aeuropean c-stores report by fbic global retail tech dec. 2015 c-stores report... · 3 !...

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DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

December 2015

EUROPEAN CONVENIENCE

STORE RETAILING

D E B O R A H W E I N S W I G E x e c u t i v e D i r e c t o r –

H e a d o f G l o b a l R e t a i l & T e c h n o l o g y F u n g B u s i n e s s I n t e l l i g e n c e C e n t r e

d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m U S : 6 4 6 . 8 3 9 . 7 0 1 7

H K : 8 5 2 . 6 1 1 9 . 1 7 7 9 C H N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

• Convenience stores are outperforming in each of the countries covered by this report—the UK, France and Germany.

• But there are major differences in scale: in the UK, convenience stores are estimated to account for fully 27% of grocery retail in 2015, while in France they account for just under 4% and in Germany, only 0.3%.

• A common theme across these countries is the encroachment of major grocery retailers such as Carrefour and Tesco into the convenience sector.

• But these retailers risk cannibalizing sales from their larger stores, as there is less justification for shoppers to make a trip to the chains’ bigger shops.

• In those countries where e-‐commerce, including e-‐grocery, is gaining share of retail, we see convenience continuing to outperform due to the two channels’ complementary natures.

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December 2015

Table of Contents

EXECUTIVE SUMMARY ......................................................................................... 3

MARKET SNAPSHOT ............................................................................................. 5

EUROPEAN TRENDS .............................................................................................. 7

UK ...................................................................................................................... 12

FRANCE .............................................................................................................. 18

GERMANY .......................................................................................................... 24

KEY TAKEAWAYS ................................................................................................ 29

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EUROPEAN CONVENIENCE STORE RETAILING EXECUTIVE SUMMARY Convenience stores are outperforming in each of the countries covered by this report—the UK, France and Germany. In each, the sector is registering growth above that of total grocery and above rates of food-‐price inflation. In the UK and France, convenience is a bright spot in a negative-‐growth grocery sector, which has been pulled down by price wars and consequent deflation. In Germany, the grocery sector is more stable.

While all three markets are seeing strong performance from convenience, there are major differences in scale. In the UK, convenience stores are forecast to account for fully 27% of grocery retail in 2015, while in France they will account for just under 4% and in Germany, only 0.3% (excluding filling station stores in France and Germany). Germany’s tiny sector size is mostly a result of its grocery sector being dominated by competing small-‐store formats, such as discounters and small, neighborhood supermarkets that take the place of convenience stores.

A common theme across these countries is the encroachment of major grocery retailers into the convenience sector. Big retailers, including Tesco and Carrefour, are looking for alternative growth channels in the face of potential saturation of mature channels such as superstores. Moreover, in the UK especially, there has been a noticeable downturn in demand for out-‐of-‐town, big-‐store shopping as consumers have begun to split their shopping between different types of stores and the Internet.

But there are some risks for the big-‐name grocers that are pushing into convenience. The most pressing of these is that retailers risk cannibalizing sales from their own larger stores: as chains bring fresh foods, their own brands and big-‐name products to consumers’ doorsteps, there is less justification for shoppers to make a trip to the chains’ larger shops. Another risk is the higher operating costs and lost sales that convenience entails. Small-‐basket shops are more expensive for retailers to service, small stores generate just a fraction of their larger counterparts’ sales and impulse purchases of the types of nongrocery items stocked in superstores can be lost.

27%

In the UK, convenience stores are forecast to account for fully 27% of grocery retail in 2015, while in France they will account for just under 4% and in Germany, only 0.3%

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Nevertheless, in those countries where e-‐commerce, including e-‐grocery, is gaining share of retail, we see convenience continuing to outperform due to the two channels’ complementary natures. First, convenience stores, particularly those with the fresh-‐heavy formats major chains offer, are a natural complement to occasional, bulk online grocery shops. Second, as general merchandise categories such as electronics migrate to online, shoppers have less reason to make trips to large, out-‐of-‐town superstores laden with nongrocery ranges. Third, for the more forward-‐thinking convenience retailers, notably Tesco in the UK, convenience stores are the latest locations to serve as collection points for online, nongrocery click-‐and-‐collect orders. In time, we could see small shops function as grocery click-‐and-‐collect points, too.

A number of grocery chains are tapping the urban consumer market through their convenience stores. They are serving these consumers with more meal solutions, which, for some retailers, includes building in food-‐service propositions. Especially in central and transit locations, convenience stores function as food-‐to-‐go outlets that can compete with specialist food-‐service outlets.

For the more forward-‐thinking convenience retailers, convenience stores are the latest locations to serve as collection points for online, nongrocery click-‐and-‐collect orders.

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MARKET SNAPSHOT The convenience store sector is outperforming: in the UK, in France and in Germany, the convenience sector outpaced both total grocery growth and inflation in food prices last year. In the UK and France, this was in the context of intense price competition creating a deflationary grocery market.

Figure 1. Convenience Store Sales Growth vs. Total Grocery Sales Growth and Food-‐Price Inflation, 2014

*In France and Germany, growth is for convenience stores excluding stores at filling stations. Source: Association of Convenience Stores/IGD/Office for National Statistics/Euromonitor International/Statistisches Bundesamt/INSEE/Eurostat/FBIC Global Retail & Technology

The UK has by far the biggest convenience store sector of the three countries. The sector has long been a complement to the bigger supermarkets in the UK and it has been boosted by more lax Sunday trading restrictions for small stores.

In France, out-‐of-‐town hypermarkets have traditionally been the leading grocery format. Convenience stores offer a natural complement to occasional, big-‐store shops, yet the convenience sector has remained minor. With the blossoming of online grocery shopping in France, this could change—and we are seeing major grocery chains push into convenience and other smaller-‐store formats.

German grocery retailing is focused on small-‐store shopping, often close to home: discounters and small supermarkets dominate, so there is no niche for convenience stores to carve. Consequently, the convenience sector is tiny in Germany.

The UK has by far the biggest convenience store sector of the three countries.

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Figure 2. Estimated Convenience Store Sales (Left Axis) and Convenience Store Sales as % of Total Grocery Sector Sales (Right Axis), 2015

Note: In France and Germany, data are for convenience stores excluding stores at filling stations. Source: Association of Convenience Stores/IGD/Office for National Statistics/Euromonitor International/Statistisches Bundesamt/INSEE/Eurostat/FBIC Global Retail & Technology

SPAR, which is a Continent-‐wide player, remains Europe’s largest convenience store retailer, according to Euromonitor International. SPAR operates in most European countries, including the UK, France and Germany. In 2014, Tesco and Carrefour advanced as the second-‐ and third-‐largest European convenience store retailers, respectively.

