Issues Monitor Retail June 2009

8/14/2019 Issues Monitor Retail June 2009

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Issues Monitor,Sharing Knowledge on the Retail Industry,KPMG INTERNATIONAL , June 2009, Volume Three,

Welcome to the June edition of Issues Monitor. Each edition pulls together and

shares our firms industry-wide knowledge to help you quickly and easily getbriefed on the issues that effect your sector.

Mark Larson,Global

Head of Retail,Keeping up to date with the very latest and most pressing issues facing your

business can be a challenge and, while there is no shortage of information in

the public domain, filtering and prioritizing the knowledge you need can be

time consuming and unrewarding. I hope that you find Issues Monitor useful

and welcome the opportunity to further discuss the issues presented and their

effect on your business.

ISSUE 1: Impact of the economicslowdown on the retail sector,The global retail sector is expected to

contract in 2009 after sales slowed

down in 2008. Retailers are closing

stores, laying off employees and

abandoning their expansion plans. In

order to capture dwindling consumer

spend, they are increasingly turning to

technology and innovative marketing

strategies, as well as offering

discounts and focusing on private label

products.

ISSUE 2: The rise of discount stores,Discount retailers have grown in sales

and store numbers since 2006 due

to factors including rising food prices

and, in 2008, the deteriorating global

economic conditions. The growing

trend towards discount has forced a

number of other retailers to offer price

cuts. Discount stores are also making

inroads into the emerging markets of

China and India. Going forward, the

discount format is expected to benefit

further from the grim economic

conditions as consumers become

increasingly price conscious.

ISSUE 3: Off-trade versus on-tradealcohol sales,Alcohol sales through the off-trade

channel are higher than those through

the on-trade channel across the globe.

Moreover, consumer preference for

off-trade is increasing due to factors

such as decline in consumer spend,

off-trade retailers offering discounts,

and legislative changes. Some

alcoholic beverage companies are

developing initiatives to help capitalise

on this growing off-trade market.


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2 ISSUES MONITOR: JUNE 2009, Volume Three

1Impact of the

economic slowdownon the retail sector

Retail sales are declining or slowing down across the

globe. This, together with a tightening credit market, has

led to some retailers closing stores, halting expansion

plans and laying off employees. A number of retailers have

also filed for bankruptcy. To combat the slowdown, retailers

are resorting to steps ranging from changing their price

strategies to increasing the use of technology. The sector

is undergoing a transition, which could change its dynamics

once economic conditions improve.

Slowdown in retail sales across the world, Globalretailsalesgrewbyonly1.2percentin2008, EurozoneandUSretailsalescontracted1.4percentand0.4percent,

respectively, ChinaandIndiareported21.6percentand15percentgrowth,respectively,According to the Economist Intelligence Unit (EIU), global retail sales grew by only

9.8percentin2008,downfrom10.7percentin2007.Salesareexpectedtocontract

7.1percentin2009.Figure1showsglobalretailsalesduringtheperiod200509.1

Figure 1: Global retail sales (2007 09E)

11

12

13

14

15

2006 2007 2008 2009E

In

trillion

US$

-8%

-3%

2%

7%

12%

Global retail sales Percentage growth

Source: EIU data tool,Eurozoneretailsalesvolumefell1.4percentin2008.Thelastsevenmonthsof

2008 witnessed a year-on-year (y-o-y) decline.2 According to the US Department

of Commerce, sales in the US retail and food services sector declined

0.4percentin2008therewasay-o-ydeclineforthelastfourmonthsof2008.3

Global retail sales areexpected to contract

7.1% in 2009.

2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the

KPMG network are affiliated. All rights reserved.


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ISSUES MONITOR: JUNE 2009 Volume Three 3

Retail sales in the emerging economies meanwhile grew, but at a slower rate

in2008.Ridingonasurgeindomesticdemand,Chinareporteda21.6percentgrowth in retail sales in 2008. However, the y-o-y growth rate slowed towards

theendoftheyearfrom23.3percentinJulyto19percentinDecember.4

Similarly,Indiasorganizedretailsales,whichconstituteasmall4percentofits

overall retail sales,5areexpectedtohavegrownbyapproximately15percent

during the fiscal year ending March 2009, compared with 30 percent growth

during previous fiscal years.6

Implications for retailers,Declining sales across the globe have forced retailers to resort to corrective measuressuch as closures and lay offs. Many retailers have shelved their expansion plans.Table1listssomecompaniesthathaveclosedretailoutlets,haltedtheirgrowth

plans or laid off employees.

Table 1: Retailers closing stores, halting expansion plans and laying off employees,Retailer Country Steps

Hudsons Bay Co.7 Canada Plans to cut 1,000 jobs, equal to five percent of its full-time workforce across Canada

Wal-Mart8 Canada Shut down six Sams Club stores in Ontario in March 2009

PPR Group9 France Plans to cut 1,200 jobs at its Conforama home furnishing arm and FNAC shop chain

Shoppers Stop10 India Closed three Crossword Stores in February 2009

Subhiksha11 India Shut down approximately 90 stores across the country during November and December 2008

Tesco12 Ireland Plans to cut 140 jobs at its headquarters in Ireland

Carphone Warehouse13 UK Plans to eliminate about 450 jobs, equal to 3.6 percent of the companys workforce

Best Buy14 US Shut down seven Magnolia stores in February 2009

Home Depot US Plans to shut down all of its EXPO stores15

Cut 7,000 jobs in February and March 200916

Macys17 US Plans to slash 7,000 jobs, equal to about four percent of its workforce

Burdened with debt and struggling to obtain cash, a number of specialty retailers

in the UK and the US have filed, or are currently filing for, bankruptcy. Here are

some examples (Table 2).

Table 2: Retailers going bankrupt,Retailer Country Details

USC18 UK The clothing company applied for bankruptcy protection in December 2008.

Woolworths19 UK The retai ler closed down the last of its stores in January 2009.

