Costco: The Pinnacle of Value

OVERVIEW
New avenues for growth emerge as inflation eases and consumer habits change

EXECUTIVE SUMMARY
Changing market dynamics alter avenues for growth
Spending growth more elusive due to more subdued food inflation
Volume growth recovers
Opportunities to address demographic trends
Future not just online but multichannel
Smaller formats for new stores
Extensions and maximising existing space
Grocers must respond to a new consumer mindset
Morrison and Asda show why strategies should focus on more than just value credentials
Non-food key driver
Big Four threaten non-retail, too - even banks

OUTLOOK
Grocers need new strategies and propositions …
… as consumer mindset changes, growth slows and competition intensifies
Changing market dynamics
Growth more elusive thanks to easing inflation, intense competition and constrained consumers
New avenues for growth
Space
Meet consumer demand and desires
Modify promotions
Adapt propositions
Key action points

MARKET ANALYSIS
Market continues to consolidate as superstores take greater share of spend
Specialists and off-licences continue to lose out
Superstores and small stores main drivers of growth
Space growth continues as Big Four add space and flex formats
Sales densities improve as market consolidates into hands of stronger players
Store numbers fall as weaker players exit the market
Food & grocery expenditure
Easing inflation and constrained consumers causes expenditure growth to slow
Expenditure growth by category

UK ONLINE FOOD & GROCERY MARKET
Double digit growth till
Food & grocery online shopping population
Shopping population heads for saturation
Food & grocery and non-food shopping population by age group
Only a fifth of customers do a weekly shop online
Spend per head
One quarter of shoppers spend £20.00 or under a year
Annual average online spend per head on food & grocery to
Online food & grocery spend to
Internet to play increasingly pivotal role in food & grocery spending
Online sales to account for 5.2% of food & grocery spend by
Factors influencing growth in online food & grocery
Major players
Online sales 2009 and 2010
Online sales 2004-
Market share
Major retailers 2010 on 2005
Major retailers 2005-
Online food & grocery picking models adopted by retailers
Key retailers
Tesco
Sainsbury
Asda
Ocado
Outlook
Growth slows but substantial opportunities remain

COMPANY DATA ANALYSIS
Market shares
Winners expand space, update product mix and achieve operational efficiencies
Key operating statistics
Sales and operating profit - greater emphasis on operational & productivity efficiencies
Space
Space allocation - non-food given more space to exploit growth potential
Advertising
Tesco remains biggest spender

ASDA
Netto acquisition will sustain flagging growth
Recent key events
New initiatives support growth
Proposition
Financials
Profits grow despite sluggish sales
Netto operating statistics
Sales slow down again in
Netto trading record
Space
Growth from Netto acquisition and expansion of Asda Living
Turnaround in density performance
Netto store portfolio
Space allocation
Sales mix
Sector performance - food & grocery
Asda
Netto
Market shares
Asda
Share set to fall back
Netto
Outlook
Danger from growing competition and future economic recovery

THE CO-OPERATIVE GROUP
Getting to grips with Somerfield
Recent key events
Continues pace of development after Somerfield merger
Proposition
Financials
Somerfield yields dramatic sales leap
Margin slips back in
Space
Focus on integrating Somerfield stores
Space allocation
Sector performance - food & grocery
Growth to moderate in
Market shares
Massive leap forward in share
Outlook
Somerfield integration and c-store competition challenge management

ICELAND
Recovery process still on track
Recent key events
Focus on expanding core activity
Proposition
Financials
Growth still high, but slowing down
Most profitable
Space
Woolworths stores give growth boost
Rapid rise in densities falters
Space allocation
Sector performance - food & grocery
Growth rate in food & grocery dips
Market shares
Rise flattens out in 2010
Outlook
Will need new ideas after recovery period

MARKS & SPENCER
Weak recovery in food performance
Recent key events
New chief executive to give momentum
Proposition
Financials
Food still underperforms general merchandise
Space
Grows out-of-town and Simply Food
Space allocation
Sector performance - food & grocery
Food business under severe pressure
No dramatic return to form in
Market shares
Still has to start share recovery
Outlook
Performance of food business improves

