State of the Industry Report 2014 - AACS · The AACS State of the Industry Report continues to...

AACSState of the Industry Report 2014

Welcome to the 2014 AACS State of the Industry Report

This report remains a sought after publication by retailers, suppliers, regulators and analysts as it is the most credible

insight into the Australian Convenience industry.

I thank the Retailers who took the time to provide data to enable us to publish this year’s report. In addition, I thank Emmy Swithenbank-Jones and the team at IRI-Aztec for their insights and excellent work in compiling this year’s report. I also thank this year’s contributors being him! International, Nielsen, Pulse Plus, Imperial Tobacco and the ACRS at Monash University.

Importantly I thank the major sponsors of this year’s AACS State of the Industry Report, Coca-Cola Amatil and Imperial Tobacco.

AACS remains committed to our pillars of Representation, Innovation, Communication and Education.

We will continue to advocate for our industry in areas affecting the things that matter to our members and could affect them both positively or negatively e.g. tobacco regulation, ‘health’ taxes, food regulations, penalty rates, liquor sales regulations, container deposit legislation and importantly petrol theft.

Once again we are pleased to

bring the annual AACS State

of the Industry report to you.

welcomeAACS State of the Industry Report – 2014 1

The AACS 2014 Overseas Study Tour to Japan, Korea and the USA was well supported, and we visited a number of excellent stores and met some terrific industry people along the way. The learning around food service will be very useful as our industry moves quickly to further develop our stores in these categories.

For the third year running, Australia’s entrants enjoyed prestigious wins at the international convenience industry awards, which are part of the National Association of Convenience Stores (NACS) Show in the USA in 2014.

The future of Australia’s convenience industry is clearly in good hands with Callum MacKay of 7-Eleven winning the Global Scholarship Award in the Retailer category and Kathryn Newiss from Philip Morris Australia winning the Supplier category award - excellent achievements.

At the AACS AGM held in Melbourne in November 2014 the following Members were elected to serve as the AACS Board:

Peri Hunter BP Chair

Rob Anderson APCO Vice Chair

Julie Laycock 7-Eleven Treasurer

Karim Sumar Caltex

Chris Andrianopoulos AA Holdings

Darren Park UCB

Steve Cardinale New Sunrise Group

were elected Retail Member Directors of AACS.

Brett Barclay Advantage Group

Jo Moxey Coca-Cola Amatil

Jason Erickson Philip Morris Limited

were elected Supplier Member Directors of AACS.

AACS BoardAACS State of the Industry Report – 2014 2

In 2015 the Australasian Association of Convenience Stores (AACS) celebrates 25 years as the peak body for the convenience industry in Australia and as the drive to innovate gathers momentum, the need to focus on customer service and optimise performance of key categories has never been greater.

As you will read further in this report, 2014 again saw convenience in store sales grow by 4.5% and fuel volumes by 3.6% - a very credible performance in relatively tough retail conditions. We are justified in having ongoing confidence in convenience through our 6070 stores.

We look forward to continuing to work with our Members for the benefit of our industry.

Jeff Rogut FAIM MAICD

Chief Executive Officer

Australasian Association of Convenience Stores Limited

ACN: 156 638 023

Jeff Rogut

AACS State of the Industry Report – 2014 3

Report Methodology

This year, IRI-Aztec were appointed by the AACS board to compile the report for the first time and as well as using their own data services, they have engaged the following service providers to the channel:

Australian Centre for Retail Studies (ACRS) at Monash University Provided insights into future trends in technological developments and shopper considerations

Him! International Provided global insights into the Convenience channel – both locally and overseas

IRI-Aztec Provided Scan sales data for the convenience channel and snapshots of performance of top categories within the Grocery channel as well as economic, population and convenience shopper attitudes.

Nielsen Provided topline retail trends, economic trends and market insights

Pulse-Plus Research Provided the Retailer-Supplier benchmarking from their ‘Convenience Pulse’ service

The Realise Group Provided research from June 2014 to determine key drivers of customer satisfaction within the convenience channel

The AACS State of the Industry Report continues to provide the industry with a compelling report with the best industry, national and global data.

methodologyAACS State of the Industry Report – 2014 4

Report Methodology

The report is a combination of data from the above mentioned companies, while leading retailers also provide levels of insight into their business to provide a comprehensive understanding of the Convenience channel. Not all Convenience retailers are members of AACS, therefore not all have provided data for this report.

Retailer Fuel Metrics

Merchandise Metrics

Employee Statistics

Store Statistics

IRI-Aztec Scan Retail Sales

7 Eleven

AA Petroleum

APCO

BP COCO

BP Regional

Caltex

Coles Express Not a member of AACS

Freedom Fuels

Night Owl

New Sunrise

Peregrine

Puma Energy

UCB

Woolworths Not a member of AACS


Report Methodology

The following chart gives an understanding of how the report has been compiled and the data that has needed to be extrapolated so everyone has a clear understanding of the report’s dynamics.

Market Representation:

Represents 62% of the Market Scan Accounts 7-Eleven, APCO, BP, Caltex, Coles Express, Night Owl, Freedom Fuels and Woolworths Petrol

Represents 32% of the Market Data provided to the report by Retailers AA Petroleum, New Sunrise Group, Peregrine, Puma Energy and UCB

Represents 6% of the Market Data estimates from Independent Retailers

representationAACS State of the Industry Report – 2014 6

Report Methodology

The Convenience Channel has come a long way since 1994…

Since the report that was published in 1994, the industry has come a long way.

Store numbers were reported as 606 in 1994, whereas today we are seeing a number tenfold of that at 6070 stores.

The average merchandise transaction was $4.63 vs $8.48 in 2014

The contribution from Tobacco has always been significant, but has become more so in recent times, as tax excises raise prices. Beverages accounts for a much greater percentage of sales, with segments such as Energy Drinks not even launched back in 1994. And categories such as Communications, which now account for nearly 10% of merchandise sales, did not even exist in 1994.

% Merchandise Sales in Convenience Channel

TobaccoBeverages

ConfectioneryGrocery

On the Go FoodMilk

Printed MaterialsBread & Cakes

Ice CreamSnack Foods

General MerchandiseAutomotive

Health and BeautyFresh Fruit & VegCommunications

30.236.9

16.524.2

8.66.2

7.6

7.64.0

6.41.9

5.32.3

4.61.8

3.52.2

2.92.1

2.73.9

1.92.4

1.51.0

0.60.1

9.9 1994 2014

1.0


Contents 9 General Market Overview

20 Retail Market Overview

28 Convenience Merchandise Performance

54 Supplier Partnerships

57 Review of 2014 Study Tour

59 Overseas Trends

62 Future Trends in Retail

69 Summary


2014 General Market Overview

As agreed with the ACCC, the Major Supermarkets ceased their aggressive fuel discounting in the first quarter of 2014, which appears to have impacted their fuel performance in the Petrol and Convenience channel.

There is strong evidence of continued Channel Blurring, with Quick Serve Restaurants aggressively targeting the Frozen Beverages offer through their $1 dollar promotions, and the Supermarkets actively seeking small sites to develop further their Small Store Format proposition in city centres and capitalise on the continuing shopper need for convenience through location and ease of shop.

Continued low interest rates and substantially cheaper fuel prices towards the end of 2014 went some way to stimulate retail spending and combat the lower Consumer Sentiment recorded in Australia in the latest year. Discounters performed well both in the Grocery and Pharmacy channels as shoppers continue to shop around for value.

Those retailers which are continuing to react to the ever-changing shopper demands appear to be performing well, where as those more reticent to jump on board are not trading so well in the current challenging conditions.

Over the last year, the retail

environment continued its

volatile journey.

overviewAACS State of the Industry Report – 2014 9

+4.5%

Convenience channel performed well in 2014

Convenience Channel Summary

The Convenience channel has performed well in 2014 (+4.5% vs YA), continuing to outgrow the Grocery channel (+2.6%) under competitive trading conditions.

We see the ‘On the Go’ food and drink offer continue to flourish, with interesting innovation from a number of leading retailers, which is successfully encroaching on the traditional café culture in Australia. Hot Coffee continues to perform well, with 31% growth in the last year, driven by 7-Eleven and BP. Food on the Go added an additional $11million to the channel’s growth, with 7-Eleven driving performance through their Krispy Kreme and Munch range, and Mrs Macs performing strongly through increased distribution.

The tobacco excise continues to impact sales’ performance, through substantial price increases. This has led to further evidence of smokers downtrading to brands within the sub value brands. Two years on, the impact of plain packaging on smoking cessation is still open to debate.

Both retailers and suppliers are keenly monitoring the impact of the sugar tax imposition on sugary beverages in Mexico, as other markets consider it as a potential tool to combat increasing trends of obesity and diabetes. Initial findings in Mexico are reporting an estimated 10% decrease in sales in first quarter of the tax introduction.

The cost of petrol theft has seen a significant increase for some retailers in the last year, who are attributing this rise to the high petrol prices throughout most of 2014. This is particularly pronounced in WA and highlights the continued need for the police and politicians to take it seriously and act accordingly.



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TERRORISM ENTERS AUS TOP 5 CONCERNS Consumer confidence recovering, but sLll below confidence levels this Lme in 2013

Source: Nielsen Consumer Confidence Survey – Q4 2014

94 98 96 95

89 85

97 93

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Increasing U7lity Bills

The Economy

Job Security

Australian Consumer Confidence Top Concerns

Health

Terrorism

Consumer Confidence

According to Nielsen’s consumer confidence index, confidence saw a significant decline in the first half of 2014 but has seen some recovery in the second half of the year. Consumers’ top concerns for 2014 focussed on job security and the increasing cost of living. Terrorism made an entrance into the top 5, most likely driven by the siege in Martin Place, Sydney at the end of 2014 and subsequent terrorist attacks overseas.

Australian Consumer Confidence

Source: Nielsen Consumer Confidence Survey – Q4 2014

Top Concerns

Job Security

Increasing Utility Bills

The Economy

Health

Terrorism



4 QUARTER 4 2014 - GLOBAL CONSUMER CONFIDENCE REPORT

GLOBAL CONSUMER CONFIDENCE

60 COUNTRIES – 3-MONTH TRENDQ4-2014 NIELSEN CONSUMER CONFIDENCE INDEX

*SurveyisbasedonrespondentswithInternetaccess.Chinasurveyresultsreflectamixedmethodology.Indexlevelsaboveandbelow100indicatedegreesofoptimism/pessimism.

Source:NielsenGlobalSurveyofConsumerConfidence&SpendingIntentions,Q42014

-5+5

+2-2

-40

-2

+4

-1

-1

-3

-1

-2

+4

-3

+1

-3

-6

-4

+1

-4

-3+6

+5+2

-10+2+1-7-3-4-5+4

-4+3

0-8

+4

-2

-5

-1

-4

-1

-2

0

-1

-2

-3

-2

-2

+2

-2

-3-5

+1

-5

85 ISRAEL

87 LITHU

ANIA

88 SO

UTH AFRICA

89 M

ALAYSIA 89 N

ETHERLANDS

90 EGYPT

SERBIA 52

90 IRELAND

UKRAINE 52

92 NORWAY

GREECE 53

HUNGARY 54

93 AUSTRALIA

PORTUGAL 55

94 UNITED KINGDOM

SLOVENIA

56

94 COLOMBIA

FRANCE 57

95 BRAZIL

FINLAND 61

97 SWITZERLAND

SPAIN 63

98 GERMANY

ARGENTINA 67

100 SINGAPORE

VENEZUELA 70 101 PERUSLOVAKIA 70 101 PAKISTAN

POLAND 72

101 NEW ZEALAND

JAPAN 73

102 SAUDI ARABIA

BULGARIA 75

102 CANADA

BELGIUM 76

103 DENMARK

TAIWAN 77

106 VIETNAM

ROMANIA 77

106 UNITED STATES

RUSSIA 79

107 HONG KONG

CZECH REPUBLIC 8

0

107 C

HINA

LATV

IA

81

111

THAILA

ND

CHILE

81

114

UNITED A

RAB EM

IRATE

S

TURK

EY

82

120

PHIL

IPPI

NES

ESTO

NIA

8

4

120

IN

DON

ESIA

SWED

EN

85

AUST

RIA

85

MEX

ICO

8

5

0

CROATIA

49

+3

129

IN

DIA

IND

EX

COU

NTR

Y

LESS

CONFIDENT

MORE CONFIDENT

-4

SOUTH

KOREA

48

-2

ITALY45

NORTH AMERICA LATIN AMERICA EUROPE AFRICA, MIDDLE EAST ASIA-PACIFIC

96 ( -2 change from Q3-2014 )

GLOBAL CONSUMER CONFIDENCE SURVEY – 60 Countries – 3-Month TrendQ4-2014 Nielsen Consumer Confidence Index

Index levels above and below 100 indicate degrees of optimism/pessimism.

