EUROPEAN OUTLOOK: MERGERS, INTERNATIONAL GROWTH

IRA P. SCHNEIDERMAN

AMSTERDAM, Netherlands -- As economic growth slows, European retailers -- especially food retailers -- can expect more consolidation, sharper competition from discounters and more emphasis on expansion outside national borders, industry observers said at the Reshaping European Retail Conference here.

At this year's forum, retail consultants and analysts examined what retailers could expect by the year 2000 and what strategies they are adopting to cope with current and projected market changes.

"The top 50 European food [chains] already dominate 72% of the market, and forecasts predict that by the year 2000 a group of about 10 international companies will control 75% of the European market," said Peter J. Roheleder, managing partner in SCG St. Gallen Consulting Group, conference chairman.

In recent decades, food retailing has seen intensified competition and changes in the traditional ways of doing business, said Gordon R. Campbell, managing director of International Spar, a global food retailer with 19,340 stores (719 supermarkets and 139 hypermarkets) in 25 countries and sales of $31 billion.

"But the rate of change is accelerating as we reach the end of the millennium," he noted. "This is being driven not only by changing consumer lifestyles but also by the possibilities opened up by developments in information technology. The removal of international trade barriers and the international ambitions of major retailers seeking growth away from saturated traditional markets will also have a major impact."

The proliferation of large-sized stores -- superstores, hypermarkets, combination stores et al -- has triggered a wave of consolidation in European retailing, said Jean Noel Vieille, a financial analyst and the head of retail research at Meeschaert-Rousselle.

"Traditionally, the market share of hypermarkets is high in countries where discounters are not yet established," Roheleder said. "In Spain, the number of hypermarkets more than doubled in the last four years." However, he noted, in the United Kingdom hypermarkets and superstores have a 13.4% market share of total retail sales but a 34.9% share of food sales.

Roheleder told attendees that "forecasts predict that discounters will reach a market share of 15% in food retailing all over Europe in the next five years." In Italy and Spain, the market share of discounters is growing fast, he noted; for example, the German discounter Lidl opened 40 outlets in Spain over two years.

"In the future, in the United States and United Kingdom, no one store format will dominate the market as supermarkets have in the past," Campbell said. He cited a survey of European retail chief executive officers by Paris-based CIES, The Food Forum, in which most CEOs thought "major rationalization and concentration of food retailing will occur throughout continental Europe before the year 2000." Discount stores are expected to become key players in all markets, Campbell said, citing a prediction that discount stores eventually will snare a 30% market share across Europe.

Campbell pointed to three key trends in European retailing: business hours, private labels and technology.

In several nations, such as Netherlands and Germany, the government is allowing extended store hours or plans to do so. Other nations, such as the United Kingdom, have relaxed guidelines about Sunday business hours. In the United Kingdom and Ireland, Spar convenience and neighborhood stores are open 112 hours per week, Campbell said. "A growing number of Spar stores now trade for 24 hours. Spar intends to be in the forefront in convenience trading throughout Europe in the years ahead," he added.

Private-label penetration also has deepened in Europe, according to Campbell, to highs of 41% in Switzerland and 37% in the United Kingdom and to a low of 7% in Italy and Norway. He projected still more private-label growth in throughout Europe, predicting that it will take a 30% share of the market.

A growing number of European food retailers, too, are using technology to cater to shopper needs and enhance customer service, Campbell said. "Whether we talk of supply chain management, category management or Efficient Consumer Response, information technology will play a significant role in ensuring that the retail store has the right range to maximize consumer satisfaction while at the same time efficiently using available space to increase profitability," he explained.

Spar has prospered in the changing retail market of the last several years, Campbell said.

"We anticipate another good year in 1996. Towards the end of 1995, Spar Austria purchased 160 supermarkets from Konsum, which increase their share of the Austrian market from 19% to 25%," he continued.

"We have jointly established a new company, Spar France, which has licensed three wholesalers to operate Spar. The objective is to have 2,000 Spar stores in France by the year 2000."

