within two days. September 2013 Aldi UK says it more than doubled its pretax profits, to £158 million (€195 million; $250 million), in the year ending December 2012. UK revenues jumped 41%, to £3.9 billion (€4.8 billion; $6.2 billion). May 2013 Aldi Nord and Aldi Süd in Germany begin stocking the Nivea brand. April 2013 Aldi UK opens a convenience-‐format store, a 650 square meters (7,000 square feet) urban store in Kilburn, London. April 2013 Aldi introduces its premium Specially Selected brand to its US stores. September 2012 Aldi Germany begins stocking Coca-‐Cola; in subsequent months, stores in other countries start to roll out the brand. Source: Company reports/press reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 35
KEY FIGURES Main Takeaways • At an estimated 4.5%, top-‐line growth was more muted at Aldi than at archrival Lidl in 2014. International stores drove growth, with non-‐
German sales up 7.5% year over year. 4.5%
At an estimated 4.5%, top-‐line growth was more muted at Aldi than at archrival Lidl in 2014. International stores drove growth, with non-‐German sales up 7.5% year over year.
• Sales growth in Germany appeared to slow in 2014, after a strong 2013 when sales were buoyed by Aldi Nord’s store refits. Aldi Nord said it saw 0.4% sales growth in 2014. Given Aldi Nord closed a number of German stores in the year, we think Aldi Süd will have performed slightly better, and estimate combined sales growth in Germany of around 1.0% for 2014. • Aldi’s global sales per store rose 6.9% between 2012 and 2014, with sales densities climbing 4.8% over the same period (both estimated)—a more muted performance than Lidl’s. • Average store sizes at Aldi are increasing, helped by Aldi Nord’s redevelopment program, which involves replacing some smaller, older stores with bigger outlets in its home market. • Although data by country is thin, those countries where Aldi has surged ahead are largely those served by Aldi Süd, not by harder-‐positioned Aldi Nord. • Note that Aldi Nord and Aldi Süd are private, notoriously secretive companies that do not report group-‐level sales, let alone profitability. Our main guide to top-‐line performance is Euromonitor data, although we have re-‐estimated 2014 figures for Aldi in Germany because Euromonitor’s estimates looked unduly pessimistic (at -‐1.8%) in light of Aldi Nord’s statement on growth and other sources. Figure 36. Aldi: Estimated Net Revenues (Fiscal Year Ending Dec.) 2012 2013 2014 Aldi (€ Mil.) 55,342 58,169 60,780 Aldi (US$ Mil.) 71,148 77,248 80,777 Source: Euromonitor/company reports/FBIC Global Retail & Technology Figure 37. Aldi: Estimated Geographic Revenue Split (Fiscal Year Ending Dec.) (€ Mil.) 2012 2013 2014 Germany 25,525 26,800 27,068 International 29,817 31,369 33,712 Total 55,342 58,169 60,780 Source: Euromonitor/company reports/FBIC Global Retail & Technology Figure 38. Aldi: Estimated Revenues for Selected Regions (Fiscal Year Ending Dec.) (€ Mil.) 2012 2013 2014 US 7,813 8,208 8,835 UK & Ireland 4,797 6,213 8,550 France 3,200 3,208 3,220 Australia 3,351 3,645 3,843 Source: Press reports/company reports/NRF/Euromonitor/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 36
Figure 39. Aldi: Number of Stores (Fiscal Year Ending Dec.) 2012 2013 2014 Aldi 9,694 9,778 9,937 Germany 4,315 4,252 4,228 International 5,379 5,526 5,709 Source: Euromonitor/FBIC Global Retail & Technology Figure 40. Aldi: Estimated Annual Sales per Outlet (Fiscal Year Ending Dec.) 2012 2013 2014 Aldi (€ Thou.) 5,767 5,975 6,166 Aldi (US$ Thou.) 7,414 7,934 8,194 Calculated using average annual store numbers Source: Company reports/Euromonitor/FBIC Global Retail & Technology Figure 41. Aldi: Sales Area (Fiscal Year Ending Dec.) (Thou. Square Meters) Aldi 2012 2013 2014 7,873 8,023 8,245 Source: Euromonitor/FBIC Global Retail & Technology Figure 42. Aldi: Estimated Annual Sales per Square Meter (Fiscal Year Ending Dec.) 2012 2013 2014 Aldi (€) 7,133 7,319 7,473 Aldi ($) 9,170 9,719 9,931 Calculated using average annual sales area Source: Company reports/Euromonitor/FBIC Global Retail & Technology Figure 43. Aldi: Average Store Size (Fiscal Year Ending