MORRISONS
Focus on profitable sales growth
Recent key events
New chief executive
Bolsters manufacturing division with the purchase of supplier Simply Fresh Foods
Optimisation
Exploits trends through product innovation
Relaunches private label ranges
Expands non-food
Move into smaller stores
Step towards a transactional website
Proposition
Financials
Product quality, value and promotions spur outperformance of market
Trading record
Space
Still much potential for space expansion
Space allocation
Sales mix
Sector performance - food & grocery
Market shares
Morrisons continues to steal share
Outlook
Exploring new avenues of growth to increase share

OCADO
Focuses on driving scale to compete with larger competitors
Recent key events
Float reveals scepticism on profitability …
… but raises funds for expansion in any event
Extension of deal with Waitrose
Strengthens value credentials
Innovative approach drives customer loyalty
Proposition
Financials
Ocado has achieved rapid sales growth during the last five years
Ocado has responded pro-actively to changing consumer mindset
Sector performance - food & grocery
Market shares
Outlook
Huge potential, but doubts over profitability remain

SAINSBURY
Faster growth driven by space expansion
Recent key events
Presses on with expansion after its recovery
Proposition
Financials
Strong set of results for 2009/
Margin is still below past performance
Space
Accelerates space growth but lags rivals
Space allocation
Sales mix
Sector performance - food & grocery
Performance not disrupted by recession
Market shares
Move into non-food flatters share
Outlook
Aggressive growth but could still fall behind rivals

TESCO
Back on track following a challenging
Recent key events
Continuous initiatives to ride out of the recession on top
Proposition
Financials
Lower space growth reflected in sales
Consistent sales and profit growth
Space
Space growth slows
Space allocation
Sales mix
Sector performance - food & grocery
Set to outperform market in
Market shares
Will benefit from continued space expansion
Outlook
Focus on non-food and loyalty will help maintain share as competition intensifies

WAITROSE
Begins vigorous expansion
Recent key events
Initiates aggressive expansion plans
Proposition
Financials
Profits and sales grow
Margin healthy
Space
Rapid growth in the pipeline
Space allocation
Sales mix
Sector performance - food & grocery
Making the best of the economic recovery
Market shares
Overtakes rival M&S
Outlook
Store format and product development puts Waitrose in a strong position

HARD DISCOUNTERS
Discount sector boom is over
ALDI
Dramatic slowdown in growth
Trading record
Store portfolio
Market shares
Outlook
Lidl
Takes back lead from Aldi despite break in double digit growth
Trading record
Store portfolio
Market shares
Outlook

SMALLER GROCERY PLAYERS
Niche operators survive market consolidation
Farmers’ markets and TV spark consumer interest
Building on local heroes trend
Property disposals boost market
Value end to come under new pressure
Booths
Steady growth due to niche upmarket appeal
Recent key events
Financials
Outlook
Farmfoods
Recession boom for frozen food
Recent key events
Financials
Outlook

SYMBOL GROUPS
Boost from local shopping trend and higher standards
Changing shopping habits will continue to help market
Major grocers continue to put further pressure on c-store market
Tough consumer environment spurs recruitment of independents
Symbol groups caught in crossfire of fight between Big Four and hard discounters on prices
Costcutter
Good performance but disputes make future uncertain
Recent key events
Financials
Outlook
Musgrave
Investment in own label continues to show dividends
Recent key events
Financials
Outlook
Premier (Booker)
Focus on growing store numbers
Recent key events
Financials
Outlook
Spar
Performance improves dramatically
Recent key events
Financials
Outlook

APPENDIX
Definitions
Methodology
Financial Statistics - VAT
Trading Profile
Physical Development
Computer Rounding
Further reading
Ask the analyst
Verdict consulting
Disclaimer

