Weinswig’s Weekly January 26, 2018

FROM THE DESK OF DEBORAH WEINSWIG

Lidl Pulls Back on US Openings, Opts for Different Store Formats

Seven months after launching in the US, Lidl is slowing its store-opening program dramatically. This year, it will open just 20 new US stores, according to a January 18 report by German trade publication Manager Magazin. Klaus Gehrig, the CEO of Lidl’s parent firm, Schwarz Group, told the magazine, “If one recognizes a mistake, one must correct it.” Lidl’s US website currently lists 48 store locations; when the company launched in the US in June 2017, it stated that it planned to open 100 stores per year in the country.

Lidl Switches Openings to Smaller Stores in Shopping Centers Closer to Urban Areas

Lidl is also switching from its original plan to open larger, “destination” stand-alone stores to opening smaller stores, some of which will be in established shopping centers.

Smaller stores: Lidl originally planned to open stand-alone stores of around 36,000 gross square feet, per its US website. It is now seeking sites of 15,000–25,000 square feet. Brendan Proctor, Lidl’s US CEO, told The Washington Post in February 2017 that Lidl US was aiming to open stores with net selling space of 21,000 square feet. That would mean the company’s US stores would be approximately 40% bigger than its largest European stores and roughly double the size of the typical Lidl store worldwide. By way of comparison, Aldi’s average US store is 10,000 square feet.

Implied reduction in product offering: Smaller stores imply fewer product lines. In July 2017, Bernstein analysts estimated that Lidl’s US stores offered up to about 4,000 SKUs. That figure is exceptionally high for a hard discounter. Aldi stores offer an estimated 1,200–1,400 SKUs and Lidl stores in Europe offer 1,700 or fewer.

Shopping-center locations: It is not just the size of Lidl’s planned stores that is changing, but their locations. Lidl’s new property advertisements ask for leased sites with “national cotenants”—in other words, the company is looking to open stores in existing shopping centers. “We want maximum flexibility in our selection of locations and for our real estate teams,” a Lidl spokesperson told German news agency Deutsche Presse-Agentur. Shopping-center locations will help drive traffic to a banner that is still unfamiliar in the US market.

Recent statements from major owners of open-air shopping centers, where grocery store operators often choose to locate stores, reference Lidl’s strategy on this front. On a July 2017 conference call, DDR COO Michael Makinen noted that the company was “seeing deals” with grocery chains that included Lidl. On an August earnings call, Brixmor Property Group CEO James M. Taylor noted that Brixmor had “discussions ongoing” with Lidl and other expanding grocery retailers. Lidl is selectively opening stores in covered malls, too: it is set to open a store in the Staten Island Mall in 2018 in a space that was formerly occupied by Sears, according to GGP, the mall’s owner.

Closer to potential customers: Lidl is also refining its catchment areas. It originally sought locations with high population density within three miles, but its current demands are for high density within two miles.

Changes Imply a Real Estate Problem

The changes in plans suggest that Lidl’s investment in larger, glossier stores in the US compared with other countries has not been justified. Moreover, they indicate that the company is struggling to draw shoppers to its stand-alone locations on the edge of towns and that it sees its challenges in the US as related predominantly to real estate choices rather than to its discount proposition: in fact, the company’s move toward smaller stores with smaller product ranges reflects a more traditional hard-discount proposition.

Discount Can Work in the US Grocery Market

The growth of Aldi and Trader Joe’s serves as proof that smaller-store, limited-line discounters can indeed carve out share in the US grocery market. Between 2012 and 2017, Aldi US grew its sales by an average annual rate of 11.3%, according to Euromonitor International data, while Trader Joe’s grew at an average annual rate of 6.0%.

Underlining this growth, Aldi US announced major expansion plans in June 2017. At the time, Aldi stated that it served 40 million shoppers each month through a total of 1,600 stores. The company’s current goal is to serve 100 million shoppers per month through 2,500 stores by the end of 2022. That implies that Aldi will open about 160 stores per year, on average, until the end of 2022. Aldi says that its expansion plans will make it America’s third-largest grocery chain by number of stores.