Dec.) (Square Meters) Aldi 2012 2013 2014 812 820 830 Source: Company reports/Euromonitor/FBIC Global Retail & Technology PROPOSITION Figure 44. Aldi: Proposition Positioning Aldi Nord: Traditional hard discount: small stores, very limited brand presence. This stance may be partly responsible for Aldi’s reportedly tepid performance in markets such as France and Denmark. But Aldi Nord has begun softening its proposition a little in recent years, refurbishing or replacing stores, bringing in more fresh foods and introducing third-‐party brands such as Coca-‐Cola. Aldi Süd: Hard discount, but typically less hard than Aldi Nord, with slightly larger stores on average and more product lines, which has helped it compete more effectively with Lidl and to flourish in international markets such as the UK, Australia and the US. Aldi Süd also stocks more major brands than Aldi Nord does, although, like its sister company, it has long had a more limited branded offering than rival Lidl. Store formats Small stores; it is believed that Aldi Nord’s stores have traditionally been smaller than those of Aldi Süd. Store sizes averaged 830 square meters in 2014, according to Euromonitor, and average store sizes are creeping up as Aldi Nord replaces smaller, older stores with bigger ones. Average SKUs Like Lidl, Aldi Süd has widened its range in recent years. As of September 2014, Aldi Süd was offering around 1,350 SKUs in the UK market, above the traditional hard-‐discount range of approximately 1,000. Aldi Nord’s SKU count is thought to be lower, at a little over 1,000. Nongrocery As with Lidl, short-‐lived special deals on general merchandise change weekly at both Aldi Nord and Aldi Süd (pictured below). Joint sourcing of these special deals is thought to be one area of cooperation between Aldi Nord and Aldi Süd. Around 82% of Aldi Germany’s sales are from grocery. Source: Company reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 37
Aldi Süd has couponed heavily to win share in the UK market, typically in tie-‐
ups with tabloid newspapers. 1,350
PRIVATE LABEL Aldi pioneered the hard-‐discount model of focusing on private-‐label products, and it has been among the last to ease back on this focus. Aldi has begun stocking more branded lines in recent years, with Aldi Süd thought to be leading the charge. Aldi UK’s SKU count: 1,350 in 2014
Aldi Nord and Aldi Süd tend to offer different private brands, although sourcing is believed to be undertaken jointly in those cases where they both offer the product. Aldi Nord stocks fewer SKUs overall than Aldi Süd does. Aldi has moved beyond the traditional model of offering a single tier of products. Premium ranges are marketed under the name Gourmet at Aldi Süd and Freihofer Gourmet at Aldi Nord in German-‐speaking countries, and under Specially Selected in the UK. Figure 45. Aldi: Examples of Umbrella Own Brands, Germany Private Label Nord: Gut Bio Nord: Biscotto Nord: Markus Süd: Bio Süd: Cucina Süd: Lacura Range Organic Biscuits/cookies Coffee Organic Pasta Beauty and personal care Source: Company reports ONLINE In line with its discounter proposition, Aldi does not retail grocery products online; the cost of fulfilling orders would be difficult to square with its no-‐
frills, low-‐overhead ethos. In Germany, Aldi Nord and Aldi Süd each offer flower-‐delivery services, photo printing, travel services and mobile telephone subscriptions online. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 38
These services are thought to be another area of cooperation between the two Aldi companies. In the UK, Aldi announced plans in September 2015 to begin selling cases of wine and its nongrocery special deals online in 2016. While it is conceivable that there is a niche for some kind of online grocery service offered by discount retailers, we do not expect Aldi to be a trailblazer. Lidl Germany launched a very limited online grocery service in 2014, and we do not expect Aldi to follow its lead in the near future. 17
Aldi has long lagged rival discounter Schwarz Group on the international playing field: it is present in 17 countries while Schwarz Group is present in 28 (as of August 2015).
