FMCG Weekly News Update

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Weekly News update
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in Packaged Groceries
Stephen Hall
Friday 12th August

Copyright © 2015 Information Resources, Inc. (IRI). Confidential and Proprietary. 2
• Consumers still spending freely despite Brexit fears
• Brexit vote fails to deter shoppers as retail sales grow at fastest rate since January
• Morrisons to expand its online operation after renegotiating deal with Ocado
• BRC-KPMG July retail sales monitor – sector by sector
• John Lewis sales up 7.3% last week
• Another heatwave could deliver £290m boost for retailers, says Co-op
• Why are online-only retailers growing faster than multichannel ones?
• One Stop included in Tesco 'Project Reset'
• Aldi’s Olympic partnership boosts fruit and veg sales
Weekly News Summary – 8th August 2016

Consumers Still Spending Freely Despite Brexit Fears
Despite weakening business activity in the wider economy and fragile consumer confidence, latest data from Visa shows
that shoppers are still spending relatively freely.
Its monthly index shows that consumer spending rose 1.6% year-on-year in July, up from a growth rate of 0.9% in June
and the biggest rise in three months. The data suggested that the warmer weather has driven demand for summer
clothing and eating out.
Kevin Jenkins, UK & Ireland Managing Director at Visa, commented: “July’s data suggests that UK consumer spending is
holding up despite the ongoing uncertainty following the referendum, albeit at lower levels of growth than we’ve seen in
the last couple of years.
“Looking at the last three months, the index indicates that consumers remain cautious with their spending. Overall growth
is hovering nearly one percentage point below the average seen over the past two years.”
Separate data from released last week by BDO showed that retail sales in July narrowly missed falling into negative
territory but only through widespread discounting.
Source: NamNews 8th August 2016

Brexit Vote Fails To Deter Shoppers As Retail Sales Grow At
Fastest Rate Since January
Despite weakening business activity in the wider economy and fragile consumer confidence following the Brexit vote, latest
figures from BRC-KPMG Retail Sales Monitor show there was solid growth in the retail sector last month.
Like-for-like sales increased by 1.1% year-on-year in July (compared to a 0.5% fall in June) as the warmer weather and heavy
discounting by retailers boosted trade. On a total basis, sales rose 1.9%, also the strongest growth since January and ahead of
the 12-month average of 1.2%.
Helen Dickinson Chief Executive of the British Retail Consortium, commented: “This month’s solid sales figures may come as a
shock to some given the slew of early indicators suggesting that consumer activity was slowing in the wake of the referendum
result. However, little has materially changed for most UK households in the wake of June 23, so it is not surprising to us that
sales are simply responding to their normal underlying drivers.
“The big question for retailers is whether that success can be carried forward into full price sales. Whilst retailers continue to
monitor the situation in the wake of Brexit, responding to rapid and complex change in consumer behaviour in the midst of a
highly competitive market remains the substantive challenge.”
David McCorquodale, Head of Retail at KPMG, added: “Warmer weather helped blow away some of the post-referendum blues,
boosting the UK feel good factor and giving consumers a sense that ‘life goes on’ following the initial shock of the Brexit vote.
“This first full month of retail sales figures post-vote suggests that UK shopping patterns haven’t changed versus previous
years. For retailers, plans to improve productivity remain top of mind to guard against recent increases to their cost base as
well as making sure they can weather what are likely to be more uncertain times ahead.”
Commenting on Food & Drink sector performance, Joanne Denney-Finch, Chief Executive at IGD, said: “Given the sharp drop in
food and drink spending in the immediate aftermath of the referendum, a return to sales growth during July was very
encouraging. As some of the economic and political uncertainties were resolved, shopper confidence began to recover. In July,
30% of shoppers felt they would be worse off over the next 12 months; broadly comparable with the 27% who said this in July
2015, but not the 49% we saw immediately after Brexit. The next few months’ sales figures will hinge largely on whether we
see the return of food inflation, following the drop in sterling. If so, this is likely to be a gradual effect.”