Figure 3. Europe’s Biggest Convenience Store Retailers: Net Revenues (Excluding Sales Tax), 2014 and 2013

Source: Euromonitor International

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EUROPEAN TRENDS Different Markets, Different Drivers The UK, France and Germany have very different grocery sectors, yet common to all is an outperforming convenience subsector. Grocery retailing in the UK pivots on high-‐street supermarkets and out-‐of-‐town superstores; in France it is traditionally focused on hypermarkets; and in Germany it is dominated by discounters and smaller-‐store supermarkets. Away from physical stores, too, there are major differences in the migration to online grocery shopping: the UK is a more mature e-‐grocery market than is France, which, in turn, is well ahead of Germany.

These factors matter because convenience store shopping is the natural complement to large, occasional bulk shops—whether these are undertaken at superstores or on the Internet. The reverse is true, too: where smaller-‐store formats are the everyday choice for grocery shopping, as in Germany, there is no real demand for convenience stores.

The marked differences in the convenience store sectors of these three countries are largely the result of these broader structural variances. As we showed in Figure 2, above, the scale of the convenience sector varies substantially: its share of grocery sector sales ranges from fully 27% in the UK to 4% in France and just 0.3% in Germany (excluding filling station stores in Germany and France).

Given these differences, why are all three nations seeing convenience grow its share of total grocery? In the UK and France, the rapid expansion of big grocery chains such as Sainsbury’s and Carrefour into smaller-‐store formats largely accounts for the growth. These retailers are bringing superstore standards to local shops, making convenience a real alternative to big grocery stores. In Germany, the tiny convenience sector is being buoyed by newer formats targeting on-‐the-‐go consumers with an offering that is heavy on food service.

Figure 4. National Convenience Store Attributes

Features of the Sector Convenience Growth Drivers Future Opportunities

UK • Large but fragmented, with symbol groups and independents holding major shares.

• Major grocery chains consolidating the sector, but risking cannibalization of their supermarket sales.

• Major grocery chains bringing higher standards to convenience.

• More smaller-‐basket, little-‐and-‐often shopping.

• Complement to increasingly popular option of less frequent, bulk Internet grocery shopping.

• Closer integration with e-‐commerce, with convenience stores serving as click-‐and-‐collect hubs.

• Further consolidation of the sector.

France • Relatively small but concentrated convenience store sector.

• Major grocery chains expanding, helping to drive sector growth.

• Leading grocer (Carrefour) is the dominant player.

• Major grocery chains introducing convenience formats to more shoppers and bringing higher standards to convenience.

• Complement to occasional, bulk shopping online or at hypermarkets.

• Broaden usage of the niche convenience channel.

• New players could challenge Carrefour’s dominance.

• Encourage usage for top-‐up shops that complement e-‐grocery purchases; integration with nongrocery e-‐commerce by serving as collection points.

Germany • Tiny sector, stifled by the dominance of alternative smaller-‐store formats in German grocery.

• Restrictive Sunday trading hours are a further depressing force. Transit locations have greater freedom to open on Sundays.

• Renewed focus on food service from new entrants such as REWE To Go.

• New fascias focusing on urban commuters, sidestepping direct competition with supermarkets or discounters.

• Transit retail niche sidesteps Sunday trading limits.

• Differentiate from discounters and supermarkets through food-‐service and multi-‐channel services such as click-‐and-‐collect.

Convenience store shopping is the natural complement to large, occasional bulk shops—whether these are undertaken at superstores or on the Internet.

0.3%

The sector’s share of grocery sector sales ranges from fully 27% in the UK to 4% in France and just 0.3% in Germany.

Source: FBIC Global Retail & Technology

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Adding to the distinctions between these markets is the short-‐term grocery environment. In the UK and France, the big grocers are currently engaged in intense price competition that has pushed the grocery sector into deflationary territory. This price competition is inevitably trickling down to convenience stores, so we expect the subsector to grow much more slowly in the UK and France in 2015 than in some recent years. Germany has also seen intensified grocery price competition, but the sector there is much more stable, largely due to the constancy of the discount stores.

Big Grocery Chains Push into Convenience Stores… A common theme across these countries is the encroachment of major grocery retailers into the convenience subsector. Push and pull factors are influencing these moves. On the push side, major retailers, including Tesco and Carrefour, are facing potential saturation of mature channels such as superstores. Moreover, in the UK especially, there has been a noticeable downturn in demand for out-‐of-‐town, big-‐store shopping as consumers’ weekly shopping has splintered into Internet retailing, discounters and stores closer to home—what we term repertoire shopping. On the pull side, there is the prospect in the UK of consolidating the sector; convenience is the last major grocery channel to experience concentration by major chains. And in France and, to a lesser extent, in Germany, there are opportunities to grow usage of the still-‐niche convenience channel by bringing the format within reach of more shoppers.

As retailers seek to tap this growth channel, big names such as Sainsbury’s and Carrefour are piling in. Carrefour, for instance, is synonymous with the hypermarket format, yet it has 15 times as many convenience stores as it does hypermarkets.

Figure 5. Number of Smaller-‐Store Outlets vs. Regular Formats for Selected Major Grocers

2010 2011 2012 2013 2014 Carrefour (France)

Convenience Store Format 3,217 3,285 3,342 3,458 3,673 Annual % Change N/A 2.1 1.7 3.5 6.2 Hypermarket Format 231 232 220 234 237 Annual % Change N/A 0.4 (5.2) 6.4 1.3

Sainsbury’s (UK) Convenience Store Format (Sainsbury’s Local) 377 440 523 611 707 Annual % Change N/A 16.7 18.9 16.8 15.7 Supermarket Format 557 572 583 592 597 Annual % Change N/A 2.7 1.9 1.5 0.8

Source: Company reports

In the UK, the convenience store channel is more fragmented than other grocery channels are—yet big grocery retailers have already established strong positions. Tesco leads in UK convenience with a share of about 18%. In France, Carrefour already represented half of the convenience store market in 2014, and the company continues to expand; it opened about 518 convenience stores last year.

In their most recent financial reports, two of Tesco’s rivals, Marks & Spencer and Sainsbury’s, said that expanding their convenience store network was a strategic priority. In 2014, Marks & Spencer opened 62 M&S Simply Food stores, while Sainsbury’s opened 96 new Sainsbury’s Local stores.

Price competition is inevitably trickling down to convenience stores in 2015.

2015

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…but Risk Cannibalization, Lower Profits and Lost Sales In the race to tap this faster-‐growing channel, big-‐name retailers must remain aware of the risks. We think the biggest risk is that retailers can end up cannibalizing sales from their own larger stores. When chains bring fresh foods, their own brands and big-‐name products to consumers’ doorsteps, there is less justification for those consumers to make a trip to the chains’ larger shops.