INTERNATIONAL PRESENCE Aldi has long lagged rival discounter Schwarz Group on the international playing field: it is present in 17 countries while Schwarz Group is present in 28 (as of August 2015). Aldi Nord and Aldi Süd divide the world up between them; they do not compete in any markets except Germany, which they divide along a north/south line. In 2014, it was reported that Aldi Süd is planning a move into China. The highly private company has given no confirmation of this. In 2015, Aldi Süd reportedly confirmed a plan to launch in Italy, and it has been rumored that the retailer will also move into Slovakia. In Austria and Slovenia only, Aldi (Süd) operates as Hofer. Figure 46. Aldi: Global Markets Country Approx. Number of Stores* Key Competitors Germany (Nord and Süd) 4,228 Lidl, Kaufland, Netto, Norma, Edeka, REWE, Penny US (Süd) 1,400 Walmart, Kroger France (Nord) 922 Lidl, Norma, Leclerc, Carrefour, Casino, Auchan, Système U, Picard, DIA UK (Süd) 560 Tesco, Asda, Morrisons, Sainsbury’s, Lidl, Iceland, Co-‐
operative Netherlands (Nord) 490 Albert Heijn, Jumbo, Lidl Belgium (Nord) 440 Lidl, Colruyt, Carrefour, Delhaize Austria (Süd) 430 Lidl, Billa, Penny Australia (Süd) 370 Woolworths, Coles Spain (Nord) 250+ DIA, Lidl, Mercadona, Carrefour Denmark (Nord) 220 Coop Danmark, Dansk Supermarked, Kiwi, REMA 1000, Lidl Switzerland (Süd) 175 Migros, Coop Schweiz, Denner, Lidl Ireland (Süd) 111 Lidl, Tesco, Dunnes, SuperValu Hungary (Süd) 100 CBA, Tesco, Lidl, Penny Poland (Nord) 90 Biedronka, Lidl, Kaufland, Tesco Slovenia (Süd) 70 Mercator, Tus, Lidl Portugal (Nord) 40 Pingo Doce, Continente, Lidl Luxembourg (Nord) 12 Cactus, Cora, Delhaize, Lidl *At closest available date to calendar year-‐end 2014. Source: Company reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 39
PROFILES: OTHER MAJOR DISCOUNTERS Netto Marken-‐Discount • Revenue growth in 2014: 2.2% Netto Marken-‐Discount is the least internationalized of all the major grocery discounters, being present only in Germany. Yet such is the strength of discounting in Germany that this single market allows Netto Marken-‐
Discount to be the world’s third-‐biggest grocery discounter. “Deutschland ist Discount-‐Land,” as the company’s latest annual report says. The company has fractionally outperformed the German grocery sector annually in recent years: its 2.2% growth in 2014 was marginally ahead of 2.1% overall sector growth. Netto Marken-‐Discount is present only in Germany yet is the world’s third-‐biggest grocery discounter.
