SWOT report 2013

www.retail-week.com

Featuring in-depth Retail Week Knowledge Bank SWOT analysis, detailed profi les and top-line stats

30RetailersReportPart 3

Counting down from 10 to 1

Top

Contents10. Kingfi sher 39. Home Retail Group 58. Alliance Boots 77. John Lewis Partnership 96. Co-operative Group 115. Marks & Spencer 134. Morrisons 153. Sainsburys 172. Asda 19 1. Tesco 21

www.retail-week.com

Retail Week has devised the Top 30 Retailers Report by using UK revenue fi gures from retailers fi nancial statements for the year ending 2012. All profi t fi gures are operating profi t unless otherwise stated.

All SWOT reports within have been produced by the Retail Week Knowledge Bank team.

All facts and fi gures are correct as of December 13, 2013.

Methodology

Retail Week 3www.retail-week.com

company snapshotKingfisher

3

2

1

0

-1

-2

-3

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

2

0

-2

-4

-6

UK like-for-like (%)


2013

Kingfisher is the UKs leading DIY retailer. In the UK in late 2013 the group had more than 350 B&Q superstores, which include 29 former Focus stores, and a rapidly expanding chain of 300 Screwfix stores, with 60 added in the last financial year.

The group is one of the UKs most global retailers, having built up a considerable overseas empire of 420 stores. While B&Q has a presence in China, outside the UK Kingfisher mostly trades through the Castorama and Brico Dpt retail brands in France, Spain, Poland, Russia and Romania. Additionally, the company operates the Kotas chain in Turkey as a joint venture with Turkish conglomerate Ko Holding. Kingfisher is also looking to leverage the Screwfix brand overseas. Its website has recently started delivering to 20 European countries, while there are plans to open four stores in Germany next year.

International operations accounted for 60% of group sales, which dipped 2.4% to 10.6bn in the year to January 2013. Domestic sales remained relatively flat at around the 4.3bn mark and have done so in the last three years, with an underperforming B&Q being offset by growth at Screwfix. B&Q sales fell by 3.6% to 3.7bn, while Screwfix boosted sales by 9.8% to 577m. Group UK retail profit fell from 271m to 234m, its first decline in three years. This was a result of wet weather over the summer in 2012 and weak consumer confidence.

In the current financial year, weather has continued to affect the DIY giants performance. UK retail profit dipped 1.4% in its first half of 2014, though total sales rose slightly by 0.2% to 2.27bn. At B&Q, sales of seasonal products fell 11% in the first quarter due to unseasonably cold weather, but the category surged 17% in the second quarter when the warm weather arrived.

While Kingfisher reported an improved sales performance in the UK in the third quarter as like-for-like sales rose 2%, this was mainly driven by Screwfix. The retail brand reported like-for-like sales growth of 11.1%, benefiting from store openings and multichannel initiatives such as the launch of a mobile click-and-collect service.

The group is focusing on turning B&Q into an omnichannel business. The B&Q site will be relaunched in 2014, which will include some 20,000 additional products for home delivery using the Screwfix omnichannel infrastructure. Online sales make up just 1% of overall B&Q sales at the end of the 2013 financial year, and Steve Willett, Kingfishers group productivity and development director, is aiming to grow its share to account for 5-10% of sales.

The retailer is also rightsizing B&Qs UK store portfolio. Group chief executive Ian Cheshire has stated that the retailer could make the same amount of money with 20% less space across its portfolio. As such, B&Q has signed 18 agreements with supermarkets to offload some store space. If the deals go through, the retailer will have slashed its UK space by 5%, saving 16m in rents and 7m in rates annually.

The gRoup iS focuSing on TuRning B&Q inTo an omnichannel BuSineSS

Figures include both B&Q and Screwfix and are for year to January

2012 (unless otherwise stated)

uK retail sales 4.34bn

uK profit

271muK stores

662(November 2013)

employees

27,047(full-time only)

chairman

Daniel Bernard

group chief executive

Ian Cheshire

group finance director

Karen Witts

KeY people

sWot analysisKingfisher

STRengThS n International Kingfisher is the worlds third-largest home improvement retailer, behind US retailers Home Depot and

Lowes, but it is by far the largest player outside North America. It has a presence in nine countries, predominately in Europe, which gives it access to more than 500 million households.

n Synergies In recent years management has intensified efforts to increase synergies between the various businesses. Management is targeting a 50% core common range across all of the groups businesses, up from just 8% in 2013. As part of this initiative, the company has increased the proportion of directly sourced product, which accounted for 20% of group sales in the first half of 2013/14.

n Increased investment in online Kingfisher has continued to invest in its multichannel operations in recent years. This includes launching a transactional site for TradePoint and mobile click-and-collect for Screwfix, the latter delivering to more than 20 European countries.

n Management Under the direction of Cheshire since 2008, Kingfisher has completed a four-year Delivering Value plan. This resulted in increased profitability for the UK business, although there was a slight deterioration in margins in 2012/13 as a result of difficult trading conditions.

n Strong cash flow Because of its relatively high operating profitability, strong working capital control and freehold property ownership, Kingfisher is cash-generative and has a strong balance sheet.

n Screwfix Through the rapid expansion of the Screwfix format, the group is gaining ground in the UK trade market. Moreover, strong trading for Screwfix has helped offset an underperforming B&Q in recent years. Despite accounting for only 13% of UK sales in 2012/13, Screwfix generated around a fifth of overall UK retail profit.

WeaKneSSeS n DIY market Consumer spending on DIY is inextricably linked to activity in the housing market, which, despite recent

increases in mortgage approvals in the UK, remains at a much lower level than prior to the financial crisis.

n B&Q store network Given the difficult trading conditions and rising proportion of multichannel sales, management has conceded that the B&Q store network has surplus space. Efforts to rightsize the portfolio by subletting space to other retailers started in 2013, but this is expected to be a slow process given the constraints of planning requirements and the scale of the task in the current economic climate.

n Recent B&Q performance Kingfishers performance in the UK has been dragged down by B&Q in recent years. The reduced operating margin of 3.4% in 2012/13 was only half the level achieved at Screwfix, while the modest 0.4% like-for-like growth in the third quarter of 2013/14 came on the back of nine consecutive quarters of like-for-like sales declines.

n China The B&Q business in China is still not profitable, with losses increasing again in 2012/13. The current 40-store store network appears to lack scale to generate enough return and the group has yet to find a store format that works.

n Weather-sensitive The weather has a considerable impact on Kingfishers financial performance, especially as seasonal outdoor products are an important category for the business.

oppoRTuniTieS n Further expansion Kingfisher plans to add slightly fewer than 70 outlets in its existing markets in 2013/14, including

50 new Screwfix stores in the UK. Its fledgling business in Russia continues to perform strongly and is expected to become a key focus in the coming years. In 2013 the company also expanded into Romania and the group continues to monitor opportunities to enter new markets.

n Trade business There is still plenty of scope to increase its share of the trade market. In the UK this is taking shape through further expansion of Screwfix as well as the TradePoint counters, which have been rolled out to all B&Q stores. Overseas, expansion in the trade market will focus on the well-established Brico Dpt format.

n New generation of DIY customers Growth is also being targeted by convincing a new generation of DIY customers that home improvement does not necessarily have to be difficult. This is being achieved through the introduction of DIY classes and the launch of a You Can Do It YouTube channel.

n Common range There is still considerable potential to improve margins through the development of a common range and a higher proportion of direct-sourcing. The group has developed a number of global super brands in gardening (Verve), outdoor leisure (Blooma) and cooling (Blyss).

ThReaTS n Economic conditions across Europe The UK economic recovery appears to be gaining momentum in late 2013, but

this has yet to drive spending on home improvement and incomes continue to be squeezed. Kingfisher is also exposed to adverse economic conditions across mainland Europe, including in the core French market, with only a slight improvement expected in 2014.

n Exchange rates With the international business accounting for some 60% of group turnover in 2012/13, the company is exposed to exchange rate movements. Adverse foreign exchange movements resulted in a reduction in retail profit of 39m during 2012/13.

n Local tastes The group will have to be cautious in how far it develops its common range as it needs to continue to take into account local preferences and tastes.