The resulting consumer shifts—and the positive small-‐store comps they fuel—can be used to justify further convenience store openings, creating a spiral of cannibalization. For retailers in the UK and France, then, moving into convenience requires tapping genuine growing demand without actively encouraging shoppers to switch from their existing supermarkets.

The threat of pushing consumers to smaller stores is all the greater due to the lost sales and higher costs that convenience entails versus big-‐store retailing. Small-‐basket shops are more expensive for retailers to service, small stores generate just a fraction of their larger counterparts’ sales and impulse purchases of nongrocery items stocked in superstores can be lost.

According to a study from commercial property firm CBRE, it can take about 12 convenience stores to generate the same level of sales as a single full-‐size supermarket—not just because of the differences in store size, but also because of the limited product ranges sold in smaller stores. So, tapping new regions with smaller stores rather than supermarkets could hit sales and margins in the longer term.

Synergies with Multi-‐Channel and Mobile Technology Despite these warnings, we see convenience as an outperforming channel in the medium term in those countries where e-‐commerce, including e-‐grocery, is gaining share of retail. Small-‐store formats appear more relevant than ever:

• Convenience stores, particularly those with the fresh-‐heavy formats offered by major chains, are a natural complement to occasional, bulk online grocery shops.

• As general merchandise categories such as electronics migrate online, shoppers are less inclined to make a trip to a large, out-‐of-‐town superstore laden with nongrocery ranges.

• For the more forward-‐thinking convenience retailers, notably Tesco in the UK, convenience stores are the latest locations to serve as collection points for online, nongrocery click-‐and-‐collect orders. In time, we could see small shops function as grocery click-‐and-‐collect points, too.

E-‐commerce aside, mobile technology may also prove particularly relevant for convenience stores, given that mobile urban consumers constitute an important segment for the channel. Many convenience stores already use apps to send promotional offers to customers, including invitations to participate in in-‐store promotions. For example, in 2012, SPAR in the UK launched an app to send promotion alerts to its customers.

We think the biggest risk is that retailers can end up cannibalizing sales from their own larger stores.

The threat of pushing consumers to smaller stores is all the greater due to the lost sales and higher costs that convenience entails.

Mobile technology may prove particularly relevant for convenience stores.

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December 2015

Meanwhile, Albert Heijn’s AH to Go chain in the Netherlands has evolved into a digitally focused convenience chain, with digital signage and QR codes, and it was an early adopter of a dedicated mobile site.

Convenience stores have adopted other cutting-‐edge mobile technologies aimed at improving the shopping experience, too. In the UK, for example, SPAR and M&S Simply Food stores already accept Apple Pay, the recently launched mobile payment technology.

Source: Wikimedia Commons

Serving More Urbanites, Plus Dining to Go Many grocery chains have expanded their convenience store channels in order to tap the urban consumer market, a segment that remained underserved by traditional out-‐of-‐town superstores. City dwellers remain an important consumer base, as urbanization continues to grow even in mature markets. In the UK, for instance, all cities showed positive population growth between 2001 and 2011, reversing a trend of city shrinkage that had occurred before 2001, according to the Office for National Statistics.

It is commonly thought that urban consumers are likely to have busy schedules and, so, less time for chores such as buying groceries. If we accept this impression of urbanites, then smaller local stores with extended

City dwellers remain an important consumer base, as urbanization continues to grow even in mature markets.

A key difference between the major chains’ convenience stores and independent convenience stores is the breadth of their offerings in meal solutions.

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operating hours suit these shoppers. Moreover, they are not likely to be looking for the ambient grocery categories traditionally found in independent convenient stores. They demand more ready-‐made foods, such as prepared meals to take home to cook and on-‐the-‐go foods to eat away from home.

Indeed, a key difference between the major chains’ convenience stores and independent convenience stores is the breadth of their offerings in meal solutions such as ready meals and salads that can be taken home. And an increasing number of convenience players are offering grab-‐and-‐go foods. Especially in central and transit locations, convenience stores function as food-‐to-‐go outlets that compete with specialist food-‐service outlets.

A prime example is the REWE To Go convenience chain launched by REWE Group in Germany in 2011. These convenience stores have a strong focus on foods to go, are located in busy transit areas, and offer freshly brewed coffee, sandwiches, salads and other meal solutions. AH to Go launched in the German market in the same year, with a similar focus on food service.

Source: fotocommunity.de

Other convenience stores have expanded their food service beyond coffee and light meals: a SPAR in East London combines an eat-‐in pizzeria with a convenience store, and the same operator has recently opened a second store that has a burger bar. This kind of premium food-‐service offering may currently be confined to trendy neighborhoods in big cities, but providing food on the go is likely to prove popular more widely.

Premium food-‐service offering may currently be confined to trendy neighborhoods in big cities, but providing food on the go is likely to prove popular more widely.

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UK Summary

• With value sales of £35 billion (€43 billion) in 2014, the convenience store sector is substantial in the UK, representing fully 27% of total grocery retailing.

• The sector has consistently outperformed total grocery in the UK, with growth in 2014 of around 5%, according to industry research firm IGD.

• Along with online and discount (e.g., Aldi and Lidl), the convenience sector is a bright spot in a negative-‐growth grocery sector hit by intense price competition and consequent deflation.

• External changes such as more online grocery shopping and greater shopping at a variety of grocery store formats, including discounters, has contributed to sector growth.

• But the push into convenience by big grocers such as Tesco, Sainsbury’s and Marks & Spencer has undoubtedly made the format an attractive alternative to big-‐store shopping for some consumers.

• Tesco is the leading player in the convenience store sector in the UK. However, the sector remains somewhat fragmented, so we expect to see consolidation in future years—indeed, the opportunity to consolidate the sector is one reason for big chains to open convenience stores.

• We expect the UK convenience store market to grow at a much slower pace—1.9% in 2015—given the deflationary context and the negative growth expected in total grocery this year.

The UK Sector in Numbers Figure 6. UK: Convenience Store Sales as % of Total Grocery Sector Sales

Source: Association of Convenience Stores/IGD/Office for National Statistics/FBIC Global Retail & Technology

1.9%

We expect the UK convenience store market to grow at a much slower pace—1.9% in 2015—given the deflationary context.

The convenience sector is a bright spot in a negative-‐growth grocery sector hit by intense price competition and consequent deflation.

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Figure 7. UK: Retail Sales Growth and Food-‐Price Inflation

2015 estimated inflation is the average for January–June. Source: Association of Convenience Stores/IGD/Office for National Statistics/Eurostat/FBIC Global Retail & Technology

Figure 8. UK: Retail Sales Data (Excluding Sales Tax)

2012 2013 2014 2015E

Convenience Store Sales (£ Bil.)*

31.2 32.8 34.6 35.2

Annual % Change 5.0 5.2 5.3 1.9

Total Grocery Retail Sales (£ Bil.)