The US grocery market is a challenging one for discounters because it is already very price-driven and because US shoppers are less likely than their European counterparts to buy private label goods, which are the focus of the discounters. But the ongoing growth of Aldi and Trader Joe’s suggests that Lidl can capture a part of this market, if it gets its store formats and locations right.

US RETAIL EARNINGS

US RETAIL & TECH HEADLINES

Luxury Retailers Are Set to Reap the Benefits from Tax Reform
(January 17) CNBC.com

• Luxury retail was the talk of the National Retail Federation’s 2018 Big Show. With shoppers perking up, the stock market rallying and new tax legislation likely to put more money back into consumers’ pockets, conditions are favorable for many luxury brands.
• Jerry O’Brien, director of the Kohl’s Center for Retailing at the University of Wisconsin–Madison, told CNBC the tax cuts could result in a bigger gap between luxury retailers (i.e., Tiffany, Hudson’s Bay, Neiman Marcus and Tapestry) and other players, though he said off-price brands will continue to outperform in 2018

Walmart May Have to Unload Stake in Brazilian Unit at Discount
(January 12) CNBC.com

• Walmart is looking to sell part of its operations in Brazil, where it has struggled for a decade, yet missteps by the US retail giant have narrowed the field of potential buyers and could lower the value of any deal.
• The world’s largest retailer is shopping a major stake in its Walmart Brasil unit to buyout firms with Latin American experience, two people with direct knowledge of the matter told Reuters on Sunday.

Amazon Opens Checkout-Free Store in Seattle
(January22) Retail-Business-Review.com

• Amazonhas opened its checkout-free grocery store to the public in Seattle, Washington. The Seattle store, known as Amazon Go, uses technologies such as computer vision, sensor fusion and deep learning.
• The Just Walk Out technology automatically identifies when products are taken from or returned to the shelves and keeps track of them in a virtual cart. After completing shopping, customers can leave the store. The company will send a receipt and charge their Amazon account.

Big Four US Banks Hit with $12.5 Billion in Credit Card Losses
(January 22) Pymnts.com

• When it comes to credit card debt, American consumers aren’t the only ones who are suffering. New results show that the big four US retail banks dealt with an almost 20% increase in credit card losses last year.
• Despite the losses, credit cards are still highly profitable, since the issuers earn fees from vendors for every transaction processed and charge customers who have difficulty keeping up with higher interest rates (usually about 13%).

Neiman Marcus Encourages Employees to Interact with Customers on Social Media
(January 21) NYPost.com

• Neiman Marcus’s 4,500 associates are ringing up sales for their employer via their personal Instagram and Snapchat accounts. The posh department store encourages its customers to follow sales associates on social media because “customers who are attached to a sales associate spend more.”
• Each of the company’s associates is given a company-issued iPhone, on which he or she uses an app called Isell to communicate with customers.

EUROPE RETAIL EARNINGS

EUROPE RETAIL & TECH HEADLINES

UK Retail Sales Post Solid Growth in December
(January 19) Office for National Statistics press release

• UK retail sales climbed by a solid 4.4% year over year in December, supported by clothing stores and department stores/mixed-goods retailers, according to the Office for National Statistics. The industry achieved this growth against a demanding comparative from December 2016, when sales expanded by 7.1% year over year.
• In December, shop-price inflation stood at 2.9%. Year over year, prices were up 3.6% at food retailers and up 2.4% at nonfood retailers. Sales grew by 9.4% at online retailers, by 5.5% at clothing specialists, by 2.7% at grocery stores, by 3.3% at department stores/mixed-goods retailers, and by 5.7% at furniture and lighting stores year over year in December.

Tesco to Reorganize Operational Structure, 1,700 Jobs to Be Affected
(January 22) Company press release

• British grocer Tesco announced that it will “simplify its operational structures to improve efficiency and give line managers clearer accountability for colleague and customer experience.”
• Tesco said that some 1,700 jobs will be affected, but that 900 new roles may be created that will have broader remits across distribution, stores and fulfillment. Tesco UK and ROI CEO Matt Davies stated that the company hopes to retain as many staff as possible in the newly created roles and currently available vacancies.

