prof. dr. dr. thomas roeb m.a. münster, 20 may 2011 · have tried to shift the burden for this...

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EPP 20 May 2011

Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. Institut für angewandte Handelsforschung

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German food retail sector – blessing or curse?

Prof. Dr. Dr. Thomas Roeb M.A.

Münster, 20 May 2011


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German farmers are under heavy pressure from the retailers´ side and there is no sign of improvement anytime soon

The major German food retailers are marked by low profitability due to the fierce competition from the discounters

But discounters have their own problems: Lidl and Netto are far away from catching up with Aldi South, but Aldi South is experiencing a slight erosion of sales

Aldi and Lidl have the additional problem of difficulties in their expansion abroad

Supermarkets are suffering from self-inflicted wounds, having privileged corporate stores over franchisees despite the former´s underperformance

Hypermarkets are in store format crisis with only Kaufland beating the trend – through price aggressiveness

German retailers have turned price aggressiveness into the key answer to these problems and have tried to shift the burden for this onto the suppliers

They are creating additional pressure on the supply chain by vertical integration

The abattoirs, the farmers´ key clients, are reacting to this by their own vertical integration and a bit of price fixing



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The biggest German food retailers are much less profitable than their foreign counterparts

source: annual reports 2010 (Tesco), 2009 (Albert Heijn, Rewe, Edeka)

EBIT in % of net sales

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A main contributing factor is overstoring

source: research and analysis Prof. Dr. Dr. Thomas Roeb, annual reports by Tesco, Sainsbury, Morrisons, Guyenne et. Gascogne

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The key reason, however, is the dominance of discounters

source: IGD

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Most surprisingly, discounters even grew further until recently from their already high level of market share

source: Nielsen Universen 2005 - 2010

Market share in German food retailing

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Key success driver in discounting is sales per POS, where Aldi South has left the competition and Aldi North far behind

source: Trade Dimensions, Analyses Prof. Dr. Thomas Roeb M.A.; all figures rounded

Sales per store as success driver in discounting

1948 Year of foundation 1962 1973 1982 2009

Albrecht Aldi SüdAldi Nord

Lidl Netto

personnel costs POS

Improve through utilization of employees at the till and while replenishing shelves

occupancy costs POS

reduced as % of sales, because fix

transpor-tation costs

reduced per item, because bigger drop size

warehouse costs

Reduced through utilization of employees because of bigger deliveries


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gross sales per PoS in mio. € p.a.

source: Planet Retail, Trade Dimensions

Non-Food Boom

This deficit is the result of problems reaching far back into the past


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This is despite Lidl and Netto offering much more SKUs – but in vain, their sales are just distributed over more different SKUs

source: analyses Prof. Dr. Dr. Thomas Roeb M.A.; all figures are rounded

no. of SKUs and gross sales/SKU p.a. of German discounters



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Aldi South had to vastly increase the assortment over the last 10 years ...

source: analyses Prof. Dr. Dr. Thomas M.A.

Discount: Wachstum/Wachstumsrate des Sortimentsumfangs

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... only to keep sales at least flat; the willingness of the consumers to accept the limited discount assortment is decreasing

source: analyses Prof. Dr. Dr. Thomas Roeb M.A.

discount: evolution of sales per SKU


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In none its three expansion phases the discount has been able to replicate its success in Germany

Market share> 40%16 – 40%10 – 15%5 – 10%< 5%


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All Western European success stories are the result of unique circumstances

• Discount market dominated by DIA% • limited presence of German discounters Aldi, Lidl etc.

• Aldi market leader since 1968• Also activities by Lidl, Penny and

Plus

• Discounters are supplanting the inefficient smaller supermarkets in their role of proximity stores, but are not taking market share of the dominating hypermarkets

• Many different discounters such as Aldi, Lidl, Norma, ED, Dia, Leaderprice etc.

• Close to half of the discount-segement belongs to an indigenous operator called Netto, which is active since the early 80s

• Aldi has been active since the 70s, but with a weak concept (Aldi North)

• Market leader is Aldi with a presence dating back to the 70s

• Lidl is active as well

• The discount market is entirely in the hands of an indigenous operator called Reitan 1000, active since the early 80s

• Lidl had to withdraw from the market



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Aldi is nowhere as price aggressive as in Germany

source: survey Prof. Dr. Dr. Thomas Roeb M.A. 11/2009

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Lidl, too, is more price aggressive in Germany than abroad

source: survey Prof. Dr. Dr. Thomas Roeb M.A. 11/2009

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As opposed to the discounters, the supermarkets have neglected their store network

Stores: discount vs. supermarkets


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Franchised stores usually outperform corporate owned ones

Supermarkets: franchise- vs. corporate owned

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The superior profitability has to shared with the franchisee, though

