McColl Retail : Chief Executive's Review

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Jonathan Miller

Chief Executive Officer

Food-led neighbourhood retail

This has been an extraordinary year and one in which the passion, dedication and loyalty of my colleagues throughout the business has been simply incredible. Since the onset of the COVID-19 pandemic, I am proud to see how our colleagues on the frontline have consistently gone above and beyond to support their local communities and keep the business trading.

The pandemic has also led to significant changes in food retail, and accelerated trends that otherwise might have taken years. There is no doubt that local neighbourhood retailing has come into focus in 2020, and our food-led stores have outperformed the convenience market. Lockdown restrictions and the move to home working have materially affected how our customers shop with us, and validated the changes we were already making to our offer. Increased demand for food-led neighbourhood retail is here to stay. For this reason, I am delighted that we have recently reached agreement with Morrisons to extend our supply agreement, giving us even greater access to their food retail expertise, breadth of product offering and brand. Together with our recently signed bank facility extension, this is an important milestone as we execute our strategy to become your favourite neighbourhood shop.

At the height of the pandemic, consumer shopping behaviour in our stores shifted towards less frequent visits, but with bigger shopping baskets and more food-based missions. Some categories benefitted from this change, with fresh food, BWS (beers, wines and spirits) and tobacco growing quickly, at the expense of other products such as food-to-go and impulse confectionery, snacks and soft drinks. As a result of this strong demand, the business was able to deliver materially higher like-for-like sales, up by 12.0%. However, a significant shift in the pattern of trade, and additional costs related to the implementation of COVID-19 protection measures for staff and customers, impacted overall operating margins.

In stores, we offered all emergency and NHS workers free coffee, as well as the delivery drivers that kept goods flowing to our stores.

Whilst we expect some of these trends to normalise when the pandemic eases, we do not expect them to completely revert, particularly the growth in take-home food and home delivery. Ultimately, the trends amplified by the onset of COVID-19 directly tie into the areas where we are focusing our strategy - towards a local grocery-led convenience retail offering, now supplemented by online.

In the short term the pandemic will continue to impact trading, and we will continue to adapt our business to a change in customer demand. We recently signed a new agreement with Uber Eats that will see the service operate across 400 stores by the end of March 2021. This provides another channel for customers to get their daily essentials, while also attracting a younger generation of customers to our brand.

McColl's is well positioned in a market that is forecast to grow. The importance of neighbourhood stores and convenience retail to local communities has never been greater. Our key strategic priorities will help deliver sustained profitable growth over the coming years.

COVID-19 response

The health, safety and wellbeing of our colleagues and customers continues to be a priority, as we remain very much amidst the COVID-19 pandemic. I thank all of our colleagues who continue to work in an extremely challenging environment.

At the onset of the COVID-19 outbreak we adapted quickly to a rapidly changing situation, to keep all of our stores trading to help serve our local communities with essential products and services. We dealt with the increased demand from consumers, deployed the necessary personal protective equipment (PPE), adopted social distancing and health and safety measures in line with Government guidance and worked closely with our wholesale partners to keep supply chains open.

As a neighbourhood retailer we implemented numerous initiatives to help serve our communities. To show our support for the NHS and the invaluable service it provides, McColl's provided essential food and goods to colleagues at NHS Great Ormond Street Hospital (GOSH) for free. In stores, we also offered all emergency and NHS workers free coffee, as well as the delivery drivers that kept goods flowing to our stores. We were the first convenience retailer to support the Free School Meals voucher scheme. We also stocked The Big Issue in-store for the first time in the magazine's history to support its vendors.

Uber Eats service operating across

400

stores by the end of

March 2021

Extension of Morrisons partnership

Our partnership with Morrisons is of key strategic importance, and I am delighted to have recently announced an extension of our agreement to January 2027, giving us continuity of supply for the next six years. Events over the past year have highlighted how critical it is to have a strong wholesale partner and how important a credible food offer will be to our future. Our partnership with Morrisons was a key reason we were able to provide continued service and extended food ranges against a backdrop

of huge disruption.

The new long-term partnership will provide McColl's with an important strategic opportunity to convert 300 of our best convenience stores to the Morrisons Daily format over the next three years. Sales in our existing stores of this format have outperformed the rest of the estate during 2020, and the move is in line with our strategic focus to grow our grocery mix. We will also have continued access to a supermarket quality fresh food and grocery offer through the Safeway brand, where further range extensions are planned.

We have now completed the process of migrating the entire estate to the Morrisons supply chain, making them our single wholesale partner, enabling us to simplify our operations, whilst ensuring the best value and enhanced range for our customers.

Extension of banking facilities

We retain a supportive relationship with our lending banks and having engaged with our banking syndicate in the latter part of 2020, we were pleased to recently announce that our bank facilities have been successfully amended with improved headroom against covenants, and extended with a revised maturity date of February 2024. Alongside the extension of our Morrisons partnership, the amended facility gives us greater security and flexibility to execute on our strategic initiatives in 2021, and beyond. Further details of the new banking arrangements are provided in the financial review.

New McColl's

brand launched

Strategic progress

The key focus in 2020 was successfully navigating the challenges posed by COVID-19, and to ensure that all our stores kept trading. However, the pandemic has reinforced our conviction that our strategy of growing fresh food and grocery mix, keeping the customer at the heart of everything we do, remains the right one, supplemented by developing an online offering to capitalise on the market shift we are experiencing.

Our vision remains to be your favourite neighbourhood shop and more than ever we are focused on delivering a great customer experience. The new partnerships with Morrisons and Uber Eats will be critical to deliver this. In addition, the work we are doing on format and range will ensure we retain the new customers drawn to our stores because

of the pandemic.

Our strategy is based on four key pillars: 1) strong customer offer, 2) easy to run stores, 3) improving our stores and

1. great place to work. We have continued to make progress on these priorities wherever possible, and adapting them to changing circumstances as required.

Our key strategic priorities are as follows:

1. Strong customer offer,
2. Easy to run stores,
3. Improving our stores and
4. A great place to work.

Home News

Delivery (HND)

Our vision remains to be your favourite neighbourhood shop and more than ever we are focused on delivering a great customer experience.

Our home news delivery (HND) grew significantly due to the COVID-19 crisis and national lockdowns. It provided a crucial service for customers who wanted to be kept abreast of the latest news with their daily newspaper, without needing to venture outside of the home.

At the end of FY20, we had over 90,000 HND customers, which represents a like-for-like increase of over 17,000 customers over the period. Our HND operation is one of the largest in Europe, and McColl's has around 10% of the total UK market.