Wal-Mart's move into the UK with the acquisition of Asda, following its recent move into Germany, will spark a major round of defensive mergers around Europe, according to a new report.

The entry of such a huge retailer poses so great a threat to the present European market leaders that they will be forced to respond, according to Grocery Retailing in Europe, published by Retail Intelligence. Cross border mergers between western European grocery leaders to date have been conspicuous by their absence. There has been expansion into the less developed south and east - the French are now market leaders in Spain and Portugal and the Austrians spearheaded the move into eastern Europe - but there has also been consolidation in home markets.

Now that Wal-Mart has followed its German acquisitions (Wertkauf and InterSpar) with Asda in the UK, it has clearly signalled its intention to build a major European business. Retail Intelligence argues that the other major multiples will need to form alliances to develop a defence to the US giant.

Wal-Mart's grocery offer is pitched at the lower mass market. The next step in Europe will almost certainly be an acquisition in France. Leclerc would be the best fit in terms of market positioning, but it is a voluntary group, making an alliance at best difficult and at worst unworkable.

Wal-Mart may therefore decide to target Carrefour which has the right sized stores, global weight (like Wal-Mart) and a European store portfolio to strengthen the US leader's worldwide share, and which would make it untouchable.

However, Retail Intelligence argues that Carrefour is pitched at the upper mass market, so would have a better cultural fit with Sainsbury, Ahold (Netherlands) and Delhaize (Belgium). In Germany, Carrefour has such close links with Metro that it is surprising there has not been a merger yet. If Carrefour were to go to Wal-Mart, the next best fit in France for an upper end group would be with Auchan.

The most ambitious and aggressively pan-European companies are Kingfisher and Promodès (France). Now that Kingfisher has been thwarted over Asda, the most logical fit in the UK would be Tesco. Kingfisher's acquisitions around Europe have been notable for being very strong players in their local markets and Tesco is, therefore, the obvious target in the UK. Culturally closest to Tesco would be Promodès in France, plus Rewe or Tengelmann in Germany and Laurus in The Netherlands. However, Retail Intelligence acknowledges that Tesco does not need Kingfisher. Of all the UK grocers Tesco is the most European in its outlook and it may well choose to be the focus for a new pan-European grouping in its own right.

Retail Intelligence estimates that the total European market for food retailers was worth £555bn in 1998. Even with Asda, Wal-Mart only ranks eleventh.

Retail Intelligence points out that while the top two UK food retailers rank only fourth and tenth in the list, they are the top performers in Europe in terms of sales per square foot. Tesco and Sainsbury generate sales per square foot of over £1,000 (£11,000 per square metre) and, in terms of sales density, all of the top five European food retailers are from the UK.

Consolidation and the consumer
Retail Intelligence argues that the expected consolidation will not act against the consumer's interests. Greater buying power, greater ability to invest in new systems and the transference of best practice across national boundaries will lead to more efficient retailing and so, potentially, to lower prices for the consumer.

Top 11 European food retailers
  Retailer Country Euro-market share (%)
1 Rewe Germany 4.0
2 Edeka Germany 3.8
3 Promodès France 3.3
4 Tesco UK 3.2
5 Aldi Germany 3.1
6 Intermarché France 2.8
7 Auchan France 2.7
8 Leclerc France 2.7
9 Carrefour France 2.3
10 J Sainsbury UK 2.3
11 Wal-Mart USA 1.9

NB: Based on turnover in Europe, not worldwide
Source: Grocery Retailing in Europe, Retail Intelligence, 1999

This is not to say that consumers are badly treated at present. Retail Intelligence points out that Wal-Mart in the US generates a higher operating profit margin than Asda does in the UK. While consumers may benefit from consolidation, there is little evidence that retailers are profiteering or overcharging at present.

Political interference
Retail Intelligence argues that legal and planning restrictions across Europe are not acting in customers' interests. Too often they are the result of successful lobbying either by manufacturers or the representatives of small retailers, the latter representing those retailers that consumers have chosen not to shop with.

So in Spain and France it is now illegal to sell below cost. In Belgium and France it is virtually impossible to open a new hypermarket. In such an environment, political interference in the consolidation process cannot be ruled out. However, Retail Intelligence believes that the most important factor is to maintain a strong competitive environment. Reinforcing legal restrictions will protect existing players, establish insuperable barriers to entry and end up being anti-competitive. Threatened with such an environment, the pressure to act quickly to create new super groups will intensify.

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