Retail Week 5 www.retail-week.com

company snapshothomE REtaIL GRoUp

Sales change (%)

Sales growth

-8

-4

0

4

UK sales cha

nge (%

)

2

-2

-6

2008

2009

2010

2011

2012

home Retail Group owns high street and multichannel retailer Argos and the UKs second-largest DIY specialist chain by sales, Homebase. During the 2013 financial year, Argos closed 11 of its shops and now has a total store portfolio of 737. Homebase has 333 edge-of-town superstores, after shutting eight stores in 2013. It aims to close a further 70 over the five years to 2018. Home Retail also owns the Habitat brand, which includes a UK website and three London stores. It also stocks its products in-store and online at Homebase and Argos.

More changes to Argoss property portfolio are on the cards, as the retailer last year revealed it aims to relocate or shut about 75 shops (10% of the estate) in the next five years. The move is part of a five-year strategy, which includes 300m of investment, to position Argos as a digital retailer. Argos managing director John Walden said the retailer will focus its stores on the collection of product and customer service for sales that will increasingly be managed online or through mobile.

Furthermore, the Argos catalogue will move from being the lead channel into a supporting role, while a new digital store format was being trialled by the end of 2013. The new format will allow Argos to test a number of new digital and store initiatives, such as fast-track collections for pre-paid online orders, an emphasis on selling on tablets instead of catalogues and greater customer support from specially trained staff.

Further boosting its digital credentials, Argos recently entered into a partnership with eBay. As part of the trial, around 150 Argos stores serve as collection points for purchases from 50 selected eBay merchants.

Since last year Homebase has been rolling out a new store format which features an upgraded kitchens offer, including an installation service, and several new product lines. The format was first trialled at its Aylesbury store and had been rolled out to seven more shops by mid-2013, with about 10 more planned over the remainder of the year.

Overall group operating profit surged 62% to 137.4m in the year to February 2013. However, revenue remained broadly flat at 5.5bn, as rising sales at Argos were offset by another poor performance at Homebase. Argos boosted sales by 1.5% to 3.93bn and produced its first like-for-like growth in five years, at 2.1%. The result was driven by strong sales of tablets and multichannel, which now represents 51% of the retailers total sales.

At Homebase the news was less encouraging, as total sales fell 5.2% to 1.43bn. This was mostly a result of poor weather conditions affecting sales of its seasonal products and the difficult market conditions in big- ticket categories. However, in the first half of its 2014 financial year, like-for-like sales rose 2.3% at Argos and 5.9% at Homebase, the latters best performance since its acquisition in 2002, as sales of seasonal products were driven by warm summer weather.

Terry Duddy, who has led Home Retail Group for the past seven years, is to step down as chief executive in July 2014, with the group yet to announce his successor.

RiSing SaleS at aRgoS WeRe offSet by anotheR pooR peRfoRmance at homebaSe

2013

Figures for year to February 2012 (unless otherwise stated)

UK retail sales 5.38bn

UK profit

84.7mUK stores

1,073(February 2013)

employees

47,832(February 2013)

chairman

John Coombechief executive

Terry Duddy


Richard Ashton

Key people

sWot anaLysIshomE REtaIL GRoUp

StRengthS n Market share Home Retail Group is a major player in home and general merchandise, with a 10% market share.

Research body GfK estimates that Homebase has continued to increase its market share in the DIY sheds market in recent years, while Argos has also increased or maintained market share in some of its key product categories, including electricals and homewares.

n Strong portfolio of own brands Argos and Homebase are among the best-known brands in UK retailing. The group also owns a number of strong own brands, including Bush and Alba in electricals, Chad Valley in toys, and Hygena, Schreiber and Habitat in furniture and furnishings.

n Online Argos is well-established as one of the UKs leading ecommerce retailers and its expertise has also been used to upgrade Homebases ecommerce offer. At Argos online accounted for 43% of sales in the first half of 2013/14.

n Synergies There is a considerable product overlap between Argos and Homebase, particularly in furniture and furnishings, allowing for synergies in buying and sourcing. The two formats also pool a number of central resources including property, IT and human resources.

n Cost savings The company has a proven track record in reducing costs through organisational and infrastructure changes. In recent years, cost savings, particularly in distribution and the supply chain, have more than offset underlying cost inflation.

WeaKneSSeS n Cyclical markets Home Retail Group has grown or maintained its market share in several key product categories.

However, many of these markets have declined in recent years as a result of the slow economic recovery and weak activity in the housing market.

n Declining margins Profit margins have declined to very low levels in recent years. The group operating margin in 2012/13 stood at 2.5%, compared with margins of more than 6% prior to the economic downturn. Profitability at Homebase is notably lower than its main DIY rivals, while Argoss margins have also been on a downward trend.

n Like-for-like sales While both formats have reported positive like-for-like sales growth in the first half of 2013/14, this performance comes against very weak comparatives. Homebase has reported negative like-for-like sales for six out of the past seven years. Moreover, first-half like-for-like growth of 2.3% at Argos is considered modest given the demise of Comet, which Argos could have done more to capitalise on.

n Argos store network Critics have questioned the need for Argos to operate such an extensive store network. While some rationalisation is happening, the importance of the physical network is emphasised by the fact that 90% of sales involve a store due to the strength of its click-and-collect offer. This is a major conundrum for management.

n Operational efficiencies Despite the groups commitment to containing costs, sales-to-employment ratios at Homebase have continued to deteriorate and are now at fairly low levels. This calls into question the strategy of moving towards a more service-oriented and, by implication, labour-intensive format.

oppoRtUnitieS n Digital stores Under the direction of John Walden, Argos is repositioning itself from a catalogue-led to a digitally led

business, which includes the trial of a new digital store format. n Homebase differentiation The turnaround plan for Homebase is focused on delivering an enhanced in-store

experience that should bolster its softer, more female-friendly USP. This is being supported by an improved multichannel offer. With online sales accounting for 6% of overall sales, there is plenty of room for digital growth.

n Partnerships with other retailers The recent trial with eBay is allowing the business to leverage its extensive store network and could be extended to partnerships with other online retailers. However, parcel service Collect+ already has a foothold in the click-and-collect market.

n New products The Habitat brand relaunch should help increase customer loyalty, while Argos has shown it is capable of selling new technology, with strong sales of tablets helping improve performance recently. Capitalising on this trend, Argos has launched an own-brand tablet.

thReatS n Economy While economic recovery in the UK appears to be gaining traction in late 2013, incomes remain under

pressure from low wage growth and high inflation. The typical Argos customer is very exposed to job insecurity and credit availability constraints.

n Outdated business model? It is telling that the catalogue showroom store format has died a death elsewhere in the world but not in the UK. It remains to be seen whether the digital transformation of Argos will be enough to fend off competition from retailers such as Amazon, Dixons, DFS and Ikea.

n Homebase competition Recent increased activity in the housing market has yet to clearly benefit Homebase. Both of the companys main competitors, B&Q and Wickes, are well-managed businesses and could potentially exploit any weakness at Homebase.

n Excessive cost control There is a risk that Home Retail Groups commitment to containing costs will make it more difficult to maintain customer service standards. This is particularly pertinent since management is looking to improve service levels across both formats.



company snapshotalliance Boots

6

4

2

0

-2

-4

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

4

2

0

-2

-4



2013

alliance Boots operates the UKs largest pharmacy chain in terms of sales, as well as an opticians business and a raft of wholesale activities. It has just under 2,500 pharmacy-led health and beauty outlets in addition to 604 Boots Opticians. A vital piece of the companys strategy is its Boots Advantage Card, with over 17 million active holders in March 2013 being targeted with personalised in-store and online offers.

Last year parent Alliance Boots entered into a strategic partnership with US drugstore operator Walgreens to create a global, pharmacy-led health and beauty business. Walgreens has invested 4.3bn in cash and shares to acquire a 45% equity interest in Alliance Boots and has the option to acquire the remaining 55% in 2015. As a result, Alliance Boots executive chairman Stefano Pessina is now on the Walgreens board, while four directors from the US company joined the Alliance Boots board.

There have recently been significant changes for Boots. Alex Gourlay, previously chief executive of the health and beauty division, has moved to Walgreens to lead its customer experience division. He was replaced by Simon Roberts, who was promoted from co-chief operating officer of Boots UK to managing director of health and beauty for the UK and Ireland.

Following the deal, the two businesses have started to target synergies, for instance through the joint buying of medicines. Boots has also started selling its No7 brand in the US through selected Walgreens flagship stores, while Walgreens.com now features a Boots shop with about 300 products including No7 and Botanics.

Globally, Alliance Boots has major European wholesale interests and a developing international pharmacy network, with 554 company-owned overseas stores in the 2013 financial year. There are also 75 franchised Boots outlets in the Middle East, and Asia is also a key growth market. Last year the business started selling 500 products in 23 stores operated by Dairy Farm-owned Mannings in Hong Kong and expanded its wholesale activities in China through strategic partnerships.

