Against a backdrop of weak consumer confidence and falling prices, four of France’s leading four retailers have, in two deals, decided to team up on purchasing. And the country’s food manufacturers are not happy.
Last week, Intermarché (which accounts for around 14% of France’s retail market) and Casino (with a market share of 11.2%) announced they work together to buy in national brands, starting from the negotiations for 2015.
That agreement came hot on the heels of a similar deal between Auchan and Système U, France’s fifth- and sixth-largest grocers, with market shares of 11.3% and 10.3%.
The agreements contain exclusions. The deal between Casino and Intermarché does not include “traditional fresh farming or fishing produce” nor to brands supplied by SMEs, nor by what the retailers termed “mid-sized companies”. The retailers also announced their work would not include private label, although, according to reports in France, Casino will submit all of its own-label tenders to Les Mousquetaires, the parent of Intermarché. If the same purchasing terms are offered, Casino will give priority to its new partner.
Auchan and Système U said their deal excluded fruit and veg, cheese, baked goods, cakes and pastries, meat and fish. Their agreement also does not cover own label.
Reflecting on the venture, Auchan pointed to trading conditions in France. “This agreement takes place in a difficult economic backdrop, with value being wiped out by deflation [and] no prospect of a rebound in the medium term.”
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Retailers, faced with falling prices and weak consumer confidence in France, are desperate to find savings to boost margins.
“They have had price deflation for well over a year. That’s a huge pressure. And then the overall macro environment in France isn’t good at the moment,” Daniel Lucht, research director at retail analysts ResearchFarm, says.
Recent competitive dynamics in France are also seen as a significant factor. “Playing into this is that Auchan has been struggling since Carrefour has had its renaissance,” Lucht explains.
Fabienne Caron, a retail equity analyst at Kepler Cheuvreux, believes Casino’s moves to improve the performance of its Géant hypermarket chain was the spark for the four rivals signing the purchasing agreements. And Caron argues Casino’s deal with Intermarché will give it the leverage it needs to further invest in prices at Géant.
“It is clear to us that the price repositioning of Géant triggered the price war and thus the consolidation process. Géant is, together with Leclerc, continuing to put pressure on the market. As such, it is difficult to believe that Géant will stop, now that it has more fire power,” she says.
Extracting savings to bolster margins appears the key reason behind the agreements. However, the retailers could, in theory, use some of the savings from teaming up on purchasing to invest in prices and promotions in the fierce battle for custom.
Either way, manufacturers have already expressed frustration at the deals. Negotiations in France are notoriously tough and the round of discussions for next year look set to be even more difficult for suppliers, faced with stronger retail customers.
“Neck and neck, only four players now share 90% of the market,” Jean-Philippe Girard, president of ANIA, the French food industry association, says. “We fear that this new merger marks the end of any prospect of improvement for our food industry and threatens jobs, our investment capabilities and upstream agricultural partners further.” Girard added the agreements would “accelerate the deflationary spiral on food”.
There has been a reaction to these concerns among the retailers. Speaking to Les Echos, Thierry Cotillard, director of purchasing for Intermarché, insisted the retailer would not look to intensify the “price war” between grocers in France. “The idea is obviously to negotiate better terms, since we are now number one in terms of buying power, ahead of Carrefour, Auchan/Système U and Leclerc. I have no figures to give you about the potential gains. We are not setting any limits. However, I can say that we do not see this deal as a way to step up the price war. A distinction must be drawn between retail prices seen by consumers and purchasing prices,” Cotillard was quoted as saying.
Nonetheless, there is the broad feeling among those who cover food manufacturing and consumer goods equities that the agreements are not positive for suppliers, with retailers’ strengthening their purchasing power.
And one most mull how the market leader, Carrefour, will react to these agreements. Combining the market shares of Casino and Intermarche, and of Auchan and Systeme U, puts Carrefour, a retailer that has invested heavily in price to try to revitalise its own performance in France, in the number two spot.
However, some equity analysts covering the French food sector do point to a potential longer-term effect of these deals: they could help manufacturers speed up a rationalisation of their range, which some industry watchers believe is vital. The agreements could help accelerate a move to more segments consisting of a brand leader, a challenger and a private-label line. Not good news for food manufacturers competing for shelf space but, for some in the investment community, a factor that could drive companies to shape their portfolios more effectively.
Despite suppliers’ fears, Lucht does point out there have been similar arrangements between retailers in France have been tried but then fizzled out just a few years later. In 1999, Système U joined forces with Leclerc but their co-operation lasted only two years. The same year, Casino and Cora formed a central joint purchasing operation that folded after just over two years. “The issue is always if these companies compete with each other as well, quite often they don’t trust each other. It’s not that stable,” Lucht says.
In the meantime, however, the two agreements are in place for the 2015 pricing negotiations in France. While not all manufacturers will be affected, the deals are set to strengthen the hand of retailers and put more pressure on suppliers operating in one of Europe’s most challenging markets.