European Trends and Implications for Portugal. By Boris Planer

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2 European Trends and Implications for Portugal By Boris Planer Planet Retail Ltd January 2012

3 Contents 1. Economy & Demography 2. Retail Evolution 3. Trends 3

4 1 Economy & Demography 4

5 Key Framework Trends - Overview Europe continues to be divided economically. Positive outlook for countries benefiting from emerging markets growth and featuring stable domestic economy (e.g. Germany). Difficult outlook for countries struck by public and household debt crises (UK, Ireland, Spain, Greece, Portugal), with most problems coming from the inside. Portugal unlikely to return to pre-crisis output levels until 2015, Greece to follow in 2016/17 (in real terms, today s forecasts). Structural adaptations in retail will be accordingly deep & fast (unlike Germany, where it is largely business as usual). IMF/ECB/EU bailouts have helped to avoid chaos, but they guarantee that predictably tough times are ahead. Consumer confidence is key in a country like Portugal. But not all structural change is economy-led. Further drivers are demographic trends and technological progress. 5

6 Portugal is not the worst case in the EU, but it is fairly close to the bottom Consumer Spending: Real Growth, (%) Greece UK Portugal Germany -6 6 Source: IMF, Planet Retail

7 Real growth index shows how deep the crisis really is GDP: Real Growth Index, (2007 = 100) 110,00 100, ,00 Greece UK Portugal Germany 80,00 7 Source: IMF, Planet Retail

8 Consumer spending will rise in nominal terms Consumer Spending per Capita, (EUR) 25000, , , ,0 5000,0,0 UK Germany Spain Portugal Source: IMF, Planet Retail

9 Healthy inflation rates do not equal absence of problems Annual Consumer Price Inflation, (%) 5,000 4,000 3,000 2,000 1,000, ,000-2,000 Greece UK Portugal Germany 9 Source: IMF, Planet Retail

10 Portugal needs positive vision to restore consumer confidence Consumer spending/gdp ratio (%), USA Portugal UK Germany China Source: IMF, Planet Retail

11 Unemployment continues to hit confidence Portugal looking bad but not the worst Unemployment Rate, 2000 Q (%) 25% 20% Spain Portugal EU 27 15% 10% 5% 0% Source: Eurostat

-5.3% May -5.7% June -6.1% July - 6.7% 2010 2011 August -7.1% September -7.

12 Dropping petrol sales due to unemployment & income pressure - to affect hypermarkets Portugal: Gasoline Consumption Year-on-Year Change, (in 1,000 tons) April -5.3% May -5.7% June -6.1% July - 6.7% August -7.1% September -7.7% October -8.1% 1250,0 1300,0 1350,0 1400,0 1450,0 1500,0 1550,0 1600,0 12 Source: Planet Retail

13 Demographic change under way fast will require more income re-distribution Portugal vs EU 27: Population Structure, % 90% 80% 70% 60% 50% EU 27 40% 30% 30.4% 27.7% 20% 10% 0% Source: Eurostat

14 Birth rates show this trend will last unless eliminated by immigration Portugal: Birth Rates, (per 1,000) Source: World Bank

1985-2010 3,500 3,00 2,500 2,00 1,500 1,00 1985 1990 1995

15 Smaller households also reflect modern lifestyles more shopping close to home Portugal: Average Household Size, ,500 3,00 2,500 2,00 1,500 1, Source: Instituto Nacional de Estatística

16 2 Retail Evolution 16

17 Key Retail Evolution Trends - Overview The crisis will continue to cause carnage in vulnerable (non-essential/ deferrable) categories. With Portugal s retail sector less concentrated than counterparts of northern Europe and with the economy doing worse retail shakeout will be stronger here. In the more resistant food category, weakest players will exit (mostly small and independent players). Independent traders most vulnerable due to extra cost in the system. Their exit will make room for city/town centre chain stores. Traditional retail in Portugal should settle at below 10% of market in the long term (30 years?) Concentration process irreversible, but Portugal will emerge with stronger retail sector. 17

18 Visible concentration trend, accelerated by crisis - Spain most dynamic Grocery Market Shares Top 10 Companies, (%) Spain Portugal UK Germany Source: Planet Retail

19 Crisis is accelerating shakeout among Portugal s independents Share of Modern Trade of Grocery Retailing , (%) 2000 UK Germany Spain Portugal ,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0 100,0 19 Source: IMF, Planet Retail

20 3 Trends 20

21 Key Retail Sector Trends - Overview Retail shareholders interests not necessarily identical with customers interests in years ahead (private ownership is what makes German retail strong in hard times). This is a time to follow demand, rather than creating it as consumer behaviour has become more professional. Demand is for good-quality essential products at affordable prices from more easily-accessible store locations sustainability component also coming, but from low level. Affordability issue reflected through reduced choice, more private label, more targeted ranges and petrol-saving easy access. Accessibility efforts reflected through shift back towards city centres, as well as spread of multi-channel strategies, including e-commerce. Internationalisation remains a selective process, partly moves online. Access to capital to remain difficult. 21

Out-of-town retail is under pressure as town centre locations are on the rise

shift, a long-term development but already visible.

specialists / online rivals High petrol prices have made shoppers avoid out-of-town

22 Out-of-town retail is under pressure as town centre locations are on the rise Hypermarkets have been under pressure in both the US and Europe, nearing saturation point. Smaller household sizes and ageing populations favour central shopping which is a slow shift, a long-term development but already visible. Non-food at hypermarkets has been hit by economic weakness, new high street specialists / online rivals High petrol prices have made shoppers avoid out-of-town trips. US & European retailers already reacting with roll-out of central formats. Market concentration continues, groups to expand at expense of independents. 22 Carrefour Express, Belgium Tesco Express, UK Sainsbury s Local, UK

