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Oliver Wyman Retail Sector Analysis

From Kiosks to Convenience Stores Strategies for Success in Switzerland

More than one million customers shop at Swiss kiosks every day Impulse buys mean high margins for retailers Retail still holds tremendous market potential Product assortment and service are the keys to success Better understanding of customers and optimal logistics a must

Munich, February 2, 2006 From a retail perspective, the convenience segment is a very attractive market. Along with the standard cigarettes and newspapers, kiosks, gas-station convenience stores, and other small retail outlets offer a basic range of food items and everyday necessities to cater to the customers immediate wants. Because customers are far less price-sensitive when they make impulse purchases, the potential margins are much higher. However, compared to other countries around the world, the Swiss convenience market is still underdeveloped. Although demand has grown significantly in recent years, product range and store services must be tailored even more to address customers needs. These are the conclusions of the latest Oliver Wyman study, entitled The Future of the Kiosk: Convenience Strategies in Switzerland. If convenience store operators wish to make the most of customers tendencies to buy on impulse, they must be proactive, customizing product ranges and optimizing service offerings. This requires a deep understanding of customers habits and close to perfect logistics processes. In recent years, convenience retailing has become increasingly important due to the demographic changes that have swept across Switzerland. Thirty-six percent of all households are now single-person households. Married couples without children account for 27 percent of total households. Only 28 percent are traditional households of married couples with children. Shrinking household sizes, greater numbers of women in the workforce, and increasing mobility are driving increased demand for ready-to-eat meals, quick services, and other impulse buys, says Nordal Cavadini, author of the Oliver Wyman study. The convenience market is a lucrative segment for retailers. Impulse buys dont follow the same rules as planned shopping purchases, explains James Bacos, Oliver Wymans retail sector expert. For many types of goods, customers are significantly less sensitive to price and and compare prices less at convenience stores than they would be at a traditional supermarket. On the other hand, the range of products available, speedy service and

friendly staff are much more important to customers shopping at a convenience retailer. If you can play the game well, you will be rewarded with above-average margins, says Bacos. Huge potential remains untapped The Swiss convenience store market has annual sales of roughly three billion Swiss francs. Of that total, kiosks account for about 1.6 billion in sales, while gas station shops and other small retailers account for the remaining 1.4 billion. There is no shortage of convenience outlets. Today, there are 2,000 kiosks in Switzerland, a whopping 1,200 of which belong to consumer-goods maker Valora. That doesnt count the 1,160 gas station shops and 100 micro-markets like Aperto or Avec. From an economic standpoint, however, the convenience store market in Switzerland is only moderately successful compared to other countries. With the notable exception of gas station shops, convenience stores have done a poor job of showing customers a tangible additional benefit compared to supermarkets, bakeries, or drugstores. Today, shoppers at kiosks make spontaneous spur-of-the-moment buys, while supermarket shoppers make planned, well-thought-out purchases to stock their kitchens. The extremely high density of retail outlets significantly weakens the traditional advantage of accessibility that kiosks and other small retailers have tended to have vis--vis supermarkets. Furthermore, mandated store closing times prevent shops in many cantons from staying open all night, or even later into the evening. However, kiosks and small retailers have only themselves to blame for some of their problems. Unlike similar shops in Japan, Great Britain, and the United States, Swiss shops have not skewed their products strongly enough toward the impulse buys their customers are likely to make. Spur-of-the-moment purchases are especially important for retailers for three reasons: they give retailers a way to differentiate themselves from the competition, make customers happy, and bring in better-than-average margins. The lions share of sales has been, and continues to be, generated by tobacco and newspaper/magazine sales. However, both segments are waning in importance. And only the most basic palette of services, such as lottery tickets, telecommunications services (phone cards), and candy, is offered. Kiosks are still balking at implementing new convenience ideas on a broad scale. In the process, they are turning their backs on an enormous untapped profit source, because more than a million customers visit a Swiss kiosk each and every day, laments Cavadini. By offering a different array of products and services, kiosks can clearly differentiate themselves from other retail formats. Handled correctly, they stand to make above-average profits. Tailor your products and services to the customer The enormous success of 7-Eleven in Japan shows the vast potential an optimal convenience strategy can unearth. 7-Eleven is one of the largest and most profitable convenience store chains in the world. In Japan alone, 7-Eleven has almost 11,000 stores, 1,400 of which are in Tokyo, and posted sales equivalent to 27 billion Swiss francs in 2004. In recent years, products and services have been consistently tailored to customer needs, which vary enormously from one region - and even one neighborhood - to the next. The convenience store chain generates 40 to 50 percent of its sales with a high-quality, long-onvariety line of pre-packaged meals that are delivered to stores three times a day. 7-Eleven has top-notch IT and forecast systems, explains Oliver Wyman expert Bacos. Unlike at other stores, 7-Elevens pre-packaged meals are never sold out. The companys outstanding sell-through forecasts accurately tell what the customer wants, when he wants it, and how much he will buy. In addition, 7-Eleven offers a number of services, including postal, mobile phone, and banking services. This is one of the critical differences between the Japanese and Swiss convenience store markets.