Group sales overall declined 2.6% to 22.41bn, with UK retail sales accounting for 6.55bn, down 2.4% year on year. Within the domestic business, sales fell 2.5% at the core pharmacy component and were only partially offset by 0.9% growth in turnover at the opticians business, which benefited from a new broader range of frames, clearer pricing and an improved layout in about half of its stores. The health and beauty division also delivered a good performance given the tough retail market and regulatory pressures affecting profitability. Overall, the UK profit performance was strong as a result of a focus on health and beauty categories and improved profit margins, as trading profit rose 8.4% to 813m.

During the 2013 financial year Boots online sales rose 17%, with mobile accounting for one in four visitors and click-and-collect on 45% of orders. In the current year, Boots continues to invest in multichannel initiatives. It launched its next-day click-and-collect service over the summer and then rolled out an in-store marketing campaign for staff to encourage customers to use its online Tap into Boots offer. It is now introducing iPads in stores to allow customers to search for products and watch product demonstrations.

A vitAl piece of the compAnyS StRAtegy iS itS BootS AdvAntAge cARd

Figures for year to March 2012 (unless otherwise stated)

UK retail sales 6.71bn

(includes chemists and opticians)

UK retail operating profit

750mUK stores

2,476(March 2013)

employees

72,667(March 2013, UK chemist/

retail employees)

executive chairman

Stefano Pessina


George Fairweather

managing director of health and beauty for

UK and Republic of ireland

Simon Roberts

Key people

sWot analysisalliance Boots

StRengthS n Scale Alliance Boots operates the UKs largest pharmacy chain, with some 2,500 outlets. It also operates more than

600 opticians. The group has major European wholesale interests and a developing international pharmacy network, with 554 overseas units trading in early 2013.

n Merger with Walgreens The recent merger with Walgreens, the largest drugstore operator in the US, has provided further scale. The merger has created the worlds largest pharmacy chain, with over 11,000 company-owned stores across 12 countries, as well as the worlds biggest pharmaceutical wholesale and distribution network, with over 370 distribution centres across 20 countries.

n Strength of the brand Boots is a highly regarded and trusted brand both in the UK and abroad. It has built its reputation by offering quality, value and high levels of service, while maintaining the ethical credentials of its founder.

n Own-label expertise Boots has a strong stable of own brands, including its No7 cosmetics brand and skincare brands such as Soltan and Botanics.

n Loyalty card The Boots Advantage Card has been a major promotional tool and has given the company a competitive advantage in the sector. The loyalty scheme is one of the largest in the UK, with more than 17 million active cardholders in recent years.

n High margins Profit margins of the companys UK retail activities stand at an elevated level and have been improving in recent years. Its double-digit margins are notably higher than those of key competitors such as Superdrug and Lloyds Pharmacy.

WeAKneSSeS n Mature domestic operations Due to its dominance, it will be difficult for Boots to increase its UK market share. Its store

network would appear to be saturated and there is limited room for further expansion. n NHS spending The companys pharmacy operations are dependent on the Governments reimbursement prices for

generic medicines. These have been in decline in recent years due to the ongoing cost pressures in the NHS. n Sales of non-core categories While Boots Lifestyle category, which includes baby, nutrition, electricals and

photography, is seen as an important footfall driver, its performance is relatively weak compared with the core beauty, healthcare and toiletries business. Lifestyle accounted for just 15% of Boots UK sales in 2012/13.

n Boots Opticians The merger with Dolland & Aitchison has created scale for the opticians business, but it is continuing to struggle suggesting that the merger of two weak players does not necessarily make a strong one.

oppoRtUnitieS n Cross-selling opportunities The merger with Walgreens offers scope for Boots own-brand products to be sold in the

US. The retailer already sells its No7 range through the Target value retailer. No7 has also recently been launched in selected Walgreens outlets and Boots products are now also available through several Walgreens-owned ecommerce sites.

n Synergies The merger is expected to deliver considerable cost savings for both Boots and Walgreens through joint-buying of prescription and OTC drugs. In total, synergies of $1bn (650m) are being targeted by the end of 2016, with some $150m (90m) already achieved in the first year of the partnership.

n International There is still plenty of opportunity for further international expansion, with emerging markets such as China and Latin America high on the agenda. Alliance Boots expertise in wholesale is proving to be an important advantage strict regulations on pharmacy ownership in many emerging markets mean the company will initially need to enter some countries through the wholesale route.

n Eradication of debt Alliance Boots considerable debt, of just under 7bn in early 2013, will be assumed by Walgreens on completion of the merger in 2015, giving Boots the opportunity to deploy its cash flows to new markets rather than servicing its debt.

n Healthcare services With its healthcare background, the company would appear particularly well-placed to benefit from regulatory issues resulting from recent Government spending cuts. For instance, Boots could capitalise on the Governments plans to shift a number of routine health tasks from doctors surgeries to pharmacists.

thReAtS n Competition from discounters While its main rival Superdrug has been underperforming in recent years, competition

has continued to intensify from value players such as Savers. There is also increased competition from non-specialists such as the single-price retailers, which have all benefited from constrained consumer incomes over the past few years.

n Grocers The major supermarket chains are continuing to improve their health and beauty offers as they seek to capitalise on their ability to offer a one-stop-shop. In addition to launching new in-store pharmacies, it is interesting to see that Sainsburys has also started opening outpatient hospital pharmacies, emphasising that this remains a lucrative sector for the grocers.

n Community pharmacies Community pharmacies of which Lloyds Pharmacy is the largest operator in the UK could become an increasing threat given that neighbourhood locations are likely to be more accessible for the ageing population than Boots high street network.



company snapshotJohn LEWIs partnErshIp

Sales change (%)

Sales growth

0

4

8

12

UK sales chang

e (%

)

10

6

2

2008

2009

2010

2011

2012

John Lewis Partnership (JLP) comprises the John Lewis department stores and Waitrose supermarkets. John Lewis has just 39 stores, nine of which are its smaller At Home format, but it is still the UKs largest department store operation in terms of sales. Waitrose has 271 supermarkets and nearly 40 Little Waitrose convenience stores. According to Kantar data Waitrose has a 4.8% share of the grocery market in the 12 weeks to November 10, 2013. The group, which also offers financial service products, is unique in that it has an employee-based ownership model, in which staff receive a share of profits.

JLP sales rose 9.1% to 8.47bn in the year to January 2013. Waitrose accounted for 5.42bn and John Lewis generated 3bn, with both businesses growing sales well ahead of their respective markets. Waitrose sales rose by 6.8% in a slow market, accelerating in the second half as investment in lower prices began to pay off. The department stores performed even better, as sales increased by 13.5%, driven by a 41% surge in online sales. Group operating profit also rose, up 61.4m on the year to 452.4m.

The department store chains success has been driven by its investment in multichannel. In September John Lewis claimed its online sales passed the significant milestone of 1bn on a rolling 52-week basis, a full year ahead of target. It has also been experimenting with a smaller department store format to leverage its multichannel operations and facilitate geographic expansion. The first such store was unveiled in Exeter in 2012 and another store is to be opened in York next year.

Despite being a multichannel leader, John Lewis has yet to take full advantage of its potential for international growth. However, a new store at Heathrow Airports revamped Terminal 2 next year signals the start of the brands efforts to boost global awareness. It already delivers to more than 30 international markets.

At sister business Waitrose, the investment in expanding product ranges has been vital to success in recent years. The launch of the Essential Waitrose range in early 2009 and the Brand Price Match has helped change consumer perceptions that the retailer is expensive. However, the launch of several upmarket ranges such as Seriously, Duchy Originals and Love Life continues to emphasise its upmarket positioning.

Managing director Mark Price aims to triple Waitroses sales in the next 10 years and will invest 300m per year to hit the target. The investment will enable the business to open 20 stores per year, with an emphasis on the convenience format. It also plans to grow its online business, which surged 40.5% in the first half of 2014.

Since 2011, Waitrose has ramped up investment in ecommerce following the sale of its stake in Ocado. It now solely acts as a supplier and commercial partner to the etailer. This year the grocer added extra capacity to fulfil its online offer, and is adding a second dark store in London next year.