123.9 127.6 128.9 128.5

Annual % Change 3.2 3.0 1.0 (0.3)

Convenience Store Sales as % of Total Grocery Sales

25.2 25.7 26.8 27.4

Convenience Store Sales (€ Bil.)

38.5 38.6 42.9 48.5

*Includes convenience stores at filling stations.

Source: Association of Convenience Stores/IGD/Office for National Statistics/FBIC Global Retail & Technology

The UK sector leader is Tesco, which had groupwide convenience store sales of £4.9 billion in 2014, according to Euromonitor International. Euromonitor says The Co-‐operative Food was in second position, with 2014 convenience store sales of £3.6 billion.

Marks & Spencer’s total UK food sales—through its large general merchandise stores as well as through its stand-‐alone M&S Simply Food convenience stores—totalled £5.2 billion in 2014. Like most of the big grocery retailers, Marks & Spencer does not split out its food revenues by type of store. But there is a case for arguing that a large majority of Marks & Spencer’s food sales fall into the “top-‐up” category and, so, are effectively convenience sales.

£4.9

The UK sector leader is Tesco, which had groupwide convenience store sales of £4.9 billion in 2014.

BILLION

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SECTOR ISSUES An Outperforming Convenience Sector Convenience stores are a bright spot in a fast-‐changing and deflationary UK grocery sector. Along with online and discount, convenience is a growth channel, whereas supermarkets and superstores are, according to various sources, losing share of sector sales.

Growth has become more elusive in UK grocery. The rapid expansion of Aldi and Lidl, and the subsequent loss of market share at chains such as Tesco, Morrisons, Asda and Sainsbury’s has prompted strong price competition in the overall grocery sector. We expect this to hit convenience sector sales in 2015—the sector will not be immune to the trickle-‐down effects of price cuts. The big convenience chains, such as Tesco Express, will lead deflation in the sector. Independents and voluntary/symbol groups are less likely, we think, to take part in strong price competition.

A Deflationary Grocery Sector Food-‐price inflation fell in 2014 before turning negative—and deflation has deepened in 2015. According to IGD and the Association of Convenience Stores, the convenience sector continued to grow at 5% in 2014. We use their data in this section, although we believe they may have overestimated 2014 growth, given the deflationary context and the numbers reported by major convenience retailers.

Traditionally, convenience growth has tracked a couple of percentage points above total grocery sector growth—but an estimate of 5% for 2014 is a full four percentage points higher than overall sector growth last year. Moreover, data from Sainsbury’s and Marks & Spencer showed a slowing of year-‐over-‐year growth in 2014, adding further weight to our belief that convenience sector sales may have slowed last year. Fiscal years for both companies end in March and, so, effectively represent the previous calendar year (i.e., fiscal year 2015 equates to calendar year 2014).

Figure 9. Year-‐over-‐Year Growth in Sales: Selected Convenience Retailers

*Sainsbury’s provides only rounded figures for its Sainsbury’s Local convenience operations. **M&S Food total includes food halls in its general merchandise stores. Source: Company reports

Along with online and discount, convenience is a growth channel.

The sector will not be immune to the trickle-‐down effects of price cuts. The big convenience chains, such as Tesco Express, will lead deflation in the sector.

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So, we use the data from IGD and the Association of Convenience Stores, but we take their 2014 growth rate with a pinch of salt. Our own estimate of 1.9% growth for 2015 assumes that convenience will continue to outpace total grocery by slightly more than two percentage points.

Grocery Chains Tap Convenience Store Opportunities The UK has seen major grocery retailers pile into the convenience sector since Tesco pioneered entry with its first Tesco Express convenience store back in 1994. Sainsbury’s, Waitrose, Marks & Spencer and Morrisons joined Tesco in opening small shops on high streets, at filling stations and in transit locations such as railways stations. Between 2010 and 2014, Tesco, Marks & Spencer, Sainsbury’s and Morrisons collectively added 1,319 convenience stores to their operations. During the same period, Sainsbury’s almost doubled the number of its convenience stores and Morrisons entered the sector.

Figure 10. UK: Selected Major Retailers: Number of Convenience Stores

2010 2011 2012 2013 2014 Absolute Change,

2010–14

Tesco Express and One Stop 1,806 2,040 2,186 2,394 2,505 699

M&S Simply Food 367 388 419 447 504 137

Sainsbury’s Local 377 440 523 611 707 330

Morrisons M Local N/A 3 12 102 153 153

Total 2,550 2,871 3,140 3,554 3,869 1,319

Source: Company reports/FBIC Global Retail & Technology

A big attraction to these retailers is the relative fragmentation of the convenience store market, with its significant presence of small independents: it is the last substantial grocery subsector that the grocery chains can consolidate. For companies such as Tesco, which have substantial big-‐store estates, convenience has proved to be a growth channel.

Repertoire Shopping Boosts Convenience In recent years, the UK convenience sector has benefited as consumers have gradually shifted away from making large, irregular shopping trips to big supermarkets in favor of shopping online or buying from smaller stores, including both convenience stores and discount stores such as Aldi and Lidl. Sainsbury’s has been one retailer to note this trend of repertoire shopping. At year-‐end 2015, the company noted, “The move away from one weekly shop has been supported by the growth of convenience stores, improvements and confidence in the ease and security of shopping online and the rise of discounters.” The push by retailers such as Sainsbury’s into convenience is therefore catering to this demand for smaller-‐store shopping, but also fueling it.

Risk of Cannibalization Since the big retailers are, as Sainsbury’s says, encouraging shoppers to switch to convenience stores, a key question is: Are their smaller stores cannibalizing sales from their own supermarkets? Given the highly concentrated nature of the UK grocery sector—where just four players account for over 70% of sector sales—we think this is a real possibility. If, for instance, a small Tesco Express store opens close to a shopper’s home,

1.9%

Our own estimate of 1.9% growth for 2015 assumes that convenience will continue to outpace total grocery by slightly more than two percentage points.

Our own estimate of 1.9% growth for 2015 assumes that convenience will continue to outpace total grocery by slightly more than two percentage points.

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then that shopper has much less incentive to drive to the large Tesco farther afield. This shopper’s pattern can then be used to justify opening more branches of Tesco Express. The end result of such cannibalization, however, is that retailers have spent large sums on expansion for little or no net gain.

In reality, it is probably not so straightforward. We think these convenience stores will be cannibalizing sales in many areas, but they will also be picking up sales from rivals, including independent convenience stores. Moreover, the big chains face a dilemma: If they pull back on convenience openings to spare their bigger stores, will their competitors simply step into those small-‐store spaces?

