When Safeway put up the ‘For Sale’ sign, speculative interest in the torpid UK stock market briefly hit fever pitch, before subsiding once more. However, the insular Brits often forget that Continental supermarkets have been busily buying each other up for some time – and have also had a much more adventurous attitude to operating across borders
Carrefour has strengthened its lead in the crossborder sector to the point where it is almost twice the size of its closest rivals. These include Tesco, which has nevertheless been reloatively adventurous, expanding into markets in eastern Europe and Asia. Tesco has now consolidated its position as Europe’s second-largest grocer, ahead of Intermarche.
Generally speaking, the European grocery retail sector has been becoming concentrated in fewer hands and there has been constant growth in cross-border activity, fuelled in part by the European single market.
Pan-European and, indeed, global mass is becoming more important as retailers seek evergreater buying power. However, as Wal-Mart has found, foreign markets can be difficult to grasp – Wal-Mart has now closed some of its German stores. Foreign interlopers often find it hard to make headway against Continental rivals in many countries. In France, for instance, the eight largest food retailers account for 80 per cent of total food purchases, making the market extremely difficult for outsiders to break into.
With the established markets at or near saturation, Eastern Europe and the less-developed regions of southern Europe are likely to be the focus of future development. Poland is a main focus for food retailers with plans by Auchan, Kaufland and Ahold all developing supermarkets and hypermarkets. However, even here the market could be showing early signs of saturation, with Kaufland focusing on smaller towns where it says there is less competition from other operators.
UK supermarkets’ interest in the Continent has been relatively limited – apart from the takeover of Asda by US-based Wal-Mart, most of the merger activity has involved home-grown firms, but that could change. Tesco is already quite active in a number of overseas markets, though its overseas operations are dwarfed by those of the international grocer par excellence, Carrefour. But if UK supermarkets are to go on expanding, they may well have to step up their interest in ‘abroad’ given the now very limited scope for expansion in the saturated UK market. It could also be attractive from a logistical point of view, given that so much of what supermarkets sell comes from southern and, increasingly, eastern, Europe.
Retailers in Europe though, are still tiny operations by US standards. Marks & Spencer, while quite a big fish this side of the pond, certainly in the UK context, freely admits that it is a minnow by the standards of Wal-Mart.
In most cases, though, the effect of the mergers has not been felt at the operational level. Some operators, notably Wal-Mart, have suggested that they will start to exploit their new-found mass at the buying level, but so far little has been said about the full supply chain.
There are exceptions that prove the rule, such as the merger between UK supermarket Somerfield and the UK discount chain, Kwik Save. While the two separate fascias are being maintained, the opportunity has been taken to eliminate duplicate stockholding systems, for example. However, this was a merger between two chains in the same country and, it must be added, some fairly beaten-up supply chain assets in the Kwik Save operations, as Somerfield’s group logistics and IT director Martin Oakes told the Logicom conference in Amsterdam in February. The Kwik Save supply chain operation needed some pretty urgent investment, which it would have found hard to justify if it had remained as a stand-alone operation.
But in general, merging supply chains is ‘a challenging task,’ says Ed Stubbs, solutions consultant at JD Edwards. The relatively easy part of a supermarket amalgamation, which is what most firms tackle first, is consolidating administration and functions such as buying. Other functions, notably logistics, tend to be ‘left to gradual osmosis’.
The process isn’t helped, he adds, by the wide, flat supply chains prevalent in the grocery trade. Much of the motivation behind merging in the sector is capturing territory. The prospects for organic growth in the sector are fairly limited, at least in volume terms, so most operators have evidently decided that merger and acquisition is the key to increased profitability in the future. But while rationalisation of the movement of goods is almost the last area that supermarkets look at, should it be? There are some big wins that could be achieved in the supply chain, not only in cost reduction terms, but also, significantly, in boosting service to the customer.
Information-sharing, and the whole CPFR area, would seem to offer huge potential. However, JD Edwards’ own research suggests that interest in CPFR is, at best, lukewarm, with only around a fifth of respondents to a recent survey interested in the concept, says Stubbs. Short term – though arguably diminishing – gains from squeezing suppliers, seem to be much more attractive for the time being.
Mention CPFR, and people often get excited about complex computer and IT systems, but it is not necessarily a matter of technology, argues Stubbs. ‘Often, it comes down to whether individuals in the two organisations get on with each other. It can be as simple as that.’
A lack of genuine information
So far, companies that have pursued CPFR – firms across the board, not just supermarkets – have mostly picked only small parts of their businesses, and perhaps only one or two suppliers. What examples there are in the grocery sector have often come from suppliers, not the retailers, often prompted by frustration at the lack of genuine information coming out of the supermarkets themselves. ‘It comes down to demand management. Order patterns (often the only information available to suppliers) is not a safe way in which to manage demand.’
That said, an approach such as vendor-managed inventory might be the most promising route, at least in the short term, as full scale CPFR might be a little intimidating for most supermarket managers – not that there is any evidence of a real upswell of enthusiasm for VMI either.
The pity of it is that it could also be in the supermarkets’ own best interests, argues Stubbs, ‘as it’s all about on-shelf availability’.