John LeWiS haS yet to take fuLL advantage of itS potentiaL foR inteRnationaL gRoWth

2013

Figures for year to January 2012 (unless otherwise stated)

uk retail sales 7.76bn

uk profit

391muk stores

347(September 2013)

employees

76,600(28,200 in department stores and 48,400 in supermarkets)

Chairman

Sir Charlie Mayfield

Managing director, John Lewis

Andy StreetManaging director,

Waitrose

Mark Price

key peopLe

sWot anaLysIsJohn LEWIs partnErshIp

StRengthSn Strong service culture The Partnership structure in which employees share in profits fosters a deep-rooted

commitment to customer service across the whole organisation.n Food and non-food The fact that JLP is strong in both food and non-food means it is not over-exposed to a single

market. It also provides synergies in terms of store locations and multichannel operations.

n Enviable reputation for quality John Lewis and Waitrose are among the most trusted retail brands in the UK and are synonymous with quality.

n Affluent customer base Both operations are relatively upmarket in terms of positioning, with Waitrose particularly strong in the more affluent southeast, an approach which has protected JLP during the prolonged downturn.

n Price promises The department stores Never Knowingly Undersold pricing stance instils a high degree of confidence, while Waitroses more recent Brand Price Match and the introduction of the Essentials range shows that it has remained in-tune with consumers during the downturn.

n Important multichannel player The enforced delay to the department store development programme has encouraged JLP to maximise multichannel opportunities.

WeakneSSeSn Lack of flexibility Given its ownership structure, JLP is less flexible than other retailers in terms of reducing labour

costs. While management has tackled operational issues such as call centres, manufacturing capacity and distribution overheads in recent years, staff costs-to-sales ratios remain high.

n Business now dominated by lower-margin Waitrose operation While the group is perhaps better known for its department stores, the rapidly expanding supermarket business accounted for almost two thirds of retail sales in 2012/13 but a lower (57%) proportion of profits.

n Fixed costs Being a high fixed-cost business, the department store outlets are becoming less profitable now that such a high proportion of sales are generated online.

n Disposal of Ocado stake short-sighted? Management may be regretting the disposal of its significant (45%) stake in Ocado in light of the food etailers recent tie-up with Morrisons.

n Bureaucracy A disadvantage of the partnership structure is the additional level of bureaucracy this creates.

oppoRtunitieSn Growing market share Both John Lewis and Waitrose have continued to trade ahead of their respective markets

throughout the downturn, but there is scope for both to grow market share further.

n Fashion and beauty The department store business is improving the appeal and design of its fashion and beauty offer, as showcased in the Oxford Street flagship, where designer collaborations feature strongly.

n Product development Waitrose has developed some very well-regarded exclusive products in recent years, including tie-ups with Heston Blumenthal and Delia Smith. While lower-priced basics have widened its appeal, it stands to benefit once the economy shows sustained improvement.

n Smaller format stores are current focus There is scope for significant geographic expansion for both John Lewis and Waitrose and the current focus on smaller format stores should facilitate this.

n Consumer concern around socio-economic, ethical and provenance issues Growing interest in and concerns about provenance (especially given the recent horse meat saga), healthy eating and ethically sourced products are now engrained in the consumer psyche. Waitrose clearly stands to benefit from this.

n International expansion The opening of a store at Heathrows Terminal 2 marks a serious step in JLPs international growth strategy. The store should heighten the profile of the quintessentially British brand within the terminals international customer base. John Lewis also plans to increase online sales overseas.

n Wholesale and franchise opportunities The recent tie-up with department store franchise Shinsegae in South Korea is the first in a planned series of agreements to establish a wholesale presence in the potentially lucrative Asian market. Meanwhile, the setting up of franchised forecourt shops with Welcome Break highlights another route to growth for Waitrose.

thReatS n Competition Both formats face extensive competition. Waitrose has Sainsburys and M&S Food in particular clipping

at its heels, while Ocado has now turned into a potential rival through its partnership with Morrisons. For John Lewis, Debenhams and M&S compete most closely in the household goods arena, though its increasing commitment to fashion and beauty means House of Fraser and Selfridges are becoming direct competitors.

n Discounting Price-matching, if done too aggressively, could undermine confidence in the initial pricing strategy.n Preoccupation with Ocado/Morrisons agreement With the retailers legal department currently scrutinising the

terms of the deal and presumably looking at the implications of potentially terminating its supply chain agreement with Ocado, there is a short-term danger that management could get distracted by the deal.

n Conflict of interests As with other retailers operating in more than one sector, there is always the prospect of conflicting interests between the two formats in terms of prioritising capital spending.



company snapshotco-operative group

50

40

30

20

10

0

-10

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

6

4

2

0

-2



2013

the Co-operative Group operates the largest retailing components of the consumer Co-operative Movement. This includes the UKs fifth-largest grocer in terms of sales. Following the Somerfield acquisition in 2009, the Co-op has 2,816 mostly neighbourhood food stores. The group also includes the UKs third-largest pharmacy chain, with 781 locations, and an electricals retailing website with sales of more than 80m.

Group chief executive Peter Marks retired in May and was replaced by former Kingfisher chief operating officer Euan Sutherland. Divisional management teams were also strengthened, including the appointment of former Tesco executive Steve Murrells as chief executive of food. The moves are part of efforts to modernise the business, which has become increasingly vital in the wake of serious management issues at the Co-operative Bank which resulted in the group losing control of its financial services arm.

Furthermore, the groups ethical image has been severely tarnished by the scandal of former Co-operative Bank chairman Paul Flowers following allegations of drug-taking. The business responded by launching a business-wide review to deliver a modern management structure while protecting the Co-ops ethical heritage.

A key hire last year was Andy Haywood, the former IT director at Boots, to the newly created role of group chief information officer. Haywood is developing the groups overall IT strategy and reviewing the Co-ops digital and multichannel operations. In the lead up to Christmas, the Co-op is going live on Monday December 16 to discover the most profitable ecommerce model with four online trials, beginning with the launch of a click-and-collect service in Stockport.

Central to the Co-op modernising and competing better in the grocery market is its True North strategy. The scheme aims to improve availability, value for money, convenience, customer service and product quality. For instance, the food division aims to develop the own-brand offer, including its new Loved By Us range, and intends to relaunch as many as 700 lines by Christmas.

The investment also includes the launch of the Co-ops new Fresh Format. First trialled last year, the store design emphasises fresh food through improved ranges, navigation and merchandising and was in 250 stores by mid-2013. The retailer aimed to launch a second iteration of the format later in the year, with 130 planned in 2014.

In the year to January 2013 group revenue rose 1.1% year-on-year to 12.45bn. Of this total, retail sales accounted for 8.29bn, an increase of 1.3%. However, underlying profits across the group nose-dived 89% to 54m as a result of issues in the banking division. Furthermore, the food division, which accounts for some 90% of retail revenue, reported a 9.5% drop in underlying operating profits to 288.4m. Profitability was hit as the business absorbed significant food price inflation and made investments in service, price and value.

Food sales declined once more over the first half of the current 2014 financial year, down by 0.4% to 3.6bn, driven by unseasonable weather. A 1.3% decline in operating profit was a result of continued investment in the business and reducing prices to compete better with larger rivals.

the Co-op iS looking to diSCoveR the moSt pRofitable eCommeRCe model


Uk retail sales 8.18bn(includes food, retail

and pharmacies)

Uk profit340.7m

Uk stores

3,597(includes pharmacies)

employees

101,282(January 2013)

Chief executive

Euan Sutherland

Chief executive, retail

Steve Murrells

group chief financialofficer

Richard Pennycook

keY people

sWot analysisco-operative group

StRengthS n Major food retailer With food sales of 7.4bn in 2012/13, the Co-op is the UKs fifth-largest grocer and is a major

player of considerable scale.

n Largest local store network The vast majority of the Co-ops 2,816 or so food stores are small neighbourhood shops, making the group the leading player in the currently buoyant convenience store sector.

n New era The appointment of Euan Sutherland as chief executive following Peter Marks retirement in 2013 has heralded a more dynamic era for the Co-op. An early move to bring the groups Food, Pharmacy and Electrical businesses under a single retail division (headed by Steve Murrells) has been a clear indication of reform.

n New head office The new head office which became operational in 2013 has been a concrete expression of the Co-ops integrated and unified future. It has won a series of sustainability accolades.

n UKs third-largest pharmacy network The 780-strong local pharmacy network is an important second string to the groups retailing bow, generating sales of 765m in 2012/13.

n Ethical image in tune with the times The Co-op has been at the forefront of ethical issues that have become increasingly important in retailing, and responsible retailing has remained at the heart of its approach.

