Growing on the Cheap

The worldwide economic slowdown has sharpened the focus of global food retailers on their small-format and value banners, as a reduction in consumer spending power has exacerbated the challenges these operators already faced. It also has led to an increase in consolidation activity around the world, despite the tight credit market, as well-capitalized retailers have scooped up struggling rivals to

The worldwide economic slowdown has sharpened the focus of global food retailers on their small-format and value banners, as a reduction in consumer spending power has exacerbated the challenges these operators already faced.

It also has led to an increase in consolidation activity around the world, despite the tight credit market, as well-capitalized retailers have scooped up struggling rivals to strengthen their positions in existing markets.

The world's largest grocery retailers are expected to expand their sales at a compound annual growth rate of 5.2% during the next five years, less than half the 10.8% rate these operators posted in the previous five years, according to projections by research firm Planet Retail, London.

“As capital expenditure budgets get squeezed, resulting in a slowdown across virtually all channels, it has become more important than ever for retailers and manufacturers to be sure they are investing in winning formats and in the winning regions,” said Natalie Berg, grocery research manager for Planet Retail, in an industry report issued last month.

Although worldwide the food retailing sector is enduring the economic downturn better than other retailing segments because of the non-discretionary nature of its products, she wrote, grocery operators have still felt enormous pressure.

“One of the winning formats [among the top grocery operators] will be the discount channel, which is expected to add $71 billion in sales over the next five years, up 6.3% on the current figures,” Berg said.

Companies like Germany-based Aldi, which has more than 1,000 stores in the U.S., and Lidl parent Schwarz Group, another no-frills, small-box discounter based in Germany, find themselves well-positioned for growth in the current climate, she said. The largest discount grocery chains will add about 12,600 stores worldwide between 2008 and 2013, Planet Retail projected.

Small-Format Growth

Multi-format global operators like Tesco, Wal-Mart Stores and Carrefour are also increasingly focusing on the opportunities for their small-format concepts, analysts pointed out, in part because of the ease with which these convenience-oriented concepts can be rolled out.

Dina Roldan, a senior consultant at Retail Forward, Columbus, Ohio, agreed that the smaller formats are providing opportunities for expansion among the multinational grocery retailers.

“You are seeing a lot of the big international companies expanding with their small-box formats,” she told SN. “The big box is becoming almost outdated.”

The smaller boxes offer numerous advantages, she explained, including the ability to locate and build sites more quickly in saturated markets and their relatively mild drain on capital resources compared with the supercenters and hypermarkets that drive the bulk of the revenues at many of the world's largest grocery operators.

France's Carrefour, for example — the second-largest food retailer in the world behind Wal-Mart — has been really “struggling with the hypermarket format,” Roldan said. “They are working on trying to reinvent that format.”

In the meantime, the company has become more focused on some of its smaller banners, which include Carrefour Contact and Carrefour City, two banners the company has begun testing in France as conversions of acquired c-store formats.

Carrefour City, measuring about 3,500 square feet and carrying about 4,000 items, according to reports, was first tested in Spain, Carrefour's second-largest market, in 2007, and was expanded to six units in urban areas in France late last year.

The Carrefour City concept reportedly features a strong focus on Carrefour private-label items, as well as convenience products, some prepared foods and fresh-baked goods.

Carrefour Contact is a similar chain designed for smaller towns and also in the testing phase in France. Both banners focus heavily on discount offerings.

“They are looking at these to compete more effectively against the hard-discount players like Aldi and Lidl,” Roldan explained.

Although Planet Retail estimates that Carrefour only generates about 2% of its annual revenues from such small-format stores, compared with 59% at its hypermarkets, the format shows promise in light of the challenges the company faces in terms of its global expansion efforts.

Berg of Planet Retail also pointed out that the conversion of the convenience stores to the Carrefour City and Carrefour Contact banners fits in with Carrefour's strategy of moving toward a “multi-channel, single-brand” approach, in which the retailer seeks to place its corporate name on more and more of its locations, regardless of format.

“Carrefour's conversion of its French store base to trade under the eponymous Carrefour name should help to strengthen the brand and create buying synergies across its supply chain and via its marketing campaigns,” she said.

And although Carrefour has enjoyed success in Asia — particularly China — through the rollout of its hypermarket format, this year it launched a new, smaller banner called Carrefour Convenient Buy in Taiwan, which at about 10,000 square feet is designed to better compete against local operator Pxmart, according to Planet Retail. The Carrefour Convenient Buy banner includes about 20,000 SKUs and carries both fresh-food offerings and some general merchandise, including small appliances.

French rival Casino, No. 20 on SN's list of global retailers and another operator of giant-sized stores, in February debuted a new small-format convenience store focused on prepared foods. The “Chez Jean” store, located in Paris, is a partnership with airport concessions provider Relay. It measures about 1,500 square feet and features a small offering of convenience groceries in addition to a prepared-food offering that changes throughout the day to appeal to different mealtimes.

