Retail Outlook 2016Paul Martin

UK Head of Retail

KPMG UK

For NG Retail Event, Dublin October 2016

2

Key factors impacting Retailers & Consumer Goods companies 20161. UK’s referendum on EU membership

3. Low commodity prices

2. FX rates

4. Continuing global uncertainties

• The UK’s leave vote is creating high market

volatility and is weakening both business and

consumer confidence.

• Initial impact will be predominantly focussed on fx

rates with Sterling weakening

• Long-term volatility depends on future

governments plan and exit negotiations with the

EU

• Sterling has already reached 31 year low against USD.

This will specifically impact non-food retailers due to

their high-dependency on USD buying

• The US has began the long haul back to a more

normal interest rate policy at the end of last year

which has strengthened the USD

• A number of currencies in key Export markets have

lost significant value over recent years

e.g. Russian Rouble

• Commodity prices have fallen significantly, with oil at

$120 per barrel in 2012 - now at around $40.

• Positive for consumers and business customers in the

UK, but large oil companies will continue to struggle as

their cashflow withers.

• Demand for other commodities is low, especially for

industrial commodities, which is why prices

may stay persistently low.

• China will continue to decelerate with a predicted 6.8%

growth in 2016 (IMF), dragging emerging markets down

and slowing growth in rich nations.

• Brazil and Russia’s recessions will continue with both

economies to continue shrinking slowly in 2016.

• Eurozone debt crisis may also impact the economy,

however it is showing slow signs of recovery

• Economic growth in the Middle East and

North Africa (MENA) is stagnating.

Source: IMF

3

Brexit presents both challenge and opportunity What’s going on:

• The UK will begin to exit the EU in April 2017

• UK participation in the European Single Market is undecided

• The pound continues to fall against the dollar, with an expectation towards parity

• Unforseen FX hedging costs• Personnel costs may rise -

• National living wage will likely raise costs

• Businesses will be expected to invest in and train its staff

• Restriction in migration may result in higher labour cost

• Sourcing international design talent might be impacted

• A pricing policy decision will need to be made to pass on or absorb costs

• Potential for longer inventory times and customs hassles

• If exporting to Europe could incur costs e.g. customs warehousing

• Data privacy and sharing laws will need to be reviewed (e.g. Denmark)

Challenges

• Lower tariffs - no longer paying

external EU tariffs on clothes

• Positive exposure to €/$ if trading

overseas

• Business models that are more

efficient or relies on less staff are likely

to be more successful in the current

environment

• Sourcing locally could offer cost

savings, though first need to consider

our competitive position

• Originally tariff-free sources of product

will have to change (e.g. Turkey), but

Bangladesh, India and China are still

relatively lower cost options

• Potentially positive impact on the

share price (inverse to dollar/pound)

Opportunities

Source: interview with KPMG BRC Expert Mark Essex

4

Economic and retail outlook by region: Europe

Germany1.2% (GDP)1.2% (retail sales)

UK1.5% (GDP)

1.9% (retail sales)

France1.4% (GDP)

1.0% (retail sales)

Italy1.1% (GDP)

0.9% (retail sales)

Russia1.1% (GDP)

0.0% (retail sales)

Spain1.9% (GDP)

2.5% (retail sales)Turkey

3.7% (GDP)1.4% (retail sales)

Sweden2.2% (GDP)

1.5% (retail sales)

Netherlands1.5% (GDP)

0.8% (retail sales)

Switzerland1.6% (GDP)

0.6% (retail sales)

GDP growth forecast 2016f-2020f (CAGR) [real]

Total retail sales growth forecast 2016f-2020f (CAGR) [real]Source: Euromonitor, KPMG Boxwood analysis

