It’s a brutal environment.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Two of the world’s biggest retail groups — France’s Carrefour and the UK’s Tesco — announced plans to form a global purchasing alliance to help drive down costs as they respond to fierce competition from German discounters and fast-growing online rivals such as Amazon.
They are not the only supermarkets in Europe opting to combine resources in a bid to fend off new rivals. Struggling French supermarket group Casino has formed a joint purchasing venture with struggling Spanish supermarket group Dia, aimed at pooling 50% of private-label volumes. It has also forged strategic partnerships with retail group Auchan and Amazon.
Aside from its latest partnership with Tesco, which would allow the French retail giant to secure better deals with its suppliers to improve private-label offerings, Carrefour has partnered with Tencent to boost its presence in China. It has also joined up with Google to become more digitized and with Systeme-U to negotiate purchases with big food and non-food suppliers.
Alliances between incumbent retail groups are an attractive option in today’s hyper-competitive environment because they enable their respective partners to negotiate volume discounts from their suppliers, in particular powerful and large suppliers such as Unilever, Procter & Gamble, Nestle and Johnson & Johnson. That in turn helps to keep margins healthy.
This is particularly important in an environment where competitive pressures from low-cost stores and online challengers are driving margins lower. In the UK, Tesco and the three other Big-Four retailers — Sainsburys, Asda (owned by Walmart), and Morrisons — were recently on the losing side of a brutal price war with German discount retailers Lidl and Aldi. In the space of just 12 weeks last year Lidl and Aldi increased their sales by 19% and 17% respectively. Their market share also increased, much to the detriment of the national incumbents.
A similar thing is happening in France, Spain and Portugal. In Spain the domestic supermarket giant Mercadona now controls almost a quarter of the entire grocery market after years of ruthless cost cutting, while Lidl and Aldi are rapidly wrestling market share from other competitors, including Carrefour and Dia.
Dia’s stock is down over 50% since January 1. Scenting fresh blood, short sellers now hold 16% of the company’s stock, according to Spanish market regulators. Both Portugal’s Jeromino Martins and France’s Groupe Casino have lost around a third of their market cap so far this year, while shares in Carrefour, have had a month-long roller coaster ride that has left shares down 14%.
In the last week as many as five investment banks, including JP Morgan and Jefferies, have lowered the target price for Carrefour in 2019 by 20%. Barclays has forecast a fall in its revenues of 3% in Spain, 5% in Italy, and 2.7% in Belgium.
Spain’s privately owned El Corte Inglés, the largest department store chain in Europe by sales and the fourth-largest in the world, has been rocked by an internal power struggle as serious doubts emerge about the retail giant’s future.
Things got so bad at one point that the company felt compelled to postpone a €1.2-billion bond issuance, which in turn set off alarm bells among the dozen-or-so banks that have helped finance its addiction to debt. That debt is (or at least was) due to be refinanced later this year. El Corte Inglés’ new management is now trying to halve its debt load from €4 billion to €2 billion via a mass sell-off of assets.
This is a company that has dominated Spain’s retail landscape for generations. It employs over 90,000 workers — more than any other national institution barring the Spanish state. But the group has been struggling for years. Its overall market share has slumped by 8% since 2013, according to The Financial Times. Last year, despite a rebound in consumer spending, El Corte Inglés posted a profit margin of less than 1% across all of its divisions. The company’s supermarkets have generated losses every year since 2006. Earnings at its Hipercor chain of hypermarkets have essentially disappeared since the crisis.
The group is so desperate that in May a faction of its management even proposed forging an e-commerce alliance with its archenemy Amazon, whose sales in Spain dwarf those of El Corte Ingles’ online store by a factor of six. When El Corte Ingles’ then-chairman, Dimas Gimenez, learned about the proposed deal, he launched a furious tirade against Amazon demanding that the company compete in equal conditions and pay the same taxes as everyone else. Within a month, Gimenez was gone. Since then, the rumors of an alliance with Amazon have died down.