Key Factors for Success The Oliver Wyman study reveals factors for success that will allow Swiss operators to exploit more of the enormous potential in the convenience niche and increase profits. Key factors include everything from locality-specific products and quick-service gastronomy items to a stronger focus on customer care, comprehensive services, and a pricing structure designed to maximize profit margins. The products on offer must be designed for the customer and distributed in an optimal fashion across the very limited sales space. Creativity is critical when considering how best to expand and refine available services. Personnel need more training, and employees must have greater customer focus. Competitive pricing is a must on key items, but the great majority of products can be priced to generate margin. Convenience store operators must deal with a logistics system that is much more complex than those in other retail segments. Because the storage areas and sales floors are so small, and because the products available in the store must change several times a day, delivery cycles have to be very short, says Cavadini. In addition to Valora (Germanspeaking Switzerland/Ticino) and Naville (French-speaking Switzerland), foreign companies like Lekkerland have easily managed to gain a foothold since October 2005. The foreign companies bring a lot of international experience with them into the Swiss market; in addition to gas station shops and highway rest areas, they also supply independent kiosks that are not part of a chain. Seize opportunities The Swiss convenience segment has come alive over the last year, thanks in large part to Coop, which is pushing hard to expand its chain of Pronto shops. Already, one-fifth of Prontos roughly 150 shops are not located at gas stations, but rather in high-traffic areas in cities and at tourist sites. Open from 6 a.m. to 10 p.m., these shops offer their customers more than 2,000 products every day. The market experienced another big move in mid-2005 when Migros and Valora established a joint venture company. The new company unites Valoras K-Fresh, K-Snack, and Aperto shops and Migros gas station shops under the Avec brand umbrella. By 2007, about 140 Avec mini-markets will be offering produce, food and non-food items from Migros along with tobacco, newspapers and magazines, alcohol, brandname goods, and lottery tickets from partner Valora at stores averaging 200 square meters in size. A coffee bar will round out the Avec concept. Some locations will offer additional items such as auto parts and train tickets. The new shop in Zurichs main train station, which opened in October 2005, is indicative of the new direction Migros and Valora are taking. The shop is open from 6 a.m. to midnight, seven days a week. It is not yet clear how well this new approach will work. There has been significant progress, but compared with the successes achieved in Japan, the United States, and Great Britain, the company still has a long way to go, concludes Oliver Wyman expert Bacos. Those who really do justice to the concept of conveniencein other words, those who consistently provide customers with the right products, at the right time of day, while keeping both prices and costs reasonable, will not only come out a winner, but could even dominate the market.

Five Keys to Success for Convenience Store Operators

1. Customized product offerings Sales floor layouts and product ranges must be assembled to address customers decisionmaking patterns in other words, differently for each sales outlet and purchase occasion and layouts and stocked products must even be able to change during the course of a day. It is also important to distribute the various kinds of items offered, product groups and products optimally on the very small sales floor and work on a continuing basis to improve these items. 2. Quick-service gastronomy items Primarily due to enormous regional differences in demand, gastronomy items (snacks, etc.) must be customized to suit local customers tastes. Operators who successfully target and meet regional customer demand will quickly enjoy success. 7-Eleven in Japan is the best example of how to proceed: in every region of the country, it offers different food items at different times of the day. 3. Comprehensive array of services For many customers, successful convenience stores are the first place to turn for certain services. This requires creativity extending well beyond selling a few lottery tickets and phone cards. In the Japanese Family Mart convenience stores, for example, there is a terminal that offers banking services, travel agency services, and downloads. 4. Focus on service Convenience equals service, and it requires well-trained employees and efficient staffing levels. Fast service and friendly workers are an absolute must. Strong employee loyalty is much more important than in traditional retail environments. 5. Profit-oriented pricing Impulse buyers are much less sensitive to price than those making planned purchases. Therefore, prices can be higher, and it is easy to earn above-average margins. However, be careful when it comes to key items like cigarettes or coffee. Prices for those items must remain competitive. It is not necessary to create store brands like M-Budget (Migros) and Prix Garantie (Coop) to market food and everyday items in convenience stores.

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Andrea Steverding Corporate Communications Oliver Wyman Marstallstrae 11 80539 Munich, GERMANY Tel.: ++49 (0)89 939 49 763 Fax: ++49 (0)89 939 49 515 andrea.steverding@oliverwyman.com ABOUT OLIVER WYMAN
Oliver Wyman is a leading management consulting firm with 2,500 employees in more than 40 offices worldwide. The company combines in-depth industry specialization with a high level of method competence for strategy development, process design, risk management, organizational consulting and manager development. Oliver Wyman works together with its customers to develop and implement long-term growth strategies. We help companies improve their business models, processes, risk structures, and organizations, accelerate their processes, and take optimal advantage of market opportunities. Oliver Wyman is part of the Marsh & McLennan Companies (NYSE: MMC). For more information, visit us on the Web at www.oliverwyman.com. Oliver Wyman is one of the leading strategy consulting firms in the German-speaking world as well, with above-average growth rates. At Oliver Wyman offices in Munich, Frankfurt, Duesseldorf, Hamburg, and Zurich, 560 employees work for leading companies from the following industries: automotive, retail, manufacturing, financial services, aerospace, mechanical and plant engineering, media, telecommunications, and transport. They are supported by a worldwide network of experts, allowing us to put together the best possible team for every assignment.