Polish retail market 11 2016

POLISH RETAIL MARKET

Andrzej KraszewskiWarsaw, 16.11.16

Change is the only constant

table of contents

introduction 4

main macroeconomic indicators 10

demographics 14

general industry characteristics 18

hypermarket format 31

supermarket format 42

convenience format 54

discount format 66

traditional trade 79

E-commerce 88

consumers 102

conclusions 111

bibliography/ netography 118

about the author 120

Andrzej Kraszewski 2016-11-16

• demographics

• consumers

• disrtuptive environment

• consolidation phase of the industry

• legal environment

• macroeconomy

• politics

foreword

„ ... successful retailers focus on three key things: thecustomer, the customer and the customer. Logistisc,great products and merchanidising help driveprofitability, but the customers experience andservice, whether in store or on-line, are critical forany retailer’s success ...”Dom Mazzone, Managing Director od M&A

2016-11-16 Andrzej Kraszewski

table of contents• Polish economy advanced 0,9% in the 2Q16, following 0,1%

contraction in the previous period. YoY GDP growth equals 3.1%. GDP growth rate in Poland averaged 1% from 2005 until 2016, reaching an all time high of 6,1% in 1Q97 and record low of -3,1% in 4Q96. Official GDP forecast for FY16 is on the level of 3,8% (in 2017 budget assumptions), GDP assumption for 2017 amounts to 3,8%

• Polish CPI is expected to decrease by 0.2% yoy in Oct’16, easingfrom a 0.5% drop the previous month and better than marketexpectations of 0.3% fall, preliminary estimate showed. It was thesmallest decline in CPI since July’14. On a monthly basis, consumerprices are expected to increase by 0.5% after a flat reading in Sep’16and above expectations of 0.4% gain. CPI in Poland averaged 8.98%from 1992 until 2016, reaching an all time high of 46.50% in Apr’92and a record low of -1.60% in Feb’15

basic macroeconomic indicators (I)

• cost of food in Poland increased 0.40% in Sep’16 over the samemonth in the previous year. Food Inflation in Poland averaged 2.91%from 1999 until 2016, reaching an all time high of 13.80% in Jul’00and a record low of -3.70% in Jan’15

2016-11-16 Source: http://www.tradingeconomics.com/poland/consumer-spendingAndrzej Kraszewski

table of contents

basic macroeconomic indicators (II)

• Unemployment Rate is expected to be 8% by the end of 2016, according to analysts expectations. looking forward, it is estimatedthat Unemployment Rate will stay at 8.00% in 12 months time. In the long-term, the Unemployment Rate is projected to trend around 7.00% in 2020.

• Business Confidence index decreased to 1 in October from 3.30 in Sep’16. Consumer Spending decreased to 264,849m PLN in the 2Q16 from 275,685.50m PLN in the 1Q16

2016-11-16 Andrzej Kraszewski Source: http://www.tradingeconomics.com/poland/consumer-spending

table of contentsKEY POINTS

• new inclusive social and economic growth model, recent social spendings to be founded from improved tax compliance and the introduction of sectoral taxes (finance institutions and retail industry)

• despite strong performance and forecast in basic economic indicators, Poland's economy enters 2017 with an air of uncerainty, mainly due to a change in political regime and issues facing the EU as a whole (Brexit, future of EURO zone, secular stagnation, deflation environment, US elections)

• challenging 2017 budget, lack of coherent set of policies needed to respond to long-term adverse developments, including managing of one of the most rapidly aging societies in Europe and leveraging technological change

basic macroeconomic indicators (III)


demographic challenges and key facts (I)

20502002

2016 2050

25-34 YRS OLD

>80 YRS OLD

2016

prognosis

actual

1,0

5,5

million inhabitants

3,5

6,5

2026

1,5

13,0

15,5

14,0

13,5

2030

million HH

2016 20502030

avg # of children per HH

0,30

0,48

0,380,36

• total population in Poland was estimated at38.4m people in 2015, according to the latestcensus figures. looking back, in the year of1960, Poland had a population of 29.6mpeople. it is estimated that by 2050, Polishpopulation will contract to 34m people

• the share of the population above 65 isexpected to increase 7pp by 2030. an agingand smaller population implies an aging andsmaller work force