• Retailer acts as wholesaler

• Franchisee can – to a limited extentt, buy from other sources (e.g. fresh products)

• Retailer ses• is supplied 80- 95%

of his needs by the retailer

• Retailer receives for this support of the franchisee ca. 4 –6% des of sales, out of which he keeps 1,0 - 1,5% as profit

• Retailer operates the stores himself

• The store is run by a employee

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Supermarkets: franchise- vs. corporate owned



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Up until well into the 90s, independents were used for using up small surfaces, the bigger profitable ones being kept for the company-stores

Independent store owners as opposed to company stores

• „So hat sich die Spar auf die Fahnen geschrieben, alle Flächen bis 1 000 qm zu privatisieren;. Auch aus Rewe-Kreisen sind Zielgrößen für neue Selbständigen-Märkte von um die 1 000 qm zu vernehmen. Ähnlich verhält es sich bei der Edeka…“ (LZ 8.1.1998) (Thus Spar-Group has proclaimed to privatize all stores with less than 1.000 sqm. Rewe management, too, indicates, that newly privatized stores should have about 1.000 sqm. Edeka is thinking similarly ...)

• Nun wird auch in den Chefetagen der führenden deutschen Handelskonzerne darüber nachgedacht, renditeschwache Filialsysteme durch Einführung von Franchise auf Ergebniskurs zu trimmen. Supermärkte einer Größenordnung zwischen 500 bis 700 qm hätten im Wettbewerb durchaus eine Chance, analysiert Wolfgang Gutberlet, Seniorchef des Fuldaer Regionalfilialisten Tegut -- nur eben nicht mehr als Teil eines zentral gesteuerten Systems“ (LZ 30.9.1999) (Top-Management of the leading German food retailers thinks about improving profitability of company operated stores through franchising. Supermarkets of between 500 and 700 sqm sales surface are considered to have a good chance of competing successfully analyzes Wolfgang Gutberlet, CEO of regional supermarket chain Tegut; but not as part of a centrally managed system)

• Die übernommenen 29 Pro-Märkte werden von unserer Einzelhandelstochtergesellschaft Neukauf *, die eine positive Entwicklung zeigt, übernommen und weitergeführt“, Günter Mülln, GF der damaligen Edeka Duisburg, zum Schicksal der von der KG Dortmund-Kassel übernommenen Märkte (LZ 22.1.1998) (The 29 Pro-markets (taken over from Coop Dortmund-Kassel) will be integrated in our retailer subsidiary Neukauf) – „…EDEKA neukauf verfügt in der Regel über eine Verkaufsfläche zwischen 1.000 und 2.500 Quadratmetern“, www.edeka.de. vom13.10.2009 (EDEKA neukauf (large supermarkets) usually dispose of a sales surface of between 1000 and 2.500 sqm.)



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Up until today, Edeka has not succeeded in making up for the mistakes of the past: franchisees´ stores are much smaller than the corporate ones

Source: annual report Edeka

takeover SPAR

Inte-gration Marktkauf

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All hypermarkets besides Kaufland are suffering from low growth or even sales losses

source: Trade Dimensions/LZ 19.2.2009; annual reports Metro, Edeka; LZ 17.1.2002;

Sales of most important hypermarkets

2006 takeover of Walmart Germany with ca. 2 bil. € net sales

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In Food and Non-Food, many specialists have sprung up competing against the hypermarket´s limited assortment per category

Competition and share of Non-Food at hypermarkets


„Mom-and-Pop-Shop“

Owner-run specialty store

H&Mkik

Deichmann

Mediamarkt

Independent drugstores drugstores

ATU

DiscounterSupermärkte

60s 90s

Umsatzanteil Non-Food

65%80%

35%20%

1975 2005

Non-Food

Food

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Kaufland has solved this problem by minimizing the share of Non-Food …

Source: researcb und Analysen Prof. Dr.-Ing. Dr.rer.pol. Thomas Roeb M.A.;

Structure of sales surface and sales at hypermarket and Kaufland

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… and becoming price leader in food through cost leadership

source: Trade Dimenstions, analyses Prof. Dr.-Ing. Dr.rer.pol. Thomas Roeb M.A.; figures are rounded

surface productivity and profitability at hypermarket and Kaufland

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In 1999 retailers started to create the organizational basis for turning occasional demands into the basic starting point of negotiations


1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

„Mitten in die zum Teil noch laufenden Jahresgespräche und die bisher beispiellosen Preiskämpfe im deutschen Handel platzen gepfefferte Einmalforderungen prominenter Handelsgruppen.

… Rewe-Pläne, die Konditionsverhandlungen zu zentralisieren, die bisher in die Region geflossenen Industriegelder nach der Bestwertmethode einzubeziehen und für diese Bündelung und die darüber hinaus geplante Geschäftsausweitung zusätzliche Verbesserungen zu fordern.