INDEXES ABOVE 100 INDICATE OPTIMISM

GLOBALAVERAGE

Global Consumer Confidence

Global Trends: Nielsen Consumer Confidence

Global consumer confidence ended 2014 with an index score of 96 — a decline of two index points from the previous quarter, which comes after several quarters of positive momentum. While confidence fell slightly in every region in the fourth quarter from the previous quarter, the global index closed the year up two points from last year (94 in Q4 2013). The index, which has been on a slow and steady rise for about two years, is still above a pre-recession level of 94 from third-quarter 2007.

Consumer confidence declined one point in North America (106) and Asia-Pacific (106) in the fourth quarter — the only regions to score above the baseline reading of 100. Confidence also decreased one point in the Middle East/Africa (95), three points in Latin America (88) and two points in Europe (76) from the previous quarter, according to the Nielsen research.

Among the world’s biggest economies, consumer confidence decreased two points in the U.S. (106), four points in China (107) and four points in Japan (73). Conversely, confidence rose one point each in Germany (98) and in the U.K. (94).

Still, year-over-year, confidence scores in 39 of 60 markets improved. And while all global consumer confidence indicators declined in the fourth quarter — job prospects (-3 percentage points), personal finances (-1 pp) and immediate spending intentions (-1 pp) — year-over-year performance was positive.






-5+5

+2-2

-40

-2

+4

-1

-1

-3

-1

-2

+4

-3

+1

-3

-6

-4

+1

-4

-3+6

+5+2

-10+2+1-7-3-4-5+4

-4+3

0-8

+4

-2

-5

-1

-4

-1

-2

0

-1

-2

-3

-2

-2

+2

-2

-3-5

+1

-5

85 ISRAEL

87 LITHU

ANIA

88 SO

UTH AFRICA

89 M

ALAYSIA 89 N

ETHERLANDS

90 EGYPT

SERBIA 52

90 IRELAND

UKRAINE 52

92 NORWAY

GREECE 53

HUNGARY 54

93 AUSTRALIA

PORTUGAL 55

94 UNITED KINGDOM

SLOVENIA

56

94 COLOMBIA

FRANCE 57

95 BRAZIL

FINLAND 61

97 SWITZERLAND

SPAIN 63

98 GERMANY

ARGENTINA 67

100 SINGAPORE


POLAND 72

101 NEW ZEALAND

JAPAN 73

102 SAUDI ARABIA

BULGARIA 75

102 CANADA

BELGIUM 76

103 DENMARK

TAIWAN 77

106 VIETNAM

ROMANIA 77

106 UNITED STATES

RUSSIA 79

107 HONG KONG

CZECH REPUBLIC 8

0

107 C

HINA

LATV

IA

81

111

THAILA

ND

CHILE

81

114

UNITED A

RAB EM

IRATE

S

TURK

EY

82

120

PHIL

IPPI

NES

ESTO

NIA

8

4

120

IN

DON

ESIA

SWED

EN

85

AUST

RIA

85

MEX

ICO

8

5

0

CROATIA

49

+3

129

IN

DIA

IND

EX

COU

NTR

Y

LESS

CONFIDENT

MORE CONFIDENT

-4

SOUTH

KOREA

48

-2

ITALY45


96 ( -2 change from Q3-2014 )




GLOBALAVERAGE






-5+5

+2-2

-40

-2

+4

-1

-1

-3

-1

-2

+4

-3

+1

-3

-6

-4

+1

-4

-3+6

+5+2

-10+2+1-7-3-4-5+4

-4+3

0-8

+4

-2

-5

-1

-4

-1

-2

0

-1

-2

-3

-2

-2

+2

-2

-3-5

+1

-5

85 ISRAEL

87 LITHU

ANIA

88 SO

UTH AFRICA

89 M

ALAYSIA 89 N

ETHERLANDS

90 EGYPT

SERBIA 52

90 IRELAND

UKRAINE 52

92 NORWAY

GREECE 53

HUNGARY 54

93 AUSTRALIA

PORTUGAL 55

94 UNITED KINGDOM

SLOVENIA

56

94 COLOMBIA

FRANCE 57

95 BRAZIL

FINLAND 61

97 SWITZERLAND

SPAIN 63

98 GERMANY

ARGENTINA 67

100 SINGAPORE


POLAND 72

101 NEW ZEALAND

JAPAN 73

102 SAUDI ARABIA

BULGARIA 75

102 CANADA

BELGIUM 76

103 DENMARK

TAIWAN 77

106 VIETNAM

ROMANIA 77

106 UNITED STATES

RUSSIA 79

107 HONG KONG

CZECH REPUBLIC 8

0

107 C

HINA

LATV

IA

81

111

THAILA

ND

CHILE

81

114

UNITED A

RAB EM

IRATE

S

TURK

EY

82

120

PHIL

IPPI

NES

ESTO

NIA

8

4

120

IN

DON

ESIA

SWED

EN

85

AUST

RIA

85

MEX

ICO

8

5

0

CROATIA

49

+312

9 I

ND

IA

IND

EX

COU

NTR

Y

LESS

CONFIDENT

MORE CONFIDENT

-4

SOUTH

KOREA

48

-2

ITALY45


96 ( -2 change from Q3-2014 )




GLOBALAVERAGE






-5+5

+2-2

-40

-2

+4

-1

-1

-3

-1

-2

+4

-3

+1

-3

-6

-4

+1

-4

-3+6

+5+2

-10+2+1-7-3-4-5+4

-4+3

0-8

+4

-2

-5

-1

-4

-1

-2

0

-1

-2

-3

-2

-2

+2

-2

-3-5

+1

-5

85 ISRAEL

87 LITHU

ANIA

88 SO

UTH AFRICA

89 M

ALAYSIA 89 N

ETHERLANDS

90 EGYPT

SERBIA 52

90 IRELAND

UKRAINE 52

92 NORWAY

GREECE 53

HUNGARY 54

93 AUSTRALIA

PORTUGAL 55

94 UNITED KINGDOM

SLOVENIA

56

94 COLOMBIA

FRANCE 57

95 BRAZIL

FINLAND 61

97 SWITZERLAND

SPAIN 63

98 GERMANY

ARGENTINA 67

100 SINGAPORE


POLAND 72

101 NEW ZEALAND

JAPAN 73

102 SAUDI ARABIA

BULGARIA 75

102 CANADA

BELGIUM 76

103 DENMARK

TAIWAN 77

106 VIETNAM

ROMANIA 77

106 UNITED STATES

RUSSIA 79

107 HONG KONG

CZECH REPUBLIC 8

0

107 C

HINA

LATV

IA

81

111

THAILA

ND

CHILE

81

114

UNITED A

RAB EM

IRATE

S

TURK

EY

82

120

PHIL

IPPI

NES

ESTO

NIA

8

4

120

IN

DON

ESIA

SWED

EN

85

AUST

RIA

85

MEX

ICO

8

5

0

CROATIA

49

+3

129

IN

DIA

IND

EX

COU

NTR

Y

LESS

CONFIDENT

MORE CONFIDENT

-4

SOUTH

KOREA

48

-2

ITALY45


96 ( -2 change from Q3-2014 )




GLOBALAVERAGE



Spending Trends

Shoppers have continued to increase savings in the latest quarter, focussing on savings on gas and electricity and spending less on new clothes.

Concerns about job prospects have seen a significant increase on last year, but more than half are still positive about their personal finances in the coming year.

This cascades through a greater intention to take a holiday and also pay off debts and / or loans in the next year.

What drives convenience store choice for shoppers?

2014 was about getting Good Value and Ease of Shop

Low Prices for most items

Food and groceries are good Value for Money

Convenient to get to

Provide Enjoyable Shopper Experience

Always have what I want in stock

Shoppers have continued to increase their awareness of the price of products with 67% (62% in 2013) claiming that they know the price of most items they purchase.

Source: Nielsen Shopper Trends 2014

55% worried about job prospects

63% cut spending in the past year

53% positive about next years finances

48

61

54

55

63

53

but more than half still positive about personal finances in the coming year

and are trying to save on gas and electricity, spending less on new clothes

increasing intention to take a holiday and pay off debts/loans

Q4, 2013 Q4, 2014

Consumer Confidence



Economic Trends

CPI Index According to the Australian Bureau of Statistics, CPI increased by 1.7% in 2014 versus 2.7% in 2013

Significant increases in Alcohol & Tobacco (+7.4%), Education (+5.6%) and Health (+4.4%)

December Key Points

THE ALL GROUPS CPI

– rose 0.2% in the December quarter 2014, compared with a rise of 0.5% in the September quarter 2014.

– rose 1.7% through the year to the December quarter 2014, compared with a rise of 2.3% through the year to the September quarter 2014.

OVERVIEW OF CPI MOVEMENTS

– The most significant price rises this quarter were for domestic holiday travel and accommodation (+5.8%), tobacco (+4.8%) and new dwelling purchase by owner-occupiers (+1.1%).

– The most significant offsetting price falls this quarter were for automotive fuel (-6.8%), audio, visual and computing equipment (-5.2%) and audio, visual and computing media and services (-3.8%).


2012

2.2

2013

2.7

2014

1.7

CPI Index

Alcohol & Tobacco Education Health

7.4% 5.6% 4.4%


FMCG Market Dynamics

Dollar Sales growth in FMCG markets was up 2.5% in 2014, which is similar to levels seen in 2013. The most noticeable difference has been performance in Unit Sales, which have suffered a decline in the last quarter of 2014, in contrast to the consistently positive performance seen in 2013. This is due, in part, to soft Christmas 2014 sales in Grocery. Despite this, sales growth by quarter has been relatively steady over the past 2 years.

Source: IRI-Aztec MarketEdge P&C and Pharmacy, ShopperView

National Employed and Unemployed Levels Trend


FMCG Market Dynamics (%)

Australian Unemployed and Participation Rates (%)

Price ($/Unit) change Nominal growth

2013 20142013 2014

Units change

Q1

2.62.5 2.4

2.9 2.7 2.6 2.6 2.4 2.42.5

Q2 Q3 Q4 Q1 Q2 Q3 Q4

Source: ABS

Jan

6.4 65.4

65.2

65.0

64.8

64.6

64.4

64.2Unemployment rate

Participation rate

Par

ticip

atio

n ra

te

Une

mpl

oym

ent

rate

64.0

6.2

6.0

5.8

5.6

5.4

5.2

5.0

4.8

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2013 2014


December Key Points

TREND ESTIMATES (MONTHLY CHANGE)

Employment increased to 11,646,800.

Unemployment increased to 770,900 from a revised November 2014 estimate.

Unemployment remained steady at 6.2% from a revised November 2014 estimate.

Participation rate remained steady at 64.7% from a revised November 2014 estimate.

Aggregate monthly hours worked decreased 1.8 million hours to 1,602.0 million hours.

SEASONALLY ADJUSTED ESTIMATES (MONTHLY CHANGE)

Employment increased 37,400 to 11,679,400. Full-time employment increased 41,600 to 8,105,300 and part-time employment decreased 4,100 to 3,574,100.

Unemployment decreased 16,200 to 759,200. The number of unemployed persons looking for full-time work increased 6,000 to 551,500 and the number of unemployed persons only looking for part-time work decreased 22,300 to 207,700.