Certainly, the pattern of M&A activity in Continental Europe has often been to leave existing national supply chains more or less intact. In fairness to the supermarkets, it can be a major step, Ed Stubbs points out: ‘If you’re going to consolidate a distribution function, there are large capital spending decisions involved, and these are often the last ones to be made.’ Experience in other sectors has shown that, once the head office functions have been merged, units are often left to run fairly autonomously.
Turning to the specific UK situation, Stubbs suggests that it would be interesting if Safeway were to be taken over, not by another supermarket, but by a venture capitalist. The latter might be tempted to do something much more radical with the supply chain. ‘It would be a great opportunity to do some form of benchmarking,’ he suggests.
While the trend in most developed markets is for supermarkets to become bigger, both in terms of the shops themselves and the companies that own them, consumer groups, town planners and ecologists have been arguing whether this is in the consumer’s, or the environment’s best interests.
For many years, the Netherlands resisted the general European move towards bigger and bigger supermarkets, with small city and town centre units holding their own. Latterly, however, supermarkets have been winning market share, with the number of hypermarkets increasing from 43 in 1998 to 50 in 2001, while large supermarkets surged from 644 in 1998 to 838 in 2001. However, the hypermarkets’ market share is still in single figures compared with 35 per cent in the UK.
Similar trends can also be detected in small markets such as Greece, where consumers traditionally relied on comparatively tiny street-corner stores. Carrefour and the other multinationals have also been making inroads.
The Irish also like to do things differently, as, Eoin McGettigan told the Logicon logistics conference in Amsterdam. Although he is now executive chairman of Musgrave UK following the acquisition of the UKbased supermarket group Budgens plc, he has an intimate knowledge of the market in northern and southern Ireland, and has seen Musgrave’s SuperValu and Centra stores increase their market share to 23 per cent in Ireland, as well as making inroads into Northern Ireland.
The first thing that grabs you about the Musgrave map of Ireland is the sheer number of dots. Including the 368 ‘Centra’ convenience stores, there are a mind-boggling 792 outlets, in all parts of the country. Moreover, all the stores in Ireland are, effectively, franchises. Musgrave also owns the 67-strong Dialsur network in Spain.
To the European mega-retailers, this is an anathema, but as McGettigan points out, ‘Ireland has more shops and more square footage per head of population than does the UK.’ Musgrave are probably much closer to their customers – physically and emotionally – than any of the hypermarket operators.
Does size matter?
In some ways, Irish retailing is in the shape town planners and some politicians would like it to be in many of the larger European countries, where the out-of-town bug has taken hold. Places like the Netherlands, where planning policies were used to keep the hypermarkets in check, are having second thoughts. But does big necessarily mean efficient or low-cost?
Are small shops necessarily less efficient than the hypermarkets?
Musgrave gives its shopkeepers a lot more autonomy than the conventional supermarket chains, and the shops also carry a high proportion of locally-produced lines – around 30 per cent. ‘Our philosophy is quite different,’ explains McGettigan. ‘We don’t believe that Head Office is the guardian of all wisdom.’
Whether the smaller shopkeepers of Ireland can withstand the onslaught of the multinational supermarket groups remains to be seen, but while the stores may be small, Musgrave has some impressively modern supply chain technology. Stores use modem-based devices to place orders on one of the company’s four chilled and ambient warehouses which maintain next day delivery to the larger stores and second day delivery to the smaller outlets, and there is no reason why these standards cannot be further improved. And Ireland is a latecomer to modern supply chain management. ‘In fact, prior to 1996, we had no centralised distribution of chilled goods – and that included Tesco, says McGettigan.
Understandably, a small shop operator doesn’t seem to have too much time for the Tescos of this world but the consumer could also lose out through their dominance. Nowadays, of every euro that the shopper spends at the till, 40 cents are soaked up by retailing costs – a record high percentage, he says. If big retailers have managed to force down costs, it is mainly through culling brands and by forcing evermore onerous terms on suppliers. In fact, some of the terms which the major retailers enjoy probably would not stand up to scrutiny by competition lawyers.
Another business that has become more global is food manufacturing and, with mergers such as that between Unilever and Bestfoods, producers have often rationalised production in Europe to a relatively small number of factories, often serving more than one country. Given that local labelling and names can be retained, this is a relatively simple process.
Much of the merger activity has been behind the scenes. As yet, there are very few genuinely global brand names in food manufacturing, and even for items that are apparently the same, there may be local variations in recipes, formulations and some of the small print may also differ.
Kraft has a presence in 145 countries, but even here it is acknowledged that its ‘Philadelphia’ brand is the only truly international cheese, as Philippe Lambotte, director of supply chain for Europe, Asia and Latin America explains: ‘Even within western Europe, there are differences. Consumers in the UK prefer coffee in glass jars, but in Germany they demand foil packets.’
Yann de Villeneuve, logistics director for United Biscuits in Northern Europe, found that of the 1000 SKUs being sold in France, Netherlands and Belgium, he found that less than 25 were common to the three countries.
