Germany's food retailers are in a period of change with the country's top grocers looking at how to generate growth in one of Europe's toughest retail environments. Nevertheless, it is the market's defining factor - the strength of the discount segment - that remains the key driver behind decision-making for consumers and retailers in the country. Dean Best reports.

Food retailing in Germany is in a state of flux. In recent weeks, executives have come and gone and stores bought and sold as the country's retailers look to reposition themselves in one of Europe's toughest retail environments.

There's been change at the top at Metro, the world's third-largest retailer, which has installed a new chief executive after pressure from investors. Metro may be big overseas but in Germany it ranks behind the likes of rivals Edeka and Rewe, and new CEO Eckhard Cordes is weighing up the options for parts of its local operations in order to get growth from its domestic business.

Last week, Edeka secured a major deal that is set to make it Germany's largest food retailer - and the fourth-largest in Europe. The company signed a deal to become the majority shareholder in a discount retail venture with local conglomerate Tengelmann.

Tengelmann, the owner of US retailer A&P, has decided to sell control of its Plus discount stores, which will be placed into a venture with Edeka's Netto outlets. Edeka will take a 70% stake in the venture, which will run around 4,200 stores in total, generating annual sales of about EUR11bn (US$16.3bn).

But underlying all this change have been the defining, long-term characteristics of German food retailing - fierce competition and the strength of the country's discounters.

The cut-price segment still accounts for a minority of food sales in Germany - but only just. The discount segment in Germany is one of the largest in Europe; the country's top seven discount retailers, including the likes of Plus, Aldi and Lidl account for around 40% of sales.

And the segment continues to grow, as German consumers continue to demand cut-price food. "The discount segment is very strong in Germany and is still growing, so if you want to be successful in Germany, you have to have a foot in the discount segment," Cecile Riverain, a senior business analyst at IGD, tells just-food. "The consumer in Germany is so used to buying on discount that they don't even think about it. You have the traditional image of a Porsche parked outside a discount store, which is where shoppers do their main shopping, and then they go to a Kaufhof department store to buy an expensive bottle of wine to complement their meal. For them, discounting doesn't necessarily equal low quality."

Edeka chairman Alfons Frenk (left); Tengelmann executive director Karl-Erivan Haub (right)

The deal between Edeka and Tengelmann shows that Germany's large grocers are jostling for a larger slice of that demand. Historically, Edeka had been seen as Germany's more upmarket food retailer but in recent years the company has moved to bolster its discount business. Edeka's first significant move into discount retailing was in 2005 when the company snapped up Netto. Last week's move to acquire control of the Plus stores will make Edeka the third-largest retailer in Germany's discount segment behind Aldi and Lidl. The move is a clear sign that Edeka sees a strong discount business as a must if it is to prosper in Germany's fiercely competitive retail sector. Although the deal remains subject to regulatory approval, Edeka and Tengelmann have already drawn up plans for their venture to open 300 more discount stores a year.

Edeka beat off a rival offer for Tengelmann's Plus business from Rewe, its nearest rival and Germany's number two food retailer. Edeka's deal with Tengelmann irked Rewe CEO Alain Caparros, who on Friday (16 November), the day the venture was unveiled, said it would be "difficult" to turnaround the Plus business. "The integration, reorganisation, and inevitable closure of hundreds of locations that would be required by cartel law will be enormously costly and slow," Caparros said.

Germany's anti-trust body is to study the agreement between Tengelmann and Edeka to see if it violates competition law and store disposals may necessary to meet regulations on competition. Rewe, meanwhile, is upping the ante in the discount segment with its own expansion plans. The company plans to open up to 180 discount stores under its Penny fascia next year.

Metro's discount business, Extra, could also be up for grabs. The retailer is mulling what to do with its 252 Extra stores and, although the company is keeping its cards close to its chest, it has admitted a sale of the business is an option. While Edeka focuses on the German market, Metro generates 60% of its sales overseas and emerging markets like India and China could be a better route to growth than its home market. Edeka has admitted a "general interest" in Extra, illustrating that further consolidation in Germany could be on the horizon.

Riverain believes that, although Germany remains a "very mature market", there is still room for further consolidation as retailers look to "leverage efficiencies and build up purchasing power".

For suppliers, it seems Germany will remain a difficult place to do business. With its buoyant discount segment and with retailers looking to build purchasing power and keep costs down, suppliers could face a squeeze as they face rising commodity costs.

Riverain agrees. "Certainly for suppliers in 2008, it will be a tough year of negotiations."