23 Portuguese not deserting hypermarkets as fast as US and German consumers Hypermarket Operators: Like-for-like Growth, Q Q3-2011, (%) Q Q2 Q3 Q4 Q Q2 Q3 Q4 Q Q2 Q3 Q4 Q Q2 Q3-02 Walmart US -03 Metro Group Real Sonae MC Source: Planet Retail

Consumers will remember retailers who offer what they need Shopping

Non-essential, deferrable and many added-value lines of less

24 Consumers will remember retailers who offer what they need Shopping behaviour is now more professional (shopping lists, better fridge management). Mass market needs good-quality essential products with late date of expiry at affordable prices. Crisis cannot be waited out, product offer needs to adapt. Non-essential, deferrable and many added-value lines of less importance, double-digit decreases in some non-food categories. A more streamlined product offer will help take cost out of distribution (independent sector at disadvantage). 24

(Switzerland: 46%, UK 43%, Germany 32%).

25 Significant expansion potential for private label lines Private label will move more into focus of attention (disadvantage for small and independent grocers). Nielsen 2010: number of Portuguese consumers buying more PL +74%. Nielsen 2011: PL share Portugal 25% (Switzerland: 46%, UK 43%, Germany 32%). Opportunities for upmarket ready meals as foodservice sector suffers. Interesting projects on private label endorsement (Carrefour France, Walmart/ Asda UK, Migros Switzerland 25

26 Internationalisation has gone careful... The area of wild flag-planting is definitely over. For around 10 years, the ideal has been to operate in a comparatively small number of markets while achieving strong market positions. Famous market exits: Walmart from Germany and South Korea; Carrefour from South Korea, the Czech Republic and Slovakia; and Ahold from all of Asia and Latin America. Carrefour and Tengelmann have withdrawn from Portugal... Main investment stream now to Asia and Latin America, requires strong localisation in store formats and product offer. Requires strong home market operation to cross-finance start-up-losses. 26

27 Internationalisation: Ahold Active Reduced ( ) Inactive 27

28 Internationalisation: Carrefour Active Inactive 28

...and globalisation is increasingly moving online As a lower-risk route to market, globalisation is going increasingly online/ global shipping

Next step: offering local language sites beyond global top markets, plus local currency options and delivery services.

29 ...and globalisation is increasingly moving online As a lower-risk route to market, globalisation is going increasingly online/ global shipping services (M&S online now in over 80 markets). Next step: offering local language sites beyond global top markets, plus local currency options and delivery services. Even small retailers can go global now, and with product offers far beyond what they sell instore (Schlecker). Don t expect any large-scale grocery bricks and mortar market entries for Portugal, but international e-commerce sites could put pressure on domestic non-food sector. 29

30 Online grocery retail is yet to take off......as e-commerce largely remains in the non-food domain Grocery online is difficult to do profitably in a mass-market without delivery fees. Germany is not ready for it, the UK and Switzerland are (traditional priorities in shopping behaviour). Click & collect emerging as sensible compromise approach, offering convenience to client while saving the retailer delivery charges danger to pure-play grocery e-commerce. E- and m-commerce will advance as the crisis passes, a stronger retail sector emerges, broadband grows, smartphones spread and importantly a very different generation (post-95) grows up. Tesco working hard to make model viable in emerging markets. This is not about eliminating bricks and mortar shopping, which has significant sensual rewards, but about giving customers the options they will increasingly expect. 30

Go where the customers are: the future will look more multi-channel As US and European shoppers get more

.. increasingly online shopping is also moving mobile.

neighbourhood stores, convenience stores, discount stores and online channels these are often complemented by

31 Go where the customers are: the future will look more multi-channel As US and European shoppers get more selective, they expect the comfort of buying in different ways: out-of-town, near the home, near the job, online... increasingly online shopping is also moving mobile... Most of Europe s leading grocers already operate mixed portfolios of hypermarkets, superstores, supermarkets, neighbourhood stores, convenience stores, discount stores and online channels these are often complemented by non-food banners. Small-format expertise will be key for expansion in emerging markets less urbanised areas, as well as in a consolidating market like Portugal. Biedronka, Poland 31

32 Summary Outlook of extended economic crisis will lead to continued shakeout in retail sector. Weakest players in most vulnerable categories to go first. European retail sector will emerge stronger from the crisis if it adapts to changed demand. Demand is for good-quality essential products at affordable prices from more easily-accessible store locations. Consumers will emerge from crisis more careful and selective. Private label still with significant potential in Portugal, with new opportunities to get customers involved. Cont... 32

33 Summary Demographic and technological change to support focus of retail investment on neighbourhood areas and online. Multi-channel approach as strategy of leading players as they will allow customers to buy how, when and where they want. Multi-channel also to involve e- and m-commerce opportunities as a very different new generation grows up. In grocery e-commerce, bricks and mortar players are at an advantage due to their ability to offer click & collect as a more viable approach. Bricks and mortar retail internationalisation will continue to be prudent and selective no large grocery market entries expected for Portugal. 33

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The winning formats in CEE Planet Retail Ltd October 2010 part of About Planet Retail We are: The leading Global Retail Analyst firm since 1995. We analyse: 9,000 retail operations across 211 retail markets.