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02/08/2016

What are the strengths and weaknesses of the food retail segment? (Part 1)

Efraín Aureliano Sánchez

Supermarket chains are looking towards the future from a position of internal strength, mainly for being in a stronger position after the crisis, which battered consumer spending and the Spanish economy over the last few years, evidencing the sector's efficiency. However, it's also true that they have their weaknesses...

The absolute leader in the segment in Spain is Mercadona, which had a market share of 22.7% at the end of 2015, according to data from Kantar Worldpanel. Mercadona grew, and continued to grow last year, but it's no longer the company with the greatest growth in Spain, as its market share expanded by 0.2 percentage points—considerably less compared with Lidl and DIA, which saw growth of 0.4 percentage points.

Mercadona is still the most popular supermarket chain among Spaniards; however, its growth rate is a far cry from what it was five years ago, when the company grew by double digits. The chain, helmed by Juan Roig, increased revenues last year by 3.3% and expects growth of 2% in 2016. Mercadona operates throughout Spain, with the result that the possibility of organic growth is somewhat limited; nevertheless, the Valencian company has plans to open 60 supermarkets in 2016.

Its main objectives are to guarantee food safety, support producers and reinforce its fresh product selection, especially products from the bakery and the butcher, which are performing the worst, much worse than fish and fruit.

Moreover, in view of the slowdown in its growth in Spain, Mercadona has finally confirmed its plans to expand internationally: at the end of June, the company announced plans to open its first four stores in Portugal in 2019, for which capital expenditure is expected to amount to 25 million euros initially, and 200 jobs will be created in this first phase of growth. Although the company has decided to head to Portugal, it has notable challenges to face in Spain: it must inspire loyalty in consumers who don't buy fresh products at its stores and who don't feel strongly about its brand, Hacendado.

As for DIA, the chain run by Ricardo Currás ranks second among Spanish supermarket chains, with a market share of 8.6% at 2015 year-end. DIA's growth (+0.4 percentage points) is mainly due to the company's recent acquisitions.

DIA is currently working on its most recent brand, La Plaza de Dia, which is replacing most of the El Árbol supermarkets, which will be completely phased out in 2018. Consumers are responding positively to the new DIA stores, and the company also signed a sales agreement with Eroski to improve negotiating conditions with the main suppliers of national and international brands, excluding traditional fresh products and small local producers.

However, it's not all good news for the company. The Spanish Food and Drink Industry Federation (FIAB) reported the agreement with Eroski to the National Authority for Markets and Competition, claiming it endangers competition. Moreover, the company also recently came to the fore due to an alleged case of selling products below cost, and several former franchisees reported it for alleged fraud, falsification of documents, misappropriation, coercion, threats and psychological abuse.

Carrefour and Eroski

The third-largest operator, Carrefour, had a market share of 8.5% according to Kantar Worldpanel, and resumed growth in Spain, expanding by 0.1 percentage points. After ending 2015 on a positive note, the company's revenues amounted to 2.024 billion euros in the first quarter of 2016, 0.6% more in year-on-year terms, up 3.4% excluding the currency effect and in like-for-like terms, and excluding the impact of fuel sales and corrected for the calendar effect.

The company has been able to grow its two commercial formats (the hypermarket and supermarket) in Spain. It has been strengthening growth over the last few quarters with its supermarket, while also stepping up innovation with the launch of a new store format: the Carrefour Express gourmet model, a premium option available in areas where consumers have high purchasing power. It's also strengthening the supermarket model by developing the franchise.

As for the hypermarket, Carrefour's challenge is absorbing the announced acquisition of 36 hypermarkets from Eroski, purchased for 205 million euros. Those stores are expected to begin operating under the Carrefour brand in early 2017, and it must make them profitable.

This sale by Eroski, which is the fourth-leading operator in Spain with a market share of 6.2% at the end of 2015 (down 0.2 percentage points), should aim to be profitable in the medium term, despite their obvious weakness: weighed down by debt, the company has had to get rid of several points-of-sale.

With this operation, which is part of its Strategic Plan to strengthen its main businesses, Eroski will complete its divestments and gradually recover the pace of supermarket openings while also accelerating growth in franchised stores.

The cooperative is getting ready for the immediate future, of which the new "contigo" sales model will be a fundamental part, and is registering growth of 7% in revenues. It also expects to open around a hundred new franchised stores in 2016, reinforcing its leading position in Galicia, the Basque Country, Navarre, the Balearic Islands and Catalonia.

In Catalonia, Caprabo, which belongs to Eroski, has rolled out new brands with a view to reaching new customer niches, namely Rapid and Caprabo Fresh. The first is in the pilot phase, strengthening the convenience concept, and around a dozen points-of-sale are expected to be up and running by the end of 2016. Caprabo Fresh is a brand whose strategy is based on several pillars: strengthening its fresh, Catalan, organic bulk products and special handmade cuts.

Auchan and Lidl

Auchan is the fifth-largest operator in Spain with a 3.8% market share at the end of 2015, the same as in 2014. The company's market share performance clearly reflects the hypermarket's pattern of stability in the last few months in Spain.

Auchan also inaugurated a new hypermarket format in Alicante, in November. Alcampo City is a smaller store than usual (4,000 square meters), where 90% of the products are food, with a special focus on fresh products.

It's also worth mentioning the uncertain future of Auchan Retail España, the company that resulted from the changes announced by the parent company at the end of last year. Patrick Coignard is the chairman of the new mega company, which comprises the Alcampo hypermarkets, Simply supermarkets and the e-commerce platform. It remains to be seen how the new company will fare...

There are also doubts about the general support of Alcampo and Simply as partners in Euromadi Ibérica which, since the beginning of this year, is responsible for negotiating the general conditions with regular suppliers of private label food, drugstore products and perfumes. That is to say, Auchan has lost its negotiating power.

And we'll conclude with Lidl, the clear winner in the retail segment in 2015. After ending the year with a market share of 3.6% (growth of 0.4 percentage points), the company is awash in positive news: revenues are up, as is the number of customers and profits; it signed its first collective agreement to guarantee the highest minimum wage in the retail segment in Spain; and it's planning its largest capital expenditure to date in Spain in 2016 (350 million euros)...

This is all very good news for Lidl, but the company should still watch its back. While it's true that its business model, which is based on selling the best quality products at the lowest price, is increasingly winning over Spanish households, for how long will that approach work?

Lidl's headquarters in Germany is betting firmly on Spain, with very notable investments. We hope that Spanish consumers return the favor and trust in Lidl.

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