Unemployment rate decreased 0.1 pts to 6.1% from a revised November 2014 estimate.

Participation rate increased less than 0.1 pts to 64.8%.

Aggregate monthly hours worked decreased 7.7 million hours (0.5%) to 1,597.8 million hours.


Unemployment

6.3%

The Unemployment Rate increased to 6.3% at the end of 2014, compared to 5.8% at the end of 2013. As seen in the Nielsen numbers, job security remains a key concern for Australians in 2014.


2.0%Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2.5%

3.0%

3.5%

2013 2014

Australian Interest Rates

As of 05/05/15, RBA Cash Rate at 2.0%

Interest Rates

Excerpt from the Statement by Glenn Stevens, Governor: (7/4/15)

Moderate growth in the global economy is expected in 2015, with the US economy continuing to strengthen, even as China’s growth slows a little from last year’s outcome.

Commodity prices have declined over the past year, in some cases sharply. The price of oil in particular is much lower than it was a year ago. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates. Prices for key Australian exports have also been falling and therefore Australia’s terms of trade are continuing to decline.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns at all-time lows. Financing costs for creditworthy borrowers remain remarkably low.


2.0%Current Cash Rate


Interest Rates

Currently sitting at 2.0% (April 2015)

In Australia the available information suggests that growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit is recording moderate growth overall. Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present… Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

At today’s meeting the Board judged that it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will continue to assess the case for such action at forthcoming meetings.



Population Increase % vs YA

VIC 1.9%

SA 0.9%

NT 1.0%

QLD 1.5%

NSW 1.5%

ACT 1.2%

WA 2.2%

TAS 0.3%


Australian Population Trends

The preliminary estimated resident population (ERP) of Australia at 30 June 2014 was 23,490,700 people.

This reflects an increase of 364,900 people since 30 June 2013 and 68,400 people since 31 March 2014.

Australia’s population grew by 1.6% during the year ended 30 June 2014.

Natural increase and Net Overseas Migration contributed 42% and 58% respectively to total population growth for the year ended 30 June 2014.

All states and territories recorded positive population growth in the year ended 30 June 2014.

– Western Australia continued to record the fastest growth rate of all states and territories at 2.2%.

– Tasmania recorded the slowest growth rate at 0.3%.

Australia’s population 23,490,700 1.6%


Retail Market Overview

Fuel volumes have seen an increase on last year, however this does not include Coles Express, Woolworths Petrol or United. Average Fuel Sales per store are relatively flat, as we see the decline versus performance in 2013 slow down. We see an increase in the average litres per transaction of +1 litres or 2.6%. Cost of Petrol Theft continues to grow in 2014 after a significant increase in the prior year. Industry experts suggest that a combination of high fuel prices and lack of support from Police in combatting this theft has led to the increase, which is a significant and ever growing challenge to Petrol and Convenience retailers.

Fuel Financial Metrics

Fuel Financial Metrics 2014 % Change vs YA

Total Fuel Sales (litres 000s) 11,009,923 +3.6%

Av Fuel Sales per Store per Year (litres 000s) 5,336 +0.5%

Average Fuel Transaction in Litres 36 +2.6%

Cost of Petrol Theft per store per week $220.58 +6.8%

overview

Fuelsales

+3.6%+2.6% increase in average litres per transaction

Petrol theft +6.8%

Average price per litre $1.49, +1¢

(Versus Year Ago)



Woolworths do provide fuel performance results through their annual report and in the first quarter of FY 2015, fuel volumes were down -3.6% and -4.5% in dollar sales. Grant O’Brien said the company had suffered from the restriction on shopper docket fuel discounts, referencing in the report “the cycling of higher fuel discount activity” vs the prior year.

Coles Express reported headline fuel volumes as declining by -3% during the first quarter and comparable fuel volumes declining by -4.6 per cent, with lower fuel prices during the quarter more than offset by reduced fuel discounts following the December 2013 undertaking to the Australian Competition and Consumer Commission. (source AFN 03/11/2014).

Both supermarkets reached an enforceable deal with the Australian Competition and Consumer Commission (ACCC) last year to limit petrol discounts to 4 cents per litre, amid concerns supermarket subsidised heavy fuel discounting was hurting independent service stations.

That said, subsequent to this agreement:

Woolworths found to have breached ACCC fuel dockets deal

By consumer affairs reporter Amy Bainbridge Updated 14 Apr 2014,

“The Federal Court has found supermarket giant Woolworths has breached an undertaking on fuel shopper dockets, but that Coles did not break the agreement….

In February, the ACCC took court action, alleging the supermarkets had breached the agreement by offering bundled discounts.

The Federal Court today found that Coles did not breach the agreement, because it funded its discounts of up 14 cents a litre primarily through its Coles Express stores located within the service stations.

“Since 1 January 2014, the 4 cents per litre offer has been wholly funded by Coles Express,” said Justice Alan Robertson in his judgment.

“Prior to 1 January 2014, Coles Supermarkets typically bore 75 per cent of the cost of the offer by way of internal rebate from Coles supermarkets to Coles Express, although this proportion changed from time to time.”

…However, the court said Woolworths breached the agreement for the first three months of this year when it offered discounts of up to eight cents a litre.




“It follows, in my opinion, that the 8 cents per litre discount on the single acquisition at retail of fuel was contingent on the acquisition of Woolworths supermarket (non-fuel) goods or services since, as a matter of the terms and conditions of the offer, the customer could not obtain that discount absent the customer’s satisfying the prerequisite,” Justice Robertson explained.

Woolworths has welcomed the “clarity” created by the court’s decision, saying it has already changed the structure of its fuel discounts.

“We said at the time when we sought a declaration from the Federal Court that we accepted we needed to make our discounts independent of each other, and this change was implemented some time ago,” the company noted in a statement.

“Woolworths will continue to offer 8 cents a litre discounts on petrol. We are pleased that the court’s decision backs our position.”

“The ACCC welcomes the decision that offering a 4 + 4 cent fuel discount conditional on supermarket purchases breaches the undertaking to the ACCC,” he noted in a statement.

“We are disappointed however that the Court has found that Coles and Woolworths can bundle a supermarket fuel offer with a petrol station offer. We will carefully consider the judgment and its implications for competition in fuel markets and any detrimental price impact on fuel consumers.”

Mr Sims voiced his concerns about fuel discounts in July last year, saying he believed they could lead to higher fuel prices in the longer term.

“If these shopper dockets continue at these levels, it’s going to be very hard for other players to compete and we may end up with just two companies in the country selling petrol,” he said at the time.”




The average price of fuel in 2014 was $1.49, which was 1 cent per litre higher than 2013. That said, fuel prices saw a significant decrease at the end of 2014. Pricing is consistently higher in Northern Territory and Tasmania, and lower in Victoria and South Australia.

With a heavier focus on pricing disparities between metro and regional areas, the ACCC has been granted additional powers to investigate this in more detail.

“Allegations of petrol price gouging in rural areas prompts ACCC scrutiny” Source Sydney Morning Herald 15 January 2015

The Australian Competition and Consumer Commission has unveiled its new plan to scrutinise petrol prices across the country, as the price discrepancy stretched to more than 40 cents more per litre between cities and some regional areas.

ACCC Chairman Rod Sims said the new monitoring process would “go a long way” to determining why the gap between petrol prices in regional areas and metropolitan areas had tripled, while prices in Sydney and Melbourne had dropped by 45 cents a litre since July.

Average Price of Litre of Petrol (cents)

112 125 125

142

120 126

141 144 148 149

0.0

20.0

40.0

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80.0

100.0

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140.0

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180.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Average Price of Litre of Petrol (cents)

NSW VIC QLD SA WA NT TAS Na9onal



-‐5

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90

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Average unleaded petrol price per litre (Average -‐ Aust. Capital Ci6es) vs % Change in Value Sales

Avg petrol price -‐ Australia Metro © (LHS) Convenience Growth (%) (RHS)

Source: Nielsen and Motormouth.com


“Under the new arrangement, fuel prices in all capital cities and 180 regional centres will be monitored, and the ACCC’s power to compel information will be used to examine petrol companies’ price-structuring systems.

Determining the cost of transferring fuels to regional centres, as well as storage and distribution costs would be crucial to working out why some places had large gaps between the wholesale price and pump price, Mr Sims said.

“I think we will be able to put the producer on the spot in the way they have never been before,” he said.

But with the global oil price hitting a six-year low this week, these reasons alone did not justify the current price discrepancy, he said.”

Average unleaded petrol price per litre

(Average - Aust. Capital Cities) vs % Change in Value Sales


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1

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5

7

90

100

110

120

130

140

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan JanFeb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2013 2014 2015


Site Statistics

The Convenience channel comprises of 6070 stores. The numbers with an asterisk are estimated numbers based on information collected from Retailer websites and supplier data. BP have sold off some stores in South Australia, which Peregrine (On the Go) have brought into their portfolio to become a 126 store network in 2014.

The channel has a diverse mix of store ownership models. Retailers such as BP, On the Run, Woolworths Petrol, Coles Express and some Caltex stores have a company owned model, whereas Retailers such as 7-Eleven and Caltex have a franchised operation. There continues to be a mix of dealer owned and operated sites under the UCB Buying Group.

Store Numbers: Retailer Contribution

Retailer 2014 2013 Difference % Difference

7-Eleven 611 595 16 3%

AA Holdings 51 52 -1 -2%

APCO 22 19 3 14%

BP COCO 185 199 -14 -8%

BP Regional 130 157 -27 -21%

Caltex All Star 595 562 33 6%

Coles Express 646 627 19 3%

Freedom Fuels 41 43 -2 -5%

Independents* 667 640 27 4%

New Sunrise 764 779 -15 -2%

Night Owl 62 63 -1 -2%

On the Run (Peregrine) 126 102 24 19%

Puma Energy 206 230 -24 -12%

UCB 1058 1126 -68 -6%

United (including Distributors)* 398 407 -9 -2%

Woolworths Petrol 508 482 26 5%

TOTAL 6070 6083 -13 0%



Store Statistics

After experiencing a reduction in site labour costs in 2013 (as a % of sales), most retailers have seen an increase in 2014 back to 2012 levels. Staff turnover remains an industry challenge at 44% and a particular focus for Retailers concentrating on the ‘On the Go Consumption’ proposition which somewhat relies on retaining quality staff to deliver and enhance the overall shopper experience.

Source: Retailer Contribution

Despite the change to regulations to limit credit card surcharges to “the reasonable cost of card acceptance” by the Reserve Bank in 2012, the convenience channel continues to reject this change. Only a small proportion of two reported retailers have chosen to pass on any form of credit card surcharge in 2014.

Retailer 2014 % change 2013 2012

Site labour costs as a % of site sales (total fuel and merchandise sales)

3.6% +10.2% 3.3% 3.5%

Staff turnover % at site level 43.9% -0.3% 44.0% 45.2%

Total store costs of running your outlets as a % of turnover

6.7% -3.0% 6.9% 7.1%

Site Labour costs

Staff turnover

Total store costs (% of turnover)

10.2%

0.3%

3.0%



Merchandise Transactions

The average numbers of merchandise customers visiting a convenience store each day has increased by 1% in 2014, from 489 to 492 per store per day, across the Retailers who contributed this information. This equates to 3 more transactions per store per day.

The amount spent per transaction on merchandise has increased +6% to $8.48 ($8.04 in 2013).


Average merchandise transactions 492, 1% increase

Amount spent per transaction $8.48, 6% increase

3 transactions per store per day more than last year.

PER STORE PER DAY

Average customers visiting a convenience store each day has increased.

Amount spent per transaction on merchandise has increased.

1%

6%


Convenience Merchandise Performance

Channel Performance

The Convenience channel value increased by 4.5% in 2014, up from the growth of 3.7% in 2013. It is now estimated to be worth $7.6B in the latest year. However, dollar sales excluding Tobacco were up 2.1%, highlighting the continued importance of Tobacco to P&C channel sales.