Richemont Bids for Full Control of Yoox Net-a-Porter
(January 22) Reuters.com

• In a move to strengthen its online presence, Swiss luxury group Richemont has bid for full control of online luxury retailer Yoox Net-a-Porter. Richemont has offered €38 ($47) per ordinary share of Yoox Net-a-Porter, a 26% premium to the e-commerce firm’s closing price on January 19, 2018.
• The deal, which values Yoox Net-a-Porter at €5.3 billion ($6.5 billion), amounts to roughly €2.8 billion ($3.4 billion). Richemont already controls 49% of the online retailer, but it controls only 25% of its voting rights, and is awaiting regulatory clearances from the relevant authorities.

N Brown Group Sales Rise in Third Quarter, Company Announces Partnership with Zalando
(January 23) Company press release

• British fashion group N Brown announced that group revenues grew by 3.2% in the 18 weeks ended January 6, 2018. Revenues of its JD Williams brand expanded by 3.0%, while Jacamo revenues grew by 4.6% and Simply Be revenues jumped 14.5%.
• Footwear and accessories sales showed the strongest growth, at 9.6%, while home and gifts sales grew by 2.1%, menswear sales by 4.1% and womenswear sales by 0.7%. The group also announced a partnership that will see its Jacamo and Simply Be brands sold on Zalando, which operates across 15 countries.

Pets at Home Group Revenue Rises by 9.6% in Third Quarter
(January 23) Company press release

• British pet products retailer Pets at Home announced 9.6% group revenue growth for the third quarter ended January 4, 2018. Merchandise revenue rose by 9.0%, while services revenue rose by 13.6%. Group comps grew by 7.2% in the period.
• In 2014, Pets at Home began a trial of a concept store for dogs called Barkers. The store format included a food hall, an accessory shop and a dog spa. The company said that the trial has now ended and that it will close all Barkers stores over the coming year.

Carrefour Provides Update on Strategy Through 2022, Announces Partnership with Tencent
(January 23) Company press release

• French retail group Carrefour unveiled a new strategy that will run through 2022. The strategy includes simplifying the organization and laying off 2,400 staff at its headquarters in France. The company will also will invest around €2 billion ($2.5 billion) annually to improve its price competitiveness and productivity.
• Carrefour will invest €2.8 billion ($3.4 billion) through 2022 to refine its omnichannel offering and is targeting €5 billion ($6 billion) in food e-commerce sales over the next five years. The company also announced a new strategic business partnership with Chinese technology firm Tencent that is part of a bid to improve its online visibility and increase customer traffic in China.

ASIA RETAIL & TECH HEADLINES

Google Inks Patent Deal with Tencent
(January 18) TechCrunch.com

• Google announced a patent cross-licensing agreement with Chinese tech giant Tencent. The terms were not disclosed, but Google said that the tie-in, which is valued at over $500 billion, covers “a broad range of products and technologies” and is “long term.” The two firms pledged to work together on future innovation and technology initiatives.
• “We’re pleased to enter into a patent cross-license with Tencent. By working together on agreements such as this, tech companies can focus on building better products and services for their users,” Google Head of Patents Mike Lee said.

Selfie App Snow, Once a Snapchat Clone, Raises $50 Million from SoftBank and Sequoia China
(January 22) TechCrunch.com

• The company behind Snow, a Snapchat clone in Asia that Facebook once tried to buy, has scooped up a $50 million investment from SoftBank and Sequoia China.
• Snow was started by Naver, the South Korean firm behind popular messaging app Line, and it had proven popular in Japan, South Korea, China and other markets in Asia thanks to its focus on localized filters, stickers and features.

Grab Is Adding Bike Sharing to Its Ride-Hailing Service in Southeast Asia
(January 22) TechCrunch.com

• Grab, Uber’s chief rival across Southeast Asia, appears to be getting into bike sharing, as signs of a joint service with oBike have surfaced in Singapore. Last week, an eagle-eyed resident in Singapore shared photos of Grab Cycle bikes—which had an oBike logo, too—being loaded into a van.
• The companies announced that oBike will integrate GrabPay, Grab’s mobile payment service, into its app, and hinted at other imminent collaborations. “The two tech companies are also working closely together with more joint initiatives in the pipeline to improve the on-demand transport infrastructure in Singapore. Details of these initiatives will be revealed in the coming weeks,” oBike said in a statement.