WeakneSSeS n Failure to exploit key USPs The Co-op has failed to maximise its strong brand and extensive local store base.

n Perceived as expensive Despite significant investment in lowering prices since 2011, its convenience store roots mean the Co-op is perceived as expensive, while the superstore operators who have moved into convenience retailing are considered cheaper. Ongoing investment in prices has exerted downward pressure on margins since 2010/11.

n Somerfield acquisition The acquisition and subsequent integration of Somerfield in 2009 was poorly executed and exposed previous lack of investment in the infrastructure and product offer.

n Declining market share Market share declined from more than 7.5% immediately following the Somerfield acquisition to 6.3% by late-2013, according to Kantar data. The Co-op has consistently underperformed compared with its larger rivals.

n Crisis at the bank The move to expand the financial services division though the acquisition of Britannia in 2009 was ill-judged, while the appointment of Paul Flowers to chair the bank from the following year proved even more of a misjudgment. The group lost control of the Bank in late-2013, while repercussions from the Flowers scandal could damage the wider businesss ethical position and commercial performance.

n Few large stores The Co-op has few stores of significant size, making it difficult to compete with the major grocers.

oppoRtUnitieS n Food stores being overhauled Steve Murrells extensive changes, which include store refurbishments, a

strengthened own-label offer and improved customer service, should invigorate the previously tired store network.

n Increasing segmentation The beefed-up commercial team is overseeing further segmentation of the offer according to location, which will be key in the increasingly competitive convenience sector.

n Online food launch imminent While the move into online food retailing has been tardy, the Co-op clearly has the skills and store portfolio to offer a multichannel approach to online grocery. It also has experience of the successful development of its online electricals business to draw on.

n Strong USPs Fuller exploitation of the Co-ops ethical stance and the trend towards more local shopping under new management will be key in driving growth.

n Opportunity to modernise The group needs to take advantage of the current root-and-branch review to modernise its structure and the way that the business is run, while honing its ethical stance.

thReatSn Increasing competition The Co-op has traditionally been seen as the soft underbelly of retailing, with its market

share open to widespread attack. Though it is now fighting its corner more nimbly, it is still not easy to compete with Tesco, Sainsburys, Asda and Morrisons, let alone fast-growing discounters such as Aldi and Lidl.

n All the majors are expanding into convenience The industry is shifting its attention from opening non-food-focused superstores to the less well-developed area of convenience stores, leading to increased competition for new sites.

n Small basket size likely to hamper online development The group faces a number of challenges in its bid to launch a viable online food service, including its small average basket size of just 6. The Co-op brand will have to prove a draw in its own right, with its traditional strength of good locations taken out of the mix.

n Short-term pressures may persist Despite signs of more sustained economic recovery from late-2013, the Co-ops results for the first half of 2013/14 were poor and there can be no guarantee that things will improve.

n Fallout from Bank problems There will have to be some significant rebuilding of trust in the wake of the Bank crisis, which has called into question the movements ethical heritage.



company snapshotmaRKs & spEncER

4

3

2

1

0

-1

-2

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

4

2

0

-2

-4

-6



2013

marks & Spencer is the UKs fifth largest retailer by sales. Annual sales reached 10bn in 2013 financial year, an increase of 0.9% on the previous financial year. Some 8.95bn of this was generated in the UK, also an increase of 0.9%. The retailer has almost 300 mainstream Marks & Spencer stores, nearly 50 outlet stores and some 420 Simply Food stores. M&S is still the UKs largest clothing retailer in sales value terms, despite its recent difficulties, while food accounts for slightly more than half of UK sales. The retailer also sells accessories and homewares.

Food sales have driven domestic growth in recent years, with like-for-like sales consistently ahead of the market, driven by trusted quality, provenance and ongoing innovation. Overall performance in recent years has been impacted by declining like-for-like general merchandise sales. Clothing has performed particularly badly, with efforts to drive sales impacting profitability. UK operating profit fell for the third consecutive year in the year to March 2013, down 3.4% to 635.8m.

As a result of the ongoing problems within the general merchandise operation, in particular the crucial womenswear category, last year highly regarded executive director of food John Dixon moved across to the division. Following this, former Debenhams and Jaeger chief executive Belinda Earl has come on board as style director.

The new teams first autumn/winter 2013 collection was positively received by the consumer fashion press. The range was backed up by the high-profile Leading Ladies advertising campaign and improvements to in-store fashion departments, including Welcome Zones showcasing new lines, added digital technology to assist in the purchasing experience and efforts to enhance customer service.

In contrast, M&Ss food offer continues to perform strongly. In the past year the retailer has launched a value-led range under the Simply M&S label, and introduced more basic ingredients to allow customers to do a fuller grocery shop. It plans to open a further 150 Simply Food stores in the UK to grow its food market share in cities where its market share is below its average such as Norwich, where it is currently under-represented.

Multichannel is also a keen focus for the business. Online sales growth rose by 16.6% in the 2013 financial year, to take overall multichannel sales to 651.8m. During the period the retailer had extended its M&S Direct click-and-collect and in-store ordering and collection service to 476 of its stores. It also introduced free next-day delivery to store. As a result, 54% of online orders were placed or collected in-store during the year.

M&S now trades online in 10 countries, including Germany, Spain, Austria and Belgium. The retailer also has 430 overseas stores across more than 50 territories, generating sales of 1.1bn in 2013. Its overseas stores are a mix of partly and wholly owned subsidiaries and franchises across Europe and Asia.

peRfoRmance in Recent yeaRS haS been impacted by declining like-foR-like geneRal meRchandiSe SaleS


Uk retail sales 8.87bn

Uk profit

658mUk stores

766(March 2013)

employees

74,758

chairman

Robert Swannell

chief executive

Marc Bolland

chief financial officer

Alan Stewart

key people

sWot analysismaRKs & spEncER

StRengthS n Iconic brand While not the biggest it is currently in fifth position behind the four leading superstore groups in sales

terms Marks & Spencer is one of the strongest brands in UK retailing, with a reputation for quality.

n Highly regarded food offer Food sales have been bolstered by the development of a network of 420 Simply Food stores and have driven domestic growth of late, generating 54% of 2012/13 UK sales. The current strategy of becoming more specialist, focusing on quality, provenance and innovation is helping the retailer to maintain its edge over the competition and is in-tune with current trends.

n Clothing Despite recent hiccups, M&S retains a market-leading position within lingerie, school uniform and clothing for older women. The clothing strategy is focused on quality and value.

WeakneSSeSn Generalist approach found lacking In an increasingly competitive and challenging retail environment, the M&S

approach of trying to be all things to all people has been found lacking.

n Declining profitability Having been in double digits over the three years to 2007/08, UK operating margin has been in decline since 2008/09 and had fallen to 7.1% by 2012/13. This reflects increased discounting in clothing and the rising proportion of lower-margin food sales.

n Management comings and goings Top-level churn seems to be endemic, precipitated by fairly regular bouts of underperformance. A number of relatively long-standing executives have left over 2012 and 2013, and the stream of departures is showing no sign of let-up.

n Underperformance in clothing Clothing has been underperforming for many years, despite various attempts to rejuvenate the offer. Kidswear in particular has never seemed to fulfil its potential.

n Sales densities deteriorating Over the past decade, UK sales densities have declined from almost 600 per sq ft to just above 500 per sq ft, as domestic sales have come under sustained pressure while new space has continued to be added.

oppoRtUnitieS n Improved fashion credentials Since becoming style director in 2012, Belinda Earl has shown her influence in M&Ss

fashion offer, which should drive sales growth.

n Overseas expansion International stores accounted for more than 10% of group sales in 2012/13, but almost 16% of operating profit. M&S is committed to continued international expansion and has been taking control of an increasing number of formerly franchised operations. Accelerated expansion in Asia would seem to offer particular potential, with recent robust growth driven by strong performances in India and China, which are designated as key markets.

n Multichannel M&S.com has driven sales growth of late, bolstered by the Shop Your Way multichannel ordering and collection/delivery service. However, at 652m in 2012/13, online sales accounted for a relatively modest 6.5% of group sales, highlighting significant room for improvement. M&S will take full control of its multichannel operations in 2014 when its fulfilment contract with Amazon expires. It will launch a new website in spring 2014.

n Your Beauty The rollout of new beauty departments with a strong multichannel element is paying off, with sales increasing by 55% in the first half of 2013/14 within the 93 stores which were overhauled.

n Home A new home format is being introduced ahead of the economic upturn which makes full use of online to improve the range and ease of shopping.