The main contributor to growth in Non-Food, as it was in 2013, was Tobacco, despite volume increasing only 0.3%. The additional sales generated this year in Tobacco contributed more than 100% of the Non Food growth. The price increases from excise tax was the main driver of this growth, despite shoppers continuing to trade down to more value offers. This means that Non Food excluding Tobacco sales actually declined by -0.3% in 2014, primarily driven by the decline in sales of Printed Materials. The older demographic is the key shopper group for newspapers and magazines, and this is a group that the channel does not actively pursue.

The slower 2014 growth rate in Food vs 2013 can be attributed to Ready To Drink (+2.5% growth, down from +4.6% in 2013), and Ice Cream (+4.7% growth, down from +8.8%). However one category that bucks this trend is Take Home Beverages (+8.7% growth, up from +6.2%), driven by stronger sales of V and Red Bull multipacks. Confectionery’s performance also improved (+1.0% growth, recovering from the -1.0% decline seen in 2013). Leading the way is Extra chewing gum, particularly in both Caltex and 7-Eleven.

performance

+4.5%

Convenience channel value increased by 4.5%


1

2

3

Convenience Channel Performance

Category Value ($000,000s) Share Share +/- Growth

Total Convenience $7,607 100.0% 4.5%

Total Non Food $4,285 56.3% 0.6% 5.5%

Total Food $3,322 43.7% -0.6% 3.2%

Tobacco $2,841 37.3% 1.5% 8.9%

Ready To Drink $1,486 19.5% -0.4% 2.5%

Take Home Beverage $333 4.4% 0.2% 8.7%

Communications $645 8.5% -0.2% 1.8%

On The Go Food $339 4.5% -0.1% 3.0%

Ice Cream $165 2.2% 0.0% 4.7%

Take Home Milk $161 2.1% 0.0% 3.8%

Snackfoods $164 2.2% 0.0% 3.7%

Confectionery $491 6.5% -0.2% 1.0%

Medicinal $34 0.5% 0.0% 13.0%

Bread $49 0.6% 0.0% 4.2%

Grocery $85 1.1% 0.0% 2.3%

Take Home Food $49 0.6% 0.0% 3.8%

Personal Care $38 0.5% 0.0% 0.55

Household $8 0.1% 0.0% 1.1%

General Merchandise $326 4.3% -0.2% -0.8%

Car Accessories $206 2.7% -0.2% -3.2%

Printed Materials $187 2.5% -0.3% -6.8%

Source: IRI-Aztec MarketEdge P&C – MAT ending 31/12/2014 + Retailer Contribution



1

2

3

Grocery PerformanceIn 2014, Grocery channel sales grew by +2.6%, slightly up on 2013 growth of +2.3%. Growth was consistent across Food and Non Food. As we saw in the Convenience channel, the primary contributor to growth in Non-Food Grocery was Tobacco. Within Food, Dairy Products contributed strongly to growth, driven by Eggs. Note that the data excludes Fresh Meat, Fruit and Vegetables.

Category Value ($000,000s) Growth Share of Growth

Total Grocery $57,140 2.6%

Total Non Food $20,401 3.6% 50%

Total Food $36,739 2.0% 50%

Tobacco $8,306 8.3% 44%

Dairy Products $7,511 3.2% 16%

Pet $2,584 4.6% 8%

Chilled Meals & Snacks $1,428 7.1% 7%

Ice Cream & Desserts $1,428 6.7% 6%

Snacking $4,146 2.0% 6%

Ambient Beverages $5,273 1.5% 5%

Confectionery $2,011 2.2% 3%

Bakery $2,318 1.7% 3%

Dry Grocery $9,320 0.4% 2%

Frozen Meat & Vegetables $1,926 0.9% 1%

Baby $739 2.0% 1%

Beauty $1,811 0.4% 0.5%

Chilled Beverages $288 0.6% 0.1%

Frozen Meals & Savouries $1,088 0.1% 0.1%

General Merchandise $1,206 0.0% 0.0%

Household Products $3,742 -0.3% -1%

Health $1,593 -1.1% -1%

Front of Store $420 -5.0% -2%

Source: IRI-Aztec ShopperView – MAT ending 31/12/2014. Figures do not include Fresh Meat, Fruit & Vegetables.



46.728.1

Ready To Drink Beverages

Tobacco

On The Go Food

Confectionery

Take Home Milk

Communications

General Merchandise

Grocery & Household

Ice Cream

Snackfoods

Car Accessories

Services

News & Mags

Bread

20.227.3

47.411.2

45.97.7

32.04.5

8.84.4

45.63.4

35.22.8

46.02.5

45.82.4

42.72.0

39.11.6

13.31.5

0.626.2

% Category Margin % of Total Store Margin

Category Margin

Total Category margin was slightly up (+0.9%) in 2014, from 32.6% in 2013 to 32.9% this year, with the mix of margin continuing to change based on category growth performance.

Source: Retailer Contribution

The store margin contribution of Tobacco continues to grow, as do less traditional convenience categories such as Grocery and Household, and Milk. We see the traditional heartland categories of Beverages and Confectionery experiencing some decline in their percentage contribution to store margin.

Equally, we see that the Grocery & Household and Milk margins have seen growth in 2014, whereas Communications, Beverages, Printed Materials and On the Go Food have all seen some margin erosion versus 2013 retailer data contributions.


+0.9%

Total Category margin increased to 32.9% this year

Category Margin (%)


Category Overview

1. Beverages

The Beverages category grew by +3.5% in 2014, although the growth has slowed from +4.9% in 2013. Take Home Beverages sales were up 8.7%, while Ready To Drink sales increased 2.5%, which combined added more than $62 million in category sales to the channel.

Source: IRI-Aztec MarketEdge P&C, MAT ending 31/12/2014

Below are some promotional dynamics for the Beverages category (excluding Hot Drinks):

% Litres sold on promotion increased from 24% in 2013 to 33% (2014), off the back of 45% growth in promotional volumes.

The key segment driving this is Energy Drinks, where promotional volume increased 76%, despite total litres sales increasing 6%.

That said, all Beverage segments apart from Juices relied on promotional volume to generate most or all of their volume growth.

As a result, all but 2 segments experienced promotional volume growth of at least 25% in 2014.

Only Packaged Water achieved non-promotional volume growth, due in the main to Private Label Water launches in Coles Express and Woolworths Petrol.


AUD$ Dollar Growth % YA

Beverages category

$62 million category sales

-2.3 -7.5

-2.1 -1.6

1.5 10.4

4.1 10.3

31.0 3.5

Carb Soft Drinks

FCB

Flav Milk

Other

Water

Sports

Energy Drinks

Dedicated Ice Coffee

Hot Drink

Beverages

AUD$ Dollar Growth % YA (segment order based on contribution to category growth)

+3.5%

-2.3 -7.5

-2.1 -1.6

1.5 10.4

4.1 10.3

31.0 3.5

Carb Soft Drinks

FCB

Flav Milk

Other

Water

Sports

Energy Drinks

Dedicated Ice Coffee

Hot Drink

Beverages

AUD$ Dollar Growth % YA


1. Beverages

At an overall level, the major contributors to Beverages’ growth have been Hot Drinks (driven by the retailers’ coffee offer) and Dedicated Iced Coffee. Shoppers are purchasing fewer ‘traditional’ P&C Beverages such as Carbonated Soft Drinks and FCB, the latter of which has been impacted by stronger competition from Quick Serve Restaurants’ $1 dollar promotions (an example of which is Mc Donald’s ‘More bang for your buck’ promotion).

With increasing focus from the World Health Organisation on what ‘healthy’ levels of sugar consumption should be, there is strong interest in understanding what the impact has been since the introduction of a sugar tax on sugary beverages in Mexico a year ago. In a country which has some of the highest obesity and diabetes rates in the world, initial reports are suggesting that the tax has been successful in reducing consumption. Something worth considering if this is ever introduced here in Australia…:

A year later, preliminary data suggest consumption rates are falling, though it’s too early to say precisely how much, said Barry Popkin, who teaches global nutrition at the University of North Carolina in Raleigh and is working with Mexico’s National Institute of Public Health to study the country’s soda tax.

The institute’s earliest results suggest in the first three months of 2014, purchases of sugary drinks dropped by 10 percent from the same period in 2013. “The results were pretty positive. In essence there was a reduction in sugary beverage intake, and there was some increase in healthier drinks, like water,” Popkin said.

Source: International Business Times (11 Jan 2015)


“”


+31%Hot Drink Sales

$29 million additional sales

1. Beverages

Hot Drink sales in 2014 grew +31%, equating to $29 million of additional sales, or almost half of all Beverages’ dollar sales growth. 7-Eleven has been leading the way in the Hot Drink segment, followed by BP.

It is estimated that the Convenience channel currently has less than 3% share of the estimated $4.3 billion coffee sales for all channels for 2014-15 (source: IBISWorld). Given that Convenience shoppers have recently ranked coffee as the number 2 reason why they visit a Convenience store, and that they rate the category very favourably, this presents the channel with a great opportunity to continue to focus on and communicate their Coffee offer.

Dedicated Ice Coffee: after achieving 12.4% growth in 2013, the segment has continued to grow strongly, with sales up 10.3% (almost $21 million) in 2014. Dare Iced Coffee is responsible for much of this growth, as a result of increased promotional activity. In addition, there is stronger competition in this segment due to the launches of Barista Brothers and V Iced Coffee, which has accelerated sales growth in this segment to +16% in the last quarter of 2014.

Energy Drinks segment is currently growing at 4.1%. The key contributors to increased sales are both V and Red Bull multipacks, who have increased their sales through increased promotional activity versus 2013. As a result, growth of all Energy Drinks Multipacks increased from +5% in 2013 to +34% in 2014. While the growth in singles has slowed recently, shoppers are consuming more (and spending more on) Energy Drinks, suggesting that Multipack promotions have been successful in driving Energy Drinks consumption, albeit at a cheaper price/litre.


Dedicated Iced Coffee sales growth

Energy drinks segment growing

10.3%

4.1%


2. Tobacco

The value of the tobacco category continues to grow, increasing 8.9% in 2014. This growth added $232 million in value to the category.

Further high tax increases have continued to put pressure on tobacco consumers to shop around for better value. This has led to lower price segments growing in both volume and brand footprint.

More traditional smaller pack size shoppers are now seeking out larger pack sizes and more shoppers are moving toward RYO (Roll-Your-Own Tobacco) as there is value found both in retail price but also in being able to control how much tobacco is used in each cigarette.

Source: IRI-Aztec MarketEdge P&C – MAT ending Dec 2014 vs MAT ending Dec 2013

This downtrading trend is highlighted when we look at the top 5 brands for volume in Convenience from 2012 compared to 2014. In 2012 there were no sub value brands present in the top 5 volume brands. In 2014 the 2nd biggest volume brand in convenience was JPS.


8.9%

$232 million in value to category

Tobacco Category growth

Volume % Growth 2014 vs 2013

43%Cigarette Sub Value

RYO

Cigarette Mainstream

Cigarette Premium

Cigarette Value

15%

-16%

-23%

-23%


2. Tobacco

Source: IRI-Aztec MarketEdge P&C (Volume) – MAT ending Dec 2012 and MAT ending Dec 2014

Tobacco sales have also benefitted from more NPD sales in 2014 vs 2013. New product sales in 2013 were $22 million, however the 2014 new product sales were $56 million, driven by the launch of Rothmans.

Quick Facts: Tobacco Shopping in Convenience

Around 10% of cigarette/tobacco smokers use the Convenience channel as their main place of purchase.

While still small, usage of the convenience channel is growing especially for the Roll Your Own tobacco category.

Source: Imperial Tobacco Profiler Tracking (MAT Dec’14)

24% of Convenience Organised shoppers are finding it hard to shop for cigarettes/tobacco these days.* In general, this is driven by legislation such as retail display bans and plain packaging and lack of detail on price boards or at point of sale. This means the consumers are finding it hard to know what brands/products are available.

