Supermarkets prepare for shake-out

Date: 28/01/1999

By Chris Johnstone

EUROPE'S cash-rich food retailers have a shopping list; and their rivals are right at the top.

Take-over and merger rumour is rife in supermarket company boardrooms as they face up to largely stagnant home markets, restrictive planning laws which are curbing the construction of new superstores, and an ominously expanding US presence on the continent.

Wal-Mart, the 'pile 'em high, sell 'em cheap' American retailer, is more than three times the size of most major European supermarket chains and struck fear into the hearts of many of them with its purchase of 74 shops owned by Germany's Spar-Handels at the end of last year.

Wal-Mart's move has helped to concentrate European retailers' minds on domestic markets after turning their attention to the heady prospects for growth in central and eastern Europe and the Far East for a few years. "No one is too big for Wal-Mart to take over," warns Mark Wasilewski, food retail analyst with ABN AMRO in London.

Getting bigger themselves is seen by companies as one way to ward off the unwelcome attention of the likes of Wal-Mart. With a few profitable years behind them and subdued inflation keeping costs low, most European retailers are thought by Wasilewski to have substantial war chests or to enjoy sufficient financial leverage to go on a buying spree. "Everyone keeps asking who will be doing a deal with whom," he says.

But he refuses to pick out any 'natural' deals, adding: "It is often a question of who hits it off well at boardroom level."

There certainly appears to be room for consolidation. European retailers are mostly big players in their own, national backyards with few, apart perhaps from Swiss-German company Metro Makro, succeeding in earning a major part of their profits in other EU countries.

Compared with the US, where a spate of recent deals has clearly indicated that its main food retailers are trying to expand out of their regional strongholds and become national players, European companies are lagging behind.

Cultural differences are one major factor braking moves towards consolidation. Belgian retailer Delhaize, which has successfully climbed to third place in the Greek and Czech markets, happily recounts how French rival Intermarche hit resistance when it tried to cross the border and set up shop in Northern Belgium.

"At first, they used French products, but people were not used to them. They faced a problem of product recognition," explains Delhaize's Guy Elewaut, pointing out that his company even has to make allowances for regional buying preferences amongst Belgium's ten million potential customers.

Appointing local managers to top posts as soon as possible, rather than parachuting in head office staff, is Delhaize's solution to the culture problem.

Yet the chain's biggest success story so far comes not from Europe but from across the Atlantic, where its Food Lion stores rank among the top ten US retail chains and contribute around three-quarters of the company's profits.

The planned cross-border take-over by Germany's Rewe of Austria's Julius Meinl posed few such cultural problems. Instead, the biggest worry for European Commission competition officials was the threat that the deal would give Rewe a dominant position in eastern Austria, where it already runs three separate store chains.

It is often claimed that national planning laws have deliberately sought to protect local supermarket chains from an unwelcome invasion by foreign rivals by making it hard for them to find sites to build on, although this is difficult to prove.

Italy's recent tightening of its planning regulations was, according to Wasilewski, aimed at keeping out international discount chains. At the same time, Rome moved to relax permission for small to medium-size stores in towns with more than 10,000 people.

Italy and the UK were amongst EU countries which tightened the conditions for granting planning permission for new superstores as concern grew about the blight they caused in nearby town centres and the pollution created by cars.

While the euro will have some impact in cutting retailers' margins, by forcing them to match the prices of nearby rivals in stores close to borders, the industry itself believes that the single currency will not have a major effect on the sector.

A recent survey by Gemini Consulting found that around two-thirds of retailers in the UK, Germany and the Benelux countries did not believe that the single currency would have a significant effect on their pricing policies, although 60% of retailers in France predicted that it would drive prices lower.

Jerome Bedier, head of France's Federation for Business and Retailing, says retail groups are now actively considering their future strategy in the EU. "Between now and the year 2002 we can expect a lot to happen in European retailing."

European retailers in 1997 (sales of food and non-food combined)

European market share

1 Metro (Germany) 6.6%

2 Intermarche (France) 4.0%

3 Rewe (Germany) 3.8%

4 Promodes (France) 3.6%

5 Auchan (France) 3.3%

6 Tesco (UK) 3.2%

7 Aldi (Germany) 3.2%

8 Edeka (Germany) 3.1%

9 Leclerc (France) 2.8%

10 Carrefour (France) 2.7%

Source: M&M Eurodata

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