In a fiercely competitive and evolving German discount sector, Netto Marken-‐Discount has stepped up to the plate in terms of investment in its proposition. Like some rivals, the retailer has installed in-‐store bakeries, ramped up its fresh food offering with a “fresh offensive,” and rolled out niche ranges such as fine wines and lactose-‐free dairy products. Collectively, these represent a retreat from hard discounting, a theme that is becoming increasingly common in Germany’s grocery sector and that appears to be bolstering growth for a number of players. Netto Marken-‐Discount is owned by Germany’s grocery market leader, Edeka. Edeka’s main operations are in nondiscount grocery retail across multiple formats, from small, neighborhood stores to larger hypermarkets. Netto Marken-‐Discount is an entirely separate retailer from Denmark’s Netto, which we profile later in this section. Figure 47. Netto Marken-‐Discount: Financial Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 Revenues (€ Thou.) 11,257 11,758 12,019 Revenues (US$ Thou.) 14,471 15,614 15,973 Source: Company reports/FBIC Global Retail & Technology Figure 48. Netto Marken-‐Discount: Store Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 Number of Stores 4,106 4,150 4,168 Sales per Store (€ Thou.) 2,757 2,848 2,890 Source: Company reports/Euromonitor/FBIC Global Retail & Technology Penny • Revenue growth in 2014: 0.2% Penny is at the softer end of discounting. As with fellow soft discounter DIA, this positioning is not translating into market-‐leading revenue growth. Growth in 2014 was impacted by currency effects—international sales grew 1.9% in constant currencies but fell 0.3% in euros. Price competition in the Austrian market was a further factor, according to the company, yet food price inflation remained well within positive territory through 2014. Store closures impacted the top line in Penny’s domestic market of Germany. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 40
Like Aldi Nord, which is at the hardest end of discount, Penny has been undertaking a round of store closures as it focuses on operating fewer, better stores. Penny joins a raft of other discounters in investing in more attractive environments, enhanced own-‐brand ranges and more appealing fresh foods. As we underline throughout this report, winning shoppers to the discount format requires, in large part, that retailers create propositions that resonate with consumers. It is not an easy channel to tap. Penny’s German operations are loss-‐making at the EBITDA level and the company has said its repositioning should reduce losses in 2015. Figure 49. Penny: Key Financial Metrics (Fiscal Year Ending Dec.) Revenues (€ Mil.) Like Aldi Nord, which is at the hardest end of discount, Penny has been undertaking a round of store closures as it focuses on operating fewer, better stores.
2012 2013 2014 10,667 10,832 10,856 Germany 6,769 6,813 6,847 International 3,897 4,019 4,008 Revenues (US$ Mil.) 13,713 14,385 14,427 Germany 8,703 9,047 9,100 International 5,010 5,338 5,327 Source: Company reports/FBIC Global Retail & Technology As Penny closes some stores and modernizes others in its home market of Germany, sales per store and sales densities are heading in the right direction. Figure 50. Penny: Store Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 Number of Stores 3,561 3,544 3,540 Germany 2,241 2,200 2,168 International 1,320 1,344 1,372 Sales Area (Thou. Sq. M.) 2,452 2,461 2,474 Germany 1,549 1,534 1,522 903 927 952 Sales per Store (€ Thou.) 2,945 3,049 3,065 Germany 2,929 3,068 3,135 International 2,974 3,017 2,952 Sales per Sq. M. (€) 4,295 4,410 4,400 Germany 4,258 4,419 4,481 International 4,361 4,393 4,268 International Source: Company reports/FBIC Global Retail & Technology Figure 51. Penny: International Store Numbers, by Country (Fiscal Year Ending Dec.) 2014 Austria 285 Italy 317 Czech Republic 353 Romania 171 Hungary 197 Bulgaria Total 49 1,372 Source: Company reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 41
DIA • Revenue growth in 2014: 0.9% DIA is positioned firmly toward the softer end of discounting, and appears to be moving even further in that direction as competitors such as Lidl and Aldi push away from hard-‐end retailing. A customer loyalty card, a strong presence of brands, more SKUs in total (up to 3,500) and multiple store formats indicate how far DIA has strayed from the hard-‐discount model. The company describes its model as the “two Ps”—proximity and price—it is positioned as a neighborhood retailer rather than as a destination store. Facing strong competition in Europe, DIA has turned in weak performances.