Circuit City20 US The consumer electronics retailer filed for chapter 11 bankruptcy in November 2008.

KB Toys Inc.21 US The toy retailer filed for bankruptcy in December 2008, citing decline in sales during Octoberand November as the reason.

Linen n things22 US The company began going out of business in October 2008, when a buyer could not be found forthe bankrupt retailer.

Retailers are shutting

stores in huge numbers.




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QInitiatives by retailers to counter declining sales, Changingpricestrategies, Pushingprivatelabelproducts, Focusingontertiarybrands, Adoptinginnovativestrategies, Turningtotechnology,Retailers are changing their price strategies to tackle declining sales. Some US

stores,includinghigh-endretailers,areofferingdiscountsofupto70percent. 23

Carrefour, for example, reduced prices on 300 of its stock-keeping units (SKUs) in

FranceinAugust2008.This,alongwithaneffectivein-storepromotionalcampaign,resultedina2.1percentgrowthinlike-for-likesalesinFrenchhypermarketsduring

Q3 2008.24

Companies are also pushing their private label products to compete with

brandedonesinnotonlylow-value,butalsotheupscaleproductsegments.For

example, Wal-Mart in the US offers food and drink brands such as Great Value,

Main Stay and Sams Choice under low-value, standard and premium categories,

respectively.25

Meanwhile, focus on tertiary brands has been increasing. These brands sometimes

sport only descriptors and not registered brand names. Tertiary brands have

minimal revenue potential but they cater to a niche market, thereby contributingto the companys overall image.26 Wal-Mart is believed to be stocking a number

of low-priced, tertiary brands across some of its stores in international markets.

Tescolauncheditsdiscounterrangeacross34productcategoriesand1,500stores

in the UK in September 2008 and developed new tertiary brands under different

product categories.27

Retailers are increasingly adopting innovative strategies to capture whatever

small amount consumers are spending. With attractive marketing and packaging,

retailers aim to grab consumer attention in a market cluttered with numerous

products.28 Craig Johnson, President of Customer Growth Partners, a retail

consulting and analysis firm, said, They (independent retailers) really have to be

creative in finding ways to get people shopping at their stores and cant depend on

the same things they were doing before.29

In order to develop effective selling strategies, retailers are turning to technology,

namely that which helps retailers to more efficiently monitor customer behavior

and purchase patterns. This enables them to drive innovative market offerings,

encouraging consumers to spend.30 Retailers also want technology to help them

retain their customers and manage customer relationships.31 A survey from AMR

ResearchandtheNationalRetailFederationfoundthat,in2008,USretailersraised

their overall information technology (IT) budgets by 8 percent, compared with a

Do you have the right strategies to

get people shopping at your store?

In 2008, US retailers

raised their overall

IT budgets by 8%,

as compared with

2% in 2007.




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2percentincreasein2007.Thesamesurveyfoundthatmanyoftheretailers

invested in new systems or upgrades in customer relationship management

(CRM).32) However, retailers are focusing on technology projects that offerquick and measurable results in capturing consumer spend, rather than large

and high-cost projects, benefits of which are difficult to measure and require a

number of years to show.33

Q

Slowdown as an opportunity for self-assessment,Industry observers view the current economic conditions as only a part of the

business cycle. According to Bernie H. Liu, chief executive officer (CEO) of Golden

ABC, Inc., a Philippines-based retailer, consumers might control their spending

and stick to essentials during tough economic conditions, but they will eventuallystart buying again.

Meanwhile, retailers can use the current economic conditions to innovate and

find opportunities within the present situation to position themselves for the good

times.34 According to McKinsey, retailers can improve their competitive positioning

for the impending upturn through a tough self-assessment and a hard-nosed

scan of the business environment. Such analysis can help retailers in prioritizing

cost reduction, increasing investment, creating financial flexibility, and striving

fornear-termrevenuegrowth.Forexample,companieswithreasonablecash

reserves can look to invest in stores, people or acquisitions, which their weaker

competitors cannot do. The least effective strategy for retailers is to try to just

weather the storm during an economic downturn.35

Do the changing market dynamicsduring the slowdown offer anopportunity for your company?

Retailers can improve their

competitive positioningfor the impending upturn

through a hard-nosed

scan of the business

environment.




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Outlook, Greaterconsolidation, Riseofonlineretailing, Growthofvalue-orientedofferings, Increasinginvestmentinemergingeconomies,The current economic climate is likely to change the dynamics in the retail sector.

There is likely to be greater consolidation. As a number of retailers are going

bankrupt, there is opportunity for retailers with available liquidity to acquire.

According to the EIU, cash-rich global retailers such as Wal-Mart, Tesco and

Carrefour could expand their operations and diversify through opportunistic

acquisitions.36

A loss of business at high-street retailers is expected to push online retailing,

as it offers an easier and cheaper means of processing transactions. Also, the

renewed focus on price is expected to result in the growth of online retail, as

thechanneloffersconsumersachancetosearchforbargains.Factors,suchas

the rise in internet penetration and increased consumer preference for shopping

around online for the best deals, are forcing traditional retailers to develop

e-commerce capabilities.37

Retail markets in China

and India are expectedto grow at a CAGR of

13.2%during 2008-12.