Vieille, the French retail analyst, told conference attendees that superstores are retailers' most effective weapon in dealing with market diversification, supply segmentation and greater selectivity in consumer spending. The mid-1990s, he explained, marked several trends that have reshaped the retail playing field:

Consumer spending has slowed, and less growth is expected. (In the past, stagnant growth rates in France led to the demise of chains as big as Codec and Euromache, Vieille noted.)

Consumer buying habits are shifting toward saving time and money.

Discounters' rising share of the market is prompting more cost rationalization among all retailers.

"Short-term, these underlying trends are likely to bring about a radical change and strategic rethinking in the retail industry, as not all the players have the means to respond to the new challenges facing them," Vieille said. "The best defensive tack is to carve out a position via rigid cost control, beefing up buying power, increasing the emphasis on own-label products, forging international link-ups, improving logistics and extending the computer backup."

More aggressive expansion solutions, he added, include opening new stores or making acquisitions. A number of European governments are limiting new store development, which is channeling growth-oriented retailers into expansion via acquisition or development abroad, he explained, noting that high land costs in some European nations also are squelching retail development.

"French retailers still put geographic diversification at the top of the list. Spain is the main focus of attention, and French retail concepts [hypermarkets] are in the process of being exported to South America and Asia," Vieille said. "Unlike Spain, these markets are more difficult to break into due to a double whammy of monetary and economic stability and competitive pressure. U.S. retailers, also on the growth trail, [are] stepping up their exposure in these areas."

With little sales growth at home, European retailers will increasingly look abroad to boost volume -- meaning that the larger operators with greater financial resources to expand will be the survivors, according to Vieille. For example, he said, five operators hold 44% of the market share in France, and five retailers hold 12% in Spain.

"The strategic thrust of the big European banners has been centered on gaining market share via concentration in core markets," Vieille said. "The first examples are Metro [wholesale], Aldi [discount], Marks & Spencer [department stores], Ikea [furniture], Carrefour [hypermarkets] and Toys 'R' Us. The prime objective is to achieve economies of scale as far as buying muscle, marketing and logistics in order to carve out a leading position in cost control."

The big food retailers, he noted, also are making increasing attempts to step up nonfood sales to stem margin erosion on food, Vielle said, citing chains like Carrefour and Leclerc, which are adding specialty departments to their offerings. And because food retailers operate on low margins, it is in their best interest to attempt to diversify into specialty retailing. In general, margins at European food retailers are below 25%, he said, citing Carrefour at about 18% and Asda and Sainsbury at approximately 22%. He noted that most specialty retailers achieve margins between 25% and 35%, and department stores snare above 35%.

"Another phenomenon is the broad range of services, the prime example being hypermarket service stations," Vieille added. "In 1994, French hypermarkets accounted for 42.5% of petrol sales." (In the United Kingdom, Safeway PLC, Hayes, England, and British Petroleum Co. reportedly are teaming up to develop about 100 food and fuel sites in the United Kingdom. The joint venture would combine shopping and fuel facilities and feature cash dispensers and car washes. A pilot site with a 2,000-square-foot Safeway store is slated to open in October.)

International expansion can bring a substantial source of growth and exceptionally high profit margins, Vieille said. "The recent freeze on opening new superstores has been an additional stimulus behind stepped-up international expansion among sector leaders," he explained.

French retailers' international expansion programs have been limited to a few countries, primarily Spain, Italy, Portugal, Brazil, Argentina and, most recently, Southeast Asia. North America, a much-prized market in the eyes of the French retailers several years ago, has faded in the wake of unsuccessful ventures by Carrefour, Leclerc and Auchan.

Food Retail Consolidation in Europe

The food retailing market share in many European countries is concentrated in the hands of just a few players.

Country Operators Market Share

France Leclerc, Intermarche, Carrefour, Promodes, Casino 44.5%

Netherlands Spar, Ahold, Ziko, Vendex, Aldi 44%

U.K.Sainsbury, Tesco, Argyl, Asda, Coop 43%

Belgium Gib, Delhaize Le Lion, Louis Delhaize, Aldi, Colruyt 43%

Germany Aldi, Rewe, Edeka, Markam, Asko 41%

Italy CRAI, Conad, Coop, Vege, Rinascente 20%

Spain Corte Ingles, Pryca, Continente, Alcampo, Mercadona 12%

Source: Panel Secodip, paris