Facing strong competition in Europe and despite investments in new and upgraded stores, DIA has turned in weak performances. Revenues in France were on a steady downward path before the sale of French operations in 2014. And a small decline in total Portuguese store numbers was not enough to explain the dismal performance there in 2014. Heightened competition from Lidl is likely to be hitting DIA’s share of the market in Portugal. DIA’s underperformance underlines that it is wrong to view discount as a growth channel across the board: those retailers that are winning in discount are doing so because they are adapting and offering what shoppers want. This is not simply a rising tide that will lift every discount player with it. Figure 52. DIA: YoY % Change in Revenues, in National Currencies, 2014 % Spain 0.4 Portugal -‐7.2 Argentina 53.9 Brazil 15.4 China -‐1.0 Source: Company reports/FBIC Global Retail & Technology DIA has been selectively exiting markets in order to focus on its core Iberian network and its faster-‐growing emerging-‐markets operations. It divested its Turkish and Beijing operations in 2013 and sold its French operations to Carrefour in 2014 as it sought to focus on markets “with brighter prospects.” 42%
DIA has a substantial franchised operation—some 42% of its stores were operated under franchise in 2014.
With a large legacy estate, some 39.9% of capex was dedicated to store openings in 2014, compared to 60.1% for “transformation and maintenance.” DIA has a substantial franchised operation—some 42% of its stores were operated under franchise in 2014—so reported revenues will not reflect final sales at retail selling prices. Gross sales under banner, a metric provided by the company, is a better reflection of final retail sales. The table below presents DIA’s gross sales metric, including and excluding divested operations. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 42
Figure 53. DIA: Key Financial Metrics—Gross Sales Under Banner (Fiscal Year Ending Dec.) 2012 2013 2014 11,679 11,476 9,400 Gross Sales Under Banner Excluding Divested Operations (€ Mil.)* 8,765 9,297 9,400 Gross Sales Under Banner (Unadjusted; US$ Mil.) 15,015 15,241 12,492 Gross Sales Under Banner Excluding Divested Operations (US$ Mil.)* 11,268 12,346 12,492 Gross Sales Under Banner (Unadjusted; € Mil.) *All years exclude Turkey and Beijing operations (divested in 2013) and France operations (divested in 2014). Source: Company reports/FBIC Global Retail & Technology Total revenues, shown below, are restated to exclude operations in Turkey and Beijing in 2012 and in France in 2013. These revenues do not represent final retail sales, due to the presence of franchised stores. Revenues and gross sales under banner include some turnover from nongrocery operations, including the Clarel drugstore chain after 2013. Figure 54. DIA: Key Financial Metrics (Fiscal Year Ending Dec.) 2012* 2013** 2014 9,839 8,040 8,116 12,649 10,677 10,786 Operating Margin (%) 3.1 4.4 4.0 Net Profit (€ Mil.) 146 196 329 331.7 361.8 349.4 Total Revenues (€ Mil.) Total Revenues (US$ Mil.) Capex (€ Mil.) *Restated to exclude Turkey and Beijing operations **Restated to exclude France operations Source: Company reports/FBIC Global Retail & Technology DIA’s reported gross sales under banner translate to very low sales per store relative to Europe’s other big discounters. The figures suggest that DIA is pushing through much lower volumes on a per-‐SKU basis: the company’s private-‐label SKUs run to 8,300 in total and even in its smallest stores, DIA stocks a broader range of products (more than 2,800 SKUs) than is traditional in hard discount. Sales-‐per-‐store figures suggest that DIA sees lower volumes per SKU than many rivals.
