Food Retailing in Europe

A new report from Mintel's Retail Intelligence reveals that food retailing remains one of the most dynamic and innovative retail sectors with sales forecast to grow by 17% between 2001 and 2006. The rationalisation started by Wal-Mart and the Carrefour-Promodès deal still has far to go and there will be more merger deals in the next few years.

This trend reflects the expansion of market leaders into non-foods areas. 'Sales through supermarkets and superstores which have capitalised on their non-food offer have continued to outperform those of the food trade as a whole and the effect on specialist retailers in all these markets will be dramatic' comments Richard Perks, Senior European Retail Analyst.

The food retailing sector is becoming increasingly concentrated and there has been talk of further concentration in the multiple sector itself, with speculation about possible mergers between the majors.

Total consumer spending on food, drinks and tobacco in Europe in 2001 was euro 903bn (including sales tax). Between 1996 and 2001, European food retailers registered a market growth of 22.7% and Retail Intelligence forecasts their market size to grow by some 17% between 2001 and 2006.

This growth has been fuelled by a number of factors. Firstly, there was the development of one-stop shopping in France, where the hypermarket concept was hugely successful. Secondly, advances in distribution technology, computing power and associated systems gave retailers who invested in them a substantial advantage over the competition. Among those are UK food retailers, who have been leading the way in product and store innovation and in systems. 'The natural consequence was that the successful, forward looking businesses were able to swallow up the smaller, weaker players, and with remarkable speed, develop a dominant position in their local markets' comments Richard Perks.

Consumers have indeed become more demanding of retailers and are increasingly looking for authority of product offer. 'Food retailers, therefore, must have a clear idea of their target market, its needs and aspirations, because any shortcomings in the offer will be punished as customers switch to competitors' comments Richard Perks.

In many respects the UK food retailers have led their European counterparts in developing non-food ranges. 'They may not have had the space to make a comprehensive one-stop shop, but with ranges such as George, they have developed real authority and even established a strong brand identity. It is noticeable that retailers such as Carrefour are now moving in the same direction, though as yet no-one on the Continent has a clothing offer as strong as George' comments
Richard Perks.

Retail Intelligence argues that retailers earn loyalty through the excellence or appropriateness of their consumer proposition. Providing consumers with one-stop shopping and clear product offer is therefore more likely to contribute to store loyalty than loyalty card schemes. 'It is time to give loyalty cards a rest', comments Richard Perks, 'they have proved a useful promotional tool, but loyalty has to be earned and cannot be bought by a few points on a card.'

Retail Intelligence believes that the profits reaped from such schemes have not always matched the time and investment required, and to a certain extent distracted retailers from concentrating on what really matters to the consumer. Safeway, who two years ago famously scrapped its loyalty card programme, has gone from strength to strength. This is not, of course, because the card has gone, but because of the improvements made to the business itself.

Space is becoming increasingly important for grocers who want to capitalise on their high footfall and consumers' growing propensity to one-stop shop. Better systems have reduced the amount of stock needed in-store and so reduced the facings necessary, releasing space for more products. In the UK it has helped fuel the growth of the superstores. However, in France and Belgium it is, in effect, no longer possible to open new hypermarkets.

The long-term trend, according to Retail Intelligence, will be a polarisation between superstores and convenience stores. In the UK, ASDA and Tesco are putting more effort into developing hypermarkets in order to make a more authoritative non-food offer and make sure that neither gains a significant lead over the other in this format. At the other end of the spectrum, Tesco and Sainsbury have powerful C-store formats. 'As a result, it is the high street retailers in the middle that are being squeezed as the performance of Iceland and Somerfield makes clear' comments Richard Perks.

Multiples now lead in almost every market in Europe and the UK is no exception. Four supermarket chains, led by Tesco (which has broken £1bn profits barrier) and including Sainsbury, ASDA, and Safeway - account for over 55% of food retailers' sales.

Next in the pecking order come a group of retailers with problems. Iceland and Somerfield share the problem of a portfolio of stores that sit uneasily between superstores and convenience stores.

Carrefour, as the world's second largest retailer, is also easily the largest retailer in Europe. Wal-Mart, which owes its world number one ranking to the strength of its US business, comes much further down the ranking of retailers in Europe in 6th place, thanks largely to the strength of ASDA. The 'Wal-Mart factor', however, is forcing big supermarket chains to look abroad and food retailing is a sector where pan-European and global mass is becoming even more important.

Aside from domestic organic and international store openings, the main way of achieving aspirations has become acquisitions and mergers. 'Saturated domestic markets and the quest for ever-greater buying power and synergistic economies of scale are meaning that gaining size on both domestic and international levels have become one of the pre-eminent goals of grocery retail companies' comments
Richard Perks.

Since moving into Germany, with the acquisition of Wertkauf and Interspar, and into the United Kingdom, with the acquisition of ASDA, Wal-Mart has shown that it sees Europe as more than a test market. The French chains Carrefour and Promodès reacted quickly to Wal-Mart by announcing their merger, putting them one step ahead of competitors in Belgium, France, Portugal, South America, Spain, and elsewhere.

UK food retailers have not been left behind and Tesco is the retailer that has embraced internationalisation most wholeheartedly. Its developments in Eastern Europe are now absolutely central to its strategy going forward.

The process of internationalisation will continue. There is still scope for the majors to expand in the less developed Southern and Eastern areas of Europe but internationalisation is not an end in itself. Indeed, food retailers who want to generate real growth on top of that must expand their non-food ranges and that requires space.

All articles 2006-22 written and edited by Mel Crowther and/or Nick Thomas unless otherwise stated.

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