The combined populations of Britain and Germany account for 40% of the EU. With more than 208,000 stores, the two countries have 30% of grocery stores. These dominant positions translate to a market share of 44% of total EU grocery sales. The two countries clearly represent the largest grocery markets in Europe and it is no coincidence that Wal-Mart, the world’s largest retailer, decided to establish base camp in Britain and Germany from which to develop its European business.
Wal-Mart’s impact has already been significant, raising price competition and sharpening the marketing and promotional activities of the major players. Nevertheless, a new study of European food retailing from Verdict, the retail research consultancy, says that we have yet to see the real impact of Wal-Mart across Europe. What is clear is that with representation in less than 50% of the European marketplace, Wal-Mart is only at the very early stages of its market entry strategy.
Verdict on European Grocery Retailing says that retailers in the third largest market, France, must be at the top of Wal-Mart’s shopping list. Carrefour and Promodes have already acted to take themselves out of the frame as potential targets, but the report says that the US giant cannot really make the most of its scale advantages in just two countries in Europe, albeit the largest ones.
Further defensive acquisitions and mergers are bound to follow as rivals battle to ensure their relative competitiveness is not undermined. Competitive pressures are not the only reason why the largest grocery retailers must seek scale. Price deflation is being forced on retailers by many factors including the euro, and the greater price transparency it facilitates. As a result they must seek scale in order to achieve the lower prices that consumers demand.
Price deflation can actually be good news for retailers where products are strongly price elastic. However, for the vast majority of grocery commodities, demand is largely inelastic. In this case, rather than boosting market sizes, the grim reality of deflation is that it simply leads to smaller sales values.
Verdict says that price deflation makes consumers more demanding of better value from retailers. Deflation tends to be self-reinforcing by encouraging a ‘sell-now’ mentality on the part of sellers that further stokes up consumer expectations of lower prices. Lower prices place greater profit margin pressures on retailers that will weed out smaller and less efficient operators. This, in turn, will lead to greater consolidation within the European grocery market. At the end of the day, the point remains that grocery retailing is a scale business worldwide.
While the EU is set to see the 1999 pick-up in economic performance continue into the early part of the new millennium, many retail sectors will not share in the buoyancy surrounding this favourable economic outlook. Just because consumers are better off, they will not necessarily spend more on food, says Verdict, but on other products and services such as leisure. The report points out that ageing population shifts are sweeping across the EU. Those aged 45 and over are forecast to account for 45% of the total population by 2010. This will result in a declining retail spend share of overall consumer expenditure. Consumer spending is forecast to grow most strongly on leisure orientated activities such as travel and entertainment, on home improvement products and services, and again, reflecting demographic changes, on healthcare.
For grocery retailers, there are numerous implications from the more elderly population bias. At the more tactical level, selling space will be extended and reconfigured with greater health and beauty focus within growing non-food offers. More strategically, advertising activities will be re-evaluated and business diversification programmes will assume greater importance. Retail brands will be stretched to cover financial services, for example.
The prospect of diminishing demand means that retailers are looking to better integrate advancing information and telecommunication technology to gain a competitive edge and better develop customer loyalty. Online commerce is receiving increasing investment as is the management of information flows, both to reduce supply chain inefficiencies and to strengthen relationships with customers.
Ultimately, limited real sales growth, allied with domestic new store development restrictions and the allure of economies of scale, are combining to form a huge wave of consolidation that is sweeping across the European grocery market.
Verdict’s report covers the major strategic issues facing European grocers today. It also covers the economic and demographic background of the EU and compares the top 10 European grocery retailers.
Within the EU countries, Germany has the largest number of grocery stores, but Italy has the highest number of grocery specialists and independents and the UK has the highest number of supermarkets. Napoleon’s comment about the UK being a nation of shopkeepers might now look misplaced. He might have approved the fact that France has the lowest number of grocery stores at 1.2 per 1,000 population, however, it now ranks third lowest with 1.4 shops per 1,000 population. No longer a nation of shopkeepers, the UK is now a nation of supermarket shoppers, says Verdict. On a per capita basis Greece has the highest number of grocery shops – and therefore grocers – at 3.8 per 1,000 population. Finland ranks second lowest.
The report splits stores by size with specialists/independents below 1,000 sq m (10,760 sq ft), hypermarkets above 2,500 sq m (26,900 sq ft) and supermarkets in the middle. The UK has more supermarkets than any other EU country at 18,171 and 1999 supermarket sales of Î73.2bn (£43.9bn), more than Î11.5bn (£6.9bn) ahead of Germany.
The UK comes behind Germany and France in total sales through hypermarkets, but taking supermarkets and hypermarkets together, the UK has the highest penetration of large format grocery outlets. These accounted for 80% of UK grocery sales and 70% of UK grocery space in 1999.
Germany comes only fourth of the EU nations in grocers’ sales per sq m. This is because its average is dragged down by having large numbers of specialist/independent stores. It is second only to Italy in terms of numbers of specialist/independent grocery stores. Germany’s equivalent £ per sq ft overall average is £197.
Italian grocery has a slightly higher overall sales density at £198, in third place, thanks to topping the EU supermarket space performance table on £279 per sq ft. France has the second best overall sales density because of a strong performance across all formats.
But the surprise leader is Ireland with a sales density of £231 per sq ft. It tops the specialists’ space performance table with £218 per sq ft and appears in the top three in all formats. This reflects in part the wide product range that can be found in Irish grocery stores within a small average size store. Consumer demand is also strong, as Ireland tops the table for grocery sales per capita.
Rankings by grocers’ sales per country are: Germany (1), UK (2), France (3), Italy (4), Spain (5), Netherlands (6), Belgium (7), Greece (8), Sweden (9), Austria (10), Denmark (11), Ireland (12), Finland (13), Portugal (14) and Luxembourg (15).
Germany has most hypermarkets and the largest space of any country devoted to hypermarkets, but ranks only 12th for space performance in the hypermarket sector. This helps to explain its relatively low overall ranking for sales per sq m. It is second only to Italy in supermarket space performance, but relatively lowly placed again at seventh for the space performance of its specialists/independents.
The UK also has mid-ranking sales per sq m, in seventh place overall. This results from the performance of smaller store operators, rather than the market leaders.
France’s profile befits its third position more or less across the board, except it leads in sales per store. This is helped by the fact that it has very large hypermarkets.
Italy scores well in sales per sq m in its supermarkets, but overall the size of its stores is small: it is in 10th place for sales per store.
Spain scores well in numbers of supermarkets (second) and numbers of specialists/independents (second) but low down for sales per store and sales density in 13th and 12th places respectively.
Verdict on European Grocery Retailing is the first in a new series from Verdict entitled: Strategic Issues in Europe.
· European Grocery Retailing 2000 – Price: £1,250 (print copy)
£2,000 + VAT (electronic copy)
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