Another major implication of the crisis in the short term is going to be the growth

of value-oriented offerings, such as discounted and private label products. Thisis expected to benefit retailers that have built a strong value perception and have

strong private and exclusive brand products.38Forinstance,accordingtoIGDRetail,

the discount channel is expected to account for approximately 20 percent of the

totalgroceryspendinEuropeby2012,comparedwith17percentin2007.39

Emerging economies are expected to be the future growth centers of the retail

industry. According to IGD Retail, China, India and Russia represent the greatest

growthpotentialinthesectorduring200812.RetailmarketsinChinaandIndia

areexpectedtogrowatacompoundannualgrowthrate(CAGR)of13.2percent

duringtheperiod;growthinRussiawouldbeslightlyslowerat11.6percent.This

growth will be a determining factor for retailers in terms of deciding which markets

to invest in, in the future.40




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FURTHERINFORMATION,Visit kpmg.com for the following

related publications, Consumer Currents 05, Consumer Currents 04, Consumer Currents 03, KPMG/CIES Survey 2008;

A survey into the growth and

sustainability issues driving consumer

organizations worldwide, Operating Risk in Emerging Markets

(EIU: KPMG Advisory and Others), Product Sourcing in Asia Pacific,How KPMG firms can help

Efficiency and cost optimization,Working alongside clients, our firms

professionals help to streamline

processes, to enhance controls and to

contain costs and business risks. We

look at systems, supply chains, capital

structures and contracts with third partiesto see how they can best be utilized. We

identify areas of weakness, that might

jeopardize achievement against objectives,

as well as advising on the development

and execution of management systems to

create sustainable business performance.

Managing financial risk,With1,600financialriskmanagement

practitioners around the world, KPMGs

experience spans industries and

geographies. We help our firms clients

create frameworks to efficiently control

business and financial risk. This process

involves not only identifying, assessing,

managing, reporting on and mitigating

risks, but also by providing guidance

regarding the nature of risks they could

take further up within their reach to

provide impetus to their business growth.

Restructuring,Signs of stress and distress appear not

just in a companys financial results but

also in their interaction with the outside

world. Obvious indicators may be the

absence of liquidity and the missing of

payment commitments, similarly, breaches

of banking covenants, if they exist, are

easy to spot and difficult to ignore. In orderto stabilize and turnaround a company a

range of skills is typically needed. KPMG

firms work alongside management as

well as lenders and stakeholders to

deliver strategies that can help bring real

improvement.

Key contacts,Nick Debnam,Head of Consumer Markets, ASPAC,KPMG in China,Tel.+85229788283,[email protected],Neil Austin,Global Head of Consumer Markets,KPMG in the UK,Tel.+44(0)2073118805,[email protected],Mark Larson,Global Head of Retail,KPMG in the US,Tel.+15137632444,[email protected],


http://www.kpmg.com.hk/en/virtual_library/Consumer_markets/Consumer_Currents/CC0805.pdfhttp://www.kpmg.com.hk/en/virtual_library/Consumer_markets/Consumer_Currents/CC0804.pdfhttp://www.kpmg.com.hk/en/virtual_library/Consumer_markets/Consumer_Currents/CC0703.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com/SiteCollectionDocuments/operating%20risks%20in%20emerging%20markets.pdfhttp://www.kpmg.com/SiteCollectionDocuments/operating%20risks%20in%20emerging%20markets.pdfhttp://www.kpmg.com.kh/files/ProductSourcingInAP.pdfhttp://www.kpmg.com.kh/files/ProductSourcingInAP.pdfhttp://www.kpmg.com/SiteCollectionDocuments/operating%20risks%20in%20emerging%20markets.pdfhttp://www.kpmg.com/SiteCollectionDocuments/operating%20risks%20in%20emerging%20markets.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com.au/Portals/0/KPMG%20CIES%20Survey.pdfhttp://www.kpmg.com.hk/en/virtual_library/Consumer_markets/Consumer_Currents/CC0703.pdfhttp://www.kpmg.com.hk/en/virtual_library/Consumer_markets/Consumer_Currents/CC0804.pdfhttp://www.kpmg.com.hk/en/virtual_library/Consumer_markets/Consumer_Currents/CC0805.pdf


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2The rise of discount

stores

The discount store was one of the most active retail

formatsinNorthAmericaandWesternEuropein2007and

2008.41 Quality goods, at low prices, is a clear differentiator

as customers are willing to overlook factors such as less

convenience and reduced organization and merchandizing

in favor of price.42Risingfoodpricesduring200708and

the economic downturn have also been important factors

in the rise of the discount store format.43

Discount stores continue to make inroads into the

retail market,As the credit crunch tightened consumers purse strings, discount retailers gained

ground on mid-market retailers, whose growth has been restricted to own brand

or discounted lines.44

Figure2showsthenetsalesfiguresforthetopfour(byvolumeofsales)global

discountretailers(200608).

Figure 2: Global top discount store sales (net) in US$ billion (2006 08) ,

48.6

36.1

12.3 9.9

54.5

43.3

14.5 11.9

64.1

52.8

17.514.1

0

10

20

30

40

50

60

70

80

Aldi Lidl & Schwartz Carrefour Rewe Group

Discount Store

Sales

in

US$billion

2006 2007 2008*

Source: IGD Retail Analysis Datacenter,* Figures for 2008 are estimates,Germany-based Aldi and Lidl & Schwartz have maintained their positions as the

top two discount retailers since 2006. They are followed by Carrefour and the Rewe

Group whose operations are considerably smaller than the two market leaders.

The sales figures for all four retailers reflect the growth story that the global

discountstoremarkethaswitnessedovertheperiod200608,withsalesatAldi

andLidlhavinggrown31.9percentand46.4percent,respectively.45




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Another indicator of the industrys growth is the steady rise in store numbers for

discounters across the board. Table 3 presents the growth in store numbers for

the aforementioned top four.

Table 3: Top four discount retailer store numbers,Discount Store 2006 2007 2008E

Aldi 7,869 8,191 8,688

Lidl and Schwartz 7,154 7,772 8,345

Carrefour 5,798 6,166 6,670

Rewe Group 2,807 3,031 3,315

E Estimates,Source: IGD Retail Analysis,

Q

Economic crisis creates favorable conditions for

discount retail,The impact of the economic crisis on the overall retail industry has been harsh.