TABLES
Table: Grocers & food specialists definition
Table: Food & grocery retail sales 2000-
Table: Channels of distribution 2005-
Table: Total grocery market size by retailer type 2000-
Table: Total grocery space by retailer type 2000-
Table: Annual sales densities by retailer type 2000-
Table: Total grocery store numbers by retailer type 2000-
Table: Total food & grocery market consumer expenditure 2000-
Table: Non-durable household goods consumer spend 2000-
Table: Total food market consumer expenditure 2000-
Table: Soft drinks market consumer expenditure 2000-
Table: Alcoholic drinks consumer expenditure 2000-
Table: Tobacco products consumer expenditure 2000-
Table: Summary of online food & grocery shoppers and spend
Table: Online food & grocery shopping population 2007?
Table: Frequency of shopping for food & grocery online
Table: Spend per year on food & grocery online
Table: Online food & grocery spend, sector penetration and share of total online 1999-
Table: Sales of major online food & grocery players 2004-2010e
Table: Share of spend of major online food & grocery retailers 2005-2010e
Table: Shares of total sales via food & grocery retailers 2005-2010e
Table: Leading grocery retailers operating statistics 2009/10
Table: Leading grocery retailers store profiles 2009/
Table: Grocery space allocation - retailers A-F
Table: Grocery space allocation - retailers A-F (continued)
Table: Grocery space allocation - retailers G-M
Table: Grocery space allocation - retailers G-M (continued)
Table: Grocery space allocation - retailers N-W
Table: Grocery space allocation - retailers N-W (continued)
Table: advertising media expenditure 2004-
Table: Asda company overview
Table: Asda retail proposition
Table: Asda UK key operating statistics 2005-2010e
Table: Netto UK key operating statistics 2004-2009e
Table: Asda UK trading record 2000-2010e
Table: Netto UK trading record 1999-2009e
Table: Asda store portfolio 2000-2010e
Table: Netto UK store portfolio 1999-2009e
Table: Asda space allocation
Table: Asda space allocation (continued)
Table: Asda estimated sales mix
Table: Co-operative Group company overview
Table: Co-operative Group retail proposition
Table: Co-operative Group food retail key operating statistics 2005-2011e
Table: Co-operative Group food retail trading record 2002-2011e
Table: Co-operative Group food retail UK store portfolio 2000-2011e
Table: Co-operative Group food retail space allocation
Table: Co-operative Group food retail space allocation (continued)
Table: Iceland company overview
Table: Iceland retail proposition
Table: Iceland key operating statistics 2005-
Table: Iceland trading record 2000-
Table: Iceland UK store portfolio 2000-
Table: Iceland space allocation
Table: Iceland space allocation (continued)
Table: Marks & Spencer company overview
Table: Marks & Spencer retail proposition
Table: Marks & Spencer UK key operating statistics 2005-
Table: Marks & Spencer UK trading record 2000-
Table: Marks & Spencer store portfolio 2000-2010e
Table: Marks & Spencer store portfolio (food) 2000-2010e
Table: Marks & Spencer space allocation
Table: Marks & Spencer space allocation (continued)
Table: Marks & Spencer trading record (food) 2000-
Table: Morrisons company overview
Table: Morrisons retail proposition
Table: Morrisons key operating statistics 2005-
Table: Morrisons trading record 2000-
Table: Morrisons store portfolio 2000-
Table: Morrisons space allocation
Table: Morrisons space allocation (continued)
Table: Morrisons estimated sales mix 2009/
Table: Ocado company overview
Table: Ocado retail proposition
Table: Ocado UK key operating statistics 2005-2010e
Table: Ocado UK trading record 2000-2010e
Table: Sainsbury company overview
Table: Sainsbury retail proposition
Table: Sainsbury key operating statistics 2005-
Table: Sainsbury trading record 2000-2010
Table: Sainsbury UK store portfolio
Table: Sainsbury space allocation
Table: Sainsbury space allocation (continued)
Table: Sainsbury estimated sales mix 2009/
Table: Tesco company overview
Table: Tesco retail proposition
Table: Tesco UK key operating statistics 2005-
Table: Tesco UK trading record 2000-
Table: Tesco UK store portfolio 2000-
Table: Tesco space allocation
Table: Tesco space allocation (continued)
Table: Tesco estimated sales mix 2009/
Table: Waitrose company overview
Table: Waitrose retail proposition
Table: Waitrose key operating statistics 2005-
Table: Waitrose trading record 2000-
Table: Waitrose store profile 2000-
Table: Waitrose space allocation
Table: Waitrose space allocation (continued)
Table: Waitrose estimated sales mix 2009/
Table: Aldi UK key operating statistics 2005-2010e
Table: Aldi UK sales record 2000-2010e
Table: Aldi UK store numbers 2000-2010e
Table: Aldi space allocation
Table: Aldi space allocation (continued)
Table: Lidl UK key operating statistics 2005-2010e
Table: Lidl UK sales record 2000-2010e
Table: Lidl UK store numbers 2000-2010e
Table: Lidl space allocation
Table: Lidl space allocation (continued)
Table: Booths facts
Table: Farmfoods facts
Table: Costcutter facts
Table: Musgrave facts
Table: Premier (Booker) facts
Table: SPAR facts
Table: Grocers & food specialists definition