Pushing high volumes through each SKU is conventionally a cornerstone of hard discount. It is a key driver of low prices. The sales-‐per-‐store figures suggest that DIA sees far lower volumes per SKU than many of its rivals do. DIA’s sales per store have been hit by two factors that top-‐line store-‐
number data may not reflect: the acquisition of a tranche of former Schlecker drugstores in 2013 and the sale of its Turkish and Beijing stores (in 2013) and French operations (in 2014). The acquired drugstores, while compensating in store numbers, will almost certainly turn in much lower sales per store than the divested grocery outlets DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 43
Figure 55. DIA: Store Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 Stores* 6,914 7,328 7,306 Owned 4,024 4,337 4,221 Franchised 2,890 2,991 3,085 Gross Sales per Store (€ Thou.) 1,699 1,612 1,285 *Not restated; includes stores subsequently divested Source: Company reports/FBIC Global Retail & Technology The acquisition of drugstores from the bankrupt Schlecker chain in 2013 boosted store numbers in Spain and Portugal. The chain was subsequently rebranded as Clarel, a discount drugstore chain. Figure 56. DIA: Number of Stores by Country (Fiscal Year Ending Dec.) 2012 2013 2014 2,925 4,151 4,781 Portugal 572 641 634 Argentina 559 643 724 Brazil 561 667 799 China 316 361 368 France 888 865 N/A Turkey 1,093 N/A N/A Spain Source: Company reports/FBIC Global Retail & Technology Biedronka • Revenue growth in 2014: 9.1% (in Polish zlotys) Biedronka’s metrics have recently disappointed, with comps declining and then turning negative.
Biedronka will launch smaller stores in urban locations and overhauling some existing stores.
Biedronka powered ahead in Poland in recent years, cementing its market leadership and stealing share from nondiscount rivals such as Tesco and Auchan. This retailer is owned by Portugal’s Jerónimo Martins, but it is present only in Poland. In 2013 and 2014, Biedronka’s metrics disappointed: comps declined and then turned negative, while EBITDA margins fell. Deflation in the Polish sector contributed. The company said comps in volume terms were up 1% in 2014, and margins are likely to have been hit by strong price competition. It would be wrong to interpret Biedronka’s faltering as a sign that the Polish discounter segment is now saturated, but as big names such as Lidl, Kaufland and Netto have piled in, competition has become tougher. Jerónimo Martins says that Biedronka’s focus will now be on improving comps rather than on the rapid expansion we have seen in the past. The company has also said that price alone will not be enough to sustain growth, so it will put a greater emphasis on innovation and attractive store environments. Biedronka had already been investing in improved fresh offerings. Now, it will be launching convenience formats in urban locations and overhauling some existing stores. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 44
This is another sign that a basic, hard-‐discount proposition may no longer be enough to sustain top-‐line momentum, and that investment in an appealing proposition is necessary to win in this sector. We expect capex to refocus on store revamps: in fiscal year 2014, some 61.8% of Jerónimo Martins’s total capex was on expansion, versus just 24.8% on revamps. Figure 57. Biedronka: Key Financial Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 Revenues (€ Mil.) 6,731 7,703 8,432 Revenues (US$ Mil.) 8,653 10,230 11,206 EBITDA Margin (%) 8.2 7.8 6.8 Comparable Store Sales Growth (%) 6.4 4.2 -‐0.8 396.1 401.8 360.5 Capex (€ Mil.) Source: Company reports/FBIC Global Retail & Technology Figure 58. Biedronka: Store Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 Number of Stores 2,125 2,393 2,587 Sales Area (Thou. Sq. M.) 1,301 1,496 1,650 Sales per Store (€ Thou.) 3,367 3,410 3,386 Sales per Sq. M. (€) 5,576 5,509 5,361 Source: Company reports/FBIC Global Retail & Technology Trader Joe’s Just as Lidl has a sister chain, Kaufland, in the hypermarket format, Aldi has an associated fascia: Trader Joe’s. It is a US-‐only specialty grocery chain, a kind of lower-‐end Whole Foods Market. Trader Joe’s is owned by a family trust established by Theo Albrecht, the late founder of Aldi Nord (apparently—this is secretive Aldi, after all), although it is not part of Aldi. Given that Aldi Süd operates the Aldi fascia in the US and that the Aldi companies have an agreement to not compete head-‐to-‐head in international markets, the Trader Joe’s fascia allows both Aldi Süd and Aldi Nord to tap the world’s largest grocery market. 50%
Trader Joe’s sales surged 50% between 2009 and 2014.