Manyretailers,includingMacysandOfficeDepot,reportedsubstantialQ42008

losses.Macyssawitssalesdeclineby7.7percenty-o-y.46 The fall in consumer

confidence, combined with scarce credit, will result in reduced demand for big-ticket

and non-essential items in 2009.47

However, these factors are expected to have the opposite effect on the overall

discount store sector. The Economist Intelligence Unit (EIU) predicts that, for

essentials, consumers will shift to discounted or cheaper substitutes, thereby

benefiting discount retailers at the expense of mid-market retailers.48

The benefits of this shift in consumer focus are already visible. Many discount

retailers have reported higher sales in recent months.

Is the economic slowdown theonly reason behind the growth ofdiscounters?




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Europe,The economic conditions have led to rapid growth in the discount sector in

Europe.49 In the UK, Aldi and Lidl have been steadily eroding the market share of

largesupermarketgroups.TotalsalesatAldiwereup14.8percentin2008over

thepreviousyear,risingto2.15billion(US$4billion).SalesinDecemberalone

were up more than 22 percent.50

In 2008, Aldi and Lidl undertook major expansion initiatives in key European

markets. The driving force for the rise in discount store sales, at that point, was

high food prices.51Aldiadded41storesacrosstheUKandIrelandin2008.52 Even

France,nottraditionallyconsideredamarketfordiscountretail,hasseenconsumers

making the switch. As a result Lidl, which is primarily located in the less affluent

suburbs, has opened a new store in an area with more well-off consumers. 53

Elsewhere, Carrefour announced that sales at its Spanish discount business Dia

hadrisen11.9percentin2008.Inthesameyear,theGermany-basedReweGroup

reportedanalmost40percentsalesincreaseatBilla,itsCzechdiscountoperation. 54

United States,According to Thomson Reuters estimates, US discount store sales rose by

2.9percenty-o-yinFebruary2009.Incontrast,departmentstoressales

dippedby9percent,childrensretailersby8.1percentandapparelchainsby

5.6percent.Overall,theUSretailindustrywitnesseda0.7percentincreasein

salesinFebruary.However,thispositivefigurewasalmostentirelyattributedtothe5.1percentincreaseatWal-Mart.AccordingtoRetailMetrics,butforthe

Wal-Martfigures,industrysaleswouldhavedroppedbyjustover4percent.55

Figure3showsthecomparativestoresalesfiguresinFebruaryforvariousretail

formats in the US.

Figure 3: Comparative store dales February 2009,

0.7%

2.9%

-9.0% -8.1%

-5.6%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Overall retai l market Discount stores Department stores Children's retailers Appar el chains

Y-o-Y percentage sales increase for February 2009

Source: US retail sales rise, World Advertising Research Centre, 23 March 2009,Wal-Mart claimed customer gains from both low- and medium-income households.

As Charles Holley, Wal-Marts treasurer, explains, If you look at the consumers

that you consider a little higher income, those maybe making over US$65,000

versus those making under US$65,000, you would see that were gaining market

share equally in both at the same rate. This demonstrates that consumers across

the board are becoming careful about their spending.56

US discount store

sales grew 2.9% y-o-y

in February 2009,

compared to a 9%

decline in department

store sales.




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AmongotherdiscountretailersreportingsalesgrowthinFebruarywereBJs

WholesaleClub,withsalesup11.5percent,Costco,withsalesup4percentandFamilyDollarstores,withsalesup6.4percent.57

Retailers react to discount trend,In the UK, as consumers lured by attractive prices move to discount stores, many

other retailers have been forced to announce price cuts in order to remain

competitive.Table4listssomeexamplesofrecentpricecutsannouncedby

major UK retailers.

Table 4: UK retailer price cuts,Company Details

Asda On 26 February, Asda announced price cuts on 5,000 staple products.

The company also said that it had cut prices on 7,500 items since the beginning of 2009; with this new plan, the totalnumber reached 12,500 by Easter in mid-April.

Chief Executive Andy Bond said, Were engaging with our customers in a transparent way to ensure the products wesell and the prices we charge meet their needs in these difficult times.58

Tesco Tesco announced a number of promotions and price cuts to help it compete more effectively with discount stores.

In September 2008, the company launched a new discounter range across 1,500 stores in the UK.

This is part of a broader program, with Tesco aiming to position itself as Britains biggest discounter. 59

In January 2009, Tesco announced a 100 million (US$145 million) price-cutting campaign on a range of staple goods. 60




12/24


In the US, discounting initiatives are also prolific. Down 20 percent is the new full

price, says Marie Driscoll, Director of Consumer Discretionary Retail Research

at Standard & Poors in New York. In the current economic climate, the traditional

retail practice of tucking sale items at the back of the store in favor of fresh stock

has been reversed. Stores now prominently display discount signs in the hope of

attracting customers. Examples of retailers following this trend include J. Crew,

Lord & Taylor, Ann Taylor and Chicos.61

ChinaandIndiaDiscountmarketcontinuestoexpand,Unlike many other economies, China has not yet experienced a drop in consumer

spending.Retailsalesinthecountrygrew15percentinthefirstfourmonthsof

2009, compared to a year earlier.62 Domestic consumption has remained stable sofar, despite the economic slowdown, says Zhuang Jian, Senior Economist with the

Asian Development Bank.63

However, the economic slowdown in the West has affected the Chinese

retail market in other ways. Export orders for Chinese enterprises have declined,

prompting them to sell their high-cost inventories through promotional sales in the

domestic market. Also, Chinese companies face competition from foreign companies

that are looking to enter China to offset the fall in demand in their home markets.64

Discount stores in China have witnessed increased sales in recent months. Online

discount department store www.dazhe.cn announced a 300 percent increase in

turnoverforQ42008.65SouthKoreanretailerShinsegaeplanstoopen100discountstoresinChinaby2014,atacostofUS$500million. 66 In December 2008, Carrefour

announcedpricecutsonselecteditemsinits125outletsinChinatoboostsales

amid the economic crisis.67

In India, the discount retail sector is going ahead with expansion even as other

retailers are putting their expansion plans on hold in light of the economic crisis.

