The German grocery sector is characterised by low-prices and discounter dominance, resulting in razor-thin margins for operators in this highly-competitive sector.
However, recent GfK research suggests that the discount boom is coming to an end, with the country’s supermarkets are enjoying a “renaissance”.
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GfK found that while discounters still account for the majority of sales share in Germany, at 43.9%, against supermarkets’ 24.6% share, sales growth in the discount channel stagnated at 1.3% for the year against 2.4% for the supermarkets.
The researchers emphasise that the “renaissance” that supermarkets are seeing is not down to aggressive space growth plans. The 1.3% sales growth recorded by the discounters was driven by an almost a 4% increase in selling space. Meanwhile, the supermarkets recorded their 2.4% sales growth with a slightly smaller sales area (down 0.4%) and with 4.6% fewer outlets.
Meanwhile, consumer confidence appears to be positive, with GfK describing the Germans as as the “optimists of Europe”, with economic growth outstripping that of the rest of the EU. German GDP was up 3.6% in 2010 and the country it remained the only EU member state to see unemployment figures fall between 2007 and 2010.
Additionally, GfK said German consumers’ propensity to buy is the highest in the EU, with an index value of 27 against -11 for the EU on average.
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By GlobalDataGfK is currently forecasting a 1.7% rise in grocery sales in Germany in 2011, on the back of a 1.2% rise in 2010.
While GfK paints a rosy picture of the German retail sector, with a strong economy and good consumer confidence, particularly when compared with its European neighbours, the picture becomes more complicated and perhaps a little bit less rosy when the full competitive situation in the country is considered.
According to the country’s Federal Cartel Office, the country’s four leading retailers – Schwartz Group, Aldi, Edeka and Rewe control some 85% of the grocery sector. On Monday (14 February), the Bundeskartellamt announced that it plans to examine the impact that concentration has on the market, particularly on the supply chain.
A spokesperson for the Bundeskartellamt said that the inquiry would be an “open one” into the sector and that it is not investigating on suspicion of collusion but is concerned about the “restricted nature of the market”.
The spokesperson explained that that there were a number of mergers between retailers that took place last year and the watchdog focused most of its attention on the impact the mergers would have on consumers. It has, so far, been unable to investigate the impact the deals have had on suppliers.
Neil Saunders, an analyst at Datamonitor’s retail arm Verdict, estimates that grocery prices in Germany are around 15% lower than the rest of Europe, which he says is due to the “predominance of the discounters”. German consumers, he argues, have come to expect low prices when they come to shop.
From a supplier perspective, Saunders says the low prices are “a concern”. He explains: “Suppliers do get squeezed as the only way you can offer low prices is to accept low margins – and also to push suppliers into having lower margins too.”
However, Saunders says that the “quite thin” margins in German grocery retail will mean that it will be difficult to accuse the grocery retailers of “profiteering from squeezing suppliers, as their own margins are very, very thin”.
He adds that the way that retailers make their profit is because they “sell in enormous volumes”, which, he says, is why “there is that enormous concentration in the market, because you need to sell at those volumes to make a reasonable profit”.
Saunders acknowledges the German economy is much more robust than other economies in Europe but argues that there is difficulty getting German consumers to spend. “They are not profligate consumers,” he says. “They are much more conservative in their spending habits, generally. But also there is still a degree of uncertainty around how things will go in the future, even though the economy is performing quite well.”
Contrary to GfK’s research, Saunders dismissed suggestions that there is a real trend for German consumers to trade up to the supermarkets.
“On the surface you could make that conclusion, and certainly the supermarkets have been doing better than they have done over recent years, so there may be a little bit of trading up,” Saunders said. “But the thing that is more significant, as to why you’ve seen supermarkets like Edeka and Rewe doing better, is because they’ve done a lot on pricing. They’ve done a lot in terms of discounting themselves. So even though they’re counted as supermarkets, they’re really behaving more like discounters.”
Saunders adds: “It’s one of the most brutal grocery markets in Europe. While it may not be the most competitive market, it’s the one where there is very little growth in the market, because there is such a lot of discounting. It constrains growth overall, which makes it very difficult for people to make a living out of it.”
While the Bundeskartellamt has only just begun investigating the relationships between German grocery retailers and their suppliers, regardless of the conclusions the study comes to, it remains clear that the German grocery market remains a tough one to compete in, either as supplier or retailer.