Improving Standards For the consumer, the result of this competition has been a radical driving up of standards in the convenience sector. We see the key distinction between “old” (largely independent) convenience formats and “new” (chain store) convenience formats as the choice of fresh foods in the latter. Prepared foods such as chilled ready meals (under known and trusted own brands) and an abundance of fresh fruit, vegetables, meat and fish are common sights in the convenience chains, but independent stores often offer only ambient or frozen alternatives.

The likes of Tesco Express and Sainsbury’s Local have brought superstore standards to shoppers’ doorsteps, making the sector more appealing and moving it beyond the traditional distress-‐purchase mission.

Dovetailing with Online Grocery Retailing… The focus on fresh foods in these stores means there is a natural dovetailing between these formats and online grocery retailing. Convenience stores laden with fresh produce, meals for tonight and lunch for the kids offer a natural complement to less frequent Internet purchases; they service a top-‐up function that complements bulk Internet purchases of more ambient products such as dried and canned foods. So, as all the big grocers push into e-‐grocery, it is perhaps natural that they offer the counterpart to online shopping—convenience stores.

…and Offering Synergies with Online Nongrocery Retailing, Too Some convenience stores have benefited from the rise in multi-‐channel retailing. Smaller independent and branded players have reinvented themselves as collection points for third-‐party retailers. For example, some Co-‐operative Food stores host Amazon Lockers, and a large number of independent stores serve as CollectPlus collection points for retailers that sell online.

In addition, Tesco has allowed its online shoppers to pick up nongrocery orders from its roughly 1,700 Tesco Express convenience stores since 2013. It is likely to be only a matter of time before some rivals follow suit, and we start to see grocery click-‐and-‐collect in convenience stores.

The big chains face a dilemma: If they pull back on convenience openings to spare their bigger stores, will their competitors simply step into those small-‐store spaces?

1,700

Tesco has allowed its online shoppers to pick up non-‐grocery orders from its roughly 1,700 Tesco Express convenience stores since 2013.

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Not All Smooth Sailing It has not been easy for the big grocery retailers recently. As part of a round of store closures announced in January 2015, Tesco has shuttered 18 unprofitable convenience stores this year, following years of seemingly unstoppable expansion.

This was followed by the more dramatic news of Morrisons’ sale of its entire convenience estate in September 2015. The grocer agreed to sell its 140 convenience stores to Greybull Capital. The announcement followed Morrisons’ March 2015 statement that it would close 23 of its small M Local stores. A number of commentators speculated that Morrisons’ exit from convenience was due in part to a difficulty in finding good locations. We think the ongoing expansion of rivals—including Tesco, Sainsbury’s, Marks & Spencer and Waitrose—into convenience suggests, however, that plenty of good locations are still available.

In our view, Morrisons looks to have been pushed into the sale by an inability to invest further in the channel and a need to rid itself of some loss-‐making stores. In its interim results presentation, management stated that the convenience store operation was a “distraction” that it was “unable to scale.”

Morrisons’ exit from convenience appears to have been prompted by circumstances that are largely unique to it, rather than by underlying problems in the convenience channel. But the assortment of announced closures from Tesco and Morrisons, followed by the latter’s sales of its M Local chain, suggests that convenience is not simply a rising tide that lifts all boats. And with more stores from major grocery chains in the market each year, competitive pressure will only increase.

Potential Threats from Legislative Developments UK convenience stores have traditionally gained substantially from their ability to trade during all hours. The UK’s Sunday Trading Act prevents stores larger than 3,000 square feet from opening for more than six hours on Sundays, and this has long given a boost to the convenience store sector. However, the UK government’s 2015 Budget announced the possibility of relaxing the Act. If passed, the new regulation would likely heap competitive pressure on convenience stores.

The Association of Convenience Stores has already voiced the industry’s concerns, saying the existing law represents a small but crucial advantage for thousands of convenience stores against growing competition from big chains. The demise of the Act would be problematic for convenience retailers that are already operating on a tight margin in a saturated and competitive market.

We expect independent stores to be the biggest losers if the Act is relaxed, as traditional convenience store formats are likely to be the option of last resort for Sunday shoppers. The big grocery chains’ convenience stores, as we have already outlined, are based on much more than simply catering to out-‐of-‐hours Sunday shopping.

Morrisons looks to have been pushed into the sale by an inability to invest further in the channel and a need to rid itself of some loss-‐making stores.

The big grocery chains’ convenience stores are based on much more than simply catering to out-‐of-‐hours Sunday shopping.

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And Independents? Given the ongoing encroachment of major grocery chains (with the exception of Morrisons), life is likely to get even tougher for independent stores. As we noted earlier, the opportunity for big retailers to consolidate the convenience sector—in the same way they consolidated the supermarket sector decades ago—is a big draw. So, we expect to see independents lose share and to see more of them flock to the relative security of voluntary/symbol groups such as SPAR, Londis and Nisa. These groups offer opportunities to drive up store standards and provide own-‐brand ranges as well as potentially lower prices on big-‐name brands.

FRANCE Summary

• France has a small but outperforming convenience store sector. Excluding all filling station shops, convenience store sales will grow by just over 2%, to €6.8 billion, in 2015, according to Euromonitor International. This equates to 3.6% of total grocery sector sales.

• Including all filling station shops (which may include small kiosks), the sector will equate to 4.6% of total grocery this year.

• The convenience store sector has traditionally been overshadowed by hypermarkets in France. In theory, these two types of stores should be complementary, making the very minor scale of the convenience sector all the more surprising.

• But the French grocery sector is gradually reshaping: hypermarkets, in general, look to be underperforming long term as more nongrocery and grocery shopping migrates online. With some consumers favoring smaller-‐basket, more frequent and closer-‐to-‐home shopping, and with big hypermarket names such as Carrefour investing in small stores, the convenience channel looks likely to outperform.

• Convenience stores also stand to gain from increased levels of online grocery shopping, which boosts demand for top-‐up shopping, especially for fresh foods.

• One force depressing short-‐term sector growth is deflation. A price war between the major grocery groups has pushed down both prices and growth for the overall grocery sector.

We expect to see independents lose share and to see more of them flock to the relative security of voluntary/symbol groups such as SPAR, Londis and Nisa.

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The French Sector in Numbers Figure 11. France: Convenience Store Sales as % of Total Grocery Sector Sales

Source: Euromonitor International/INSEE/Eurostat/FBIC Global Retail & Technology

Figure 12. France: Country Data, 2014

*Excluding filling station stores. 2015 estimated inflation is the average for January–July. Source: Euromonitor International/INSEE/Eurostat/FBIC Global Retail & Technology

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Figure 13. France: Retail Sales Data (Excluding Sales Tax)

2012 2013 2014 2015E

Convenience Store Sales (€ Bil.) 6.4 6.5 6.7 6.8

Annual % Change 3.5 2.9 2.2 2.3

Filling Station Shop Sales (€ Bil.)* 1.9 1.9 1.9 1.9

Total Incl. Filling Station Shops (€ Bil.)** 8.2 8.4 8.5 8.7

Annual % Change 2.3 2.1 1.6 1.8

Total Grocery Retail Sales (€ Bil.) 192.5 192.8 189.3 189.3

Annual % Change 1.8 0.1 (1.8) 0.0

Convenience Store Sales as % of Total Grocery Sales 3.3 3.4 3.5 3.6

Convenience/Filling Station Stores as % of Total Grocery* 4.3 4.4 4.5 4.6

*Not all filling station shops are full convenience stores—some may be small kiosks. We include the data for completeness.