We consider Trader Joe’s to be a borderline discounter. It has some of the core elements of discount, most notably limited ranges (c. 4,000 SKUs) and a focus on private label (reportedly c. 80% of SKUs). Yet it has a specialist positioning, with store environments, customer service (including staff emblazoned with Hawaiian shirts) and a focus on organic and premium or gourmet foods that run counter to the norms in discount retail. This positioning may in part stem from its Californian roots—the retailer was established as an independent store before being acquired by the Albrecht family in 1979, and it didn’t expand outside the state until 1993. And it helps explains Trader Joe’s presence in upscale neighbourhoods such as Manhattan’s Chelsea district. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 45
It’s a format that has evidently proved popular: between 2009 and 2014, store numbers rose 31% and sales surged 50% over the same period, says the NRF. Being privately owned by the secretive Albrecht family means Trader Joe’s releases no operational data. Figure 59. Trader Joe’s Estimated Net Revenues (Fiscal Year Ending Dec.) 2012 2013 2014 Trader Joe’s (US$ Mil.) 7,844 8,350 9,388 Trader Joe’s (€ Mil.) 6,103 6,289 7,072 Source: NRF/FBIC Global Retail & Technology Figure 60. Trader Joe’s: Store Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 395 410 447 Sales per Outlet (US$ Thou.) 20,348 20,745 21,909 Sale per Outlet (€ Thou.) 15,832 15,625 16,504 No. of Stores Source: NRF/FBIC Global Retail & Technology Source: Wikimedia Commons DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 46
REMA 1000 • Revenue growth in 2014: 8.8% (in Norwegian kroner) Norway’s high grocery prices have contributed to REMA 1000’s growth.
Norway-‐based REMA 1000 has grown on the back of consumer demand for cheaper food in a country that has traditionally been burdened with highly priced groceries. Significant portfolio growth, of 5% in 2013 and 3% in 2014, has buoyed the top line as REMA 1000 has tapped Norwegian shopper demand for discounters, demand that has also boosted rivals such as KIWI. REMA 1000 is owned by Reitan Group, and has stores in Denmark, but will reportedly not open any in Sweden as long as Reitan maintains an interest in Axfood, a Swedish grocery group that operates the Willys discount chain. Figure 61. REMA 1000: Key Financial Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 41,288 45,646 49,656 Revenues (€ Mil.) 5,520 5,852 5,944 Revenues (US$ Mil.) 7,093 7,769 7,905 Revenues (NOK Mil.) Operating Margin (%) Net Profit (NOK Mil.) 3.9 3.6 3.7 1,041 1,160 1,259 139 149 151 Net Profit (€ Mil.) Source: Company reports/FBIC Global Retail & Technology The unusually high prices of groceries in Norway are partially responsible for REMA 1000’s very high sales per store. Figure 62. REMA 1000: Store Metrics (Fiscal Year Ending Dec.) 2012 2013 2014 Stores 737 776 800 Norway 505 528 541 Denmark 232 248 259 7,619 7,735 7,543 Sales per Store (€ Thou.) Source: Company reports/FBIC Global Retail & Technology Netto • Revenue growth in 2014: 0.4% (Dansk Supermarked total; in Danish kroner) Present in Germany, Poland, Sweden and the UK as well as its home market of Denmark, Netto is part of the privately owned Dansk Supermarked Group. As a consequence, financial disclosure is limited. Dansk Supermarked’s total revenue growth was negligible in 2014, suggesting that Netto has not seen the strong growth enjoyed by some of its bigger rivals. In 2014, Netto unveiled a 50/50 joint venture with British grocer Sainsbury’s, and relaunched in the UK market. Netto hopes to tap some of the explosive growth in the UK discount channel as British consumers flock to Aldi and Lidl. Sainsbury’s, meanwhile, said that the agreement “provides a great opportunity for us to gain exposure to the high growth discount DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 47
market.” The joint venture initially plans to open 15 stores by the end of 2015. 193
Netto exited the UK market in 2010, selling its 193 stores to British grocer Asda.