thReatS n Increasing competition in womenswear The womenswear offer continues to face competition from all angles and this

is unlikely to lessen over the years ahead. Despite significant improvements to womenswear in 2013, it may take some time to convince potential customers of the improved quality and style.

n Food competition The superstore operators have continued to expand their premium and convenience-led offers into traditional M&S territory, significantly closing the quality gap with M&S Food. Meanwhile, the trend towards more scratch-cooking during the downturn does not play to M&Ss strengths, despite its recently increased focus on value and extending its range to enable a fuller shop.

n Lack of online food offer The food for tonight element does not correspond easily to an online model, but as M&S expands its range, Marc Bolland may live to regret his reluctance to get involved in this key growth sector. M&S will be the only major mainstream food retailer without some sort of an online food offer from 2014.

n Targeting issues The difficulty of attracting younger, higher-spending customers without alienating its older customer base has challenged various management teams over the years and remains a huge problem. As such, ranges and approaches that would be appropriate within the 70 or so flagships are unlikely to be suitable for the significantly higher number of smaller, provincial stores.

n Scale of challenges Efforts to make the stores easier to shop have been in place since 2011, but have sometimes seemed more of a nod in the direction of refurbishment than a full-scale overhaul. It remains to be seen whether the refreshed womenswear departments will do the trick. Meanwhile, the paring back of investment levels is of some concern given the ongoing challenges.



company snapshotmoRRIsons

12

10

8

6

4

2

0

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

8

6

4

2

0

-2

-4



2013

morrisons is the UKs fourth-largest supermarket group in terms of sales, with a market share of 11.5% for the 12 weeks to November 2013, according to Kantar data. Following the acquisition of Safeway in 2004 and the opening of 100

additional stores since 2010, the retailer has a total of 525 stores as of July 2013. It is making further inroads in the southeast in particular, where it has traditionally been under-represented.

Further store growth will be driven by Morrisons new convenience format M Local, especially in the capital, following the acquisition of a new distribution and food preparation centre in west London. The grocer aims to have a total of 100 M Locals in place by January 2014 and another 100 by the end of 2015.

Morrisons is behind its competitors in the key grocery growth areas of convenience and online. However, after agreeing a 216m technology and logistics deal with food delivery service Ocado in May 2013, it will launch an online grocery offer in January 2014. The website will emphasise the grocers fresh food credentials and will display quality ratings, as well as the use-by date of products. It will also include an online fishmonger and a virtual butcher, which will let shoppers choose the quantity and cut of their meat. The service will launch in Warwickshire, followed by Yorkshire in February, before expanding to other regions.

Morrisons is also behind in its non-food offer, although in March it launched its first clothing range. The Nutmeg childrens range is now in 200 stores in dedicated shop-in-shops. Furthermore, the retailers acquisition of Kiddicare has led to the opening of 11 stores for the previously online-only retailer, while a move into adult clothing from 2014 is also on the cards.

In terms of its grocery product offer, the retailer focuses on fresh food at value. Since the 2012 financial year it has been working on a three-year programme to strengthen its own brand another area in which it has lagged behind rivals. Some 11,000 products were relaunched as part of the first phase, which was completed during the third quarter of the 2014 financial year. This encompassed the launch of the M Kitchen range, as well as the M Savers range, which is designed to offer good quality at the best price.

As part of the diversification of the retailers product offer, chief executive Dalton Philips made a series of appointments last year. Of particular significance was the hiring of former Peacocks managing director Tim Bettley as the companys first commercial director of clothing.

In the year to January 2013 the retailers sales rose 3% from 17.66bn to 18.12bn. However, like-for-like sales were down 2.1%, while operating profit also declined 2.5% to 949m. Like-for-like sales continued to decline over the first three quarters of the 2014 financial year, although overall growth is being driven by the accelerated convenience store conversion programme and improvements in its own-brand offer.

MoRRiSonS iS behind itS coMpetitoRS in the key gRoceRy gRoWth aReaS of convenience and online



Uk profit

973mUk stores

525(July 2013)

employees

131,207(UK)

chairman

Sir Ian Gibson

chief executive

Dalton Philips


Trevor Strain

key people

sWot analysIsmoRRIsons

StRengthSn Strong fresh credentials Crucial against the background of growing concerns about food provenance and healthy

eating, Morrisons has a strong reputation in fresh food. This dates back to its Market Street concept of in-store butchers, bakers and fishmongers.

n New store format Morrisons has created a new Fresh Format store that builds on its Market Street image in fresh produce and creates a more attractive shopping experience. This will have been rolled out to more than 40% of the estate by the end of the 2013 financial year.

n Vertical integration Morrisons has a high level of vertical integration. This is unusual among the major grocers and enhances its fresh food credentials. It also meant it was one of the few grocers to emerge unscathed from the horse meat scandal.

n Less exposed to non-food Unlike its rivals, Morrisons has stuck to its fresh food focus and has eschewed the hypermarket route. It is therefore not encumbered with surplus non-food space.

WeakneSSeS n Recent underperformance Because of a lack of presence in the growth areas of online and convenience, Morrisons

has been underperforming since 2012 in comparison with its rivals. Market share had been reduced to a five-year low of 11.1% in September 2013, according to Kantar data, although there appears to have been some improvement since.

n Belated move into online food As the only big four grocer not yet online, Morrisons will have a significant amount of ground to make up when its service launches in 2014.

n Late entrant to the c-store market Morrisons has eventually developed a fresh-focused concept for small local stores, but is behind Tesco and Sainsburys in tapping into this growing market.

n Overexposed to UK economy Apart from its minority stake in the New York online business Fresh Direct, Morrisons is entirely focused on the domestic market, leaving it exposed to the UK economic cycle.

n Lack of loyalty card With no loyalty card database, Morrisons lacks the knowledge of its rivals regarding its customers spending patterns.

n Underexposed in the southeast Morrisons has less coverage in the affluent London and southeast markets than it does in the north. However, it aims to have 100 convenience stores across this region by the end of 2014/15.

oppoRtUnitieS n Multichannel The partnership with Ocado means Morrisons will hit the ground running with its online grocery offer from

early 2014. Also, Kiddicares store presence will raise its profile and help build share of the kidswear market.

n Convenience stores Morrisons will have 100 c-stores by January 2014. The strong fresh focus of the M Local offer would appear to be in tune with customer demand and changing shopping patterns. Another key USP is keeping prices consistent with its superstores, an area in which rivals have come under criticism in the past.

n Additional manufacturing facilities More manufacturing facilities are being added to help increase profit. The extension of the role of group manufacturing director to include specific responsibility for the various manufacturing subsidiaries underlines the increased importance of the companys vertical integration.

n Own-label Despite strong vertical integration, Morrisons proportion of own-label sales lags behind competitors, providing it with a significant opportunity to develop differentiated products and build a strong own-brand offer.

n New store format Morrisons appears to be getting good returns from its new store concept and the revamp programme has been accelerated, with more than 200 stores converted by the end of 2013.

n Extension of deal with Ocado If Waitrose terminates its supplier agreement with Ocado, there is scope for Morrisons to take on a potentially lucrative supplier partner role, which would fill the void left by Waitrose.

thReatS n Increasing competition With the top three superstore groups increasing store capacity more rapidly than Morrisons,

it faces mounting competition in its heartland from a more aggressive Asda and the revival of Tesco.

n Brand perception A drift upmarket in customer perceptions could undermine the retailers value image. There is potential to alienate its traditional customer base with the new, relatively upmarket Fresh Format concept.

n Challenge of diversification New areas such as clothing and online could prove distracting, while the loss of Kiddicare founders Scott and Elaine Weavers-Wright could be detrimental.

n Will online deliver? The jury is still out on just how different the online grocery offer will actually be from that of competitors. The profit implications of the 25 year tie-in with Ocado are also a cause for concern.

n C-store issues The target of 100 c-stores is still only a fifth of the way towards the groups recently raised longer-term ambitions. Morrisons remains well behind its rivals in terms of coverage, with a concept which has yet to prove itself on any scale. Meanwhile, the accelerated expansion means further investment on the distribution side, as its hub-and-spoke model is struggling with fulfilment on a larger scale.

n Commodity prices Rising commodity prices could undermine the profitability of Morrisons manufacturing base, a downside of vertical integration.



company snapshotsaInsBURys

6

5

4

3

2

1

0

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

5

4

3

2

1

0



2013

sainsburys is the UKs third-largest retailer after Tesco and Asda. Its grocery market share is the highest it has been for a decade, standing at 16.8% in late 2013. As well as groceries, Sainsburys has an expanding non-food offer encompassing clothing, homewares and entertainment, all of which are linked to its Nectar loyalty card scheme. It also has an extensive financial services offer through Sainsburys Bank, as well as partnerships with British Gas and Vodafone for the provision of energy and mobile phones. Sainsburys reports that non-food growth is twice that of food, and has recently relaunched the Tu clothing brand and extended the By Sainsburys range into general merchandise.