RajeshSeth,VicePresidentofMarketingatCentralandBrandFactory,says,We

have seen a lot of new customers shop at our stores; they could have been

previously shopping at full-priced retail stores. Such formats have the capacity to

attract shoppers as they offer great deals and bargains.68 The Loot India, which

operates Loot discount retail outlets, plans to increase its store numbers from

30to100bytheendofthefiscalyear.Similarly,anotherdiscountretailer,Grab,

planstoinvestUS$30.5milliontoadd24newstoresduringtheperiod.69

QOutlook optimistic for discounters,TheEIUpredictsthat,astheriseinfoodpricesin200708andtheeconomic

slowdowninlate200809haveresultedintheemergenceandgrowthofdiscount

formats, the intensification of price competition among retailers will further benefit

the format in the short term. EIU expects consumers to become increasingly price

conscious, which bodes well for the discount retail sector.70

Discount retail in India isexpanding even as other

retailers put their growth

plans on hold.

Down20%is the new full

price, Standard &

Poors, New York.

Is discounting the newway forward?




13/24


Discount retail in

Europe is expected

to account for 20%

of the total grocery

spend by 2012,

compared to 17%

in 2007.

In Europe, discount retail is expected to grow further, accounting for 20 percent

oftotalgroceryspendby2012,upfrom17percentin2007.71

IntheUS,Fitch,theinternationalratingsagency,expectsthevalueformoney

promise of discounters to attract consumers across all income levels. Within the

discount sector, it expects operating profit margins to remain relatively steady due

to discounters efficient supply chain management and low-cost operating structures.

Among product categories, food and consumables are expected to drive store

traffic for discounters. Therefore, discounters such as Wal-Mart and Costco,

which have a wide range of grocery offerings, are expected to outperform.72

Overall, the discount retail format looks set to gain greater market share at the

expense of its traditional, more expensive competitors, as price becomes

paramount for consumers.

FURTHERINFORMATION,Key contacts,Nick Debnam,Head of Consumer Markets, ASPAC,KPMG in China,Tel.+85229788283

,[email protected],

Neil Austin,Global Head of Consumer Markets,KPMG in the UK,Tel.+44(0)2073118805

,[email protected],

Mark Larson,Global Head of Retail,KPMG in the US,Tel.+15137632444

,[email protected],




14/24


3Off-trade versus

on-trade alcoholsales

Across the globe, research suggests that consumers prefer to

consume alcohol in the comfort of their homes (off-trade) rather

than going out to drink (on-trade). Reasons for the consumer

preference for off-trade drinking range from the comfort and

convenience of an at-home experience to the price advantage

that off-trade offers. Retailers and alcoholic beverage companies

can leverage this by offering products that enhance the at-home

drinking experience for their consumers.

Off-trade alcohol sale refers to the sale of alcohol for consumption off the

premises, whereas on-trade sale refers to the sale of alcohol for consumption on

the premises of the point-of-sale. Off-trade alcohol is sold typically through

specialist shops, hypermarkets, supermarkets, and other outlets such as

convenience stores and gasoline retail stations. Alcohol can be consumed

on-trade in l icensed restaurants, bars or pubs.

Alcohol sales greater from off-trade than on-trade, Off-tradealcoholsalesaccountforahigherpercentageoftotalalcoholsales

across the world

Supermarkets/hypermarketsaccountforahigherpercentageofthetotal

off-trade alcohol sales in the developed world, than that in the emerging

economies

Off-trade channel

accounts for

72%of total alcohol

sales in the US.




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Off-trade alcohol sales account for a higher percentage of the total alcohol sales

than on-trade sales across the world. At-home drinking occasions in the US and

Europe were expected to outnumber those held out-of-home in 2008. 73 The

percentage share of on-trade is higher in the developed world than that in the

emerging economies of Brazil, Russia and India.

Figure4showsthebreakdownoftotalalcoholsalesvolumebydistributionchannel

in various geographies across the world in 2008.

Figure 4: Breakdown of alcohol sales volume by distribution channel (2008),

0

20

40

60

80

100

US Europe Brazil Russia India China

Percentagebreakdown

off-trade on-trade

Sources: Alcoholic drinks in the US, Datamonitor, December 2008; Alcoholic drinks in Europe,Datamonitor, December 2008; Alcoholic drinks in Brazil, Datamonitor, December 2008; Alcoholic

drinks in Russia, Datamonitor, December 2008; Alcoholic drinks in India, Datamonitor, December

2008; Alcoholic drinks in China, Datamonitor, December 2008,Invalueterms,totalon-tradealcoholsalesinEuropestoodatUS$157.4billionin

2008,comparedwithUS$43.3billionintheUS.74 The value of on-trade alcohol

sales was much lower in the emerging economies of Brazil, China, India andRussia,withUS$15.2billioninChinabeingthehighestandUS$0.5billioninIndia

being the lowest.75

Supermarkets/hypermarketsaccountfor60.7percentand69.0percentofthetotal

off-trade alcohol sales in Europe and the US, respectively,76 and almost half of the total

off-trade alcohol sales in China and Russia.77 There is strong competition between

specialist retailers and supermarkets in China. Supermarkets have the advantage of

selling products at lower prices and offering more souvenirs than specialist retailers,

while the latter have the advantage of offering professional wine selling services.78

InIndia,supermarkets/hypermarketsandspecialistretailerscollectivelyaccount

foramere4.7percentofthetotaloff-tradealcoholsales.79 This is likely to beattributable to the presence of a huge unorganized retail channel in the country.

Rising consumer preference for off-trade drinking, Off-tradealcoholsalesaregrowingfasterthanon-tradealcoholsales, Off-tradedrinkingoffersgreaterchoice,convenienceandcomfort, Consumersarechoosingtostayindoorstoenjoydrinkingduringtheeconomic

downturn, Legislativechangescontributetohigheroff-tradesales,Off-trade alcohol sales in Europe and the US were projected to grow at a CAGR

Greater emphasis

on value for money,

combined with loyalty

to preferred brands,

leads consumers to

off-trade alcohol.