5

80%

85%

90%

95%

100%

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

% o

f re

tail

sale

s

Western Europe

Store-based retailing Non-store retailing

European Retail Outlook

12% non-store

retailing

W European Consumer Spending W Europe Channel Overview

STORE VS NON-STORE Online Category split

Source: Euromonitor; WeAreSocial; Adyen

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

USD

bn

RETAIL CHANNEL

2010-2020 CAGR

Supermarket 1%

Internet 12%

Leisure & personal -0%

Direct 2%

Hypermarket 1%Health & BeautyHome & garden -0%

Discounters 3%

Vending 0%

Electronics & appliances

0%

Mixed 1%

0%

Home shopping -8%

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

USD

per

cap

ita

Consumer spending

Consumer spend Retail spend

The Age of Disruption

7

Disruptors

Poundland

B&M

ALDI

Cdiscount

Uber

Amazon

Argos

Asos

Hello Fresh

Zappos.com

Thread.com

Warby Parker

Build A Bear

Workshop

Niketown

Hamleys

ValueConvenience

Experience

8

Designer glasses

without the designer

price tag

Redefining food

shopping

A personal stylist on

your phone

1

Warby Parker

2

Hello Fresh

3

Thread.com

Top 10 Retail Trends

10

Retail macro trendsFulfilmentConvenience

Connected homeBusiness model Artificial intelligence

Internationalisation

Omni-channel

Innovation

Consumer power

Discounters

Theme 1:Discounters

12

Both Aldi and Lidl have grown consistently

36,293

51,898

29,349

48,986

20,000

30,000

40,000

50,000

60,000

€m

n

Year

Retail Value RSP

Aldi Lidl

+3.6%

+5.3%

Source: Euromonitor

1,000

3,000

5,000

7,000

9,000

Num

ber

of

outlets

Year

Number of outlets

Aldi Lidl

8016

8462

Western Europe market

Compound Annual Growth Rates notedWestern Europe market

13

Discounters continue to threaten the multiples market position

Discounters gain significant market share, predominantly from AsdaMarket shares: UK Retailers (2013-2015)

Asda’s low price proposition is under threat from the discounters

‘The Grocer 33’ basket comparison: UK Retailers (2014-2015)

Asda market share declines to 16.4% below Sainsbury (16.5%)

for first time in 3 years

0%

5%

10%

15%

20%

25%

30%

35%

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Mar

ket S

hare

(%)

Tesco Asda JS Morrisons Aldi Lidl

Source: Kantar 12 week market shares (March 2013 – July 2015)

Source: The Grocer 33 (Average basket price: 15/08/14, 7/11/14, 5/12/14, 13/3/15, 8/5/15, 2/7/15,

24/7/15)

66.96

61.0257.66 56.45

54.23

47.1844.27

0

10

20

30

40

50

60

70

80

Avera

ge b

asket com

parison (

£)

14

Supermarketisation - Lidl Rushden

15

Case study: Trader Joe’s

15

• Founded in in 1958 in California, this chain is owned by ALDI

since 1979

• Over 450 stores in the US located

• Phenomenal growth: sales up from $2.1bn in 2003 to $9.4bn in

2014

• For the last three years named by consumers as their overall

favourite store (survey by Market Force Information)

TJ is targeting different customer segments: from cost-conscious to

cool college kids to trendy well-heeled urbanites

What’s unique

• Elevate food shopping from a chore to a cultural experience

• Focus on gourmet, organic, natural, MSG free products, mostly

private label

• Quirky fashionable products at a Walmart’s price point, many of

which you won’t see anywhere else (80% of stock is own label)

• Friendly ‘neighbourhood store’ type customer service

• Competing on price is not the only option – TJ is an example of how a chain with many characteristics of a discounter can position themselves

differently and target different customer segments

• Some of the Trader Joe's-branded products are already in Aldi stores in Europe – when will they be in Croatia?

World’s leading private label organic supermarket

Value Proposition

“Trader Joe’s doesn’t pick up on trends — it sets

them”

A Trader Joe’s buyer

High Sales Density

• Standardised store layout with most locations about 1,100m2

• Low SKU count (4,000) – they don’t carry all the necessities

• Whenever possible, Trader Joe’s purchases directly from the

manufacturers

• Small stores rely on timely distribution and don’t have large back

rooms

• Good pay and employee culture help maintain customer service and

low employee turnover (4%)

Operating Model

Trader Joe’s

stores

operate at

one of the

highest sales

density levels

in the US –

over $1,750

per sq. f.

16

The trend towards “Supermarketisation”

Value

Experience

Convenience

17

Case study: Mercadona

• Spain’s leading grocery retailer operating

supermarkets predominantly located in or

the edge of town centres

• A benchmark for retail productivity in Spain

– sales per employee up by 62% between

2004 and 2012

• Sales: €18.2bn, growth of 20% between

2010 and 2014 while overall Spanish

household consumption contracted by 2%

• 1,576 stores, with plans to open a further

200 stores by 2018“Mercadona wants to control its supplies totally,

to dictate what they produce, when and how.”