• European Commission’s researchers projectthat Poland’s potential growth in GDP percapita – that is, the long term growth trendsbeyond the ups and downs of the economiccycle – would decline to below 3 percent ofGDP after 2021, owing to the aging of thepopulation

KEY FACTS

• TOTAL POPULATION38.5m in 2015, forecasted 34m in 2050

• MEDIAN AGE 39,3 years or 4,2 greater than in 2000

• FERTILITY 1,3 birth per femail in 2015 compared to 2,3 in 1980

• AGING CONTINUES 8,3m of elderly people in 2030 i.e. 22% share in total population compared to 15,1% in 2015. (50+ ≈45% by 2030)

2016-11-16 Andrzej Kraszewski Source: GUS, Euromonitor

• shrinking population and decreasing working age group

with the growing elderly population in Poland, there is a decrease in working aged individuals. a decrease in working age individuals means that Poland's workforce could slowly decrease by 2050. with Poland's growing economy, more jobs will continue to appear requiring individuals to fill the role of workers. in order to meet this need, Poland will most likely depend on immigration to fulfill economic needs. lack of immigration could cause Poland's growing economy to reach financial troubles. Poland, not being able to keep up with their economy, will lose their economic strength and influence

demographic challenges and key facts (II)


demographic challenges – single HH

25-34 YRS OLD

>80 YRS OLD

prognosis

actual

million inhabitants

in %

……………

2016 2030

2050

2,10

2002 20502016 2030

2,25

2,20

2,00

2,15

2,05

• across all countries (EU-28) the size of HH has decreased between2005 and 2015 (except of Croatia). almost two thirds of all households were composed of one or two persons in 2015. the most common type of household was that composed of a single person, with one third (33.4%) of the total number of households. this group also recorded the highest increase from 2005 to 2015 (4.1 pp)

single HH density prognosis

Poland, avg HH size

EU-28 HH composition statistisc: avg HH size

Andrzej Kraszewski Source: Eurostat, GUS, Prognoza gospodarstw domowych 2016 – 2050 2016-11-16

unique & aspirationalsimple & oridinary shopping experience

market overview – finding the Holy Grail of retail industry

price attractiveness

C-SWEET

SPOT

max UoNcovered,

assortment range (depth

& width) & in-store

ambience S-SWEET SPOT


understanding maturity and concentration of the market is a key

BUSINESS CYCLE 25 YRS

MT < 80%

% Top 5 MS

Modern Trade

Paradigm of high growth via modernisation

High share of MGD but low level of concentration

INITIAL STAGE

MT < 35%

Top 5 < 45%

*the market is dominated by local chains and TT*BBR (particularly C&C) are predominant

PENETRATION

MT < 35 - 65%

Top 5 < 45-65%

*TT still controll a good part of the market *MT start to penetrate proximity

CONCENTRATION

MT < 65-80%

Top 5 < 65-85%

*strong decline of TT, rapid development of MT*concentration to gain scale to face competition

MATURITY

Top 5 < 85%

*convenience and specialization

2016-11-16 Andrzej Kraszewski Source: Beragua, Fundacja Republikańska, AT Kearney

market concentration is an important measure to asses the bargainig power of market players

2016-11-16 Source: Špička, research paper: J. Market concentration and profitability of the grocery retailers in Central EuropeAndrzej Kraszewski

understanding maturity and concentration of the market is a key

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

45,0 Biedronka

Tesco

Auchan

Lewiatan

Żabka/ Fm

Nasz Sklep (GKS)

Polomarket

PiP

LD Holding (GKS)

Topaz/ Eden

Lidl

Kaufland

abc

Carrefour

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

45,0 Biedronka

Tesco

Auchan

Żabka/ Fm

Polomarket

PiP

Mila

Topaz/ Eden

Carrefour

Intermarche

E.Leclerc

Dino

Stokrotka

BaćPol/ Spar

EC

STOKROTKA

GKS

BAĆ-POL

ŻABKADINO

TESCO

AUCHAN

SCHWARZ

• even after grouping main players by ownership structure, still Biedronka remains an undisputable leader by value, bargainig power, brand recognition, coverage and shopping frequency

• in 2017 some of the PE houses may wish to exit. Żabka as potential game changer. few wholsalers announce willingnes to consolidate the market