If the process of forming alliances among the largest retail groups plays out, market power is set to become a lot more concentrated as traditionally competing retailers seek salvation by cooperating with each other in order to be able to dictate lower prices to their suppliers. That can only be bad news for the suppliers. The smaller ones will be squeezed and eventually driven out of the market. The suppliers that survive will be those powerful enough and with enough working capital to weather the initial price squeeze. By Don Quijones.
The tourism boom accounted for a quarter of the jobs created in Spain since 2013 — but mass-tourism of this type brings its own problems, and now the boom is fading. Read… Multiyear, Job-Creating, Mass-Tourist Boom in Spain Runs Out of Steam
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I have trouble seeing how established brick&mortar retailers will be able to compete effectively. I would imagine that 20 years from now, 70%-90% of commerce will be conducted online. Unless the EU intervenes to protect old regional retailers I don’t know how firms like El Corte Ingles could possibly avoid being steamrolled by Amazon, Alibaba etc.
In the US, WalMart and Kroger are teaming up with Microsoft to fend off Amazon. On paper, these associations make sense but online commerce requires more than having a potent cloud provider. The logistics and the complexity of the software are mind-numbing.
The error here may be extrapolating only from recent data points.
Looking back over 100 years of retailing shows many, many buying fashions. Amazon looks unbeatable now, but so did Sears in 1980s and Walmart in early 2000s.
Amazon is undoubtedly strong now, but consumer preference determines winners & losers (unless, of course, the stupid government gets involved to “save” failing retail).
and then when the dust settles, prices will rise.
I’m not going to justify the relevance of this with a comment.
Sooner or later you will drop your smart phone.No way around it.It is the Law of Nature.
Hence the need for a decent well-fitting protective case.
Lets compare the prices:
Official phone dealer:$25
Mom & Pop shop (a hole in the wall):$18 + tax
Street vendor:$5 but total crap
Walmart:$13 + tax
Amazon:$7.99 + shipping + occasional tax
Ebay seller located in CA (who probably orders this stuff by the container):$5.99 + free shipping + no tax
Ebay seller located in Hong Kong:$3.99 + free shipping + no tax (item arrives in 2 weeks)
Ebay seller located in Mainland China:$1.99 + free shipping + no tax (item arrives in 4 weeks).
Another example:
T-mobile charges $25 + tax for a blank SIM card.Recently I bought the very same nano SIM card on Ebay for $0.99 + free shipping.It arrived in a regular letter and works like charm.
Gee,I even ordered from Hong Kong Ebay seller an exact copy of the latest military handheld radio ( Frequency Hopping Spread Spectrum + strong encryption).It is such fun to use this brick in public places when I am tired of my smartphone.
Bottom line:
Brick-and-mortar stores cant’t go out of business fast enough IMHO.
Sorry but your cheap Beofeng Chinese radio based around a single chip “SDR” type radio chipset won’t even come close to a quality Motorola or Harris radio that public service or Military use.
I’d guess it’s probably not AES or DES encryption.
But the Chinese radios are probably doing a pretty decent amount of damage to sales to the long standing Japanese ham radio equipment vendors. Not the same quality, but 1/5th the price or less.
I just bought a Wouxun power supply and dual band mobile and it is fine, except for the manual. I can use it as a repeater, has full encryption if desired, and suits my needs perfectly. I use it for a base station, and purchased it online from a mom and pop who moonlight ham equipment. Cost? $325 cdn. Similar Motorola or Icom would have been +3X as much, and certainly no better. Harris seems to be military focused and is probably 10X the cost.
Plus, my Wouxun can override programming restrictions limited by other models. This is very handy in my rural setting.