22% of Convenience Organised shoppers will always compare prices at various stores for cigarettes/ tobacco before they decide where they will be buying their tobacco.*

19% of Convenience Organised shoppers compared the prices of different brands on their last cigarette/tobacco purchase.*

* Imperial Tobacco Profiler Tracking (Nov- Dec’14)


2012 Rank 2014 Rank Cigarette Brand

1 1 Winfield

8 2 JPS

2 3 Peter Jackson

3 4 Longbeach

4 5 Benson & Hedges

Tobacco New Product Sales

56 million

$34 million increase in 2014

Tailor made cigarettes Roll your own tobacco

9.1%10.5%

Dec 14Dec 14

7.3%9.3%

Dec 13Dec 13


2. Tobacco

Plain Packaging: Two Years On

The 1st December 2014 marked the 2 year anniversary of the introduction of Plain Packaging in Australia. After two years, the data from Australia shows that plain packaging is failing to meet its policy objectives:

Plain packaging has not reduced youth smoking.

Plain packaging has not made Graphic Health Warnings (GHWs) “more effective”.

Plain packaging has not reduced volumes or smoking rates amongst adults.

Youth Smoking

One of the key drivers for introducing plain packaging was to stop youth smoking. Mike Daube, Director of Public Health Advocacy Institute and Professor of Health Policy at Curtin University said “Plain packaging will stop children from taking up the habit.” A submission from Cancer Council Australia and the National Heart Foundation of Australia to the Senate Enquiry stated, “Plain Packaging is likely to… reduce youth smoking and decrease smoking uptake by youth.”

Fact: Slight increase in youth smoking

Breaking a long-term trend, the smoking rate for 12-17 year olds is up from 3.8% to 5.0% between 2010 and 2013. This represents a 32% increase.

(Source: Australian Government National Drugs Strategy Household Surveys, 1991 – 2013, Australian Institute of Health and Welfare).


How does the convenience shopper compare prices of different brands?

66%

19%

1% 1%

Price board On shelf Others Can’t remember

44%

Asked retailer


2. Tobacco

More Effective Graphic Health Warnings (GHWs)

The Plain Packaging Act itself states that plain packaging increases “the effectiveness of HWs on retail packaging of tobacco products.” Once again Cancer Council Australia and the National Heart Foundation of Australia supported this ideology, “Plain Packaging is likely to: make health warning messages on packs more prominent and enhance recall.”

Fact: Graphic Health Warnings are not “more effective”

Data from the New South Wales Cancer Institute shows that health warnings are less salient for consumers since plain packaging was introduced. In 2014, 59% of smokers said they did not believe that the GHWs on packs encouraged them to stop smoking. This number has increased from 53% in 2012, suggesting that since the introduction of plain packaging, fewer smokers believed that warnings encouraged them to quit.

(Source: Economics analysis of New South Wales Cancer Institute Tobacco Tracking Survey (CITTS) obtained through FOI)

Reduction in Volumes or Smoking Rates

The Plain Packaging Bill states that a major aim of the legislation is “discouraging people from taking up smoking or using tobacco products.” Nicola Roxon, the Australian Minister for Health 2007-2011 and Attorney-General 2011-2013 said that plain packaging “might actually achieve its aim – which is to reduce the level of smoking.” Once again Mike Daube, Director of public Health Advocacy Institute and Professor of Health Policy at Curtin University supported the Bill saying, “it will help to reduce smoking in adults.”

Fact: No real change to people smoking

Prior to plain packaging there was a steady and slow natural decline in volumes of around 3% per year. Over the first 12 months of plain packaging, industry volumes increased for the first time in a decade, by almost 1%.



2. Tobacco

The long-term decline in adult smoking rates has not accelerated since the introduction of plain packaging. In fact, 2013 data shows a 1.8% annual increase in smoking rates before reverting to the long-term decline trend in 2014.

(Source: Smokefacts – Roy Morgan Incidence Report, access requires subscription)

At the time of going to print the Federal Government are currently conducting a Post Implementation Review (PIR) to check whether the Plain Packaging Act met its objectives.

Illicit Tobacco

The exorbitant rate of excise (additional 4 x12.5% ad-hoc excise) on tobacco is affecting the stability of the legal tobacco market. The latest KPMG Illicit Tobacco in Australia Report shows the share of illicit tobacco has now grown to 14.3% of the total market, costing an estimated $1.2 billion dollars in lost revenue for the government.

Roman Quaedvlieg, CEO of the Australian Customs and Border Protection Service, said recently “Serious and organised crime will use the same infrastructural spine upon which it imports prohibited drugs to import tobacco. I put (org crime role in illicit tobacco) down partially to the fact that the excise in duty payable on tobacco is increasing.”

Significant increases to the price of a packet of cigarettes is a measure which drives the illegal trade in tobacco. Australia has the highest cigarette prices within the Asia Pacific region, and this large price differential between Australia and other relatively nearby markets creates smuggling opportunities for those involved in the illicit market.

High duty rates make legitimate tobacco products expensive for consumers. As a result, those on lower incomes are more likely to move from legitimate tobacco products to illegal tobacco products (which would typically cost between 50-75 per cent of the price of legal tobacco products).

The report found that more branded illegal cigarette packs are being smuggled into Australia than ever before. Contraband cigarettes are now the largest component of the black market.

The report highlights that:

The illegal tobacco trade is up from 13.5% to 14.3% of total consumption in the 12 months to June 2014.

The Australian Government and taxpayers are losing $1.2 billion in unpaid excise annually.

Contraband cigarette consumption (imported to Australia without excise paid) is growing.

A pack of 20 cigarettes is up to 7 times more expensive in Australia than South Korea.


+14.3%

Illegal tobacco trade has increased from 13.5% to 14.3%


3. Communications and Travel

After achieving 5.8% growth in 2013 following several years of double-digit decline, Communications’ sales continued to grow, increasing at 1.8% (almost $13 million) in 2014. Sales of Myki, which was largely responsible for the turnaround in Communications’ performance in 2013, have stabilised recently and consequently, category growth has softened.


Phone Card growth has mostly come from the launch of E-Pay Ukash in BP in September 2013. As a result, BP’s percentage growth for Phone Cards far exceeded the national growth.

A product that is attracting shoppers to the store is the launch of OPAL travel tickets, primarily in 7-Eleven NSW. As with Myki in VIC, sales of Travel Tickets are higher than sales of most categories in 7-Eleven in the State of NSW. Therefore retailers could look for these travel card contract opportunities to add significant sales to their business, and footfall to their stores.


National P&C Value (000s) Growth Actual YA

12,905Communications

Phone Card

Mobile Access

Tickets

Pre-paid Net

Connection Dev

Recharge Card

17,159

12,258

4,627

-1,050

-1,185

-18,843


4. Confectionery

Growth in Confectionery sales was a modest 1.0% increasing sales by $4.6 million, although this is an improvement on the prior year’s dollar decline of -1.0%.

(segment order based on contribution to category growth)


Sugar Confectionery sales growth improved from -1.7% in 2013 to a positive +2.4% in 2014. The key driver of the improved performance is Gum, with growth of +1.0% in 2014 vs -6.1% in 2013. Extra was the brand mostly responsible for this change, due to new line launches (pellets and bottles). Sugar Bags Singles have generated the greatest sales growth for the Sugar segment in 2014, off the back of increased distribution of Haribo, and stronger promotional activity for Starburst Party Mix.

Chocolate Confectionery sales growth in 2014 was -0.2%, down from the previous year’s growth of +0.5%. While Chocolate Bars performance continues to be affected by the deep discounting in supermarkets, Chocolate Bags have been gaining sales. The Maltesers promotion program in 2014 was stronger than in 2013, driving growth for the brand and segment.


Value Growth % YA

1.0Total Confectionery

Choc Bags Single

Other Choc

Sugar Bags Single

Mints

Gum

Other Sugar

Choc Bar King Size

Choc Bar Medium Size

10.5

3.6

5.1

3.0

1.0

0.5

-2.5

-6.2


5. Food on the Go

Sales in 2014 increased 3.0%, down from 2013 growth of 4.6%. Food on the Go sales increased $11 million in 2014.

(segment order based on contribution to category growth)


The category growth was driven by Fresh Cakes, where sales have achieved double-digit growth in the past 2 years. In particular, 7-Eleven has performed strongly through their focus on both Krispy Kreme and their Munch range. Hot Pastry growth has resulted from new ranging of Mrs Macs in 7-Eleven from mid-2013, and wider distribution of Mrs Macs in BP at around the same time.


Value Growth % YA

Total On The Go Food

Fresh Cakes

Hot Pastry

Produce

Biscuits

Sandwiches

Food Service

3.0

19.9

2.1

-5.0

-47.2

-0.8

-12.4



5. Food on the Go

We know that Food on the Go has been identified as a major opportunity for the Convenience channel, with some fantastic innovation being trialled by a number of the leading retailers in this space. Let’s have a look at the Jack & Co concept in some detail as a great example of strong execution in this area.

The Jack & Co concept is less reliant on tobacco and traditional convenience store items such as confectionary and drinks, instead focusing on the fresh food category. While convenience stores have traditionally focused on packaged branded goods, Jack & Co aims to create a point of difference by offering customers fresh and healthy food. Jack & Co also serves barista-made coffee, bread and rolls baked in-store, and freshly made salads and sandwiches, as well as having a top-up grocery offer.

Fruits, nuts, cereals, cold meats, sauces, magazines, and Ben and Jerry’s ice creams all feature in the store, while those on a gluten-free diet are well catered for, with a range of gluten-free baked and snack foods. Jack & Co aims to connect with customers in more interactive ways including via Facebook and Pinterest, and has also developed a mobile ordering application.

The app allows customers to order coffee and food so that it is ready when they arrive at the store (Source: Manning River Times, April 2013).


Category in the Spotlight: Medicinal

Although Medicinal sales in 2013 were up 7.3%, sales growth accelerated to +13.0% in 2014, adding almost $4 million in category sales.

The key drivers of the stronger growth this year were wider distribution of both Nurofen and Panadol Optizorb. The growth achieved in Medicinal over the past 2 years is very encouraging, albeit off a small base.

Although shoppers naturally gravitate to pharmacies or even the grocery channel for their medical needs, the later opening hours of Convenience retailers do present the channel with an opportunity to tap in to ‘distress purchase’ shopping mission.

Given that the pharmacy channel is under increasing pressure from supermarkets, and that the ‘Health’ department performance in Supermarkets is soft, Convenience retailers could explore the opportunity to offer more specialised medicinal products at a premium price.

$4 million in category sales

Medicinal sales increased


+13.0%


Supplier Channel Performance

Source: IRI-Aztec MarketEdge P&C – MAT ending 31/12/2014

Of the top 10 suppliers to P&C, seven achieved growth, while four of those exceeded the average P&C channel growth.

The rank order largely reflects the rank in 2013, with the two key differences being Frucor replacing Lion Dairy & Drinks as the 6th-largest supplier, and Red Bull replacing Schweppes as the 9th-largest supplier.

The impact of the tobacco excise, and the consequent downtrading to sub value brands, resulted in Imperial Tobacco achieving very strong growth (44.7%), while Philip Morris lost sales.

Frucor Beverages sales increased 11.9% this year, off the back of a number of new line launches (V Kaboom, Maximus and others).

EPay recovered from lost sales in 2013 to register a growth of +3.4% in 2014.


Supplier Rank Value Growth % YA

BAT 1 4.2%

Philip Morris 2 -0.8%

Coca Cola 3 -1.8%

Imperial Tobacco 4 44.7%

Epay 5 3.4%

Frucor 6 11.9%

Lion Dairy & Drinks 7 -1.8%

Parmalat 8 4.9%

Red Bull 9 6.7%

Schweppes 10 1.5%


NACS 2014 State of the Industry Report Highlights

Fuel Contributes to a Successful, Historic Year for Convenience

CHICAGO – Buoyed in part by low fuel prices, the U.S. convenience store industry had record in-store sales of $214.9 billion in 2014, higher than overall industry sales in 1998, according to figures released today by NACS. Overall industry sales for 2014 reached $697.5 billion, evidence that the value of convenience continues to resonate with consumers.