• market saturation: expansion strategies vs.growth barriers (growing shortage of available locations), cannibalization (3,9k wholesalers, 108k shops (2,8 per 1k persons, EU avg 0,5 per 1k persons)

• consumers shifts in buying behaviors, social trends: consumer is getting richer, Private Labels enter premium categories, dusk of impulse shopper, rose of smart, surgical consumers, eco & organic food as fastest growing segment (+30% yoy), reginal patriotism and origin awareness, fair trade and CRS issues, e-commerce, click & brick, convenience: nearby and carry everything, millennials entering labor market, demographical challenges: fertility rate low, aging and decreasing population

market saturation

consumer behavior

business excellence

external risks

main priorities of the retail industry (II)


• operational and financial effectiveness: big data & data lake, IoT, cloud computing, quality of earning considerations, rent & labor costs development, LfL, avg GM, EBITDA/ EBITDAR levels, net profit and FCF, outsourcing, lean management, effectiveness and efficiency measurements, typical KPIs/ CSF

• regulatory, economic & political: new retail T/O tax, unfair market pracites law, Sunday trading ban, minimum salary raise, deflation, decreasing unemployment (employee job market and strutural deficiencies), political upheaval, global markets volatility, future of EU and EURO zone

market saturation

consumer behavior

business excellence

external risks

main priorities of the retail industry (III)


• price point management: value for money, emotional attributes, functional benefits, clear & differentiating value proposition resonating with consumers

• target consumer group: undrstanding variuos consumer segments, purchases frequency, attributes of particulat products valued the most, taillored value proposition, data gathering and analytics

• bifurcation of portfolio & commercial models: risk of getting stuck in the middle, stretching brands, design-to-value, complexity of portfolio, UoN

• product availability & pricing consistency across channels: comprehensive channel strategy & channel conflict management, selective investment in highest growth channels, robust digital play

pricing

consumer targeting

business diverisity

R-t-M excellence

main priorities of the retail industry (IV)


not that simple corner store concept

Convenience store concept is based on threefundamental principles: it should be availablethrough long opening hours 7 days a week, itshould be close to the residents and it shouldsuport and contribute to the development of itslocal community.Joe C. Thompson, founder of the 7-eleven

convenience is a food retail concept clearly focused on attending„on-the-go” shopping mission (need) and can be also used forquick replenishment of certain categories. small proximitysupermarkets (which share some similarities with pureconvenience concept) are primarly focused on replenishmentfunction.


BAKERY-LEDPanera Bread: favourite US cafe bakery, craveable wellnes and efficient store experience Paris Baguette: Korean take on authentic French bakery – stylish and indulgent

FAST FOOD LEDLotteria: reinventing the fast food template for the developing Asian consumerSubway: global phenomenon, mixing operational simplicity and consumer customisation

FRESH & HEALTY LEDPret a Manger: packaging freshness, speed of service and helath to create a compeeling lunchtime offer Freshii: champion of functional eating – aims to do for superfoods what McDonalds did for burgers

COFFEE-LEDStarbucks: the iconic global coffee shop –raising coffee expertise and extending food capabilityCosts: fast growing coffee specialist, expanding ina growing numer of marketsJulian Valdez: coffee specialist exporting Columbian provenance thrrough an expanding coffee shop chain

food-to-go, ready-to-eat, grab’n go – still many possible inspirations

for c-stores: 4 main traits:

2016-11-16 Source: IGD Retail Analysis, 9 Food-to-go specialist to learn from, Jan 2016Andrzej Kraszewski

o strong price & promotion strategy forces small and medium sized independent players to join franchise systems and/ or create purchasing groups, in order to optimise S&OP and increase their bargaining power

• franchise models are either controlled by wholesale-oriented retailers(Eurocash, Bać-Pol, Chata Polska, GK Specjał) or operated by local/ regional retailers (dozens of systems)

• vertical integration between wholesalers and retail chains may be an effective competitive strategy against GMD players (both international and Polish)