16/24


ofabout2.2percent,comparedtoa1.4percentgrowthinon-tradesales,during

19982008.80 More recently, according to David Ozgo, chief economist of the

Distilled Spirits Council, an industry trade group, on-trade sales growth in the US

droppedtoalmostzeroin2007,comparedwith56percentgrowthin2005.

Off-tradesalesinthecountrygrewover2percentin2007.81

Q

Off-trade drinking offers greater choice and freedom to consumers than on-trade

drinking.82 The desire for comfort and convenience leads consumers to drink

alcohol within the confines of their homes. Availability of premium food and

alcohol products in the mass market helps consumers recreate the luxury of

eating out inside their homes.83 Moreover, staying at home is more fun for

consumers than it used to be due to factors such as advances in satellite televi-

sion and computer games.84

Consumers are increasingly likely to adjust their spending and reduce their on-trade

occasions as a result of the economic downturn.85 There is greater emphasis on

value for money, although loyalty to preferred brands may remain. This shift

in consumer behavior aids off-trade alcohol which is, in the main, cheaper than

on-trade alcohol.86

You may not go out as often but you wont give up those brands...

Tom Pirko, President, Bevmark, Food and beverage industry consulting87,

Off-trade alcohol retailers are cashing in on the growing consumer preference to drink

at home. They are discounting alcohol products in an effort to move volumes,

resulting in further impact on on-trade alcohol sales. In 2008, beer prices in the UK,

intheon-trade,grew4.9percent,comparedwitha0.6percentriseintheoff-trade.88

Supermarkets are using loss-leading deals on alcohol to attract people to their stores.

Major supermarkets in the country that are offering attractive bargains to consumers

include Asda, Morrisons, Sainsburys and Tesco.89

Legislative changes in different parts of the world have also contributed to

more consumers opting for off-trade drinking. In June 2008, Brazil passed

a zero tolerance law for drivers with any measurable amount of alcohol in

their blood.90 This negatively impacted on-trade alcohol sales in the country.91

Similarly,asmokingbanintroducedinEnglandin2007negativelyimpacted

on-trade alcohol sales. In England and Wales, sales fell 8 percent duringJuly2007March2008,comparedwitha3percentfallduringthesame

period before the ban.92

Implications of increasing preference for off-trade

alcohol,On-trade and off-trade retailers,Rising consumer preference for off-trade alcohol offers an opportunity for retailers

with strong product portfolios, since they offer a greater choice to consumers

Supermarkets are using

loss-leading deals

on alcohol to attract

customers.

Will loss-leading alcohol salesby retailers lead consumers toshift irreversibly to off-trade?




17/24


lookingforalcoholforoff-tradeconsumption.Furthermore,theycandevise

marketing messages highlighting off-trade availability of such products.93

Q Off-trade retailers move volumes at low prices and margins to leverage the higherprice and premium positioning of alcohol in on-trade. This has become a major factorin the decline in sales of on-trade beer.94 Heavy discounting by supermarkets,

together with regulatory constraints and rising beer taxes, has resulted in a record

number of pub closures in the UK.95 According to the British Beer and Pub

Association (BBPA) and leading breweries, if current trends continue, supermarket

sales of beer in the UK are likely to overtake pub sales in 2009.96

The Publican, a website for the UK pub and bar industry, campaigned to the

government for a minimum price of 0.5(US$0.7)perunitofalcoholtobring

off-trade prices closer to pub prices. It also tried to collaborate with the leading

supermarkets in the country to take forward the minimum pricing regulation.97

FollowingthegovernmentsrejectionofcallsforminimumpricinginMarch,

trade bosses urged the government to lower the alcohol duty on draft beer to

counter deep discounting by supermarkets.98

Alcoholic beverages industry,Rising off-trade consumption has a negative impact on brewers margins, as it is

less profitable for them than the on-trade channel. Changing consumer preferences

have already had an impact on the strategies of alcoholic beverage companies,

whicharenowlookingtotapintothegrowingoff-trademarket.Forinstance,C&C

Group has appointed a new management team that has a good understanding of

the UK cider market. The new strategy, unveiled in March 2009, was expected to

focus on key growth categories such as the off-trade market.99

Some alcoholic beverage companies are taking steps to encourage the uptake

of premium alcohol products in the off-trade. They are developing products and

adopting marketing efforts that focus on creating value in off-trade drinking.

Through this, they aim to encourage consumers to buy premium products for

at-homeconsumption.Forinstance,DiageolaunchedacampaigninApril2009

topromotespiritsforoff-tradeconsumption.Thecampaign,entitledBring

Home the Spirit of Summer, included outdoor and print advertising to display

attractive-looking spirit drinks.100

Other initiatives by companies to tap into theoff-trade growth by enhancing the at-home drinking experience have been

outlined below.101

Formats to let consumers create an on-trade experience at-home: Diageo

launched a Surger Kit in the UK market in March 2006. The system uses

ultrasonic waves to stimulate the molecules in the Guinness to produce the

perfect pint, usually only achievable in an on-trade environment.

Refrigerator-friendly packaging: Diageo offered Baileys Irish Cream Whiskey in

a refrigerator pack for its consumers in Spain in October 2006. The convenient

packaging allowed consumers to store the Baileys in their refrigerators.

Manufacturers are

encouraging the uptake

of premium alcohol forat-home consumption.

Does your company focus on

premium alcohol products forat-home consumption?




18/24


Ready-to-drink solutions: Carlsberg launched its DraughtMaster Plastic

Keg in Denmark and Norway in April 2006. The DraughtMaster allows

consumers to enjoy beer served directly from the tap in their homes.

