EUROPEAN STORES ADD CATEGORIES, FORMATS

DAVID GHITELMAN

CHICAGO -- Supermarkets in Europe are broadening their product range to enhance growth and margins, according to Julian Gething, partner, corporate finance group, Arthur Andersen, the financial services company based here.

This broadening has led European companies to expand into new formats, such as convenience stores, and additional categories, such as general merchandise and health and beauty aids, he said.

Gething noted that the industry faces some of the same problems in both Europe and the United States. In both places, stores need to grow profits but must contend with slow top-line sales growth, a result of low inflation and increased competition from other channels, he said.

In both places, he added, the threat of expansion by Wal-Mart stores is a factor driving companies to consolidate.

In both places, government scrutiny -- in the form of the Federal Trade Commission in the United States and the European Commission in Europe -- has served as a brake on consolidation.

Also, both European and American acquisition targets have been demanding higher prices than most potential buyers have been willing to pay. In the United States, Gething said, this is a matter largely of seller expectations fueled by the high prices paid by acquirers in the late 1990s, while in Europe it is a result of generally higher price/earnings ratios in the industry.

However, there are numerous differences, according to Gething. In the U.S., the industry is highly fragmented, with the top five companies responsible for only 41% of sales. In Europe, the degree of fragmentation varies, from highly consolidated France (where the top five have 81% of sales) to a mid-range group of Germany (58%), the United Kingdom (54%) and Italy (53%), and all the way down to Spain (43%).

Another uniquely European factor is the perception that "the number of attractive targets is now reduced," with larger sites considered more valuable

One response to these challenges has been the move by European companies into Asia. France-based Carrefour, Netherlands-based Ahold and U.K.-based Tesco "have each opened dozens of stores around Asia," Gething noted.

"European grocers are dominating local mom-and-pop stores, and high-end European hypermarkets are negatively impacting Asian department stores," he observed.

But the conquest of Asia remains incomplete. "Foreign retailers have yet to cut deeply into the middle," Gething said.

Along with looking to expand in the Far East, European supermarket companies will continue their focus on making acquisitions in their domestic markets, Gething predicted.

"The need for planning permission prevents organic growth," he said, "while the desire for larger sites encourages expansion through acquisition. At the same time, companies are seizing the opportunity to acquire competitors forced out of crowded markets."

Gething also predicted that the next few years could see "one or two global megamergers." The challenge to such deals are "the higher perceived risk" and "the need to find a cultural fit," he noted.

Still, large companies will be tempted to consolidate, he said, as they strive "to expand their product range and their access to customers."

On a country-by-country basis, Gething made the following observations:

In France, food retailing is dominated by two companies, Carrefour-Promodes and Leclerc, with both showing "a strong tendency to branch into smaller stores and move overseas."

Germany is "characterized by a discount culture," which is contrained, however, by being "more strictly regulated" than elsewhere on the continent.

In Italy, a recent "reduction in restrictions has resulted in the entry of acquisitive international players."

In the United Kingdom, the industry faces the "increasing dominance by the major players" through product diversification and consolidation.