Other global giants leveraging their small-format expertise include Wal-Mart, based in Bentonville, Ark., which is expanding its bodega format in Central America after enjoying success with the concept in Mexico.

In the U.S., Wal-Mart last year debuted its Marketside concept, another small-format store, with three locations in Phoenix. Safeway, Pleasanton, Calif., and Supervalu, Minneapolis, also began testing small-format stores in 2008, while Ahold's Giant of Carlisle, Pa., banner opened its first Giant to Go convenience outlet this year in Pennsylvania.

The stores were viewed by some as a response to the planned rapid expansion in the U.S. of Tesco's Fresh & Easy Neighborhood Market banner, a 10,000-square-foot, discount concept modeled to some degree after the company's Tesco Express format in Europe, as well as to the success in the U.S. of such small-format chains as Trader Joe's, Aldi and Save-A-Lot.

Tesco, based in Cheshunt, England, also has been aggressive in the expansion of its small-format banners in other markets. It has plans to add more than 100 Tesco Express convenience stores in the Czech Republic and Hungary, for example.

Consolidation Ahead

In addition to the ongoing expansion of discount and small-box formats, the global economic downturn may already be driving more mergers and acquisitions as some weaker operators have run out of capital, observers said.

“There are pockets of opportunities,” said Roldan of Retail Forward, citing Latin America in particular. “A lot of big retailers are struggling with heavy debt loads and have little or no access to credit, so there are some opportunities to go in and buy up some large operators pretty cheaply.”

In Mexico, she noted, some consolidation has already occurred, with food retailing giant Soriana acquiring rival Gigante last year.

Also in Mexico, Comerci, which operates a range of retail formats in that country and has a 50-50 joint venture with Costco Wholesale Corp., Issaquah, Wash., to operate Costco membership clubs there, filed for reorganization last year. Costco may end up buying out Comerci's stake in their partnership, Roldan suggested.

In the wake of these events, Wal-Mart is “taking advantage” of the opportunities they present, she explained.

“Wal-Mart is pushing and pushing, grabbing up more market share,” she said, noting that the company is already Mexico's leading retailer, operating a range of formats.

It also became Chile's largest retailer earlier this year with the acquisition of a majority stake in Distribución y Servicio D&S, which operates about 180 supermarkets, hypermarkets and convenience stores in that country.

Planet Retail sees Latin America as one of the areas of greatest opportunity, and projected a 6.6% compound annual growth rate in the region from 2008-2013 for the 30 largest global grocers.

A report issued by Paris-based CIES — The Food Business Forum earlier this year also projected consolidation in the global food retailing industry, as those companies with strong balance sheets will find opportunities to acquire their distressed rivals to shore up market share.

At the same time, the CIES report noted that retailers are “taking steps to limit cost risk in over-retailed markets,” by closing stores where necessary and downsizing logistical and support functions where possible.

Roldan agreed that as the global economic downturn lingers, more and more retailers are reevaluating their positions in the countries where they currently operate.

“Companies, including Wal-Mart, are rationalizing their country portfolios,” she noted. “They are asking, ‘Where can we pull back?'”

She said she expects Wal-Mart may have to reconsider its position in Japan, where it has a partnership with Seiu.

“They have invested quite a bit in it, but going forward I think investors will pressure them to either leave the market or do something more drastic,” she said.

She also noted that the consumer market is shifting in Japan, which has a highly fragmented retail market.

“Japanese consumers are becoming more price sensitive,” she noted. “They used to be very adamant about quality and fresh foods, and were suspicious of discount.”

Recently, however, retailers there have begun marking down prices more aggressively, she pointed out.

The CIES report, based on a survey of the organization's nearly 600 retail and manufacturing members in 64 countries, found that the economy was the No. 1 concern this year, replacing corporate responsibility. Food safety remained the No. 2 concern.

Although the slowdown is impacting the way the global retailers are approaching many aspects of their operations in fully developed markets, the major multinational food retailers are continuing to lay the groundwork for future growth in underdeveloped areas such as India, China and Russia.

“There is a continued expansion in establishing supply chains and creating direct relationships with farmers for sourcing [in developing countries], especially going into Vietnam, China, India, Russia and Latin America,” said Roldan of Retail Forward, citing Germany's Metro AG as an example of a company that is particularly adept at establishing sources in developing markets. “They want to get first-mover advantage.”

Wal-Mart is really pushing into China, creating relationships with farmers, and doing the same thing in Latin America,” she added. “In India, where they have a partnership with Bharti, they are establishing a supply chain, so that when India does open up to direct investment in retailing, Wal-Mart will have the groundwork already in place.”

Bharti said earlier this year that it planned to begin opening cash-and-carry stores in India later this year, primarily focused on supplying small businesses.

Meanwhile, Carrefour, Wal-Mart and Tesco are focused on gains in China, where all three operate.

In Russia, German operator Rewe is the only major international operator to have a presence, although other operators have begun discussions to enter the market. Rewe recently increased its store count in Russia to 59 with the acquisition of local supermarket operator Njam Njam.