In light of the tendency of alcohol manufacturers in the off-trade market to adopt

price discounting strategies, the merger between Anheuser Busch and Inbev in

2008 may benefit the newly created market leader. According to observers, the

new company can follow an aggressive pricing strategy in Europe and the US, and

still generate profit, through economies of scale in production.102

Outlook,More consumers are expected to shift to off-trade drinking as the global econom-

ic conditions remain depressed. In the US, volume sales are expected to grow

ahead of the overall sales value, as focus shifts from the on-trade to the off-trade.103

Manufacturers are likely to take initiatives to further promote off-trade alcohol

sales. These include undertaking promotional campaigns and developing products

that help consumers conveniently recreate the on-trade drinking experience in

their homes. There could also be an upsurge in retailers off-trade offerings.

FURTHERINFORMATION,

Key contacts,Nick Debnam,Head of Consumer Markets, Asia Pacific,KPMG in China,Tel.+85229788283,[email protected],

Neil Austin,Global Head of Consumer Markets,KPMG in the UK,Tel.+44(0)2073118805,[email protected],

Mark Larson,Global Head of Retail,KPMG in the US,Tel.+15137632444,[email protected],




19/24

Companies mentioned in this issue,Aldi 8, 9, 10

Anheuser-Busch Inbev 18

Ann Taylor 12

Asda 11, 16

Best Buy 3

BJs Wholesale Club 11

C&C Group 17

Carlsberg 18

Carphone Warehouse 3

Carrefour 4, 6, 8, 9, 10, 12

CentralandBrandFactory 12

Chicos 12

Circuit City 3

Costco 11, 13

Diageo 17

FamilyDollarStores 11

Golden ABC, Inc. 5

Home Depot 3

Hudsons Bay Co. 3

J. Crew 12

KB Toys Inc. 3

Lidl & Schwartz 8

Linennthings 3

Loot India 12

Lord & Taylor 12

Macys 3, 9

Morrisons 16

Office Depot 9

PPR Group 3

Rewe Group 8, 9, 10

Sainsburys 16

Shinsegae 12

Shoppers Stop 3

Subhiksha 3

Tesco 4, 6, 11, 16

The Grab Store 12

USC 3, 18

Wal-Mart 3, 4, 6, 10, 13

Woolworths 3

www.dazhe.cn 12

ISSUES MONITOR: JUNE 2009, Volume Three 19




20/24

Sources,1 EIU data tool

2 Eurozone Retail Sales Continue To Log Y-o-Y

Decline,INO.com,4February2009

3 Time Series Data, US Census Bureau, Website

accessedon19March2009

4 Chinese Retail Sales rose 21.6% in 2008, RNCOS,

17February2009

5 Indias unorganized retail sector, Invest in India,

17December2008

6 India: Retail sales expected to slow this year to 15%,

FreshPlaza,6March2009

7 Hudson's Bay restructuring to slash 1,000 jobs

nationwide, TheLondonFreePress,5February2009

8 Wal-Mart shuts down Sam's Club stores,

TheRecord.com,26February2009

9 Retailer PPR cuts jobs at Conforama, FNACunits,

Reuters,18February2009

10 Shopper's Stop shuts three Crossword stores,

BusinessLine,27February2009

11 Subhiksha shuts down 90 stores; attributes low

inventories to introduction of new software package,

IndiaRetailBiz,5December2008

12 Tesco to shed 140 HQ jobs after shift to UK prod-

ucts,LNP,14May2009

13 Carphone Warehouse plans to cut 450 jobs in UK,

AOLNews,26February2009

14 Best Buy absorbing Magnolia, Eclectic Electronics,

16February2009

15 Home Depot Laying Off 7,000; Closing EXPO Stores,

wsbtv.com, 26 January 2009

16 Home Depot to lay off 580 in Florida, SouthFlorida

BusinessJournal,26February2009

17 Macy's Announces 7,000 Job Cuts, abc news,

2February2009

1 8 Clothing company goes into bankruptcy protection,

AOL News, 30 December 2008

19 Woolworths stores shut, The Straits Times,

6 January 2009

2 0 Circuit City files for bankruptcy, cnet news,

10November2008

2 1 KB Toys Files Bankruptcy With Plan to Close Stores,

Bloomberg.com,11December2008

2 2 Linens 'n Things going out of business,

TimesDaily.com,17October2008

2 3 Businesses Around World Try to Boost Sales,

VOA News.com, 26 December 2008

2 4 Global Retailing: Preparing for Change, IGD Retail

Analysis, November 2008

2 5 Promoting Brand Simplicity in Food and Drinks,

Global Business Insights, 2008

2 6 http://www.va-interactive.com/inbusiness/editorial/

sales/ibt/branding.html2 7 Global Retailing: Preparing for Change, IGD Retail


2 8 Retailers adopting innovative strategies for this

festive season, shine.com,16October2008

2 9 Holiday sales threaten small retailers, The Australian

Business,17December2008

3 0 Best Buy, Other Retailers Tap Tech to Boost Sales,

BusinessWeek,8February2009

3 1 Can technology help retailers survive '09,thrive in

'10?,CIO,4February2009

3 2 Best Buy, Other Retailers Tap Tech to Boost Sales,

BusinessWeek,8February2009

3 3 Can technology help retailers survive '09, thrive in '10?,

CIO,4February2009

3 4 Cebu retailers see crisis as opportunity for business

growth, GMANews,31October2008

3 5 How retailers can make the best of a slowdown,

McKinsey, September 2008

3 6 World consumer goods and retail outlook: Two years

of trouble, EIU, 30 December 2008



3 8 Fitch U.S. Retail Outlook: Navigating a Difficult Path

for Holiday and 2009,BNet,19November2008









21/24

Sources



4 2 Global Discount Apparel Retail Sales Expected to

Rise from US $146 bn to US $204 bn by 2010,

AllBusiness.com,10January2006





4 5 IGD Retail Analysis

4 6 Retailers report fourth-quarter losses, DM News,

24February20094 7 World consumer goods and retail outlook: Two years




4 9 Europes shoppers turn to discount food store,


5 0 Aldi's sales soar as it lures wealthier shoppers,

TheGuardian,13January2009

5 1 German Discount Supermarkets Increase Market