The industry’s 2014 numbers were announced at the NACS State of the Industry Summit, a two-day conference that reviews and analyses the industry’s key economic indicators.

The industry’s in-store sales of $214.9 billion represent an increase of 4.6% over 2013, which was itself a record year. Although more gallons of fuel were sold in 2014 than 2013, total industry fuel sales decreased by 1.8%, due to gasoline prices that were 4% lower in 2014 than the previous year.

Even though fuel sales decreased, the link between fuels and convenience retailing continues to grow. Overall, 83.5% of convenience stores (127,588 total) sell motor fuels, a .7% increase (930 stores) over 2013, according to the 2015 NACS/Nielsen Convenience Industry Store Count. The growth of convenience stores selling motor fuels is double the overall growth in the industry, as fuel retailers add convenience operations and convenience retailers add fuelling operations. The U.S. convenience store count increased to 152,794 stores as of December 31, 2014, an almost 1% increase (1,512 stores) from the year prior.

Convenience stores also account for 33.9% of all retail outlets in the United States, according to Nielsen, which is significantly higher than the U.S. total of other retail channels including drug stores (41,799 stores), supermarket/supercentre (41,529 stores) and dollar stores (26,572 stores).

In-store sales growth in 2014 was driven by sales gains in both foodservice and merchandise, with the highest growth in commissary (e.g., packaged sandwiches, deli salads) up 9.8%, salty snacks (up 8.5%) and packaged beverages (up 6.5%).


Founded in 1961 as the National Association of Convenience Stores, NACS (nacsonline.com) is the international association for convenience and fuel retailing. The U.S. convenience store industry, with more than 152,000 stores across the country, posted $697.5 billion in total sales in 2014, of which $482.6 billion were motor fuels sales. NACS has 2,100 retail and 1,600 supplier member companies, which do business in nearly 50 countries.



Here’s how in-store sales were broken down in 2014:

Centre of the store (candy; sweet, salty and alternative snacks): 10.6%

Meanwhile, foodservice accounted for 33.5% of gross profit dollars, a 4.4 percentage point increase over 2013. While tobacco products constituted 35.9% of in-store revenue dollars, they accounted for only 17.3% of gross margin dollars. Packaged beverages were third, accounting for 18.5% of gross profit dollars.

The industry’s 2014 metrics are based on the NACS State of the Industry survey powered by its wholly owned subsidiary CSX, the industry’s largest online database of financial and operating data. Complete data and analysis will be released in June in the NACS State of the Industry Report of 2014 Data.


2014 In-Store Sales

35.97.3

19.415.4

10.6

11.4 Tobacco

Food Service

Packages Beverages

Centre of the Store

Beer

Other



Inside (Merchandise) Sales performing on par with the Convenience channel here in Australia, but Fuel sees a decline in the last year. The US channel has also enjoyed a very strong increase in Pretax Profit in 2014.

Fuel Consumption is = Average Monthly Barrels per Day (Thousand Barrels)


Key Industry Metrics

In-Store Contribution (%)

Food service continues to be a strong contributor to overall merchandise profit, now accounting for a third of GP$ and close to a fifth of Sales ($) in 2014.

17.335.93.97.3

33.5

19.4 18.515.4

12.810.6

14.011.4Tobacco

Food Service

Packages Beverages

Centre of the Store

Beer

Other

Sales GP$

2013: 29.12013: 18%

8.8% for stores selling beer14.6% for stores selling beer

Snapshot 2013 2014 % Change

Store Count 151,282 152,794 1.0%

Inside Sales $204.0B $214.9B 4.6%

Fuel Sales $491.5B $482.6B (1.8)%

Total Sales $695.5B $697.5B 0.1%

Pretax Profit $7.1B $10.2B 47.3%

Credit Card Fees $11.2B $11.4B 2.3%

US Gas Consumption (bbl/day) 8.75M 8.84M 1.1%

Employees 2.20M 2.43M 10.6%

Fuel Margin (cpg) 18.7¢ 22.2¢ 18.8%

Net of CC Fees 13.4¢ 16.9¢ 26.4%


Convenience Shoppers

IRI-Aztec’s ShopperView Attitudes is a survey service which connects online to an engaged group of primary household shoppers who are keen to share their opinions, thoughts and values in order to improve their shopping experience. Focusing on understanding the ‘why’ behind what shoppers do, Attitudes can present a holistic and truly compelling story when combined with actual, recorded purchasing habits through ShopperView.

As the Convenience industry continues to face a challenging landscape, it is becoming evermore crucial to connect with and maintain relevance amongst shoppers in order to meet their core needs. While the Petrol and Convenience channel in Australia continues to be primarily a destination for fuel purchases, retailers have worked hard to expand the in-store offer in a bid to encourage customers into store and extend their purchasing repertoire. IRI-Aztec recently conducted a ShopperView Attitudes survey to understand whether this strategy is working; determining who the Convenience shopper is, what they purchase, and how they currently view the Convenience channel.

Who is the Convenience Shopper?

Whilst fuel continues to dominant the channel with over half of all shoppers stating that purchasing fuel is the primary reason to visit a Convenience store, retailers’ efforts in-store appear to be making progress. Please note that for the purpose of this study, newsagents and milk bars/independent grocers were included in the channel definition.


Shoppers stated a number of reasons to visit a Convenience store other than fuel, with the three most popular being; to buy a newspaper or magazine (25%), purchase a drink (11%) or top up on grocery items (10%).

Purchasing cigarettes or tobacco (3%), emergency purchases (3%) and buying a meal (2%) attracted the smallest proportion of shoppers.

What is the main purpose for visiting a convenience

store?

1.Purchase Fuel 52%

2. Purchase anewspaper or magazine

25%

3. Other 16%

4. Purchase a drink 11%

5. Top up on grocery items 10%6.

Purchase a snack 8%

7. Other non food

4%

8. Purchase Cigarettes or tabacco

3%

9. An emergency purchase

3%

10.Purchase a meal 2%


9Purchase

a meal

2%

1 Purchase

Fuel

52%

2 Purchase a

newspaper or magazine

25%3

Purchase a drink

11%

4Top up on

grocery items

10%

5Purchase a snack

8%6Other

non food

4%

7Purchase

cigarettes or tobacco

3%

8An emergency

purchase

3%

What is the main purpose for visiting a convenience store?

35A Snack

A Drink

A newspaper/magazine

Top up on grocery items

Fuel

Other non-food

A meal

An emergency purchase

Cigarettes/tobacco

28

18

16

13

6

3

2

2

Many of these factors are influenced by a shopper’s demographic profile. Whilst buying a newspaper or magazine was the primary purpose for visiting a Convenience store for a quarter of all respondents, this almost exclusively resonated amongst those aged over 55 years. This age group also appear to more ‘health aware’; they are much less likely to buy cigarettes, snacks or drinks but instead frequent Convenience stores to buy non-food items such as lottery tickets. Those under 35, on the other hand, behave quite differently. This age group is significantly more likely to buy into categories such as, cigarettes, meals, snacks and drinks. Only 4% of under 35s’ primary purpose for visiting the store was to buy a newspaper or magazine. This raises the question whether the over 55s are less engaged because the Convenience offer doesn’t appeal to them, or because they are disengaged with the channel? Furthermore, shoppers’ life stage and household size also play a key role in purchasing behaviour, with families and large households (those with more than 5 people) much more likely to visit a Convenience store in order to top up on grocery items.

Do Convenience shoppers buy on impulse?

Whilst the vast majority of shoppers pre-plan their Convenience purchase, with over 70% of responders stating that they did not purchase any items that they had not planned to, there is a group of shoppers that are driven to purchase once in store.

If shoppers do buy on impulse, they are most likely to buy snacks (35%) and drinks (28%). A smaller proportion of people also buy newspapers or magazines (18%), top up grocery items (16%) and even fuel (13%) on impulse. Of note, the survey was conducted as a time when fuel was at a recent low.


N = 1654

N = 453 Multiple responses allowed

What do shoppers purchase on impulse? (%)

No 73%

Yes 27% What %

of shoppers impulse

purchase?

Perhaps unsurprisingly, (based on retailers’ strategy to focus primarily on attracting the younger shopper), it is those under 35 that are the most likely to purchase on impulse. Young families and those with larger households (3+) are also more likely to impulse purchase. Conversely, the older you are, the less likely you are to buy on impulse.


What are the key barriers to purchasing in Convenience?

On the whole it is a positive story, with the majority of shoppers stating that they are satisfied with their Convenience offering. Two thirds of those surveyed stated that the current range of products and services offered is either “good” or “very good”. Those over the age of 55 years, and in particular retired couples, were the most likely to reflect positively on their Convenience store.


I was hungry and/or thirsty

It was at a good price

I walked past it on the way to pay

The display caught my eye

It was on promotion

I realised I had run out once in the store

It was on the counter

The staff drew my attention to it

I didn’t realise I could buy it in the store

It was a new product that I wanted to try

The healthy option

More expensive than other stores

Limited product range

Lack of healthy options

Poor store presentation

Poor customer service

Poor product quality

Poor forecourt presentation

Health & safety concerns

Poor perception of the store’s brand

Lack of available car parking

2521

201312

108

4332

7847

2511108

4332



Key reasons for buying on impulse (%)

The three key drivers for buying on impulse are needs based (i.e. hunger, thirst), price and awareness (e.g. walked past the product in store). Those aged under 35 are the most driven by price and awareness and this age group is more likely to purchase impulse items in store if they are on promotion, staff direct them to it or they view it as being at a good price. Alternatively, promotions have much less appeal to shoppers aged over 40 years.

The two areas that shoppers are the least satisfied with are loyalty programmes and in store promotions. 19% of respondents view the loyalty programme offered as either poor or very poor whilst 13% of responders scored in store promotions in one of these buckets. Based on this, it is not surprising that expense is by far the largest barrier to purchasing in a convenience store, with 78% of buyers stating that it is more expensive than other stores. This barrier was particularly prevalent amongst younger age groups (under 44 years).

What is the main barrier to shopping at a convenience store (%)


Post office services

Healthy food options

Freshly baked items

More extensive grocery range

Fresh food/produce

Late night food options

Banking services

Food to go

Internet access/WIFI

Sells alcohol

33

29

24

20

17

12

12

11

9

6


What other products and services would you like to see in a convenience store (%)

Additional Services

There are a number of additional services or products that shoppers identified as adding value to the current Convenience offer. Post office services (33%), healthy food options (29%) and freshly baked items (24%) were listed as the top 3 needs. Although the addition of selling alcohol (6%) sat relatively low on the list of additional services desired, it was of particular interest to the under 35s, who identified that it would improve their perception of the products offered by the Convenience store.



In addition to the ShopperView Attitudes survey conducted by IRI-Aztec, The Realise Group conducted some earlier research in June 2014 to determine how the following banners had delivered on key aspects of the customer experience:

7-Eleven Woolworths Petrol

BP Coles Express

StarMart United

240 customers who had visited a petrol / convenience store were surveyed – 40 from each of the banners.

KEY INSIGHTS:

Four key variables continue to hold the highest probability of predicting high customer satisfaction and high likelihood to recommend scores (i.e. 90% or greater)

Value for Money maintained the strongest influence on Customer Satisfaction, followed by Staff Friendliness, Speed of Service, and Store Appeal. Customer Satisfaction, in turn, had the strongest influence on likelihood to recommend the retailers, followed by perception of Value for Money and Store Appeal.


Source: The Realise Group, June 2014

Value for Money

Customer Satisfaction

Likelihood to Recommend

Staff Friendliness

Speed of Service

Store Appeal


Supplier Partnerships

Convenience Pulse provides key suppliers in the industry with real information, sourced from over 660 respondents representing more than 1000 Convenience retailers nationwide: delivering real information for FMCG Suppliers & Traditional Wholesalers on what your retail customers want and need, from direct to store servicing.

Convenience Pulse joined AACS in 2013 and for past three years has held a successful alliance with Convenience World magazine that distributes the nationwide Industry survey and publishes the Snapshot Report.

