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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.

UK Supermarket Fashion:

Big Players Facing

New Threats

D E B O R A H WE I N S WI 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

• Asda, Tesco and Sainsbury’s are major clothing and footwear retailers, with a combined 2014 market share of around 7%.

• By number of shoppers, Asda was the second most popular womenswear retailer in the UK in 2014, and was the top retailer for menswear and childrenswear.

• But the migration of some grocery shopping to the Internet and to smaller stores threatens to hit impulse purchases of fashion in big superstores.

• At the same time, growth at the three Ps—Primark, Peacocks and Pep&Co—is providing stronger competition in budget fashion.

• As a result, supermarket retailers will have to work harder to actively attract customers to their fashion ranges, whether that is in-‐store or online.

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UK Supermarket Fashion: Big Players Facing New Threats PROXIMITY SHOPPING TREND POSES A THREAT Grocery retailers are among the biggest sellers of clothing and footwear in the UK. And three retailers dominate this segment: Asda via its George fashion brand, Tesco through its F&F label and Sainsbury’s through its Tu brand. For a number of years, these retailers carved solid positions in the lower end of the mass apparel market.

In this report, we posit that the major changes in grocery shopping—the boom in online and smaller-‐store, more local shopping—have the capacity to substantially erode grocery retailers’ prominence in fashion retailing. At the same time, we see a second threat in the growth of specialist value players, notably the three Ps: Pep&Co, Peacocks and Primark.

SUPERMARKETS AMONG THE UK’S BIGGEST APPAREL RETAILERS In UK fashion retailing, the top three grocery retailers, Asda, Tesco and Sainsbury’s, account for a little under 7% of UK spending on clothing, footwear and accessories, we estimate. This is roughly equivalent to the share enjoyed by market leader Marks & Spencer (M&S). Asda is the UK’s sixth-‐biggest clothing and footwear retailer, we estimate, based on 2014 sales values.

In unit volume terms, Asda overtook M&S to become the UK’s second-‐biggest clothing retailer in the 24 weeks ending July 6, 2014 (latest publicly available), according to Kantar Worldpanel, a market-‐share monitoring service. Primark is the UK’s biggest fashion retailer in volume terms. We have no indications of whether Asda has maintained the second position by volume.

At the end of fiscal year 2015, Sainsbury’s claimed to be the seventh-‐largest UK clothing retailer by volume and the 10th biggest by value.

The UK’s fourth-‐biggest grocer, Morrisons, began selling apparel only in early 2013; under the Nutmeg brand, it sold childrenswear initially and later branched out into adult clothing. We expect Nutmeg’s total sales to be minor due to several factors other than its relative newness: unlike Asda’s stores, many of Morrisons’ stores are too small to carry a full clothing line; the adult ranges remain limited; and Morrisons does not sell its clothing range online.

Figure 1. Top Retailers’ Estimated Share of UK Clothing, Footwear and Accessories Spending (%)

2013 2014

M&S 7.5 6.9

Next 6.0 6.1

Primark 5.0 5.1

Arcadia Group 5.2 4.9

Sports Direct 4.4 4.4

Asda/George 4.0 3.9

Tesco/F&F 1.8 1.7

Sainsbury’s/Tu 1.3 1.3 With the exception of M&S data, which are those published for clothing/footwear sales, the data are estimated and exclude items other than clothing, footwear and accessories.

Source: Company reports/S&P Capital IQ/Office for National Statistics/FBIC Global Retail & Technology

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Recent Performance Neither Asda nor Tesco has given recent updates on the performance of their fashion brands. Given Asda’s negative comparable sales performance in 2014, we estimate the retailer lost share in clothing and footwear as a result of lower footfall in its hypermarkets. Recent sales data from Kantar Worldpanel show that Asda has typically turned in total sales declines in excess of 2% in 2015. In light of this, we expect the company’s share of total clothing, footwear and accessories sales to decline further this year.

Tesco noted a 28.5% increase in its online clothing sales in fiscal year 2015, following a near-‐60% surge in its Internet fashion sales in fiscal year 2014. But this online growth is probably from a very small base. Tesco has not recently noted the overall UK performance of its fashion brand, F&F, but we suspect that sales growth has been held back by the poor performance of some Tesco superstores.

Figures released by Sainsbury’s suggest it saw around 8% growth in its fashion sales between fiscal years 2014 and 2015: including VAT, sales grew from approximately £750 million to “over” £800 million. Sainsbury’s Tu brand has benefited from several tailwinds: it is a newer brand than George and F&F, so it has not reached the same level of maturity; a rebrand in 2013 and a tie-‐up with TV stylist Gok Wan since 2011 have kept the label fresh and fashionable; total sales in Sainsbury’s larger stores do not appear to have been hit as badly as Tesco’s or, in 2015, Asda’s; and the launch of a transactional Tu website in August 2015 should boost sales in the current and forthcoming fiscal years.