Javier Alfonso, author of “Mercadona, a success story”

2010 2011 2012 2013 2014

Sales (€m

ex.VAT)15,055 16,284 17,422 17,849 18,163

Operating

profit560 641 656 660 675

Outlet

numbers1,310 1,356 1,411 1,467 1,521

Sales area

(‘000 sqm)1,680 1,769 1,851 1,894 1,919

Sales per

outlet

(€’000)

11,698 12,216 12,597 12,404 12,157

Sales per

sqm (€)9,123 9,443 9,625 9,532 9,527

18

Case study: Mercadona continuedValue Proposition

• Mid-market offering with excellent quality

to price ratio

• Up to 8,000 branded and private label

lines; private label accounts for over 20%

of Spain’s private label sales by volume

• Everyday Low Prices policy with stable

prices and low promotion share

• Customer is at the top of the company’s

organizational pyramid - high standards of

customer service and constant

dialogue with the customer

Operating Model

• Integrated supplier model - close relationship

with a group of suppliers that exclusively

produce for Mercadona, often in exchange for

Mercadona’s investment.

• Tight control over costs across the supply

chain, e.g. working with suppliers to eliminate

the glossy finish on some packaging

• Innovation over imitation of popular brands -

Mercadona has its own laboratories where

they invite customers to showcase and test

their products

• High employee morale and low turnover

boosted by high job security (90% permanent

contracts) and above average pay

• Total control over supply chain and customer centricity allowed Mercadona to become the

market leader with over 20% market share

• Mercadona has successfully withstood the economic downturn and competition from discounters

– will it last in the online age?

Theme 2:Connected Home & AI

20

The Connected Home

Automation &

control

•Temperature

•Lighting

•Blinds

•Garden

Security &

monitoring

• Cameras

• Monitoring

Energy

management

• Intelligent

thermostats

• Consumption

management

Entertainment

&

communication

• Access in and

out of home

Wellness

•Heath

monitoring

•Assisted living

Lifestyle

automation

• Making

shopping

easier

“Home” encompasses both the fabric and environment of the dwelling and the well being of people. The

connected home is no different. The connected home offers a huge spectrum of benefits, spanning the

provision of protection, convenience and environmental improvements to its inhabitants as well as delivering

entertainment, wellness and lifestyle benefits. These are available whether the occupants are In or away

from the house.

21

The Connected Home: the 5 ‘Cs’

Customer

• Loyalty + trust

• Complex sales

• Tech service

• Relationship

management

• Insight +

Analytics

$400-700bn market by 2019 | Growth of 50-60% annually over the next 5 years | 25bn connected devices by 2020

Connectivity

• Infrastructure

• ID management

• Social

• Platform +

Automation

• Geofencing +

triggers

• Provider

management

Cloud

• Storage

capability

• Access quality

• Security

• Cross platform

integration

Content

• Delivery channel

• Media

development

• Learning +

curation

• Provider

management

Kit

• Media and social

tech

• Beacons +

controls

• Ambient

computing

• Non-media tech

• White goods

• Wearables

22

Robotics in the value chain

Strategy &

PropositionAttract Buy SellSupply Relate

Support (Finance, Property, HR, IT, Partners)

Robots are talking

to us!

30% of Amazon

marketplace sales

are priced by

algorithms!

• A robot in the

board of

directors!

• Bring back

production

thanks to

robotics!

• Robots are

replacing

warehouse

workers!

• Self-driving

trucks have

arrived!

Robots

entertain me in

the shop!

An algorithm is telling

me to replace failing

parts!

I’ve been hired

by an

algorithm!

KPMG UK LLP

15 Canada Square

London

E14 5GL

United Kingdom

Paul Martin

UK Head of Retail, KPMG UK LLP+44 7551 152088

paul.martin@kpmg.co.uk

DisclaimerThe information contained herein is of a general nature and is not intended to address the

circumstances of any particular individual or entity. Although we endeavour to provide accurate and

timely information, there can be no guarantee that such information is accurate as of the date it is

received or that it will continue to be accurate in the future. No one should act on such information

without appropriate professional advice after a thorough examination of the particular situation.