And retailers can also add their own complexities – for example, initiatives like shelf-ready packaging. While this is a noble idea in theory, specifications are apt to vary across retailer and country, leading to some ‘difficult decisions’ for producers, Quaker Oats logistics manager John Elliott told the Logicom conference.
Ideally, producers need to start rationalising the number of brands, but this cannot be at a forced pace, otherwise consumers will be alienated.
As it operates in so many different countries, Kraft more than any other producer recognises that ‘one size fits all’ in supply chain and its customers range from a retail giant like Carrefour or Metro to one-shop operations in Eastern Europe. The logistics infrastructure it deals with ranges from the near-perfect in some areas to places like the Ukraine, about which perhaps the less said, the better.
Migration to a common platform
Faced with all this variety, developing concepts like key performance indicators is going to be a long haul, though Kraft has started the process. It is also working hard to unify its IT – two years ago it was running 45 different SAP systems, now it is migrating to a common SAP platform for Europe
But according to some analysts, food producers need to get their act together fast. ‘There’s a fight to the death taking place on the shelves of your local supermarket and producers of consumer packaged goods (CPG) are facing a crisis,’ argues Bill Gilmour, global CPG industry leader at IBM. Retailers ownlabel goods are gaining the upper hand, and growth among CPG producers could be dead by 2007, he believes. Spending on CPG goods is falling as a proportion of income in developed countries and their allure as brands is fading fast – of the food producers, only Coca Cola is now in the top ten of worldrecognised brands.
What will probably happen, says Gilmour, is that retailers will go on getting ‘bigger and uglier’, more willing and able to squeeze suppliers. Wal-Mart will be a $1 trillion company by 2013 at its current rate of expansion. The top three retailers in France, Germany and the UK all account for 40-50 per cent of the total market, despite the efforts of the competition authorities.
However, not everything is rosy for the retailer, says Gilmour. ‘The top 100 retailers collectively are facing their first downturn in profits for ten years. And the average retailer made only four per cent on sales, compared with 12 per cent for manufacturers – so there’s a long way to go in terms of squeezing.’
Retailers growing fast
What could well happen is that merger and acquisition among CPG companies will also accelerate; at the moment, the top five retailers are growing much faster than the top five CPG firms. The head of Unilever is reported as saying that the CPG industry is on the verge of a major consolidation.
What many of them may also do, he adds, is decide that heavy spending on advertising is subject to the law of diminishing returns and, like Heinz, concentrate on becoming ‘the retailer’s best friend’ – and that includes having an outstanding supply chain, coupled with leading-edge collaborative planning. However, in most current company cultures, it could be difficult for supply chain directors (assuming there even is anyone at board level) to wrest budgets away from marketing or other departments.
Third- and fourth-party logistics operations are also becoming increasingly global in their outlook. UK-based Exel has recently celebrated its first success with Carrefour in France, although it already works exclusively with the retailer in other markets such as Belgium, Spain and South Korea. Exel is starting off by managing a fresh produce distribution centre for Carrefour at Beziers in south-east France.
The multi-temperature facility, which is projectmanaged by Exel, provides storage for around ten categories of fresh produce ranging from pastry to houseplants, and from meat and seafood to fresh fruit and vegetables.
Alain Ripoche, Exel’s commercial director in France said that, while it hoped further to extend its relationship with Carrefour, the main priority was to ensure that the new operation started without a hitch. ‘We have spent several weeks training people and recruiting as well as testing systems, all to ensure that the start of the new business is absolutely perfect.’
Longer term, Carrefour’s merger with Promodes has made it the largest retailer in France, Spain, Portugal, Greece, and Belgium. However, it is a bit too early to be talking about joined-up supply chains says Ripoche. ‘Merging with Promodes is a huge job,’ he says, and it could be quite some time before the retailer’s attention turns to logistics issues. However, it will not be lost on supply chain experts that the Beziers site is close to the main motorway linking south east France with Spain – one of Carrefour’s largest markets outside its home country.
Supermarkets have long been at the forefront of supply chain technical innovation and their supply chains live or die principally by on-shelf availability.
Sean Cassidy, programme manager for demand chain solutions at NCR’s Teradata division, quotes a survey by Nielsen from the Dark Ages of supermarket retailing, which found that an average of 7.2 per cent of items were out of stock. In the high-tech 2000s, a similar survey by consultants Roland Berger found an out-of-stock rate of – eight per cent! (In fairness, the number of lines carried by supermarkets in 2002 is infinitely greater than it was 35 years ago.)
Don’t scoff at RFID
However, the technology is improving all the time. Those who scoff at the idea of RFID tagging taking hold in a big way should remember that, 20 years ago or so, few people knew what a barcode was. Now they can be found in the remotest country store. In an address prepared for the Logicon conference, SAP’s senior vice president for global product marketing Wolfgang Runge, said that he believed item tagging would be a reality in about five years, as the cost of the devices drops to around five cents each.
The technology would bring the physical world closer to the digital world and would address the flaws of supply chain managers, as often they are guilty of ‘assuming where things are as opposed to knowing where things are’. But will it make a dent in that eight per cent out of stock figure?