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The price war causes retailers' profit to plummet

Teresa Sánchez

The ongoing price war in Spain's retail sector is taking a major toll on companies. Most hypermarket and supermarket chains, aware of the importance of maintaining their market share in a very complex economic context, have seen their profit margins shrink dramatically in the last two years, with returns of barely 1% in many cases. And those are the ones that continue to make money, because plenty of companies are in the red.

Although not everyone has published their income statements for 2014, a close look at sector balance sheets for 2013 and 2014 is quite dramatic. Dia, which is specialized in the discount segment, was the most profitable by far, with a margin of 3.3%.Net profit totaled 267.3 million euros, excluding extraordinary gains on the sale of its business in France.

Mercadona, another chain committed to low prices, had a profit margin of 2.69% in 2014,just 0.10 points more than in 2013. The company reported revenues of 20.161 billion euros and profit of 543 million euros in 2014. This Valencia-born venture is one of the few that has been able to remedy its profitability, albeit at the cost of its suppliers.

Beyond Dia and Mercadona, the financial situation of Spanish retail food chains has taken a very dramatic turn. Lidl and Alcampo have tied, with a profit margin of 1.7%, but they are pocketing less money as they try to maintain their customers' trust; Carrefour, which reported losses in 2012, was back in the black in 2013 but with a profit margin of just 0.6%;Hipercor increased gains by 62.5% on the heels of a severe restructuring plan and changes to the commercial strategy, although its profit margin is just 0.4%; and Eroski remains in the red, reporting losses of -102 million euros in 2013.

At Dia's earnings presentation on February 23rd, CEO Ricardo Curras said, "Last year was one of the Spanish retail sector's worst years in a very long time."

Curras attributed the situation to two causes: "first, the shrinking population, which led to a reduction in consumer spending, and second, the worst deflation seen in the last 20 years". In short, the price war—which has been ongoing since the crisis began in 2008—has intensified. The current outlook is slightly more optimistic, but companies are also aware that they have very little wiggle room to continue to slash prices.

The situation in the coming months will depend heavily on the strategy employed by the two low-cost giants: Dia, and especially Mercadona. The latter is maintaining pressure on its suppliers so as to continue to battle its rivals on prices, but the question is whether the others will be able to keep up with this strategy.

In view of the company's offensive, El Corte Inglés had to reduce prices on 5,000 food products by 20%—and one year later it cut prices by another 5%—and constantly review them. This may be good news for consumers, but its subsidiaries Hipercor and Supercor have been left with minimal gains.

Along the same lines, Alcampo saw its profits cut practically in half, from 95.8 million euros in Spain, to just 54 million euros in 2013.Not even Lidl, which is also specialized in the low-cost segment, can keep up the fight, as its profits in the last fiscal year (ending in February 2014) plummeted by 31%.

However, the price war is attracting international companies specialized in very aggressive commercial strategies.That's the case of German company Aldi, French retailer E.Leclerc, and US giant Costco, which have invested in, and reinforced, their position in Spain, further increasing market competition.

Aldi, which already has 250 stores in Spain, has announced plans to open another 15 to 20 supermarkets this year, mainly in central areas in Madrid and the north. E.Leclerc, which expanded its foothold in 2011 with the acquisition of the seven Eroski hypermarkets in Madrid, is planning to open 3 new stores per year until at least 2020. It remains to be seen how wholesale shopping club Costco advances; for the moment it has opened stores with very low prices in Seville and Madrid.

Regardless of what happens, the industry knows that sector concentration will accelerate if deflation and the slide in prices continue for much longer. Small regional chains will find it increasingly difficult to compete with the discount giants.

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28/06/2017