FIGURES
Figure: New avenues of growth in food & grocery retailing 2010-
Figure: The market dynamics have changed
Figure: Food & grocery price inflation element of consumer spend 2007-
Figure: Change in share of major grocery distribution channels 2014 on
Figure: Real household disposable income growth trend 2008-
Figure: Protect and build share by adding space 2010-
Figure: New Tesco store, Kingsbridge, Devon
Figure: Sainsbury's store improvements of Garratt lane, Wandsworth, London
Figure: New mezzanine level at Asda, Clapham Junction, London 2010
Figure: Maximising space by redesigning and adapting to customer needs - Carrefour, Ecully and Venissieux, France
Figure: Consumer profile and mindset have changed 2010
Figure: Profile of food & grocery shoppers - by age bracket 2006-
Figure: Food & grocery loyal main users identifying drivers of loyalty % 2006-
Figure: Low prices not enough to entice spend
Figure: Adverts convey more supermarket credentials
Figure: Shopping habits and behaviour are changing 2010-
Figure: Products exploiting demand for convenient meal solutions
Figure: Use of private label ranges to exploit shopping habits and emerging trends
Figure: Leveraging multichannel capabilities - Tesco Direct
Figure: Product innovation to capitalise on consumer behaviour and trends
Figure: Food & grocery retailers share of total consumer spending 2000 to
Figure: Food & Grocery retailers share of total retail spending 1999 to
Figure: Total food & grocery retail sales and year-on-year change % 2000-
Figure: Channels of distribution - share of total grocery market by retail sales 2005-
Figure: Change % in total grocery market sales by retailer type 2010 on
Figure: Change % in total grocery space by retailer type 2010 on
Figure: Change % in annual sales densities by retailer type 2010 on
Figure: Change % in total grocery store numbers by retailer type 2010 on
Figure: Sources of growth in food & grocery expenditure 2000-
Figure: Change % in food & grocery expenditure by category 2005-
Figure: Online food & grocery spend and growth rate 2000-2010
Figure: Age breakdown of internet food & non-food shopping usage % 2009
Figure: Spend per head on food & grocery online 2009?
Figure: Value and growth of online food & grocery market 2000-
Figure: Online share of total food & grocery spend 2000-
Figure: Drivers and hindrances to growth of online food & grocery market 2010-2014
Figure: Sales of major online grocery retailers 2009 and 2010e
Figure: Share of spend of major online food & grocery retailers 2010e on
Figure: Top Eight food online retailers - where food & grocery shoppers bought online 2008 and
Figure: Comparison of the picking models in online food & grocery retailing 2010-
Figure: Tesco online food & grocery sales in calendar 2005-2010e
Figure: Tesco share of food & grocery spend online 2005-2010e
Figure: Sainsbury online food & grocery sales in calendar 2005-2010e
Figure: Sainsbury share of food & grocery spend online 2005-2010e
Figure: Asda online food & grocery sales in calendar 2005-2010e
Figure: Asda share of food & grocery spend online 2005-2010e
Figure: Ocado food & grocery sales 2005 to
Figure: Ocado’s share of online food & grocery market 2005 to
Figure: Retailers share of the total grocery market 2010e
Figure: Market shares % 2005 and
Figure: Change in operating profit % 2009/10 on 2008/
Figure: Change in sales area % 2009/10 on 2008/
Figure: Average space allocation by category 2010 vs.
Figure: Asda UK sales and growth to December 2005-2010e
Figure: Asda UK operating profit to December 2004-
Figure: Asda sales density 2005-2010e
Figure: Asda food & grocery sales in calendar years 2005-2010e
Figure: Netto food & grocery sales in calendar years 2004-2009e