**Total may not sum due to rounding.

Source: Euromonitor International/INSEE/Eurostat/FBIC Global Retail & Technology

The convenience store sector leader is Carrefour, with French convenience store sales of €3.3 billion in 2014, according to Euromonitor International. Casino is in second place, with convenience store sales of €1.7 billion in 2014. In the filling station shop subsector, Total is the sector leader, according to Euromonitor International, with shop sales of €788 million (excluding fuel sales) in 2014.

SECTOR ISSUES A Complement to the Hypermarket By serving demand for top-‐up shopping closer to home, convenience stores can flourish as a complement to larger grocery stores used for more occasional shopping trips. Given that France is the European home of the hypermarket format, the convenience sector in the country is unexpectedly small.

This is perhaps indicative of the long-‐standing dominance of the hypermarket and supermarket formats—French shoppers have not traditionally done any secondary shopping elsewhere. But it also reflects a relative paucity of big-‐name grocers in the convenience sector. It is only in recent years that companies such as Carrefour have moved into convenience formats.

Accounting for a little under 4% of grocery sector sales, excluding filling station shops, the convenience store sector in France is nevertheless more than 10 times bigger in relative scale than that of neighboring Germany. This suggests that hypermarket and convenience formats are somewhat complementary in France.

€3.3 BILLION

The convenience store sector leader is Carrefour, with French convenience store sales of €3.3 billion in 2014.

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Figure 14. France: Number of Outlets, Selected Grocery Store Formats


Big Names Using Acquisitions to Push into Convenience In France, Carrefour has led the charge of big names into convenience formats. Once the epitome of hypermarket-‐focused retail, Carrefour has seen underperformance at its biggest stores, prompting the company to ramp up its small-‐store presence. In fiscal year 2014, for instance, Carrefour opened 755 stores worldwide; 518 (or 69%) of these were in the convenience format. In its domestic market, convenience stores are already the dominant format by total number for Carrefour, and they have been the focus of its opening program. Future development of convenience stores will be boosted by the late-‐2014 acquisition and conversion of the small-‐store DIA chain. DIA was already part of Carrefour before its spin-‐off in 2011.

Figure 15. Carrefour France: Number of Stores, Selected Formats (as of Dec. 31)

2010 2011 2012 2013 2014 Absolute Change, 2010–14

Convenience Stores 3,217 3,285 3,342 3,392 3,607 390

Hypermarkets 231 232 220 221 223 (8)

Total 5,494* 4,631* 4,635 4,670 4,900 (594)*

*Store numbers fell primarily due to the spinning off of DIA in 2011. Source: Company reports/FBIC Global Retail & Technology Casino’s development of small stores has been less straightforward, with the franchised, multi-‐fascia nature of its operations adding complexity. But, as with Carrefour, a large-‐scale acquisition has boosted Casino’s presence in proximity formats. In 2013, Casino acquired 100% control of the mixed-‐goods/grocery chain Monoprix, and the company stated that this “marked the apex of a development strategy focused on convenience outlets and launched in 1996.” The Monoprix store numbers are not included in the convenience segment reported below.

Figure 16. Casino France: Number of Stores, Selected Formats (as of Dec. 31)

2010 2011 2012 2013 2014 Absolute Change,

2010–14 Convenience Stores 6,675 6,561 6,546 7,347 6,825 150

Hypermarkets 125 127 125 126 127 2

Total 9,461 9,551 9,734 10,649 10,416 955

Source: Company reports/FBIC Global Retail & Technology

Cooperative retail group Système U has also been growing its convenience estate, with convenience store numbers jumping from 368 in 2010 to 426 in 2014, according to Euromonitor International.

2010 2011 2012 2013 2014

Modern Grocery Retailers Total 27,495 27,683 27,647 27,422 27,276

Including:

Convenience Stores 8,838 9,041 9,024 8,935 8,908

Filling Station Stores 4,761 4,644 4,554 4,481 4,427

Hypermarkets 1,607 1,648 1,655 1,683 1,705

Once the epitome of hypermarket-‐focused retail, Carrefour has seen underperformance at its biggest stores, prompting the company to ramp up its small-‐store presence.

2013

In 2013, Casino acquired 100% control of the mixed-‐goods/grocery chain Monoprix, and the company stated that this “marked the apex of a development strategy focused on convenience outlets and launched in 1996.”

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Outperforming Stores, but Risk of Cannibalization For Carrefour, this investment has yielded above-‐average comps in its convenience stores. Its multi-‐fascia approach—with brands such as Carrefour City, Carrefour Contact, Carrefour Montagne and Proxi—together with its tailoring of ranges to local catchments, is likely to bolster the convenience segment’s performance: it is not a one-‐size-‐fits-‐all model.

Figure 17. Carrefour France: Comparable Sales Growth, by Format

Source: Company reports

A big question for hypermarket players such as Carrefour—as for retailers elsewhere that are pushing into convenience—is the extent to which they are cannibalizing their existing stores’ sales by opening large numbers of convenience stores. As we note elsewhere in this report, there is a case for arguing that retailers are discouraging shoppers from visiting large stores by bringing supermarket standards to their doorsteps. The robust comps that result can then justify more store openings, potentially creating a spiral of cannibalization.

Sector Performance Investment in convenience stores from the likes of Carrefour, Casino and Système U is one factor behind the outperformance of the sector. But there are also signs that these stores resonate with modern French living. First, convenience stores offer a strong complement to online grocery shopping due to the demand for top-‐up shopping, particularly for fresh foods. Relative to other markets, France has a mature e-‐grocery sector. While only around 2%–3% of grocery sector sales were generated online in 2014, according to our estimates, all the major players have pushed into e-‐commerce convincingly, in contrast to markets such as the US and Germany.

Second, the hypermarket appears to be a format in slow decline or, at best, one seeing low growth. This is not a trend seen purely in France: in the UK, we have observed a more dramatic decline in hypermarket performance. As more general merchandise sales move online, and as some grocery sales migrate to the Internet, big out-‐of-‐town stores look to have less relevance for shoppers. This does not mean consumers will simply switch from the largest stores (hypermarkets) to the smallest (convenience stores) for their

There is a case for arguing that retailers are discouraging shoppers from visiting large stores by bringing supermarket standards to their doorsteps.