The retailers 1,160 store estate is increasingly becoming a 50/50 mix of supermarkets and Local convenience stores, with 589 supermarkets and 571 Local stores. Convenience is a particular focus, with nearly 50 convenience stores added during the first half of the 2014 financial year. In 2011 Sainsburys market share in the southeast was 20%, which is double the average of other regions it operates in. To address this imbalance, the retailer is focusing on expanding its current store development programme elsewhere in the UK, with strong growth in space in the east and northwest of England in the 2013 financial year.

Sainsburys increased sales 4.5% to 23.3bn in the year to March 2013 and operating profit rose 5.1% to 829m, with continued growth driven by online convenience and non-food. Growth in non-food was particularly driven by investment in the quality of the offer, in-store experience and trading space.

The business followed this up with a strong performance in the first half of its 2014 financial year, with Sainsburys achieving nearly nine years of uninterrupted like-for-like sales growth. Total sales were up 4.4% and like-for-likes 1.4%. Own-brand sales remained strong, growing at more than twice the rate of branded goods.

The online grocery operation continues to perform well, growing at more than 15% over the first half of 2014. Online accounts for more than 1bn in annualised sales, and orders placed regularly exceed 190,000 a week, putting Sainsburys in second place behind Tesco in terms of online grocery. To help meet growing demand in London and the southeast, the retailer will open its first dedicated online fulfilment centre next year.

Sainsburys has also dedicated a significant proportion of the 2014 financial years 1.1bn investment budget to digital developments. These include a core systems upgrade across the business, a replatforming of the online grocery operation and further development of mobile technology. For the latter in August Sainsburys trialled the extension of the app that allows customers to scan their shopping on a smartphone and pack it as they go. However, there is no word on the development of click-and-collect for grocery, which Sainsburys lags behinds its rivals in offering.

In addition to the main website, there is also a Sainsburys Entertainment website selling games, music, films and books, as well as a new mobile phone website and sites offering music downloads and video-on-demand services.

ConvenienCe iS a paRtiCulaR foCuS, With neaRly 50 ConvenienCe StoReS added



uK profit

789muK stores

1,160(September 2013)

employees

157,000(March 2013)

Chairman

David TylerGroup chief executive

Justin King Chief financial officer John Rogers

Key people

sWot analysIssaInsBURys

StRenGthS n Strongest performer of the big three The UKs third-largest retailer has been outperforming its larger rivals in recent

years. It continues to close the gap with Asda and has a particularly strong position in the affluent southeast.

n Widespread appeal Underpinned by its core own-label food range, Sainsburys has built up a strong reputation for quality and value. This is supplemented by the Taste the Difference and Basics own brands, which give the grocer near-universal appeal. Its Live Well For Less mantra is particularly in tune with the current climate.

n Nectar card As the biggest partner in the Nectar loyalty card scheme, Sainsburys has an effective customer database tool which it uses to incentivise repeat visits and strengthen price perceptions. It has done this recently in combination with the powerful Brand Match promotion and coupons-at-till.

n Values With a long heritage of social and environmental responsibility, Sainsburys values resonate with consumers. For example, it is one of the leading sellers of Fairtrade and Marine Stewardship Certified fish; it has run successive Active Kids promotions; and it sponsors events such as Red Nose Day. It is also among those grocers to have emerged unscathed from the horse meat scandal in 2013.

n Leadership After mismanagement on a major scale in the early 2000s, the recruitment of Justin King as chief executive in 2004 has heralded a prolonged period of management stability. His Making Sainsburys Great Again recovery plan has paid off, with nearly nine years of uninterrupted like-for-like growth.

WeaKneSSeSn Low profit margins Although it is ahead of Asda, Sainsburys operates at a lower level of profitability than Tesco and

Morrisons.

n Convenience stores Despite an early experimental move into town centres in the late-1990s, full-scale expansion into convenience failed to take off at the time. Then the retailer failed to fully exploit the potential economies of scale from its spate of convenience store chain acquisitions in the mid-2000s. As a result, it has been playing catch-up with Tesco ever since.

n No overseas exposure Having previously failed to make a go of international ventures such as US supermarket chain Shaws, Sainsburys is wholly exposed to the UK market. However, it has apparently been looking at opportunities in China and possibly other Asian markets.

n Banking Compared with Tescos banking division, Sainsburys Bank (a joint venture with HBOS/Lloyds until 2013) has never been particularly profitable, even though its insurance, credit card, savings and loan products are linked to the Nectar reward scheme. While signalling its commitment to developing its financial services, the acquisition of full control of the bank in early 2014 will put pressure on profits and earnings.

oppoRtunitieS n Scope for expansion With less than 5% market share in around a third of UK postcodes in 2013 and some 21% of the

UK population living further than a 15-minute drive from a Sainsburys store, there is still significant opportunity for expansion. Moreover, only a third of the population live within a 15-minute drive of the full non-food offer.

n Non-food Sainsburys has an opportunity to grow its general merchandise business through store extensions and the new online operation. General merchandise and clothing sales grew at twice the rate of food sales in 2013 and Tu stands to benefit from its relaunch in Autumn 2013.

n Convenience stores Sainsburys has developed a solid base of new convenience store sites. Having fine-tuned the Local format, it is now well-placed to grow this business.

n Online growth The retailer has developed a profitable store-based online food delivery operation. An enhanced online groceries offer has been rolling out since September 2013 and will be available nationwide by Easter 2014.

n Increased customer loyalty Full ownership of Sainsburys Bank from 2014 will enable future products to be even more tailored to Sainsburys customers, leveraging Nectar data to drive sales uplifts in both financial services and the supermarkets business. With only around 5% of customers holding a financial product with the Bank in 2013, there is significant scope to increase this and grow customer loyalty further.

thReatS n Takeover speculation The failure of its 2007 bid left the Qatar Investment Authority with a 26% stake in Sainsburys.

Recurring rumours that it may make another move could be destabilising for management and staff.

n Succession issues Persistent rumours that Justin King is looking to leave the business although staunchly denied highlight succession issues and could also prove unsettling for the business.

n Competition Both Asda and Morrisons are actively looking to increase their presence in Sainsburys traditional southeastern heartland.

n Pricing issues Sainsburys strong associations with the southeast have resulted in it being perceived as expensive, and this could be a problem as it expands further north. The late 2013 decision by the ASA to ban Sainsburys latest Brand Match advert, which was judged to be misleading, could also have a negative impact.



company snapshotasDa

10

8

6

4

2

0

-2

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

8

6

4

2

0



asda is the UKs second-largest retailer in terms of sales, with a grocery market share of 17.2% in late 2013. The Walmart-owned retailer has 568 stores, comprising 346 superstores, 189 supermarkets and 33 Living stores, which sell furniture and homewares. It is now set to test a smaller store model through 100 petrol stations which could signal a move into convenience store retailing if successful. George clothing is a key part of its retail offer in the form of large in-store concessions.

Asdas strong 2011 performance was driven by the addition of the Netto stores to its portfolio, but 2012s results were more pedestrian. Retail sales rose 5.3% but like-for-likes were only up 1%, driven by investments in low prices on essentials, product quality and multichannel. Since then, Asda reported a 1.3% rise in like-for-likes in the first quarter to April and a 0.7% increase in the second quarter.

Retail operating profit during 2012 was down 6.3% to 433.9m, although underlying operating profit was ahead by 15.4%. Despite significant cost pressures, Asdas We Operate for Less programme continued to reduce supply chain and store operations costs.

In recent years Asda has also invested in improving the quality of its product offer. For instance, it has partnered with Leiths School of Food and Wine on the development of the Extra Special food range, and it continues to extend its Chosen By You range.

However, reducing prices remains key to the grocer. 1bn of price cuts are planned for the next five years, beginning with 50m of investment in the first quarter of 2014 on own-label and branded food. Asda chief executive Andy Clarke recently said that through the combination of cutting prices and improving products, it will redefine value for UK retail.