… Markant-Vorhaben, neue Rahmenvereinbarungen zu erheblich verbesserten Konditionen“

LZ 28.10.1999

„Right into the ongoing negotiations and the so far unheard price wars among retailers are coming very high on-off demands of prominent retail groups

REWE´s plans to centralize negotiations, to include the money flown into the regions into the central annual talks on the basis of best-result-for-the-whole-group and to demand additional improvements for this concentration and the planned sales increases.

Markant plans, to obtain a new contractual framework at much improved conditions“

Price pressure on suppliers as key negotiating strategy of retailers


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Since 2003, annual talks have changed; occasional demands have been replaced by annual demands as component of annual talks

Quelle: Analysen Prof. Dr. Dr. Thomas Roeb M.A.

Price pressure on suppliers as key negotiating strategy of retailers

Frust über Jahres-gespräche

„Vom Konditions-gebolze wollen die meisten Händler auch in diesem Jahr nicht abrücken“

Frustration with annual talks –most retailers stick to price haggling this year, too“

LZ 30.10.2003

Jahres-gespräche mit Nachver-handlungen

Neue Gangart. Jahres-gespräche leiden unter den Preisattacken der Discounter.

Annual talks with renegotiations –annual talks are suffering from price attacks by the discounters.

LZ 25.11.2004

Vollsortimenter: Kampfpreise gegen Discounter

Supermarkets and hypermarkets: attack prices against the discounter

LZ 5.11.2009

Konditionen: Hersteller beißen auf Granit

conditions: manufacturers are banging their heads against a brick wall

LZ 8.11.2007

Jahres-gespräche: Finanzkrise erhöht den Druck

Annual talks: financial crisis increases the pressure

LZ 23.10.2008

Handel ignoriert Rohstoffpreise –Konditionsver-besserungen von 3- 8% gefordert

Retailers ignore price increases of raw materials – demanding improvements of conditions of 3 – 8%

LZ 1.10.2010

...

...


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SWL20. Juli 2010

Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A.Institut für angewandte Handelsforschung

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Farmers´ operating costs are the main cost factor of the whole value chain for meat – thus making them the prime target for pressure from retailers

slaughtering,splitting

supply chainstores

producing jointspackaging

source: Basis: Daten für den Einzelhandel von AIM, other data: estimations/calculations by Prof. Dr. Dr. Thomas Roeb M.A on the basis of expert interviews


Service counters in the store• selling• processing into pieces small enough to be sold• in some stores, processing of joints into products ready to be sold • production of Wurst

Meat processing units:• purchasing of split animals or joints• further processing into smaller joints, then• packaging directly for sale as fresh meat• adding spices, sauces etc. to sell as convenience products• processing into Wurst for service- and self-service-counters• beyond this• wholesaling of products from third parties• operating the self-service counters in the store (e.g. Fuck by Dohle)

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Retailers are exerting backwards price pressure through verticalintegration through the development of meat processing units

Quelle: Basis: Analysen Prof. Dr. Dr. Thomas Roeb M.A auf Basis von Expertengesprächen

retailerMeat processing unitsFleischwerke/meat processing units

value chain meat/Wurst

slaughteringraising processing retailing

abattoirs

„Wurst“-manufacturers

farmers


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Unfortunately, there is no sign of price pressure decreasing, because retailers are using meat for price promotions

source: analyses/calsuclations Prof. Dr. Dr. Thomas Roeb M.A on the basis of interviews with experts

discounters pursue an EDLP (every day low price) strategy forcing them to align their every-day price with the retailers´promotional prices

since early 2009, discounters have slowly but surely started to do promotional pricing themselves


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Abattoirs have reacted likewise with their own vertical integration

Quelle: Basis: Analysen Prof. Dr. Dr. Thomas Roeb M.A auf Basis von Expertengesprächen

slaughteringraising processing retailing

abattoirs

farmers

„Wurst“-manufacturers

value chain meat/Wurst

• slaughtering and splitting, i.e. in halfs or sometimes somewhat further

• further cutting up into smaller pieces depending on demand

then (e.g. Tillmanns by Tönnies and Westland by Westfleisch)

• partially packaging to sell as fresh meat• partially adding spices etc. to sell as

convenience products • a small part processed further into „Wurst“

(sausages, delicatessen etc.)

retailerMeat processing unitsFleischwerke/meat processing units


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in addition, the abattoirs are using the oligopolistic market structure to keep purchasing prices for the animals low

abattoir B

abattoir C

abattoirf A

abattoir …

small number of abattoirs faicilitates informal exchange of information about the market situation

however: information exchange is hindered by negative personal feeling between certain players (Tönnies towards Vion)


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Thank you for your attention

prof. dr. dr. thomas roeb m.a. münster, 20 may 2011 · have tried to shift the burden for this...

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