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CUSTOMER NUMBERS Customer numbers are an effective proxy for volume sales, and for this we turn to figures from Kantar Media and TGI. These data confirm the prominence of Asda’s George brand across women’s, men’s and children’s clothes, and the overall 1/2/3 ranking of Asda/Tesco/Sainsbury’s. Note that the data below exclude footwear.

Figure 2. Leading Ladies’ Clothes Stores in the UK, by Number of Customers, 2014

Figure 3. Leading Men’s Clothes Stores in the UK, by Number of Customers, 2014

Figure 4. Leading Children’s Clothes Stores in the UK, by Number of Customers, 2014

Base: 24,506 consumers aged 15 years and older; Great Britain; January through December 2014

Source: Kantar Media/TGI/Statista





All three of the big supermarkets make the top 10 for womenswear, by shopper numbers.

Womenswear is the largest segment of the clothing market, accounting for around half of total UK apparel sales, according to multiple sources. So, the ranking of retailers for womenswear is likely to be most representative of rankings for clothing overall.

Asda and Tesco climb up the rankings for menswear and childrenswear—confirming that they are stronger than their competitors in segments where fashionability is a little less important.

Each of the three big supermarkets overindex in kidswear, reflecting the lower value attached to children’s clothing. In this segment, Asda widens the gap with Primark, and Tesco and Sainsbury’s jump ahead of rivals. The young-‐family shopper segment is core to grocery retailers’ supermarket sales.

LOOMING THREATS There are clearly pockets of growth: Sainsbury’s Tu brand continues to grow more quickly than the total apparel market, and Tesco’s F&F has posted very strong Internet sales growth. But for the immediate and medium-‐term future, we see two main threats that could herald a sustained period of aggregate market share loss for Britain’s supermarkets.

Threat 1: The Decline Of Superstores Structural changes in grocery retailing mean there are likely to be ongoing declines in total sales and footfall in large, out-‐of-‐town superstores. In turn, we see this negatively impacting clothing and footwear demand at

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Sainsbury's

Tesco

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Primark

Asda

Mil.

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supermarket retailers. Shoppers are buying more groceries online, and at discounters and convenience stores, and if these trends continue—as we think they will—they will hit fashion sales made during regular grocery shopping trips.

Stripping out sales by Aldi and Lidl, and convenience store and online sales, we estimate that the residual supermarket/superstore segment will see total turnover decline by a little over 4% in 2015. As a result, the online channel is crucial for grocery retailers’ fashion sales—even more than it is for specialist apparel stores. E-‐commerce offers supermarkets the opportunity to recover some of the sales lost in their big stores. Recognizing this a little belatedly, Sainsbury’s rolled out e-‐commerce for its Tu fashion brand in August 2015.

But switching sales from in-‐store to online is not easy. First, impulse sales are important for supermarket fashion, and impulse sales are not made as easily online. This is particularly relevant because the major grocery retailers operate stand-‐alone fashion sites, which means shoppers cannot buy apparel in the same online order as their groceries. To buy groceries from Tesco online, for instance, shoppers go to Tesco.com/groceries; to buy clothing or footwear, they need to go to Clothingattesco.com.

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Second, delivery and, especially, returns add to the cost of doing business online, given the lack of product tangibility. Return rates of online clothing purchases can vary from 15% to 40%, as we noted in our recent report Fit For Purpose? Online Fitting Tech and the Boom in Internet Apparel. This means that selling online instead of in lower-‐cost superstores threatens to erode margins on clothing and footwear.

The big grocers need to pull out all the stops online:

• They need to have convincing fashion sites that make it as easy to buy as possible. Simple checkouts, multiple payment options, and 360-‐degree photographs or videos will be essential to fully compete online.

• Retailers should bridge the gap between their grocery and fashion websites wherever possible—i.e., customers should be able to buy apparel with their grocery order, as they do in stores.

• Where retailers operate convenience store chains, they should extend click-‐and-‐collect options to as many of these smaller stores as possible in order to gain a competitive advantage over specialist rivals.

• To compete as brands, retailers may even consider selling through third-‐party sites, notably ASOS. Primark trialed retailing on ASOS back in 2013, suggesting it could be a possibility even for budget fashion brands.

Compelling Brands Could Support Superstores

Of course, the opposite may also prove true. Strong, desirable and affordable fashion brands from major supermarket retailers, such as George from Asda, may prove to be one savior of out-‐of-‐town grocery stores—if they convince shoppers to continue to make the trip to the superstore. We think this possibility only underscores the need for sustained fashion-‐brand investment.

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Threat 2: Heightened Competition from the Three Ps The threats to supermarket fashion are not limited to structural changes in grocery shopping. A second threat is strengthened competition from the three Ps at the lower end of the market: Pep&Co, Peacocks and Primark.