Also part of its customer offer are its rapidly improving multichannel credentials. The Asda Direct site, which sells general merchandise goods, is supported by click-and-collect across the entire store portfolio. Meanwhile, following a successful trial last year, click-and-collect for grocery had been extended to 200 stores by the end of 2013 as part of an accelerated nationwide rollout to cover 98% of UK postcodes. Asda also offers same-day in-store collection and has extended cut-off for next-day delivery of online orders to midnight.

The grocer is hoping to extend its reach by increasing the number of collection points to 1,000 by 2018, targeting high-footfall locations such as stations. For instance, in a bid to appeal to commuters, Asda is partnering with Transport for London to offer shoppers who order before noon the opportunity to collect their order after 4pm at around half a dozen London Underground stations.

The George brand remains a key driver of growth as Asda looks to take the clothing brand overseas through franchise stores and online expansion. The franchise opening programme accelerated this year, with ten or so openings across the Middle East and the UAE, as well as recent moves into Singapore and Malta. Furthermore, this year George.com launched international delivery, initially in France, Spain, Denmark and the Benelux countries.

paRt of itS cuStomeR offeR aRe itS Rapidly impRoving multichannel cRedentialS

Figures for year to December 2012 (unless otherwise stated)


uK profit

433.9muK stores

568(October 2013)

employees

178,792

president and chief executive

Andy Clarke

chief financial officer

Alex Russo(Starting in January 2014)

Key people

sWot analysisasDa

StRengthSn Major superstore presence Asda is the UKs second-largest grocery retailer, consolidating its position ahead of

Sainsburys following the acquisition of Netto in 2011. After pioneering the superstore concept in the UK, Asda has a strong position in its northern heartland.

n Value image Under Andy Clarke, Asda has made the transition from being purely price-led to offering genuine value for money, successfully balancing its Everyday Low Prices strategy with improving quality across both food and non-food.

n Synergies with Walmart Asda is focused on leveraging the global scale of the Walmart Group in terms of sourcing and driving down costs through its We Operate for Less programme.

n George Asda pioneered clothing retailing in supermarkets and is now a leading player in the value clothing market.

WeaKneSSeSn Declining market share At 17.2% in November 2013 according to Kantar data, Asdas market share has been

declining since mid-2012 and is now less than half a point ahead of Sainsburys. Asdas value positioning has made it particularly vulnerable to discounters.

n Non-food exposure Ambitious expansion plans for the Living format have quietly been downgraded, with the prolonged downturn hitting consumer spending on discretionary merchandise.

n Regional store base Asdas regional superstore base has been a disadvantage given the recent trend towards frequent, smaller-basket purchasing patterns. This is also necessitating investment in order and collection points as the retailer tries to strengthen its multichannel credentials.

n Under-exposed in southeast Given its northern base, Asda is under-exposed to the greater growth potential of London and the southeast. However, it is hoping to extend coverage across this more affluent region from 2014.

n No loyalty card Asdas lack of loyalty card and resultant customer database makes it less effective than Tesco and Sainsburys in terms of customer promotions.

oppoRtunitieS n Redefining value As part of its five-year strategy from 2013, Asda is investing 1bn in lowering prices to widen the gap

with its mainstream rivals and close the gap with the discounters. n More upmarket food range The investment in several premium food ranges has emphasised Asdas commitment to

enhancing its quality credentials ahead of the eventual economic upturn. It will invest 250m in quality, style and service to retain and win customers as part of the five-year plan.

n Local supermarkets Bolstered by the Netto acquisition, there is a clear opportunity to establish a significant position and proposition with a smaller supermarket price-oriented operation, offering a wider range than the smaller-format hard discounters and other major players convenience stores.

n Online growth Asda has developed a successful store-based online food delivery operation and is well-placed to develop its multichannel offer. It is now looking to extend its reach by increasing the number of collection points in high-footfall locations such as stations.

n Commitment to expansion The group is committed to extending its store coverage from 53% of UK households in 2013 to 70% by 2018.

n George exploring international potential Georges international franchising programme accelerated in 2013, and international delivery is now being made available in key European markets.

n Financial services Against an increasingly unfavourable background for the traditional banks, there is significant scope to exploit the trusted Asda franchise and build up its embryonic financial services business.

n Social media focus Asda is involved with customers and local communities through the use of blogs and Twitter, which help it develop new product ranges, for example. The Your Asda approach can help drive customer loyalty.

n Limited exposure to very large formats The fact that planning constraints have stymied development of the massive Supercentre format can be viewed positively in light of changing shopping patterns.

thReatS n Management drain Asda has lost many senior managers to rivals and the stream of defections of key staff to Walmart

is of some concern. The departures of highly respected chief operating officer Judith McKenna and chief financial officer Richard Mayfield in early 2014 will be a major blow.

n Industry over-capacity The grocers are increasing store capacity and Asda faces increased competition in its heartland from Morrisons new store format and Tescos revived interest in customer service.

n Discounters The continued growth of Aldi, in particular, and the discount sector in general via the pound stores is a threat to Asdas value reputation.

n Challenges of supermarket business Operating a small supermarket operation is a very different task from Asdas traditional large-scale focus and the grocer is now running 40% more outlets since the Netto acquisition.

n Lack of convenience offer Being focused on value, Asda has eschewed the small c-store format up to now. The decision on whether to move into this key growth area is only set to be taken towards the end of the five-year plan, which could result in a lot of ground having to be made up.



company snapshottEsco

10

8

6

4

2

0

-2

Sales change (%)

Sales growth

Gross m

argin (%

)

2008

2012

2010

2011

2009

4

3

2

1

0

-1



2013

tesco is the UKs leading grocer and the countrys largest retailer in terms of sales. It has 3,114 grocery stores, of which 1,547 are Express convenience shops a net gain of 120 stores during the 2013 financial year and 639 are One Stop convenience stores. Tesco also sells clothing, household goods and furniture, electronics, software and books.

The expanded retail services division comprises Tesco Bank which the retailer has wholly owned since 2008 the UK Tesco telecoms business, the online business and the consumer data subsidiary Dunnhumby. Although Dunnhumby also has third-party clients, its work with Tesco Clubcard has been instrumental in helping the grocer achieve and retain its dominant UK market position. Tesco also owns the Scotland-based Dobbies Garden Centres operation, which generated sales of 137m in 2012/13 through its 32 UK stores.

In 2013 overall sales in the UK were up 1.8% to 43.6bn, but like-for-likes dipped 0.3%. The retailer performed strongly in food, but the business conceded general merchandise continued to weigh on UK performance in the year, with a fall in like-for-like sales of 5%. An exception to this was the clothing brand F&F, which boosted sales by 9% to exceed 1bn in the UK.

UK retail operating profit also fell 8.3% to 2.27bn. However, the retailer said it had made significant progress with its Building a Better Tesco plan, tackling its product and service offer and improving the look and feel of certain stores. Under the scheme the business hired 8,000 new staff, and more than 250,000 staff received customer service training. It also revamped more than 300 stores to give them a more welcoming feel and improved presentation standards within fresh food departments.

The acquisition of the Giraffe restaurant chain and investments in the Harris + Hoole coffee shop business and upmarket Euphorium Bakery have also enabled Tesco to make the larger stores more compelling retail destinations for customers. As part of this goal, in November Tesco sub-let space in its Newport Extra store to general merchandise retailer The Original Factory Shop the first time the grocer has done such a thing.

In the first half of the 2014 financial year, Tesco said the response to its overhauled Extra stores in Watford, Purley and Coventry had been very positive, with more refits planned for the second half. During the period UK sales were up 1%. However, they were down 0.5% on a like-for-like basis as a result of the strategic shift away from selling consumer electronics in-store and the ongoing transformation of its general merchandise offer.

TeSco haS big ambiTionS foR iTS f&f bRand and aimS To Take on The Top high STReeT faShion ReTaileRS

Figures for year to February 2012 (unless otherwise stated)


Uk profit

2.48mUk stores

3,146(February 2013,

includes Dobbies)

employees

213,304(February 2013, full-time

employees only)


company snapshottEsco

Tesco has big ambitions for its F&F brand and aims to take on the top high street fashion retailers. The brand sells in 450 UK Tesco shops and 16 countries worldwide, and although Tesco does not have any plans at present for UK standalone F&F stores, nearly 50 in-store clothing departments were refitted during the first half of the 2014 financial year. The refurbishments make F&Fs presence more distinct from the rest of the store and give it an enhanced high street look. Since the revamps, F&F has achieved a like-for-like sales uplift of more than 10%.

Overseas is also key for the brand, with Tesco recently expanding F&Fs European franchise arm. It has opened two standalone stores, including

Documents

SWOT report 2013