• fragmentation of the TT segment, strong tradition of small grocery stores and specific ownership culture effectively slow down integration processes

o there are still appr. 4,000 grocery wholesalers on Polish market. there is only one player with potential and resources for material consolidation (EC) and it is rather unlikely that such M&A transaction may be concluded next year

o small and regional wholesalers may play a consolidation role on local markets

traditional trade – bloody battlefied


o wholesale industry struggles with narrow margins. avg net profit margin varies between 2,2 and 3,2%. like retailers, wholesalers are trapped in diminishing or at best stagnant profitability zone

o specialization in a specific product group/ category (meat, fish, frozen, dairy, alcohol, fresh produce) may by one of defensive strategies

o small local/ regional vertical merges may by also an option, albeit there are many different considerations like valuation, managerial competences, etc.

o some smaller wholesalers may choose to increase cooperation with producers and engage in common marketing projects, especially in one or two related product categories

o despite decreasing numer of non-organized stores, traditinal trade still represents appr. 20% (RB, GFK: 35%) of the total grocery market in Poland. from producer’s perspective, there are several operational tactics available to defend or even increase market share in this segment

o however, any route-to-market game plan in TT segment requires thorough profitability considerations and must align with company’s strategic goals

traditional trade – bloody battlefied


two sides of the coin, or is it?

„ ... I am convinced that the two principles – thatof small ranges and low prices, can not beseparated.”Karl Albrecht, the founder of Aldi stores, 1954

Biedronka, a chain of food stores with apositioning that combines the quality of itsassortment, store environment and proximitylocations with the most competitive prices in themarket.Pedro Soares dos Santos, CEO of JM Group, 2016


Biedornka vs. Lidl – slight but visible difference

21191986

2332

1881

Biedronka Lidl

0

500

1 000

1 500

2 000

2 500

2015 2016

2015 2016

2015 2016

• two different growth strategies

• different approach to GM & PL share and role


online - the great unknown: indicative of how many European grocery retailers currently feel

„ ... we don’t know where the online train is going and how fast it is running. I only know that we need to be on board.”Alain Caparros, CEO Rewe Group

Andrzej Kraszewski2016-11-16

our consumers: three different universes

VALUE ($)

EXPERIENCE

CONVENIENCE

DISCOUNTERS ...

online grocershome delivery

click & brick

neighborhood stores

farm-to-table

organic

recipe box-to-door

upscale grocers

single HH

millennials generation Z

late-lifers

*Yeppies

DINKs

Yuccies

Guppies

small appartments

food solution

pure & healthy

Yeppies: young experimenting perfection seekers Yuccies: pursue our dreams and profit from them

DINKs: dual income, no kids Guppies: gay urban professionals

Source: own compilation: KPMG Consumer Currents, Euromonitor Andrzej Kraszewski 2016-11-16

consumers: time perception in changing

2016-11-16 Source: Euromonitor Andrzej Kraszewski

price advantage does not last forever, polarity of maintaining vol. vs. margins

shoppers and sellers are moving in tandem with product expansion

companies need to interact with shoppers on their terms

retailers must match growing sophistication of their customers

3

4

1

2suppliers need to evolve to move with retail change

different strategies for different channels, markets and retailers

retailers will be looking to suppliers to help them through change

personalising the path to purchase will help customers get what they want

6

5

8

7

key watchwords: FLEXIBILITY AND COLLABORATION,

RELATION instead of TRANSACTION


I am a senior finance and business executive with profound experience in FMCG sectorand consumer markets (production, distribution and retail). During my carrier, I leadvariuos teams in different organizational cultures - from sheer start-ups to more maturestructures. I have over 15 years of experience as a member of management & supervisoryboards of various entities, including biggest commercial companies on the Polish marketlike Żabka, Bomi or Iglotex.

I succesfully supported several new strategy development projects both on the high-levelindustry vision context and in-the-trenches implementation levels.

I participated in many professional trainings and courses, both in Poland and abroad. Igave many presentations on different forums and was invited to be a panelist at differentretail market events. In December 2015 I have completed the Executive MBA atKozminski University. I joined my career with passion to continue personal developmentand recently commenced PhD dissertation on consumers’ behavior patterns.

I show interest in social sciences, especially behavioral economics. I am a fan of thewriting and speeches of Malcolm Gladwell, Daniel Kahneman, Karl Albrecht and DanielGoleman. I also like to actively practice in sports, like long distance running, swimming,squash and biking.

contact details: (+48) 602 627 406, [email protected], see also my profileat LinkedIn

Polish Retail Market – change is the only constant

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