The challenges of IR in a consumer society

Enter the world of food retailing and you discover an exciting, vibrant, colorful sector. Over the past 10 years, the industry has been the scene of important structural changes that will be key to driving the fortunes of companies in the future.

Because a retailer’s performance is influenced by a variety of economic factors, such as the fairly volatile consumer confidence and consumer spending trends, these perspectives must be mastered in detail to engage with the once enthusiastic, now more cautious, investors in the sector. In addition, while the European economy is enjoying long-awaited positive momentum, recovery has been timid for food retailers, which still suffer from the frugal mood of their customers.

‘Expanding your footprint is hard in the Netherlands due to strict urban planning restrictions’ – Henk Jan ten Brinke, Ahold

In a sector where investors are known to be unforgiving when trading levels disappoint, it’s unsurprising that retail IROs meeting with stakeholders invariably get grilled on their companies’ top-line growth. ‘As the sector is highly operationally geared, looking at the sales line and what drives it is paramount,’ explains Andrew Porteous, a food retail analyst at London-based brokerage Agency Partners. ‘The industry is, in effect, an oligopoly in many ways: if someone is winning sales, someone else is losing some, so it’s important to keep track of sales and market share in particular.'

Henk Jan ten Brinke, Dutch major Ahold’s head of IR of 10 years, agrees. ‘Investors and analysts are mainly keen to talk about current trading: the macroeconomic environment, consumer behavior and their impact on sales,’ he explains. ‘The second most-popular question is how we differentiate ourselves from the competition. And as we have a franchise in North America, they want to know our view on the consolidation that’s going on in the US retail sector.’

An IR professional at a large French food retailer cites emerging market foreign exchange rates and e-commerce issues as recurrent topics brought up during meetings: ‘I’ve also noticed the market is increasingly valuing retail firms on a ‘sum of the parts’ basis. This has led us to communicate more detailed information on the different branches of the business.’

In order to get a better picture of a retailer’s multiple operations, Porteous does as many field trips as possible. ‘I’m lucky they’re always very good in our sector,’ he says, recalling a Tesco store tour that took him to four countries in three days and a visit to Delhaize’s US operations. ‘Food retail is a very local business, so if you’re covering global companies like Tesco or Carrefour and having to analyze some of their business remotely, visiting stores and getting a chance to talk with management offline is extremely valuable.’

Ahold organizes site visits and capital market days that are praised by investors and analysts alike. Ten Brinke believes three conditions are key to their success. For visits, it’s the combination of store tours and a ‘more general presentation or chat about strategy’ that makes the event worthwhile. He also gets a lot of positive feedback on how his team explains competitive dynamics. ‘We don’t only take our audience around our assets, but also around our competitors’ stores,’ he reveals. ‘If you want stakeholders to understand the business we’re in, showing your own stores is only half of the story.’

Ahold’s capital markets days are also designed to give investors and analysts access to a much larger range of senior management than just the CEO and CFO – certain divisional managers or CEOs of smaller subsidiaries are given a role in presenting or answering Q&As. Others take part in more informal events such as a dinner or bus ride, giving them a chance to talk directly with stakeholders.

‘For larger events, we organize the logistics in-house,’ details Ten Brinke. ‘The rest of the visits are usually part of a broker-led program, taking a group of investors around Dutch companies.’

Retail events

Those unable to attend a company tour can meet the industry’s top executives and IROs during one of the high-profile broker conferences dedicated to the retail sector. Investors and corporates flock to Paris in June to attend Deutsche Bank’s consumer and retail conference and to London in May for JPMorgan’s. Barclays, Bank of America Merrill Lynch, Citi and Goldman Sachs all host retail sector events in New York; and there is also the annual conference of the Consumer Analyst Group of Europe, held in London in March.

The French IRO seeks to take part in a maximum number of retail events, which facilitate ‘meeting a large number of investors in one day’, and is also keen on generalist conferences. Ten Brinke, by contrast, limits his firm’s attendance to the Deutsche Bank and Barclays events. ‘Given our size and visibility, there is usually a lot of appetite from investors to see our firm during regular roadshows,’ he explains.

For targeting new investors, his team uses CMi2i, a service provider that specializes in shareholder identification. It provides a list of financial institutions that are potential targets ‘based on size, style, willingness to invest in the sector and other factors. We also look at their holdings in our peer group. It’s a fairly sophisticated model that allows us to classify them into three tiers,’ says Ten Brinke, who services the higher-priority top two tiers himself, leaving the third in the hands of his IR manager.

Key indicators for retail are comparable store sales growth – which provides a picture of how specific locations are performing and indicates how a retailer is performing generally – and organic growth. These numbers are typically put out quarterly, as opposed to the general retail sector where some companies publish sales figures monthly.

‘It’s an extremely seasonal business and margins shift a lot, so it’s always dangerous to extrapolate monthly or even quarterly trends,’ warns Porteous. ‘Continental European companies report a full P&L quarterly, while UK firms typically publish sales growth on a quarterly basis and report their profits twice a year.’