Figure: Asda share of total market held by food & grocery retailers 2005-2010e
Figure: Asda share of market in food & grocery products 2005-2010e
Figure: Netto share of total market held by food & grocery retailers 2004-2009e
Figure: Netto share of market in food & grocery products 2004-2009e
Figure: Co-operative Group food retail UK sales and growth to * January 2005-
Figure: Co-operative Group food retail operating profit to * January 2005-
Figure: Co-operative Group food retail UK sales density to * January 2005-
Figure: Co-operative Group food & grocery sales in calendar years 2005-
Figure: Co-operative share of total market held by food & grocery retailers 2005-2010e
Figure: Co-operative share of market in food & grocery products 2005-2010e
Figure: Iceland UK sales and growth to March 2005-
Figure: Iceland group operating profit to March 2005-
Figure: Iceland UK sales density to March 2005-
Figure: Iceland food & grocery sales in calendar years 2005-2010e
Figure: Iceland share of total market held by food & grocery retailers 2005-2010e
Figure: Iceland share of market in food & grocery products 2005-2010e
Figure: Marks & Spencer total UK sales and growth to March 2005-2010
Figure: Marks & Spencer group total operating profit to March 2005-2010
Figure: Marks & Spencer UK food sales and growth to March 2005-
Figure: Marks & Spencer UK food & grocery sales density to March 2005-
Figure: Marks & Spencer sales of food & grocery products in calendar years 2005-
Figure: Marks & Spencer food sales as share of total market held by food & grocery retailers 2005-2010e
Figure: Marks & Spencer share of market in food & grocery products 2005-2010e
Figure: Morrisons UK sales and growth to January 2005-
Figure: Morrisons UK operating profit to January 2005-
Figure: Morrisons sales density to January 2005-
Figure: Morrisons food & grocery sales in calendar years 2005-2010e
Figure: Morrisons share of total market held by food & grocery retailers 2005-2010e
Figure: Morrisons share of market in food & grocery products 2005-2010e
Figure: Ocado UK sales and growth to November 2005-2010e
Figure: Ocado food & grocery sales in calendar years 2005-2010e
Figure: Ocado share of total market held by food & grocery retailers 2005-2010e
Figure: Ocado share of market in food & grocery products 2005-2010e
Figure: Sainsbury UK sales and growth to March 2005-
Figure: Sainsbury operating profit to March 2005-
Figure: Sainsbury UK sales density to March 2005-2010
Figure: Sainsbury food & grocery sales in calendar years 2005-2010e
Figure: Sainsbury share of total market held by food & grocery retailers 2005-2010e
Figure: Sainsbury share of market in food & grocery products 2005-2010e
Figure: Tesco UK sales and growth to February 2005-
Figure: Tesco group operating profit to February 2005-
Figure: Tesco UK sales density to February 2005-
Figure: Tesco food & grocery sales in calendar years 2005-2010e
Figure: Tesco share of total market held by food & grocery retailers 2005-2010e
Figure: Tesco share of market in food & grocery products 2005-2010e
Figure: Waitrose UK sales and growth to March 2005-
Figure: Waitrose operating profit to March 2005-
Figure: Waitrose sales density to March 2005-
Figure: Waitrose food & grocery sales in calendar years 2005-2010e
Figure: Waitrose share of total market held by food & grocery retailers 2005-2010e
Figure: Waitrose share of market in food & grocery products 2005-2010e
Figure: Aldi share of total market held by food & grocery retailers 2005-2010e
Figure: Aldi share of market in food & grocery products 2005-2010e
Figure: Lidl share of total market held by food & grocery retailers 2005-2010e
Figure: Lidl share of market in food & grocery products 2005-2010e

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