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.
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