Singapore Soars Up Innovation Rankings, US Falls Out of Top 10
(January 23) Bloomberg.com

• The US dropped out of the top 10 in the 2018 Bloomberg Innovation Index for the first time in the six years the gauge has been compiled. South Korea and Sweden retained their No. 1 and No. 2 rankings. The index scores countries using seven criteria, including research and development spending and concentration of high-tech public companies.
• The US fell two spots to 11th place mainly because of an eight-spot slump in the post-secondary, or tertiary, education-efficiency category, which includes the share of new science and engineering graduates in the labor force. Value-added manufacturing also declined. Improvement in the US’s productivity score couldn’t make up for the lost ground.

LATAM RETAIL & TECH HEADLINES

TCS Opens New Office in Brazil
(January 22) ZDNet.com

• Indian IT outsourcer Tata Consultancy Services has opened a new office in Brazil as part of its growth strategy in the country. The company aims to create 4,000 new local jobs in what it plans as its largest center in Brazil and its largest Portuguese language hub in the world.
• The new office is based in a building in the city of Londrina in the southern state of Paraná. The current location has capacity for 700 staff, but the firm plans to relocate to a new center that is due to be built in a technology business park in Londrina.

Lenovo Brazil Operations Back in Black
(January 19) ZDNet.com

• Chinese manufacturer Lenovo has seen its first positive financial results in Brazil after seven years of losses in its computer division. The company saw EBITDA reach $5 million in the quarter ended September 2017. This compares with a loss of $15 million in the same quarter a year earlier and a loss of $15 million in the same period in 2015.
• Lenovo’s Motorola operation—estimated to represent more than two-thirds of the company’s total earnings—has also seen a turnaround in Brazil. The company saw EBITDA of $46 million in the quarter ended September 2017, compared with a $1 million loss in the same quarter of 2016.

Brazilian Government Will Seek Help from Tech Giants to Reduce Fake News
(January 17) ZDNet.com

• Brazil’s Superior Electoral Court (TSE) wants to engage with tech giants Facebook, Google and Twitter as part of its efforts to reduce fake news in this year’s presidential elections. A TSE council focused on the Internet’s impact on the elections gathered for the second time to discuss its agenda.
• The Internet companies are not part of the TSE council, but the court’s general secretary, Luciano Felício, stated that they will be asked to provide input. “We will approach them, as we know that they are interested in collaborating,” Felício said.

Walmart Shops Brazil Unit Stake to Advent, Other Funds: Sources
(January 21) Reuters.com

• Walmart is in talks with buyout firm Advent International and other funds to sell a major stake in its Brazilian operations, two people with direct knowledge of the matter said on Sunday.
• Walmart is being advised by Goldman Sachs, according to one of the sources, who spoke on condition of anonymity. Other private equity firms that are looking into the investment in the Brazilian unit are GP Investments and Acon Investments, the source added.

MACRO UPDATE

Key points from global macro indicators released January 17–24, 2018:

1. US: Housing starts decreased by 8.2% month over month in December, to 1,192,000. Industrial production increased by 0.9% month over month in December, exceeding the consensus estimate. Consumer sentiment in the US ticked down to 94.4 in January.
2. Europe: In the UK, retail sales decreased by 1.6% month over month in December, missing the consensus estimate of a 1.0% decrease. UK retail sales including auto fuel decreased by 1.5% month over month but increased by 1.4% year over year in December.
3. Asia-Pacific: In China, GDP in the fourth quarter grew by 1.6% quarter over quarter. Year over year, China’s GDP grew by 6.8%, exceeding the consensus estimate. Retail sales in China grew by 9.4% year over year in December, slightly below the market’s expectation.
4. Latin America: In Mexico, the unemployment rate ticked down to 3.1% in December, beating the market’s expectation and signaling a healthy labor market. After seasonal adjustment, the unemployment rate stood at 3.4%.

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