Morrisons To Expand Its Online Operation After Renegotiating
Deal With Ocado
Morrisons looks set to significantly grow its online home delivery service after renegotiating its current deal with Ocado.
After entering talks earlier this year, Morrisons said it had now finalised an agreement with Ocado that will enable its online activities to
grow profitably having agreed a number of changes to components of the original contract.
The main change is the lifting of a restriction on store picking, allowing Morrisons to service orders from its outlets across the UK,
significantly extending the reach of its delivery network. Morrisons.com can currently offer grocery deliveries to around half of UK
households, mainly in central England, via its tie-up with Ocado. However, the new arrangement will allow it reach new areas such as
Scotland and the South West of England.
Ocado will develop the store pick solution for Morrisons, but once operational, a contractual obligation to share a proportion of its future
online profits with Ocado will end.
The new deal will also see exclusivity restrictions on Ocado being reduced, although it will still be prohibited from serving certain grocery
retailers, namely Tesco, Asda, Sainsbury, Aldi and Lidl.
As previously announced, Morrisons has agreed to take capacity in Ocado’s new Customer Fulfilment Centre (CFC) in Erith, further
expanding its reach. The new arrangement has significantly lower upfront capital costs than the original operating agreement and includes
an option to break after five years. Once Morrisons.com is operational from Erith in 2018, the retailer will pay Ocado a reduced annual R&D
fee.
Meanwhile, in parallel with the delivery changes, Morrisons has agreed a move to grow its range of non-food items available online. The
supermarket will sell thousands of non-food items from well-known brands, currently available via Ocado.
A statement from Morrisons said: “Our aim has always been to achieve profitable growth online. The extension of our online offer
nationwide, through our investments in Erith and store pick, means that the break-even point for Morrisons.com will be slightly later than
originally planned when the business operated solely from the Dordon CFC. In future, we expect the annual Morrisons.com EBIT loss to
continue to reduce each year and to be a key component of the £50m-£100m incremental profit opportunity we announced at our
preliminary results in March 2016. Our capital expenditure guidance of c.£450m for 2016/17 and a sustainable range of £400m-£450m per
annum in future years is unchanged.”
David Potts, Chief Executive, added: “The new investments in online growth are further examples of Morrisons building a broader business
and will allow millions more customers all over Britain to enjoy Morrisons good quality fresh food and great value for money. As food maker
and shopkeeper, we continue to ‘follow the customer’ and move towards achieving capital light, profitable growth online.”

BRC-KPMG July Retail Sales Monitor – sector by sector
Despite concerns Brexit might dent consumer spending, the latest BRC-KPMG Retail Sales Monitor shows like-for-like retail sales
increased 1.1%.
Meanwhile, total sales grew 1.9% in July – their strongest performance since January. Here we look at how each of the sectors
performed on an individual basis.
Food – up
It was a strong month for food in July, with the category reporting its best performance since November 2013, excluding Easter
distortions. Consumers rushed out to buy snacks and picnic food during the hotter weeks of July, while soft fruits also proved to be a
good seller.
Health & beauty – up
Following a dismal month in June when sales hit a record low, health and beauty bounced back into shape, thanks to strong sales of
seasonal items such as sun-cream; cosmetics also sold well. The report said shoppers were encouraged by promotional activities,
particularly online, although discounts did lead to higher sales in stores too.
Household appliances – up
The hot weather spurred consumers to buy fans and cooling devices, helping deliver growth in the small domestic appliances
category. Large domestic appliances also performed well, with good sales of refrigeration products. Strong competition on delivery
services also helped.
Other non-food – up
The other non-food category managed “decent” growth in July. In-store sales have fallen for six months in a row, as retail space is
rationalised and consumers tend to buy online and collect in-store. Electricals retailers reported good demand for new mobile devices
but differed over the strength of purchases of TVs and audio equipment.
In physical books, which had achieved a good run since the beginning of 2015, the trend slowed in July, perhaps due to a particularly
strong comparable period last year. Sales of outdoor products, including garden furniture and sport equipment, drove performance in
the leisure category.
Department stores
While July brought BHS store closures, many of the retailer’s shoppers would have turned to other department stores. Some wealthy
foreign tourists are thought to be taking advantage of the post-EU referendum weakness of the pound to holiday and shop in the UK.
However, the impact was not felt across all retailers.
Source: Retail Week 9th August 2016

John Lewis sales up 7.3% last week
John Lewis saw its sales climb by 7.3% year-on-year last week as trade was boosted by a strong performance in
electricals and home technology.
Sales in the category increased by 11.2% as customers made hi tech purchases ahead of their summer holidays, with
cameras and wireless headphones both proving popular. The warm weather also drove sales of home cooling devices,
which finished the week up 61%.
There was a 5.4% sales rise in the home category boosted by the popularity of outdoor living items. Trade was also
bolstered by the launch of an exclusive collaboration with the Loaf furniture brand.
Fashion sales were also 5.4% up year-on-year. The category benefited from a strong week for beauty, helped by the
launch of a Charlotte Tilbury counter in Peter Jones. Menswear also had a strong week, with sales rising by 11.4%.
Source: Retail Bulletin 10th August 2016

Another heatwave could deliver £290m boost for retailers, says
Co-op
Another heatwave this summer could bolster food retailers by £290 million, according to an analysis by the Co-op.
With many retailers being affected by a wet, colder-than-usual start to summer in June, food retailers are pinning their
hopes on a late heatwave this month as Brits stock up on barbecues, burgers and cold beers.
The Co-op said when average temperatures rose above 21 degrees, food sales also increased by 10 per cent – and with
an average weekly spend of £2.9 billion at UK food retailers, this could mean a £290 million boost in a week.
In addition, a 10 degree rise in temperature can lead to a 300 per cent spike in barbecue meat sales, while cold beer
sales goes up by 135 per cent.
Co-op chief executive Steve Murrells told The Telegraph that shoppers spend less time cooking in summer, opting to make
last-minute meal decisions.
“It is a challenge for food retailers to ensure that we are ahead of the weather and have the right products in stock at the
right time: shoppers quite rightly expect that their local convenience store will have the food they want: whatever the
weather,” he said.
The Met Office is predicting sunny, warm days for much of the UK next week, despite the below-average temperatures for
the month as a whole.
Source: Retail Gazette 10th August 2016

