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EMEA Equity Research
Food retail
July 2012
Food retail
Food retail team
Jérôme Samuel*
Analyst
HSBC Bank Plc, Paris Branch
+33 1 56 52 44 23
[email protected]
Emmanuelle Vigneron*
Analyst
HSBC Bank Plc, Paris Branch
+33 1 56 52 43 19
[email protected]
Raj Sinha*
Head of MENA Research
HSBC Bank Middle East Ltd
+971 4423 6932
[email protected]
Sector sales
David Harrington
Sector sales
HSBC Bank Plc
+44 20 7991 5389
[email protected]
Lynn Raphael
Sector sales
HSBC Bank Plc
+44 20 7991 1331
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
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EMEA Equity Research
Food retail
July 2012
Sector structure
Consumer & Retail - Europe
Food
and HPC
Beverages
See sector section for
further details
See sector section for
further details
Food retail
General retail
Luxury
See sector section for
further details
See sector section for
further details
Bricks & mortar
Online
Ocado
UK
CEEMEA
Europe
Morrison
Casino
Tesco
Carrefour
Sainsbury
Colruyt
Magnit
DIA
Jeronimo Martins
Metro
Ahold
Delhaize
Source: HSBC
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1000
Delhaize buys
Hannaford (2000)
DIA spin-off
(2011)
Profit warnings from
Carrefour and Metro
(2011)
Merger CarrefourPromodès (1999)
EMEA Equity Research
Food retail
July 2012
Performance of European Food retail stocks 1990-2012
800
Morrison buys
Safeway (2004)
Promodès launches unfriendly
takeover for
on Casino (1997)
600
400
Auchan buys Docks
de France (1996)
Sector boosted by
property valuation
(2007)
Wal-Mart buys
Asda (1999)
First ever profit warning
from Tesco (2012)
200
0
90
92
96
98
00
02
04
06
08
10
12
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Source: Thomson Reuters Datastream, HSBC
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EMEA Equity Research
Food retail
July 2012
EBIT margin versus asset turnover (2012e)
3.5
DIA
3.0
2.5
Asset turnover
Colruy t
Jeronimo Martins
Ahold
2.0
Metro
Sainsbury
Delhaize
Morrison
Carrefour
1.5
Casino
Tesco
1.0
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
EBIT margin
Source: HSBC estimates
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EMEA Equity Research
Food retail
July 2012
Sector description
Food retailing is the largest consumer sector, at least by sales, with an estimated GBP132bn of revenues
in the UK in 2012, according to Verdict Research. It has always been seen by investors as a defensive
sector, but we believe this is no longer the case. In the 1980s, food retailers with negative working capital
benefited from high inflation and high interest rates. In the 1990s, sector performance was driven by
international expansion and consolidation in mature markets. The top five market shares now exceed 50%
in the main European countries.
There are several reasons why the sector is not as defensive as it was. Food spending has shrunk as a
percentage of total spending, few listed players are pure food retailers, and even discounters are exposed
to economic slowdowns.
 In mature markets, spending on food as a percentage of total household spending has continued to
shrink, and now accounts for an average 14% of consumer spending in mature European markets,
one-third of its level in the 1960s.
abc
Jérôme Samuel*
Analyst
HSBC Bank Plc, Paris Branch
+33 1 56 52 44 23
[email protected]
Emmanuelle Vigneron*
Analyst
HSBC Bank Plc, Paris Branch
+33 1 56 52 43 19
[email protected]
Raj Sinha*
Head of MENA Research
HSBC Bank Middle East
+971 4423 6932
[email protected]
*Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
and is not registered/ qualified
pursuant to FINRA regulations
 Few listed food retailers are pure food retailers and are therefore largely immune to a slowdown in
discretionary spending. Metro and Carrefour are the most exposed to non-food; Jeronimo Martins,
Morrison, Ahold, Delhaize, Dia and Colruyt still sell mainly food.
 Discount stores enjoyed faster organic growth than other formats in the past decade, taking market
share from hypermarkets and supermarkets in Germany, France and Belgium, and even in the UK.
That trend has since reversed in France and Germany, as hypermarkets have started to compete more
on price and as the economic crisis has curbed spending by lower-income households.
The industry operates in various store formats: hypermarkets, supermarkets, discounters, convenience
stores, cash and carry and department stores, which often reflect market positioning: premium, mass or
value-orientated.
 Hypermarkets are large stores (above 5,000 square metres per store) that focus on volumes; they sell
groceries and general merchandise, offering up to 50,000 stock-keeping units (SKUs).
 Supermarkets (around 2,500 square metres per store) are medium-sized stores focusing on groceries,
with a limited non-food range and about 13,000 SKUs in grocery.
 Discounters have smaller stores, fewer SKUs and aggressively promote non-food items.
 Convenience stores offer a variety of food and are generally located near their target customers,
who are prepared to pay higher prices than in hypermarkets or discount stores as a result.
 Cash and carry stores offer low prices but only sell groceries and general merchandise in bulk to
hotel, restaurant, catering customers and small retailers.
 Department stores have multiple categories functioning as different business units under one roof.