Store & Respondent Profile

A Convenience Retailer’s satisfaction with its Suppliers directly affects the latter’s sales, as seen in Convenience Pulse’s Service Satisfaction survey conducted in late 2014.

The majority of these retailers are Independent service stations and Convenience outlets, as well as News Agencies, Tobacconists and Organised Convenience. The annual turnover for 57% of retailers surveyed ranged from $1.6 - 3 million. In terms of the respondents profile, 88% of those surveyed were either an owner or manager, predominantly males, and 31 - 40 years of age with 4-6 years experience.

This indicates that Convenience management is on the whole a younger audience and in large requires constant engagement by FMCG Suppliers, traditional wholesalers and service providers, as they have been in the Convenience channel a relatively short period of time compared to that of other mainstream FMCG Retail channels.

The best source of information for Convenience retailers remains to be the Sales field agents, followed by trade publications.

Online sources is growing at 31%. Not only is the source of this information important but also the manner it is presented as the decision makers may have English as their second language. Hindi, Arabic and Indian are the most spoken by the Convenience Retailers decision makers and as such Suppliers must be aware of this when sending out information to the Convenience channel.

Sales field force agents

Trade magazines

Online

Trade shows/conferences

79

76

31

22

N = 661 Total more than 100% due to multiple responses

Which is the Best source of Information for your store? (%)



Suppliers

Respondents were asked which suppliers they would like to see more regularly and the suppliers most named had a mean call cycle of 4.4 to 4.7 weeks. Retailers stated that would like to see more regularly sales reps from Mars Confectionary and Red Bull as well as Vodafone and Mondelez International.

Which suppliers would you like to see more regularly? (%)

27

24

31Mars Confectionery (Snickers,Milky Way)

Red Bull

Mondelez International (Kraft,Cadbury,Oreo)

Vodafone

Coca-Cola (Mt. Franklin, Nestea, Powerade)

Frucor (V, Evian, Rockstar)

Superior Sales Force (SSF,Up&Go,Berrocca)

Schweppes (Spring Valley,Solo,Pepsi,Monster)

Lion Co (Dare,Pura,Dairy Farmers)

Nestle Confectonery (Kit Kat, Allens,Butter Menthol, Wonka, Lifesavers)

Smith's Snackfoods (Red Rock Deli, Twisties)

Peters Ice Cream (Maxibon,Drumstick,Frosty Fruits,ICY Pole,Weis)

Stuart Alexander (Mentos,Fisherman's Friend, Pringles)

Unilever (Lipton Ice Tea)

Australian Convenience Foods (AFC)

Goodman Fielder's (Helga's,Buttercup)

Snack Brands Australia (Kettle,Thins,Natural Chips, CC's,Cheezels)

Pacific Optics (Telstra Prepaid)

Parmalat (Norco,Paul's)

Bundaberg Brewed Drinks

George Weston Foods(Tip Top)

Go Natural Health Foods

Mrs Mac's

Patties (Four n'20)

Unilever (Streets Ice-Cream,Ben & Jerry's)

GSK (Panadol,Ribena,Nicorette)

Optus Optics

Wrigley (Eclipse,Extra)

Battery Specialties (Energizer, Evereday)

Ferrero (Tic Tac, Rocher, Kinder Surprise)

24

19

17

17

16

12

12

12

9

9

8

6

6

6

5

5

4

4

4

4

4

4

3

3

2

1

1

N = 661 Total more than 100% due to multiple responses



Wholesalers

Wholesalers were also benchmarked by respondents according to the frequency of rep calls and overall satisfaction with the rep’s services. There are large gaps in performance among this small pool of competitors, as demonstrated by the wholesaler rep call cycle ranging from 2.2 weeks to 5.5 weeks.

Convenience retailers place more importance on Wholesalers who provide deals, new products offerings and on-time deliveries, which is very different from what they expect from Suppliers as previously outlined.

Wholesaler Attributes Most Important to your business (%)

51

49

46

43

34

33

27

26

26

24

18

Offers deals and promotions

Advises on new products

On time deliveries

Rep calling

Accurate Invoices

Notifies on all out of stocks

Accepts phone orders

Delivery windows are met

Fast credit claim processing

Provides professional advice

Electronic Ordering Systems


In Japan where there are over 50,000 well developed convenience stores, or one convenience store for every 2000 people, around 150 convenience located stores within a square mile, and over 1million vending machines, there are certainly lessons to be learned by visitors to that country just as there are in Korea which has 25,000 convenience stores.

The AACS 2014 Overseas Study Tour visited the NACS Show in Las Vegas, and then the major focus this year was Seoul in Korea and Tokyo in Japan to see what new products or trends we should be aware of that may impact our market.

Aside from the warm hospitality shown to us in each country, our group had access to senior operators and companies who shared knowledge openly with us, and for which we are certainly appreciative.

There were also exclusive presentations made to our group, so that rather than just visiting stores as anyone could do, we had the benefit of understanding the background as to how the industry arrived at its current excellent development, as potentially what the future may hold for the convenience industry in the countries we visited, as well as our own.

We often hear from retailers or suppliers about the challenges of implementing innovative new ideas. Yet faced with very competitive conditions, changing consumer demographics and customers who constantly expect fresh new products, the convenience industry does manage to achieve that successfully in the markets we visited. The operators that we were fortunate to meet are constantly looking to evolve their offers.

The future for our industry is in fresh food – this is a global trend.

How each company goes about this will differ, but unless there is accelerated innovation in this category both by retailers and importantly suppliers, we will be open to risks through not meeting our customers needs for fresh, healthier options as lifestyles change.

“Convenient Convenience” By Jeff Rogut: CEO AACS

AACS Study Tour attendees welcomed by senior execs of Circle K, Japan

Excellent Bakery presentation in Circle K,

Japan

2014 AACS Study Tour


Convenience store showing the wide variety of ready to drink coffee and teas

Fresh presentation in a supermarket in Seoul, Korea

“

For the third year running, Australia’s entrants have enjoyed prestigious wins at the international convenience industry awards, which are part of the National Association of Convenience Stores (NACS) Show in the US.

The future of Australia’s convenience industry is clearly in good hands with Callum MacKay of 7-Eleven winning the Global Scholarship Award in the Retailer category and Kathryn Newiss from Philip Morris Australia winning the Supplier category award.

As the 2014 winners of the Peter Jowett Scholarship Award, administered by the Australasian Association of Convenience Stores (AACS), Callum and Kathryn travelled to the US to compete for global recognition.

They presented to an audience of leading convenience industry professionals from around the world.

All the finalists, including those from Australia, Canada and New Zealand, gave excellent presentations and the four judges had a tough task separating the finalists.

Callum and Kathryn’s success is a fantastic example of the efforts of Australia’s convenience industry in innovating for the future. A big congratulations to them both.

AACS CEO Jeff Rogut said. ”

2014 AACS Study Tour


Overseas Trends

How do you/your household do your grocery shopping? (%) 80% of the world’s population now use convenience shops.

Household don’t do a main grocery shop - household just does smaller shopping trips through the week.

Household does a main grocery shop but also “tops-up” on items through the week.

Household does all grocery shopping in one go once a week/fortnight and doesn’t need to top-up in between.

Global Average

Japan

Germany

Russia

Poland

South Africa

Netherlands

Taiwan

Ireland

France

Australia

United Kingdom0 20 40 60 80 100


With the ever growing shopper-need for convenience across the globe, we have seen some interesting developments in the last few years, particularly in the areas of ‘on-the-go’ consumption and ‘meal for tonight’ solutions.

Source: him! international

Globally, 25% of respondents claim that they top up or convenience shop more often than they did a couple of years ago. This trend is evident in Australia at 24% of respondents.

When we consider the different shopping missions that a convenience store can satisfy, we see that Shoppers “top-up” shop on average 2.6 times per week, at a global level. This is slightly lower at 2.06 times per week in Australia, but this reflects the different nature of the convenience store vs some overseas propositions, which are similar to a mini supermarket. This frequency of visit does not take into account the additional shop visits driven by Food to Go, Snacking, Distress purchase, etc. missions that the convenience store can also satisfy and where we have seen some good innovation in Australia over the past couple of years.

Developing a range of solutions to meet different shopper missions will become even more important in the future to help retailer differentiation. There are opportunities to increase shop visit frequency further by providing solutions for the wide range of missions that can be fulfilled in-store.

21% 59% 20%

27% 62% 11%

Corner Bakery, Engen, South Africa

20-30% of shoppers around the world believe that c-stores are competing better against supermarkets now than 3 years ago. If we marry that statistic up with the fact that 56% of shoppers will often decide what they’re having for dinner on the day itself, but this rises to 62% in Australia, the opportunity is evident.

If we add to this picture that 24% of shoppers leave home regularly without having breakfast and 28% eat lunch on-the-go, the opportunity for the Convenience channel to capitalise on these consumption trends is even greater.

We will call this an opportunity for the Australian Convenience channel, because whereas 39% of shoppers buy food-to-go from c-stores at a global level, this is driven by countries such as Taiwan, Japan, South Africa and Ireland, all of which have a strong on-the go offer.

Australia currently lags behind this trend with 25% of shoppers buying food-to-go from c-stores.

So in which nation are shopper ratings the highest for convenience stores?

(Across 14 criteria relating to service, products, range & prices)

Australia is ranked 9th out of the 11 countries covered

across a range of 14 service and product

ratings criteria.

Source: him! international

Country

Taiwan

Russia

Ireland

South Africa

United Kingdom

Japan

Poland

Holland

Australia

Germany

France

Overseas Trends


AppleGreen in Ireland is a good example of a P&C retailer capitalising on the ‘food-to-go’ opportunity presented by Shopper needs. Their aim is to provide “Fresh delicious reasonably priced food” which translates into a range of ‘Wholesome Soups and Salads’, ‘Hand Held Hot Savoury Snacks’, custom and pre-made sandwiches, paninis, rolls, etc., as well as own-brand juices, water and a sustainable freshly ground coffee offer linked to the iTierra! Project.

Waitrose recently (April 2015) opened a new Little Waitrose store in West Kensington, its fifth in the borough of Hammersmith and Fulham, an upmarket area in London, UK. The new store features a bakery, fresh fruit and vegetables, and range of take-away sandwiches and snacks, alongside everyday items.

It is another example of how the supermarkets are continuing to target and encroach on the Convenience channel. We have seen similar activity in Australia with Coles and

Woolworths actively seeking out 200-400 square metre sites to develop their small store format proposition in city locations such as Surry Hills, Sydney and

Flinders Street, Melbourne.

‘‘

Overseas Trends

The ‘Look and Feel’ is not dissimilar to the Jack and co. store proposition here in Australia, albeit on a larger scale.


Future Trends in Retail

Retailing in an Era of Disruption

Retail disruptions, from emerging generations of consumers to innovative new businesses, are combining to reshape global retail. Disruption is also the key concern for global retail leaders over the next 12 months, according to recent ACRS research. This is of little surprise given that the past five years have been especially characterised by both unprecedented and disruptive change. Further, the pace of change has quickened, turning evolution into revolution as retailers battle to maintain relevance.

Every aspect of the retail industry - from manufacturing to e-commerce - has fundamentally shifted. Although some shifts can be seen as negative, retail today is more dynamic and exciting than ever before and there is an abundance of possibilities for growth. Further, and despite the pressure to react in the era of disruption, the basic fundamentals of retail must be in place.

Connected consumers and relentless technology advancements have been key drivers of disruption in retail.

Connected consumers come of age

New generations of connected consumers have come of age, developing more sophisticated expectations of product, service, value, and store environment. Consumer power is also consolidating with improving access to information, an ever-widening choice of goods and services and opportunities to share their experiences more widely. However, while the digital revolution has handed additional power to consumers, including more information and more choice, it has also increased the complexity of making consumption decisions.

Consumers have found ways of dealing with this ‘tyranny of choice’ and many now use tools such as social media or price comparison websites to inform their decisions and exert their power.