In line with a general increase in standards across UK discounting, the new British Netto stores have higher-‐quality store fits and a greater emphasis on fresh foods such as bakery than Netto’s old stores did when they last appeared in the UK market. Netto exited the UK market in 2010, selling its 193 stores to British grocer Asda. Since that disposal, however, the discount channel has boomed in Britain as Aldi and Lidl have expanded quickly and stolen share from nondiscount rivals. Dansk Supermarked does not break out revenues for Netto from its Bilka and Føtex grocery chains, but we estimate that Netto accounts for the lion’s share of group sales. • We estimate that Netto’s sales were in the region of €5.5 billion (US$7.3 billion) in 2014, equivalent to almost three-‐quarters of total Dansk Supermarked revenues. This is based on estimated sales per store across its countries of operation, factoring in trends for higher sales per store in Nordic countries. Our estimates suggest that Netto saw in the region of €4.2 million in annual sales per store. Figure 63. Dansk Supermarked: Key Financial Metrics (Fiscal Year Ending Nov.) 2012 2013 2014 55,610 56,857 57,074 Revenues (€ Mil.) 7,468 7,625 7,654 Revenues (US$ Mil.) 9,601 10,125 10,172 3.1 4.2 4.2 1,476 1,938 1,819 198 260 244 Revenues (DKK Mil.) Operating Margin (%) Net Profit (DKK Mil.) Net Profit (€ Mil.) Source: Company reports/FBIC Global Retail & Technology The Dansk Supermarked Group also includes 18 Bilka stores, 88 Føtex stores and two Salling department stores, in addition to the 1,304 Netto stores itemized below. The German Netto stores affiliated with Dansk Supermarked are entirely separate from Netto Marken-‐Discount, which is owned by Edeka. Figure 64. Netto: Number of Stores (Fiscal Year Ending Nov.) 2012 2013 2014 1,210 1,271 1,304 Denmark 441 452 457 Germany 345 350 351 Poland 276 314 334 Sweden 148 155 157 0 0 5 Total UK Source: Company reports/FBIC Global Retail & Technology DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 48
IN SUMMARY The biggest discounters have made substantial gains in international markets. But, as we have shown in this report, it is too simplistic to declare that the discount channel is universally a growth channel, or that it is destined to inexorably continue making rapid gains. Looking back, some players, such as Penny, have turned in disappointing growth, while consumer indifference in some regions has prompted declining sales and store closures even at successful chains such as Lidl. Moreover, in some countries, discounters were a slow-‐burning channel for a number of years before they saw a rapid uptick in market share, which was often prompted by better marketing and the adoption of a more appealing proposition. Consumers in some countries could tire of the inconveniences associated with discounter shopping
Looking ahead, the biggest medium-‐term risk is that consumers in some countries will tire of the inconveniences associated with discounter shopping. High-‐growth forecasts rest on the assumption that a growing proportion of shoppers across the world will sacrifice convenience to shop at discount stores. We expect strong growth over the short-‐to-‐medium term on a global level, which will pressure retailers in markets such as the US, the UK and Australia. But we think there are reasons to be more cautious beyond this, as some consumers will start to (re)prioritize convenience. This risk is likely to be greatest in those countries with traditions of big-‐store shopping or with strong demand for online grocery shopping. DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 49
Deborah Weinswig, CPA Executive Director—Head of Global Retail & Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: +852 6119 1779 [email protected] John Mercer [email protected] Filippo Battaini [email protected] Marie Driscoll, CFA [email protected] John Harmon, CFA [email protected] Aragorn Ho [email protected] Shoshana Pollack [email protected] Kiril Popov [email protected] Jing Wang [email protected] Steven Winnick [email protected] HONG KONG: 10th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 2470 LONDON: 242-‐246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 NEW YORK: th
1359 Broadway, 9 Floor New York, NY 10018 Tel: 646 839 7017 FBICGROUP.COM DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved. 50

European Grocery Discounters report Nov. 2015

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