Share in Europe,Plan Further Expansion Into the

United States, Germany.Info, 22 August 2008

5 2 Aldi's sales soar as it lures wealthier shoppers,

TheGuardian,13January2009

5 3 German Discount Supermarkets Increase Market

Share in Europe, Plan Further Expansion Into the

United States, Germany.Info, 22 August 2008

5 4 Europes shoppers turn to discount food store,


5 5 US retail sales rise, World Advertising Research

Centre, 23 March 2009

5 6 US retail sales offer glimmer of hope,

FinancialTimes,12March2009

5 7 US retail sales rise, World Advertising Research

Centre, 23 March 2009

5 8 How Big Are Those Price Cuts?, Retail Wire,

12March2009

5 9 Global Retail, IGD Retail Analysis

6 0 Tesco Fires New Price War Salvo, Sky News,

6 January 2009

6 1 Discount fever in full swing at stores, Chicago Tribune,

30 January 2009

6 2 Chinas Retail Sales Up 14.8% In April 2009, China

RetailNews,19May2009

6 3 China's retail sales up 15.2% in 1st 2 months,

People'sDailyOnline,12March2009

6 4 China's Leading Online Discount Department Store

dazhe.cn Expands Sales in Face of..., Reuters,

5January2009

6 5 China's Leading Online Discount Department Storedazhe.cn Expands Sales in Face of..., Reuters,

5January2009

6 6 China retail: Shinsegae eyes 100 discount stores in

China by 2014, EIU, 30 April 2008

6 7 Carrefour cuts prices in China to boost sales,

retailnu.wordpress.com, 26 December 2008

6 8 Recession-friendly discount format stores bet on

expansion, HinduBusinessLine,16February2009

6 9 Recession-friendly discount format stores bet on

expansion, HinduBusinessLine,16February2009



7 1 Global Retail, IGD Retail Analysis

7 2 Fitch U.S. Retail Outlook: Navigating a Difficult Path

for Holiday and 2009,FindArticles,19November2008

7 3 Off-trade Trends, PR-inside,25June2008

74 Alcoholic drinks in the US, Datamonitor,

December 2008; Alcoholic drinks in Europe,

Datamonitor, December 2008

7 5 Alcoholic drinks in China, Datamonitor,

December 2008; Alcoholic drinks in India,


76 Alcoholic drinks in the US, Datamonitor,

December 2008; Alcoholic drinks in Europe,


7 7 Alcoholic drinks in China, Datamonitor, December

2008; Alcoholic drinks in Russia, Datamonitor,

December 2008

ISSUES MONITOR: JUNE 2009, Volume Three 21




22/24

7 8 Alcoholic Drinks in Hong Kong, China, Global

InformationInc.,February2008

7 9 Alcoholic drinks in India, Datamonitor, December 2008

8 0 Growth Strategies in Alcoholic Drinks, GBI,

December2007

8 1 Bars and restaurants see the bottom of the barrel,

MarketWatch,27February2008

8 2 Understanding Alcoholic Drinking Occasions:

The Off-Trade, Research and markets, 2008

8 3 Growth Strategies in Alcoholic Drinks, GBI,

December2007

8 4 Roll out the barrel, Economist,31July2008

8 5 Off-trade Trends,PR-inside,25June2008



8 7 Bars and restaurants see the bottom of the barrel,

MarketWatch,27February2008

8 8 The Publican calls for meeting with supermarket

chiefs,ThePublican,19February2009


chiefs,ThePublican,19February2009

9 0 Drinking and Driving Law in Brazil, About.com9 1 Alcoholic Drinks in Brazil, Euromonitor,

February2009

9 2 Smoking ban one year one, Alcohol Policy UK,

1July2008



9 4 Long-term solution lies with families, off license

news, 2 May 2008

9 5 Death of the boozer, The Independent,

14March2009

9 6 Supermarkets spell last orders for the pub,

Times Online, 30 August 2008


chiefs, ThePublican,19February20099 8 Trade pushes for lower duty on draught,

MorningAdvertiser,19March2009

9 9 European Beverages, ESN,11February2009

10 0 Diageo: Bring Home the Spirit of Summer,

TalkingRetail,19March2009

101 Growth Strategies in Alcoholic Drinks, GBI,

December2007

10 2 InBev: Berkshire Hathaway approves proposed

takeover,DrinksBusinessReview,18June2008

10 3Trading Down in Vodka Prompts Growth for Skyy,Svedka and Smirnoff, Wine and Spirits Daily,

24March2009


Sources




23/24


Notes




24/24

Contacts,Formoreinformationcontact:

Nick Debnam,

Head of Consumer Markets, Asia Pacific,KPMG in China,Tel.+85229788283,[email protected],Neil Austin,Global Head of Consumer Markets,KPMG in the UK,Tel.+44(0)2073118805,[email protected],Mark Larson,Global Head of Retail,KPMG in the US,Tel.+15137632444,[email protected],

The information contained herein is of a general nature and is not intended to address the circumstances of any

particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no

guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in

the future. No one should act upon such information without appropriate professional advice after a thorough

examination of the particular situation.

2009 KPMG International. KPMG International is

a Swiss cooperative. Member firms of the KPMG

network of independent firms are affiliated with

KPMG International. KPMG International provides no

client services. No member firm has any authority

to obligate or bind KPMG International or any other

member firm vis--vis third parties, nor does KPMG

International have any such authority to obligate or

bind any member firm. All rights reserved.Printed

in the United Kingdom. KPMG and the KPMG logo

are registered trademarks of KPMG International, a

Swiss cooperative.

Designed and produced by Evalueserve

Contact: Donal OSullivan,

KPMG in the UK,Tel.+44(0)2073118538

Publication name: Issues Monitor

Publicationnumber:15-003

P bli ti d t J 2009

kpmg.com

Issues Monitor Retail June 2009

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