As more general merchandise sales move online, and as some grocery sales migrate to the Internet, big out-‐of-‐town stores look to have less relevance for shoppers.

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main grocery shopping, although convenience stores can certainly gain from the top-‐up shopping needs associated with big-‐store shopping. It certainly implies a move among consumers to closer-‐to-‐home, more frequent, smaller-‐basket shopping—and convenience could well benefit from this trend.

A Hard-‐Hit Grocery Sector Convenience stores are a relatively bright spot in a grocery sector impacted by a supermarket price war and consequent deflation. A battle for customers between the big players has led to sector deflation and a struggle to maintain positive top-‐line momentum. Having lost market leadership in the grocery sector to discount-‐positioned Leclerc, and facing expansion by hard discounters such as Lidl, Carrefour sought to turn around performance with a renewed emphasis on lower prices. This prompted a full-‐on price war in France between the leading groups, Leclerc, Carrefour, Auchan and Casino. In turn, this competition led to sectorwide deflation and a significant decline in total grocery sector sales in 2014.

Convenience Store Sector Expected to Continue to Grow The convenience store sector will continue to outperform total grocery, we predict, even though sector sales will be depressed by deflation in the short term. The migration to Internet shopping over the medium term is likely to bolster demand for the close-‐to-‐home, top-‐up shopping that convenience stores can serve—but the stores that benefit will be those that meet demand for high-‐quality fresh foods. So, traditional convenience formats, with their focus on ambient products, are likely to lose out to those that bring supermarket standards in fresh foods into consumers’ neighborhoods. We expect ongoing investment in the channel from the likes of Carrefour, Casino and Système U to drive up standards and support sector growth.

Finally, the general perceived migration away from hypermarket shopping is a mixed blessing for convenience stores. These stores benefit from consumer demand for top-‐up shopping between occasional trips to hypermarkets, so any shift to town-‐center supermarket shopping could, in theory, hit convenience stores. Nevertheless, on balance, we expect convenience stores to benefit from consumers’ move to more frequent, proximity shopping as convenience stores come to be viewed as a viable alternative to supermarket shopping.

The migration to Internet shopping over the medium term is likely to bolster demand for close-‐to-‐home, top-‐up shopping.

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GERMANY Summary

• In Germany, the convenience store sector is miniscule relative to the total grocery sector. In 2015, convenience store sales (excluding filling station stores) are forecast to be equivalent to just 0.3% of the total grocery sector. Including all filling station shops (which may include small kiosks), the sector will equate to 4.4% of total grocery this year.

• Lackluster performance in the filling station shops segment has pulled total growth down into negative territory in recent years. The neighborhood convenience store sector has been turning in positive growth.

• The preponderance of small-‐store discounters that have shops in local neighborhoods, together with the strength of the complementary small-‐supermarket format, has traditionally depressed demand for small convenience stores.

• Trading restrictions in Germany prohibit most convenience stores from opening on Sundays, which means there is also little competitive advantage for the convenience store format. Filling station stores are an exception to these restrictions, helping to explain the substantial scale of the subsector.

• Innovation has come in the form of REWE To Go and AH to Go, both fascias that target on-‐the-‐go, urban consumers with ready-‐made, grab-‐and-‐go food. We think these types of formats, particularly in transit locations, could inject greater dynamism into the convenience sector.

• Yet overall, we do not forecast major shifts: German grocery is a sector marked by stability and a relative conservatism in terms of consumer shopping habits.

The German Sector in Numbers Figure 18. Germany: Convenience Store Sales as % of Total Grocery Sector Sales


In 2015, convenience store sales (excluding filling station stores) are forecast to be equivalent to just 0.3% of the total grocery sector.

0.3%

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Source: Euromonitor International/Statistisches Bundesamt/Eurostat/FBIC Global Retail & Technology

Figure 19. Germany: Retail Sales Growth and Food-‐Price Inflation

*Excluding filling station shops. 2015 estimated inflation is the average for January–July.


Figure 20. Germany: Retail Sales Data (Excluding Sales Tax)

2012 2013 2014 2015E

Convenience Store Sales (€ Bil.) 0.6 0.6 0.7 0.7

Annual % Change 5.3 6.4 2.4 4.1

Filling Station Shop Sales (€ Bil.)* 8.5 8.5 8.4 8.4

Total Incl. Filling Station Shops (€ Bil.)** 9.1 9.1 9.0 9.1

Annual % Change (0.3) (0.3) (0.7) 0.8

Total Grocery Retailer Sales (€ Bil.) 189.8 196.7 200.9 205.1

Annual % Change 3.3 3.6 2.1 2.1

Convenience Store Sales as % of Total Grocery

0.3 0.3 0.3 0.3

Convenience/Filling Station Store Sales as % of Total Grocery*

4.8 4.6 4.5 4.4


**Total may not sum due to rounding.


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In Germany, the convenience store sector leader is SPAR, which had convenience store sales of €182 million in 2014, according to Euromonitor International. Lagardère, a travel retail specialist, is in second place, with convenience store sales of €64 million in 2014. In the filling station shops subsector, BP is the sector leader, according to Euromonitor International, with shop sales of €1.5 billion (excluding fuel sales) in 2014.

SECTOR ISSUES A Small Convenience Store Sector Stripping out filling station stores to look only at neighborhood convenience stores, the convenience sector accounts for a very small and stable share of German grocery. At just 0.3% of all grocery retail, convenience stores excluding filling stations represent a much smaller share of market in Germany than they do in the UK or France, as a result of the unique characteristics of the German grocery sector. The filling station subsector boosts the total convenience sector substantially.

Convenience stores are typically used as a complement to big-‐store or online shopping, but the preponderance of small-‐store, offline grocery shopping in Germany makes these functions redundant. As a result, there are only about 1,000 convenience stores in the country, according to Euromonitor International. In contrast, in the UK, Tesco alone operates more than 1,700 convenience stores.

Figure 21. Germany: Number of Outlets, Selected Grocery Store Formats

2010 2011 2012 2013 2014

Modern Grocery Retailers Total 47,799 47,915 48,075 47,639 47,656

Including:

Convenience Stores 888 935 981 1,032 1,039

Filling Station Stores 14,731 14,688 14,623 14,655 14,722

Discounters 15,487 15,638 15,804 15,494 15,615


Nevertheless, the convenience sector, excluding filling stations, has tended to outpace the overall grocery sector, according to Euromonitor International, attributable in part to increasingly busy consumers and the stores’ appeal to young urban consumers.

Discounter Dominance Germany is the heartland of grocery discounters. The country is home to hard-‐discount heavyweights Aldi and Lidl as well as to smaller players such as Penny and Norma, and the discount segment accounts for more than 40% of all grocery sector sales. The popularity of discounters has four effects on the remainder of the grocery sector:

• Local, small-‐store discounters already serve many of the purposes of convenience stores.