Why Are Online-Only Retailers Growing Faster Than Multichannel Ones?
The important role that smartphones play within retail has been underlined by a new report from IMRG and Capgemini.
For around a year now (starting July 2015), the IMRG Capgemini Sales Index has been tracking a consistent gap in online
retail revenue growth rates – with online-only retailers up +24.8% year-to-date (Jan to June) and multichannel retailers
back on +9.5%.
The gap between the two groups reached a record-high in June 2016, when growth for the online-only retailers (+32.4%)
was a full 23 percentage-points ahead of the rate for the multichannel retailers compared with June 2015.
The average gap between the two groups in year-on-year growth over the past 12 months is 13 percentage points. Year-
to-date in 2016 (January to June), the average basket value for online-only retailers is also £6 higher than that of
multichannel retailers.
Explaining the reasons behind the trend, Andy Mulcahy, editor at IMRG said: “Another trend that we observed just before
this gap emerged was a sharp upturn in sales growth through smartphones – and all the evidence points to this being a
significant factor. As smartphones have evolved from being used in retail primarily for research purposes to being major
devices for completing purchases too, the gap between online-only and multichannel retailers has grown and remained
consistently wide.
“While multichannel retailers have been under pressure to focus on rolling-out services such as click & collect and ensure
it operates efficiently it seems that, generally speaking, online-only retailers have been able to invest more in mobile
optimisation and are reaping the benefits as these devices continue to grow in importance for shoppers. It shows just how
key smartphones have become to the overall retail experience.”
Bhavesh Unadkat, management consultant in retail customer engagement design at Capgemini, added: “With the e-retail
boom showing no signs of abating, there are opportunities for every retailer to capitalise. It’s important that online-only
retailers continue their momentum in e-retail, while multichannel retailers do all they can to catch up with their ‘pure play’
counterparts.
“Whether physical, online only or multichannel the retailers that will succeed will be those that best use data and insights
together with providing a seamless relevant customer experience to their customers. It will be fierce, it will be competitive
and we will have further breakthroughs in technology – may the best retailer win!”

One Stop included in Tesco 'Project Reset'
Tesco has extended its ‘Project Reset’ to include its One Stop stores. This follows on from the decision last month to
include Tesco Express stores in the range rationalisation programme.
Gains in large store formats
We reported last month the decision to include Tesco Express stores in the programme, following the success of the larger
stores whoafter the 18 month exercise saw an average of 18% of SKUs removed from categories. Project Reset has been
credited with supporting Tesco's volume growth and isn't just about reducing ranges, Tesco has also introduced some
2,000 lines to enhance its offer for shoppers, improving availability on retained lines and often lowering prices too.
Entry level priced products added
In a report in 'The Grocer' as well as range cuts One Stop has also introduced a range of value entry-level priced products
as a result of customer feedback. In fact that has seen 80 new products added to the range whilst removing only 58.
These new lines follow on from the 85 new lines added across the fresh and chilled categories earlier in the year.
Speaking of the recent changes Lizzie Reynolds One Stop customer director said "Following on from our fresh and chilled
reset in may, these new, improved process represent great value for customers." She continued "The additions to the
range, the reductions in price and the additional inspirational marketing have all been developed to help serve our
customers a little better every day."
Source: IGD 11th August 2016

Aldi’s Olympic Partnership Boosts Fruit And Veg Sales
Aldi has claimed that its sponsorship of Team GB has significantly boosted sales of healthy foods in its stores.
The discounter revealed that its customers spent over £289m on fresh produce from May to July, up 19% year-on-year.
Seemingly inspired by the partnership and their Olympic heroes, shopper’s top ‘Olym-picks’ included bananas, salads and
tomatoes, which saw an increase in sales of 25%, 14% and 15%, respectively in Aldi stores.
Aldi announced its campaign to support Team GB in August 2015. In the run-up to the Rio Olympics, all 650+ members of
Team GB were given £25 worth of vouchers per month to spend in its stores, which in total amounted to £145,000.
Tony Baines, Joint Managing Director of Corporate Buying at Aldi, commented: “At Aldi, we’re incredibly proud to be the
first supermarket to partner with Team GB and are delighted that our dedication to fresh, healthy produce has positively
impacted Team GB athletes and our customers.”
In addition to supporting the athletes, Aldi and Team GB’s Get Set to Eat Fresh initiative has been helping young people
understand the pleasure of cooking and eating healthy meals whilst gaining the skills they need to feed themselves using
fresh, nutritious ingredients.

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