Now, since they don’t even make Ham radios in the States anymore, how on earth can someone who lives in the boonies hope to make purchases unless it is online. As for other products, I buy many tools online as the cost of driving miles and miles for comparison shopping negates any savings that might be out there. If someone lives in a city, and does not own a vehicle, then online is also a smart way to go unless a store is within a few blocks. I see many poor people taking taxis home after shopping for groceries. Seems pretty wasteful.
The only way brick and Mortar can compete is to group together and lower prices with bulk ordering. Otherwise, they cannot make it going forward. The future might see a lot of neighborhood bodegas stocking liquor, smokes, milk, bread, and eggs, (in that order). Oh yeah, chips.
Prick-152
https://www.ebay.com/itm/METAL-SHELL-5W-TRI-AN-PRC-152-MBITR-RADIO-INVISIO-SILYNX-DEVGRU-MARSOC-SEAL-FR-/263332760195
The same stuff peddled by Harris to the US Military with a 100% markup
I am not talking about $25 Baofeng.This stuff is for the Persons of Special Needs.
Harris makes AN/PRC-152 military radios (pronounced prick-152) from parts manufactured in Hong Kong.One vendor sells those radios for $225.Probably he works at the factory.
Long time ago I used AN/PRC-148 but there is not much difference.
===I’d guess it’s probably not AES or DES encryption.===
It is AES-256 certified “TOP SECRET”.
DES is history.Triple-DES still lingers though.
This stuff is for the Persons of Special Needs.
Special needs people are going to have a tough time mastering such technology, aren’t they?
Good example of “race to the bottom”!
I want to point out some difference among these stores: Aldi, Lidl, and also Billa are medium size stores in residential neighborhoods with minimum to no parking space. They hardly face competition from online retail. Carrefour, Tesco, and also Metro are huge, city-perimeter stores where car access is mostly the only option. They carry daily necessities so you need to get there on a weekly basis. Also they are not anchor stores in a shopping mall, so safety and security is not an issue. Amazon can chip away at the margin, but will have a hard time wiping them out.
“If the process of forming alliances among the largest retail groups plays out, market power is set to become a lot more concentrated as traditionally competing retailers seek salvation by cooperating with each other in order to be able to dictate lower prices to their suppliers. That can only be bad news for the suppliers. The smaller ones will be squeezed and eventually driven out of the market. The suppliers that survive will be those powerful enough and with enough working capital to weather the initial price squeeze.”
Uh, hate to break to news to you Don Quinones, but that ain’t news. Walmart has been doing this in the US for decades. They squeezed and squeezed, and all their suppliers either went offshore or were replaced by offshore producers.
One problem is that once a product has moved from being produced in the US or Europe to China is that the Chinese factory will then start making the same stuff for other sellers, re-badging under multiple names. So that’s not a strategy that works at all to keep out online sellers.
In fact, Walmart decided that the way to expand its retail business was to go upscale, as they started going after Target’s more upscale shoppers by offering some of the same higher quality stuff as Target had been offering. And to compete with Amazon, it bought Jet.com and scaled up its own online sales website quite a bit.
If you were paying attention, a couple years ago, Amazon briefly increased the baseline total goods purchased to get free shipping to $35 – and then Walmart.com ramped up, offered free shipping at $25, and whoops! Amazon had to drop their free shipping to $25 minimum purchase again!
Competition is alive and well in the online business. I always check multiple sellers besides Amazon depending on the product – Walmart, Jet, eBay, BH Photo, Newegg, and sometimes Aliexpress.
The Spanish stores need to learn from Walmart.
Seem to me its the farmers and small food Companies that will be the target from these consolidations . Cheap food is fine but everybody needs to make a dollar . We may in the future pay a high price , if I cannot make a decent living producing your cheap food then I wont .
We are literally swamped in supermarkets here in Europe. It’s beyond crazy as this is a business with rice-paper-thin margins which depends on completely irrealistic growth figures and especially easy access to credit. This includes the two German discounters which have gone on an expansion drive that makes even their French competitors look tame by comparison. One can often find two Lidl’s within less than 4 miles of each other: supermarkets and discounts multiply in areas with lax zoning rules and thrive where city and town councils have 24oz steak appetites but Happy Meal budgets.