For retailers, the prominence of connected consumers has meant that word-of-mouth is more important than traditional paid advertising, experiences are more important than transactions, as are individualised and personalised experiences, services and product offerings. This new world is also reflecting consumers’ desire for convenience - to get what they want, when they want it and how they want it.


Technology’s paradigm shift

The convergence of mobile, social and cloud technology has greatly disrupted retail. Other technology trends include ubiquitousness utilisation, the ability to turn insight into action (e.g. big data) and the Internet of Things (e.g. interconnected devices), as well as omni-commerce solutions. Such changes in technology have created a paradigm shift in the way people shop - a ‘once in a lifetime’ change in consumer shopping expectations and habits. By the same token, technology has had a profound effect on what retailers are able to provide.

Macro DisruptionsTen macro factors are currently disrupting retail.

Establishing a seamless experience for consumers across the store, online, mobile, tablets, and social media is accepted as the required retail model. This means that the days of brick-and-mortar or online as exclusive touch points no longer exist. Further, the physical and virtual worlds have merged to create a new retail offer, one that strengthens the consumer experience and subsequently drives sales. However, executing omni-channel retailing remains difficult, with customers, digital technology

and service at the heart of any successful omni-channel strategy. Further, cultural change must be affected from the top of the organisation. Successful omni-channel

retailers are also structuring themselves internally in ways that incentivise employees to think as customers do.

Brands investing in omni-channel are reaping the rewards. The UK based John Lewis Partnership, recently reported year-on-year online sales growth of almost 20%, 56% of which comes from click-and-collect.

1 Omni-channel

retail




Macro Disruptions

Mobile has proven to be a game-changer in retail, taking omni-channel to the next level, both inside and outside of the physical store. In fact, mobile devices in some way influence

70% of purchase decisions. Three years ago, driving consumers from mobile to store was critical. Today, however, there are so many traffic drivers that the current focus is about using mobile in-store. Indeed, consumers often shop stores without interacting with staff - they can look, compare and pay via their mobile. The big opportunity lies in encouraging interaction with these kinds of consumers and building a mobile

strategy around that.

On Black Friday 2014, mobile traffic accounted for 52.1% of all internet traffic in the USA, the first time mobile devices have accounted for a larger share than their PC counterparts for

internet browsing. In addition, 28% of all Black Friday purchases were made on a mobile device.

We also see examples of the progressive retailers in the Petrol & Convenience channel developing apps for customers to place their coffee and food orders in advance to cut down wait times in the store.

Wearable technology is the next evolution of mobile technology, allowing consumers to be connected at all times. Today, wearable technology is in approximately the same place as smartphones were 10 years ago: available and useful, but not widely accepted as they are yet to fully fit into consumer lifestyles and behaviour. Nonetheless, wearable technology devices of all kinds are entering the marketplace

to great fanfare and excitement and are already impacting the way consumers live, work and socialise. Inextricably linked to the Internet of Things, these new devices, such

as the Apple Watch and Google Glass, represent a game-changing influence set to utterly disrupt the modern business world.

The global smartwatch sector is currently estimated to be at $1.6 billion AUD, and is expected to surge to $12.7 billion by 2018 according to Deloitte. The market is expected to be driven by the arrival of big new players such as Apple as well as existing luxury watchmakers such as Mont Blanc adapting their product offer.

2 Mobile

communication

3 Wearable

technology



Macro Disruptions

Data is fundamentally changing business and redefining consumer interactions. In fact, big data and the new generation of advanced analytics have been acknowledged as ‘the

new oil in retail’. The challenge lies in the ability to collect and store large quantities of information and putting that data to work to answer strategic business decisions that impact the longer term. Key application areas include customer relationship management, store location and layouts, supply chain optimisation, and dynamic pricing. Opportunities also exist in the creation of more meaningful customer

relationships by using their data to create personalised experiences.

There is a demand for in-store analytics to become as precise and granular as online analytics, which has caused the rise of new capabilities from firms such as Nomi and RetailNext.

Bricks and mortar retailers can now measure metrics such as average dwell time, most viewed item in store, and item abandonment just like their pure play counterparts.

Technology advances have allowed retailers to get closer to customers and suppliers, however they have also created new risks regarding cyber security and data privacy.

Although retailers hold these risks as extremely high priorities and are heavily investing in preventative measures, recent high-profile successful attacks against retailers, technology companies, utilities, and even government agencies, have focused consumer attention on the issue. Unlike attacks on non-consumer facing industries that seek proprietary corporate information, cyber attacks on retailers are

aimed at sensitive customer financial data.

A McAfee survey revealed that consumer confidence in online retailers’ data security has fallen since 2009. Only a third of consumers believe that most websites are safe for shopping, compared to 44% in 2009. Now that retailers are handling a hugely broad range of data – from financial data to location based data, the industry at large has data privacy and security as a key focus.

4 Big data and

analytics

5 Cyber security

and data privacy



Macro Disruptions

The number of consumers shopping online continues to rise, with global e-commerce sales reaching US$1 trillion in 2013. Competition in retail naturally stems from domestic

players, but it is increasingly coming from online retailers in other continents. As such, retailers are looking to grow international sales and are adopting cross border e-commerce in a number of ways.

Some retailers are opening their domestic websites to local and/or international orders, or pursuing cross-border sales from a domestic location. Several are entering

new markets with a pure-play online model to test the market, and following up by opening stores. Still others are entering new, high-growth or under-served domestic

markets via multiple channels, or upgrading their omni-channel offer in locations where they already have stores.

Price transparency is not a competitive threat in retail; it is a disruptive shift in how consumers shop. The rise and success of comparative price shopping and

‘showrooming’ have underpinned this challenge. As such, retailers are looking for innovative ways to keep consumers from abandoning them for a cheaper price. Importantly, price transparency is evolving and the newest generation of mobile shopping apps, websites and services are designed to create a win for both retailers and consumers. Innovation has created opportunities for retailers, allowing them

to engage their customers even when they are not in a physical store environment. Ultimately consumers want quality products, but they also want affirmation that they are

paying a fair price.

Setting the standard in ultimate price transparency is US ecommerce store Everlane. The company boasts ‘Radical Transparency’ as its point of difference. Browsing the site, users can see the cost of materials, labor, duties and transport that went into producing the item. In this way, consumers get an idea of the ‘true cost’ of each piece of clothing.

6 Cross border e-commerce

7 Price

transparency



Macro Disruptions

Retailers are becoming more vertically integrated to contain costs and enhance operating efficiency. Through controlling the whole value chain, from manufacturing to retail,

vertical brands can offer attractive economics. With traditional retail channels on the decline, many manufacturers – especially those in beauty, consumer electronics, textiles, furniture, leather goods, sporting goods, and luxury goods - are also vertically integrating in order to better manage their brands. Nonetheless, vertically integrated commerce and innovation has only just begun to disrupt the retail industry.

Australian Shoes of Prey epitomizes the vertical integration mindset – the custom shoes company owns its manufacturing facility and directly employs all factory staff. By taking

control of the entire supply chain, Shoes of Prey hopes to offer overnight delivery on custom shoes by 2020. The company has recently expanded into luxury US department store Nordstrom and currently offers a two week turn around on high-end, ultra customizable products. Other brands that are reaping the benefits of the increased control and often lower cost of vertical integration include US eyewear sensation Warby Parker and menswear favourite Bonobos.

. There are a number of well-known global consumer shifts occurring, including a growth in ageing communities, as well as the number of consumers and single-person households. Technology is also having a profound effect on the way consumers live, shop and inform their expectations. As such, consumers are demanding retail ‘their way’ and are incredibly connected. Connected consumers are epitomised by Millennials, those born between 1982 and 2004. Growing up with the Internet,

Millennials are quick to adopt new technology and media - a key reason why retailers are struggling to keep up with their rapidly evolving demands and consumption

patterns. Millennials are pushing back against traditional notions of consumption. In a 2013 survey by the Boston Consulting Group, millennials anticipated that they would spend the

greatest amount of money on fresh product and natural products rather than luxury goods, soda and fashion accessories.

Many brands are directly targeting Baby Boomers (60+), for example Joan Didion, now 80 is the new face of Celine in a big to attract the huge spending power of this generation. A wellness renaissance means that this segment is much more ready, willing and able to spend than they once were.

Brands should also be mindful of the aging population over time. By 2050, 33% of populations in developed nations will be over 60 according to data from the United Nations magnitude of aging report.

This presents the P&C channel with a big opportunity which no-one appears to be tapping into currently with targeted and relevant offers and innovation.

8 Vertical

integration

9 Changing

demographics & lifestyles



Macro Disruptions

Retail has become one of the most complex business models, and thus talent requirements and capabilities have evolved considerably. Arguably, retailers need more expertise in

information technology, data analytics and social media than in the past.

Even at the executive level, there is a requirement to have someone who understands social media and digital products. Rising concerns surrounding cyber security and data privacy are also seeing the role of the IT executive gain prominence.

Already, some retailers are recruiting from outside the industry to introduce specific expertise, diverse experiences and new thinking into their culture.

Future Trends - Summary

A disrupted path to purchase

The era of disruption in retail has ultimately disrupted the consumer’s path to purchase. Rather than the traditional funnel-shaped path, consumer journeys are now subject to interruptions, diversions and delays. Moreover, when considering a purchase, consumers prefer to ‘pull’ information, rather than have brands ‘push’ it to them. For example, consumers are actively looking for inspiration by exploring other consumers’ social media profiles, rather than be inspired by brands through traditional advertising. Post-purchase, consumers are not only actively sharing views that influence others, but are also becoming more involved in product development. This means that consumers have also become critics and creators themselves. Savvy retailers are responding by making it as easy as possible for consumers to complete their purchase path through listening, inspiring and co-creating. With new technologies entering the mainstream, more disruptions to the traditional path to purchase are expected. Nonetheless, these technologies also offer retailers new and different opportunities for engaging with consumers.

About ACRS

For retail, consumer and services-oriented businesses who need to better understand consumers, traverse global trends and best-practice, or employ marketing as a source of competitive advantage, the ACRS is the place to turn. Respected through out the world as a definitive source of retail and marketing knowledge, and located within Monash University’s Department of Marketing, the ACRS has a 35 year history of working with business to deliver insight. With one foot firmly anchored in sound academic thinking and the other in commercial relevance and practicality, the ACRS combines the latest advances from the academic world with the best of business strategies.

10 Talent

requirements


Summary

Overall we have seen another positive year for the Australian Convenience Store channel and we can justifiably have ‘confidence in convenience’ in the future.

There are still excellent opportunities for the industry to embrace, such as ‘food on the go’, but also challenges in providing ‘value’ so that we are increasingly seen as a destination and credentialed for offering a range of healthy products, at fair prices with excellent customer service in modern, clean, bright and safe locations.

There is a raft of new technological advancements, that retailers are just starting to tap into with some success, and that could be leveraged further to engage with both the current and potential shopper bases out there.

It is encouraging to see a diverse range of in-store innovation over the past year, with the execution of many store trials testing the feasibility of new and exciting propositions.

In addition, Convenience Retailers continue to invest in their store refurbishments and their in-store merchandise propositions, pushing the boundaries and creating pleasant shopping environments for their customers. They are also testing new ideas and taking key learnings onto the next stage of development as they continue on the journey of enhancing their shoppers’ overall experience.


Contact

Summary

On the flip side, we need to keep focused on the some of the key areas which have the potential to negatively impact the growth of the channel; these include grocery retailers and QSRs encroaching on the ‘traditional’ territory of the convenience channel, further tobacco excises looming this year and next, the potential of a sugar tax which is being monitored overseas currently and the increasing cost of petrol theft.

This report has been compiled to provide you with key metrics and insights into the convenience channel and also stimulate some more thoughts on where the channel could develop in the Australian market place.

AACS values your feedback on this report and any areas you may wish to see covered in future reports. Please contact Jeff Rogut to share any comments that you may have. Contact details are below:

Jeff Rogut Chief Executive OfficerAustralasian Association of Convenience Stores Limited Mobile 0467 873 789Office 03 9807 5552email [email protected]

www.aacs.org.au PO Box 2309, Mt Waverley VIC 3149 Australia


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