• Newcomer Pep&Co launched in July 2015, with plans to have 50 stores on secondary high streets within eight weeks (as of September 17, it appeared to have reached that target).

• Peacocks, under the ownership of Edinburgh Woollen Mill since 2012, has reestablished its niche and is growing again, increasing turnover by 2.8% in fiscal year 2014.

• Primark Stores, the UK arm of Primark, grew sales by 7.8% in fiscal year 2014.

Pep&Co: Supermarket Clothing on the High Street Pep&Co entered the UK clothing market in July 2015. Backed by South African group Pepkor, the retailer is headed up by Andy Bond, former Asda chief executive, which suggests the supermarket fashion template could be transposed to the high street. The company’s product offering is limited to women’s and children’s apparel.

Positioned in secondary high-‐street and shopping center locations, Pep&Co is aimed at young mothers buying for themselves and their children. It strikes us that its demographic is lower-‐income mothers—specifically, smaller-‐basket, town-‐center shoppers with more limited access to big, out-‐of-‐town stores and slightly lower expectations of quality.

In our view, the stores look uncompromisingly low-‐end and the product a little middle-‐of-‐the-‐road compared to the in-‐store experience and fashion choice offered by Primark and others. We think the retailer needs to stand out more. As a result, we retain a degree of skepticism about Pep&Co’s execution—but it is another threat in an already well-‐served segment.

With 50 stores, Pep&Co is a shadow of Asda, which operated 592 stores at the end of fiscal year 2015. But Pep&Co Managing Director Adrian Mountford has said there is potential for up to 500 UK stores.

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Peacocks: Back to Basics Under the ownership of Edinburgh Woollen Mill, value-‐apparel chain Peacocks looks to have rediscovered stability. Revenue growth has not been spectacular, according to accounts filed for fiscal year 2014, but at least it was positive, at 2.8%. More importantly, Peacocks strikes us as a retailer that has rediscovered its place in the market. And that place is similar to that sought by Pep&Co: young mothers who are happy to buy affordable but unexciting product in secondary high-‐street locations.

Edinburgh Woollen Mill has reportedly invested £80 million into Peacocks since buying it out of administration in 2012, including capitalizing new store openings. Coupled with the launch of Pep&Co, a Peacocks that is back on the front foot threatens to intensify competition for the “young mum” shopper segment. For supermarket retailers, these stores add more town-‐center competition for the core family-‐shopper demographic.

Primark: Sustained Growth Could See Dominance of Value Segment The last of the three Ps is Primark, a retailer that has been capturing headlines for its international growth in Europe and, most recently, in the US. But it has been progressing solidly in the UK, too.

• UK sales grew at a 9.8% CAGR in the five years ending September 2014, its latest reported year-‐end, according to accounts filed for Primark Stores. In fiscal year 2014, UK operations turned over £2.8 billion—as shown earlier, this put it at number 3 in our ranking of clothing and footwear retailers; it leapfrogged Arcadia Group in 2014.

• Over the same five-‐year period, Primark UK put down additional space at a CAGR of 6.6%, reaching 6 million square feet in the year ending September 2014.

These metrics lead us to conclude that Primark could come to dominate the value segment, to the detriment of supermarket retailers.

Primark’s distinction is evidently not just price—attractive stores and fast-‐changing ranges of fashionable product alongside a core range of staples give it credibility. And this threatens to steal shoppers from the younger end of supermarket fashion’s demographic.

A particular threat for grocery chains is Primark capturing more shoppers in the young-‐family demographic, which is key for supermarket fashion brands. Primark’s chipping away at the younger end, and Pep&Co and Primark making gains among those who are less demanding in terms of fashion, could together really put the pinch on supermarkets.

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WHAT IT MEANS

For years, supermarket fashion could piggyback on the footfall from grocery shopping, and impulse purchasing played a big part in the success of apparel brands. A sustained decline in footfall in large grocery superstores may well result in sliding market share for supermarket fashion in aggregate, as it would mean many fewer impulse purchases. Grocery retailers could recoup some sales online, but the impulse element would largely be lost.

At the same time, threats from high-‐street budget specialists are intensifying. So, the supermarket segment has to work harder to actively attract visitors—whether they are online visitors or visitors to large superstores. Practical solutions could include integrating grocery and clothing websites, to replicate online the type of cross-‐category shopping that physical stores facilitate.

But the underlying way to sustain growth in this context is to make supermarket fashion brands more attractive than ever—they must be destination brands that drive visits as much as their fashion-‐specialist rivals’ brands do. If grocery retailers can do this, then their fashion brands will be another lever to support their large, out-‐of-‐town stores at a time when they are coming under pressure from proximity and online shopping.

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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 [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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