In Germany, the convenience store sector leader is SPAR, which had convenience store sales of €182 million in 2014.

€182 MILLION

Local, small-‐store discounters already serve many of the purposes of convenience stores.

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• Discounters have ingrained frugal habits in shoppers, meaning that

many are reluctant to pay the higher prices typically seen at convenience stores.

• There is little demand for nondiscount hypermarkets due to larger-‐store formats’ relative lack of appeal. This pushes down demand for convenience stores, which in other countries are used for top-‐up shopping between occasional trips to large out-‐of-‐town hypermarkets.

• Finally, discounters boost demand for smaller, nondiscount supermarket formats, which serve as top-‐up shopping destinations for the products shoppers cannot find at discount stores. The preponderance of these smaller, local supermarkets further depresses demand for convenience stores.

Moreover, German shoppers still tend to frequent local, specialist stores such as bakeries more often than shoppers do in some other Western European countries. This kind of repertoire shopping at competing small stores further decreases demand for convenience stores.

So, neighborhood convenience stores are a relative rarity in Germany, but other smaller-‐store grocery formats are commonplace. The small discount stores and supermarkets are not, technically, convenience stores, but they serve as such and make “conventional” convenience stores redundant.

Few Big Names The relative absence of big grocery names among the top tier of convenience operators reflects the almost unnecessary nature of convenience stores in Germany. SPAR is a name familiar across the Continent, but it is a convenience-‐focused symbol group. Major German grocery retail groups such as Edeka and Metro have little or no presence in the convenience segment, and they have not pushed into convenience formats. Edeka, for instance, is the grocery market leader, operating across hypermarket, superstore, discount and neighborhood supermarket formats—but not the convenience format. Its small, local supermarkets are the principal reason for the near absence of convenience stores in Germany.

Scope for More Innovation Convenience is a tiny subsector of a stable, relatively conservative grocery sector in Germany. This means there has been little innovation on a substantial scale. One of the more innovative ventures in the recent past has been the launch and growth of REWE Group’s REWE To Go chain. Launched in 2011, the chain has an urban focus, a modern look and a strong food-‐to-‐go offering. The company has opened REWE To Go stores in transit locations such as railway stations and filling stations—the types of places where there is demand for prepared food from on-‐the-‐go consumers.

AH to Go, operated by Ahold from the Netherlands, opened its first German store in 2012. Like REWE To Go, AH to Go focuses on serving urban customers with freshly prepared, grab-‐and-‐go snacks and meals.

This food service/food-‐to-‐go element is one that had previously been underserved in German convenience retailing. Possibly because of ingrained German frugality with regard to grocery shopping, we have not seen food to go become as prominent in the country’s convenience subsector as it has in some neighboring countries. Given this, we see opportunities for food

The small discount stores and supermarkets are not, technically, convenience stores, but they serve as such and make “conventional” convenience stores redundant.

We see opportunities for food service to be a springboard for growth in the sector.

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service to be a springboard for growth in the sector. Grab-‐and-‐go food, fresh-‐food counters and collaborations with food-‐service players such as Subway suggest new opportunities to pull consumers into the convenience segment.

Sunday Shutdowns German retail shuts down on Sundays. The sector is far less liberalized in Germany than it is in countries such as the UK and (very soon, given new legislation there) France, where limited opening hours are permitted. The only major exemptions are small bakeries and convenience stores located inside filling stations, railway stations and airports. The filling station exemption is a contributory factor to the disproportionate scale of the filling station store subsector relative to neighborhood convenience stores in Germany.

The forced closure of all other convenience stores on Sundays means there is much less competitive advantage for the sector than in other countries, where daylong Sunday operating hours are an important driver of weekend sales. This is yet another factor that has suppressed the development of a significant convenience sector in Germany.

Convenience Store Sector Expected to Remain Small German grocery is a sector of exceptional stability and continuity. So, we do not expect any rapid growth in the tiny German convenience sector. The characteristics of German retail mean that small-‐store demand is served through discounters and local supermarkets, and most convenience stores have no opportunity to gain an advantage by opening on Sundays.

What opportunities there are lie mainly in transit retail and in focusing more on food-‐to-‐go options, we think. Transit locations are exempt from Sunday trading restrictions, meaning they can tap demand for out-‐of-‐hours shopping. Moreover, these locations are likely to see demand for grab-‐and-‐go food from on-‐the-‐go consumers. So, transit location stores have greater scope to differentiate themselves from competing grocery formats. REWE To Go and AH to Go are innovators here, and we think others are likely to follow their lead.

The forced closure of convenience stores on Sundays means there is much less competitive advantage for the sector than in other countries.

Transit location stores have greater scope to differentiate themselves from competing grocery formats.

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KEY TAKEAWAYS Convenience stores stand to benefit from shifts in shopping patterns in markets where online grocery or discounters such as Aldi and Lidl are gaining share. When shopping fragments from the traditional big-‐store shopping trip, it fuels demand for top-‐up shopping, and many consumers turn to convenience stores for those kinds of shops.

The UK is likely to continue to lead growth in convenience: it is Europe’s most developed e-‐grocery market and Aldi and Lidl are rapidly gaining share in the country. In time, we may see strong demand in other countries that experience similar changes to their grocery sector, including countries outside Europe, such as the US. But convenience retailers cannot expect to naturally be lifted by a rising tide. More fresh foods and greater food-‐service propositions will cater to the needs of repertoire shoppers and put clear blue water between modern convenience retailers and their traditional counterparts. In countries such as Germany, a food-‐service proposition could also provide convenience retailers a way to more clearly differentiate themselves from “conventional” smaller-‐store grocers.

Integration with e-‐commerce—both grocery and nongrocery—is likely to be more commonly used to drive footfall in the sector. Small, local stores can serve as useful click-‐and-‐collect points, initially for nongrocery orders, but, longer term, also for groceries. These services allow the sector to dovetail with the fast-‐growing online channel, complementing the natural boost that convenience is likely to enjoy as a result of increased online grocery shopping.

More fresh foods and greater food-‐service propositions put clear blue water between modern convenience retailers and their traditional counterparts.

Small, local stores can serve as useful click-‐and-‐collect points, initially for nongrocery orders, but, longer term, also for groceries.

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Deborah Weinswig, CPA Executive Director—Head of Global Retail & Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected] Filippo Battaini [email protected]

Marie Driscoll, CFA [email protected]

John Harmon, CFA [email protected]

Aragorn Ho [email protected]

John Mercer [email protected]

Shoshana Pollack [email protected]

Kiril Popov [email protected]

Jing Wang [email protected]

Steven Winnick [email protected]

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