They are sometimes national chains and often carry the largest number of SKUs.
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EMEA Equity Research
Food retail
July 2012
 Online grocery retailing: Among other formats, it is worth highlighting the emergence of online
grocery retailing, which has two types of players: conventional retailers that have added online
retailing and pure online retailers such as Ocado.
A typical discount store will have a leaner cost structure than a hypermarket, with a lower gross margin
but also much lower SG&A. A supermarket enjoys a higher gross margin but provides a higher level of
service in store. We estimate that hypermarkets have an operating margin of 4.5%, supermarkets and
discount stores about 5.5%, and convenience stores higher, all things being equal.
Along with location, brand awareness and private labels are key success factors in food retailing,
attracting customers and helping build their loyalty. Private labels ensure higher margins for the retailers
– in terms of percentage rather than cash – since, although private label goods are sold at lower prices
than national brands (c25% on average), their costs are much more heavily discounted. In all mature
markets, private labels are growing much faster than national brands. The UK is the leader, with private
labels representing more than 40% of retailers’ sales, but French, German and the other European retailers
are catching up; private labels now account for more than 25% of their sales.
Key themes
Top line: organic sales
An important metric is like-for-like (same-store, identical) sales growth: the constant currency sales
growth in stores that have been open more than a year (the duration may differ slightly from company to
company). Like-for-like gives an indication of how the retailer has performed in attracting more
customers and increasing sales per customer through techniques such as better branding, pricing,
offerings and loyalty programmes. It gives a fair representation of actual sales growth, excluding forex,
new stores and stores acquired/disposed of.
Historically, the top line has helped drive returns for investors, since margins tend not to change much.
With top-line growth opportunities drying up in existing stores, retailers keep opening new stores and
increasing store sizes. Organic growth represents increases in sales ex-currency effects and ex-M&A.
Besides company-specific factors (eg brand awareness, loyalty programmes, promotional activity),
certain structural differences explain why some retailers enjoy faster sales growth than others.
 Maturity of the domestic market: As a general rule, the higher the retail density, or retail space per
capita, the lower the growth potential.
 Extent of opening programmes: Retailers plan store openings to improve coverage, complementing
the coverage of existing stores and adding new space that will later contribute to like-for-like growth.
 Exposure to growth markets: Although currency fluctuations and shorter economic cycles may
increase earnings volatility, emerging markets offer a good opportunity for top-line growth. Modern
retailing is still at an early stage of development in emerging markets. A weak currency may have a
positive impact on financial interest by lowering net debt. Most food retailers try to ensure that their
international activities are self-financed in local currencies and are not hedged. Large food retailers
are present in multiple countries, thereby bearing significant forex risk. Although most of the
sourcing is done locally, the currency exposure still brings volatility to the top line and the bottom
line, if not the margins.
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EMEA Equity Research
Food retail
July 2012
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 Exposure to different formats: Different formats have different dynamics and may grow at widely
differing levels even in the same region. For example, in France, discounters lost market share in
2009 and 2010 as a consequence of greater price competition from hypermarkets.
Cost savings
Of late, the focus for large retailers has turned more towards cost savings (mainly Carrefour and Metro) and the
resultant margin improvement. Economies of scale provide an opportunity for significant cost savings – for
example the ability to harness synergies in purchasing and distribution for different banners within the same
company. Building efficiency in logistics and optimising store size also helps improve margins.
Since 2009, most of the major food retailers have been executing cost-saving plans. Asda, for example,
describes the virtuous circle of its trading model as buying better, lowering prices, improving quality,
getting the offer right, driving volume and finally improving operational profitability. In other words, low
prices help to drive higher volumes through gains in market share, which in turn leads to better buying
conditions and hence the ability to offer even better prices to customers.
M&A
Big mergers like Carrefour-Promodès in 1999 and Morrison-Safeway in 2004 had problems with
integration and value creation. Most synergies announced at the time of the deals have not been delivered,
especially in the case of cross-border deals where buying synergies have been made on a national basis.
As the top players enjoy major market shares in mature markets, few developed countries offer
opportunities for consolidation. However, emerging markets are a source of growth, and many players
enter them through acquisitions. Sometimes retailers also swap assets, which may make sense if each
lacks critical size. For example, in 2005, Carrefour and Tesco agreed to swap some Tesco stores in
Taiwan for Carrefour stores in the Czech Republic and Slovakia.
Sector drivers
Consumer confidence
In mature economies, consumer confidence is one of the main drivers of the top line. Although the sector
withstands shocks well, consumers do tend to trade up when confidence is high and vice versa. Emerging
markets are structurally different. Their low per-capita incomes and lower retail penetration provide room
for significant long-term structural growth.
Economy/inflation
Moderate inflation is good for the sector; it helps both the top line and the bottom line for those who have
pricing power. The worst scenario for food retailers is deflation. In general, macroeconomic factors such
as rising per-capita income and expenditure levels help sales growth.