‘We publish results on a quarterly basis, with a focus on sales, sales growth and margins,’ confirms Ten Brinke. ‘Annual results are more about balance sheet items such as cash, debt and pensions. We also publish a trading update on Q4 in mid-January, with sales figures only, and then publish our full-year numbers at the end of February, ahead of our AGM in April.’ Dutch individual investors account for nearly 10 percent of the firm’s shareholder base, and this usually makes Ahold’s annual meeting ‘a lively event. These shareholders, who are also typically our customers, all have an opinion to give based on their shopping experience in-store.’

‘Retail is a fascinating sector, which is very much at the heart of people’s lives,’ enthuses the French IRO. ‘Because its performance is directly correlated to the macroeconomic situation, the main challenge for IROs in our sector is to have a clear vision of macro trends, both current and prospective, for the countries in which their companies operate.’

Digital challenge

For Ten Brinke, macroeconomic trends are less of a challenge than the digital revolution transforming the business ‘at lightning speed’, not only via online retail, but also by the way people have started shopping in stores using smartphones. ‘Explaining that online and digital shopping is more of an opportunity than a threat for retail is still a bit of a challenge,’ he says. ‘Investors ask whether online retailing will take away some of our profitable existing business and replace it with a less lucrative one. We feel an omni-channel approach and the development of online are key for growing our business while maintaining healthy returns for our shareholders.’

According to IGD, a provider of food and consumer goods intelligence, online shopping is expected to be the fastest-rising channel in food retail in the UK, with sales forecast to grow by 123 percent over the next five years. ‘Online food retail is only 5 percent of sales in the UK at the moment, but it’s a segment that is growing very rapidly,’ confirms Porteous. ‘Food retailers talk about the opportunity of online because of how good internet penetration is in Europe.’

New channels

But the business model for online is very different from traditional grocery retailing: with online shopping, the seller bears a large part of the costs previously borne by consumers, which makes reaching an acceptable profit level hard. ‘That’s why you see different structures of online retailing in different markets,’ Porteous points out. ‘French retailers, for example, have mainly developed click-and-collect schemes, which balance the costs between retailers and consumers much better.’

The UK online retailer Ocado offers a full shopping and delivery service, and there’s a similar product from Ahold, ‘the only company doing online food retailing at any scale in the Netherlands. We’re also number one in the US with our Peapod service,’ adds Ten Brinke.

Another structural change in the sector has been the shift away from hypermarkets to smaller, convenience-type stores, as highlighted in the UK by supermarket Sainsbury’s recent announcement that its smaller Sainsbury’s Local stores now outnumber its larger stores. IDG attributes the smaller outlets’ new-found popularity to a ‘firmer focus on value, with more tailored promotions and major investments in private label.’

‘Quite a few of our shops, especially in more densely populated areas, are of the size you would probably call a convenience store,’ says Ten Brinke. Ahold has developed a specific smaller, convenience-type outlet called Albert Heijn To Go, typically found at airports, railway stations and hospitals. ‘There are clearly growth opportunities in this segment, but expanding your footprint for both large and smaller stores is difficult in the Netherlands due to very strict urban planning regulations.’

Cost-cutters

Discounters, a retail channel booming everywhere else in Europe, also have limited upside in the Netherlands, according to Ten Brinke. With regular grocery prices already substantially lower than the European average, and even below German levels – which are ‘iconic in terms of hard discount,’ Ten Brinke says – the thinner price gap makes discounters less attractive. ‘The country has had a sizable discount segment for 20 years already with 15 percent of the market taken up by Aldi and Lidl. It’s been growing a little, as a reflection of the level of Dutch consumer confidence, which remains low.’

‘In the wake of the recession, consumer spending in the UK never really recovered, from a food retail perspective, because of how food prices have risen,’ notes Porteous. ‘In that sense, industry growth is at the lowest many people can remember.’

Over the past five years, there has been a lot of pressure on consumer spending, a sharp contrast with the previous 15-20 years, when real disposable income grew steadily. ‘The consumer dynamic has changed radically, from a shopper trading up, eating more expensive calories, to one that’s thrifty, looking to cut waste and using promotions to cancel out inflation,’ Porteous explains. ‘This frugality is now a key feature of the consumer environment.’

Discount retailers have invested in better-located stores and upgraded their premises and the quality of their offering, making them an even more attractive alternative to mainstream channels. IGD’s research indicates that nearly half of all UK shoppers regularly shop at food discounters, and will likely continue shopping there should their economic situation improve. With 40 percent of UK shoppers reportedly expecting to be worse off in the year to come, it seems discount retailers have a bright future ahead of them.

Communicating about the rise of the new ‘big three’ channels and explaining the mutated sector dynamics will certainly keep retail IROs busy in the near future. ‘I find really good IROs understand the business and don’t just focus on delivering results announcements,’ says Porteous. ‘You can have a wider discussion with them about strategy and how the business works around different product lines: this gives you a lot more color on the industry and really helps your understanding.’