When margins are so thin and when companies go on irrealistic and overambitious expansion drives without a fallback plan the end result is always the same: bankruptcy.
Financial repression may delay the process but cannot eliminate it. Just look at Air Berlin.
Supermarkets are one of the smaller bubbles I fully expect to deflate regardless of how everything else behaves: when a small town with 1,995 residents in the Italian Alps boasts four supermarkets you know peak absurdity has been reached.
There doesn’t need to be that big of a pop: bubbles can deflate for years to an end as stores get closed (it’s already happening), creditors have to choose between eating large losses or face the uncertainty of a bankruptcy, companies get bought by their competitors for pennies to the pound or get liquidated and town councils start running around with their hair on fire (that’s the best and funniest part).
Love your commentary(ies)… I’m a little puzzled over “irrealistic” though. Artistic license, a unique way of thinking about what’s “real” Bizarro-world behavior…? In any case, you’re right about the hair on fire phenom.
That’s a quasi-Gallicism: unreal = irréel
Knowing too many languages and being a certain age do not mix well, I can assure you that.
I’m not totally pessimistic about brick and mortar. The problem was over expansion due to all the easy money from Wall St. Any of the brands that scale back before they go bust can probably survive. I don’t see any reason why there should be multiples of a store in a town or small city. Instead of increasing their margins, they are increasing their overhead, just stupid.
I love shopping at my small local grocer, Longo’s. A small chain here in Southern Ontario. I would never buy food online, it just doesn’t compute with me. I buy my clothes at a small mom and pop shop, everything fits. I do a little shopping at Amazon for odds and ends but that it. Yet judging from the comments I’m an anomaly. I predict it will be just small and local brick n’ mortar that survive. Mega malls and CRE will have many bad years ahead.
One thing I’ve noticed about Lidl and Aldi is their range is much reduced compared to the regular Big 6 in UK at least. Who needs 150 different soups?
When I was in retail, many years ago (1970s), we looked at stock range rationalisation and concluded that the old Parteo rule applied and 80% of our sales came from 20% of our stock. So we cut back seriously on slow-selling lines. We lost in total sales volume but gained a bit in margin and had a better bottom line.
This went on for a while until, low and behold, we found that again Pareto had taken effect and we were back to square one. There is no getting away from the on-going 80/20 rule, it is just standard distribution formula and seems to be nature taking over eventually.
Your observation is spot on.
The first time I was in a Lidl, must have been 20 years ago or so in Germany, I immediately noticed all the candy they had on sale were top brands, such as Maltesers, Kit-Kat and the like. Same thing about the soft drinks: all top brands such as Coca-Cola, Schweppes etc. There was none of the offbrands supermarkets all around the world carry in large quantities and which sit unsold on the shelves until removed.
It was merchandise that would sell, and sell quickly.
I was told Aldi originally invented the model in the late 60’s: systematically eliminate all the merchandise that doesn’t sell well from the shelves to keep both stock and store size to a minimum, even if this means eliminating merchandise which is cheaper to stock than top brands and losing a bit of volume because, say, people who want fresh melons or bell peppers do not find them on sale all year around.
The system has its merits albeit, very much like Toyota’s much vaunted production system, requires people trained in-house to properly run it and constant vigilance from all levels of management to keep on working like intended. Nothing wrong with that.
However Lidl has gone on an expansion drive that makes you wonder exactly if they hired somebody from Uber or Netflix…
Very different here in Australia. While they usually do have some stuff in the one-off weekly specials area, an Aldi supermarket wouldn’t have more than half-a-dozen brand name items TOTAL on their shelves. EVERYTHING is home-brand.
When do they begin exporting this brand of economic emphysema to the US?