Loyalty programmes, private labels
Food retailers have been developing ever more attractive and innovative loyalty schemes. Loyalty
schemes have been found to work well for retailers, leading to improved repeat purchases and consumer
data collection. The data collected from such schemes lead to useful insights in tailoring the offerings and
increasing loyalty further. Tesco’s Clubcard has been one of the most successful. Private labels command
higher margins for food retailers with lower prices for consumers. Obviously, food retailers focus on
increasing the share of private labels in total sales.
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EMEA Equity Research
Food retail
July 2012
Over the long term, the food retailers that have performed best have been mono-format retailers with a
strong concept and brand awareness and the ones that have managed to secure loyal customers.
Key segments
Capex is a leading indicator
On average, capex for food retailers is expected to equate to 4% of net sales in 2012e, compared with 5%
in 2008, reflecting the economic crisis. One of the sector’s strengths is that total capex comprises a
multitude of small investments, offering more flexibility in a downturn. Capex comparisons between
retailers can be distorted by the nature of the business (mix of food versus non-food), the property strategy
(freehold or leasehold), the proportion of owned stores versus franchises and the regions of expansion.
Distribution costs
Distribution costs are not entirely comparable because retailers do not all account for their costs in the
same way. Formats, assortment, exposure to non-food and the level of service in stores have a direct
impact on distribution costs and margins.
Property
The level of property ownership is different for each company, making EBITDA comparisons difficult.
However, EBIT is generally comparable as it includes both rental costs (for leased property) and
depreciation (for freehold property).
Valuation
Most of the major international food retailers provide good revenue and earnings visibility, so they can be
valued using a discounted cash flow model. The presence of comparable peers means relative valuation
can also be used. We estimate that the food retail sector in Europe now trades at 2012e EV/sales of 36%
and EV/EBITDA of 5.7x, and on a 2012e PE of 10.4x, compared with the 16.3x at which it traded on
average between July 1999 and August 2010. During the same period, the average PE relative to the DJ
Stoxx 600 for European food retailers was around 1.03x.
European food retail: growth and profitability
2008
2009
2010
2011
2012e
Growth
Sales
EBITDA
EBIT
Net profit
7.2%
7.4%
7.6%
-0.9%
1.2%
1.3%
-0.1%
-4.0%
3.3%
5.6%
8.0%
15.8%
4.4%
1.0%
-0.9%
-2.4%
6.8%
4.8%
4.6%
2.6%
Margins
EBITDA
EBIT
Net profit
6.48%
4.26%
2.44%
6.49%
4.21%
2.32%
6.63%
4.40%
2.60%
6.42%
4.18%
2.43%
6.30%
4.09%
2.33%
Productivity
Capex/sales
Asset turnover (x)
Net debt/Equity
ROE
5.1%
1.71
56%
14.4%
3.5%
1.64
46%
12.7%
3.7%
1.65
41%
13.6%
3.8%
1.67
48%
13.0%
3.9%
1.71
46%
12.8%
Note: based on all HSBC coverage of European food retail sector All data in the table are aggregated from the individual company data
Source: company estimates, HSBC estimates
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EMEA Equity Research
Food retail
July 2012
Sector snapshot
Food CPI and consumer confidence are industry drivers
(% change y-o-y)
Key sector stats
MSCI Food & Staples Retailing
Dollar Index
2.1% of MSCI Europe US Dollar
Trading data
5-yr ADTV (EURm)
Aggregated market cap (EURbn)
Performance since 1 Jan 2000
Absolute
Relative to MSCI Europe US
Dollar
3 largest stocks
Correlation (5-year) with MSCI Europe
US Dollar
12.0%
8.0%
498
99.2
4.0%
-75%
-60%
Tesco, Ahold, Carrefour
0.85
0.0%
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
-4.0%
Source: MSCI, Thomson Reuters Datastream, HSBC
Consumer confidence
Top 10 stocks: MSCI Food & Staples Retailing Dollar Index
Stock rank
Stocks
1
2
3
4
5
6
7
8
9
10
Tesco
Ahold
Carrefour
Jeronimo Martins
Morrison
Metro
Casino
Sainsbury
Colruyt
Delhaize
Inflation (food)
Source: Thomson Reuters Datastream, HSBC
Index weight
30.5%
10.0%
9.5%
8.7%
8.5%
7.2%
7.2%
6.7%
5.3%
2.6%
PE band chart: MSCI Food & Staples Retailing Dollar Index
190
19x
17x
160
15x
13x
130
100
Source: MSCI, Thomson Reuters Datastream, HSBC
70
2001
Country breakdown: MSCI Food & Staples Retailing Dollar Index
Country
UK
France
Netherlands
Portugal
Belgium
Germany
Spain
Finland
Source: MSCI, Thomson Reuters Datastream, HSBC
Weights (%)
45.7%
16.7%
10.0%
8.7%
7.9%
7.2%
2.4%
1.3%
2003
2005
2007
2009
2011
Source: MSCI, Thomson Reuters Datastream, HSBC
PB vs. ROE: MSCI Food & Staples Retailing Dollar Index
3
20
3
15
2
10
2
5
1
0
2004 2005 2006 2007
Fwd PB (LHS)
2008 2009 2010 2011 2012
Fwd ROE % (RHS)
Source: MSCI, Thomson Reuters Datastream, HSBC
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