Miloš Ryba, Research Director, Planet Retail

Central & Eastern Europe saw a quiet 2012 without any wave of mergers & acquisitions as in 2011. Apart from the fact that Magnit and Auchan traded places in the ranking, the order of the Top 10 players in CEE did not change. It was only Auchan which undertook any M&A activities in CEE, while Russian retailers like Magnit and X5 continued their massive organic development with 1,575 and 800 new stores, respectively. Economic slowdown in the region’s major economies like Russia and Poland negatively impacted revenues in the second half of 2012. Planet Retail expects that 2013 and 2014 will primarily be about business consolidation and ongoing improvement of customer services. 

Auchan driving consolidation in CEE

Auchan bought seven Cora hypermarkets in Hungary and, more importantly, acquired Metro Group’s 91 Real hypermarkets and 13 shopping centres in Poland, Romania, Russia and Ukraine for a bargain sum of EUR1.1 billion (USD1.41 billion). These twin acquisitions cemented its position in the CEE hypermarket sector as well as in the hypermarket sector in each respective market. Thanks to the Real takeover, Auchan significantly increased its footprint in Warsaw and gained market shares in central and southern Russia, regions where it had been under-represented.

As some of the Real acquisitions had not been completed by the end of 2012 and therefore these revenues could not be fully reflected in Auchan’s sales. The French retailer did not gain full market share in our 2012 ranking and subsequently relinquished its top 4 position to Russian operator Magnit. However, the takeover has been completed by now, meaning Auchan should occupy either first or second spot in 2013. It success lies not only in M&A acquisitions, but also in excellent store locations and a low-end pricing strategy with EDLP fully introduced in Russia. Its Russian success has seen Auchan taking successful concepts like Auchan City hypermarkets into its other CEE markets. This compact hypermarket concept, which Auchan first tested in Moscow, is not yet rolled out in Poland or Romania, but this may change in time.

Even though Auchan lost its fourth position from 2011 to Russian operator Magnit, we forecast that the French retailer will emerge as one of the Top 3 leading CEE grocery retailers in the next five years, competing head-to-head with Magnit and Schwarz Group.

Magnit - master of business efficiency

Just as last year Auchan was the king of M&A, so Magnit proved to be its peer when it came to organic development. The retailer doubled its profit to RUB25 billion (USD807 million) in comparison to 2011 and reported an impressive net profit margin of 5.57%, while its EBITDA margin swelled to 10.56%. Its net revenue climbed 33.6% to RUB448.661 billion (USD14.479 billion) for fiscal 2012, making Magnit the best-performing grocer in Central & Eastern Europe and one of the most profitable grocery operators in Europe. All this was achieved on the back of over 2,800 store openings between 2010 and 2012.

Franchising gaining ground

Whereas organic store development has characterised retail channel development in Russia, store expansion in Central European markets was driven by franchising. Franchising as a trend arose in the Central European grocery market partly as a result of retailers’ focus on the development of smaller store formats. Carrefour, for example, has opened almost 140 franchised Carrefour Express stores in Poland, entered several franchising agreements in Romania and changed ownership of operations in the Balkans to the franchised format when it sold its stake in the Carrefour Marinopoulos joint venture operating in Greece, Bulgaria, Cyprus and Albania. Leading Polish convenience store franchisor Zabka opened a record 366 stores in 2012, while Portuguese Jerónimo Martins is testing franchised Biedronka stores and France’s Casino was rumoured to be looking at entering the Balkans (specifically, Serbia) via a franchisee partner.

A landmark year for grocery e-commerce

The grocery e-commerce market has seen considerable expansion and the introduction of new services by the online banners of retailers like Tesco, Auchan and X5 Retail Group. Tesco has expanded its online grocery operation to residents beyond Prague and Warsaw and has launched grocery click & collect trials in the Czech Republic. In Russia, X5 Retail Group introduced its non-food e-commerce banner E5.ru and established over 500 collection points in its stores, not only in Moscow, but in another 50 cities in the north-west, central Russia and the Urals. However, as the woes of online pioneer Utkonos have shown, grocery e-commerce remains an unprofitable business concept, something which applies not only to Russia but also to the CEE region as a whole. Tesco, as well as Auchan, may expand their grocery e-commerce business into new cities and countries, but in the long term this channel should be viewed as an additional customer service rather than a profit-generating unit per se. 

2013/14 to see business consolidation and product innovation

The rate of consumer spending growth in the CEE region is likely to slow down significantly from 5.7% in 2012 to 2.1% in 2013, largely due to the slowdown of major economies like Russia and Poland. However, the outlook looks more positive in countries like Hungary and Romania, where real GDP has begun to grow. Whereas Russian and Polish consumers will probably become more cautious about spending their money, minor improvements in consumer confidence have already been seen in Hungary and may well be noticeable later this year in Romania as well.

Considering the economic outlook, 2013/2014 will be a period of business consolidation rather than massive store expansion for many grocery operators. Shoppers should be looking forward to new product ranges, improved customer services and refurbished stores as the incremental costs of unsustainable price wars and continual promotion-oriented pricing strategies will impel retailers to fight for consumer spend using more sophisticated strategies.

The second-largest player Schwarz Group (Lidl and Kaufland), as well as Tesco, are likely to decelerate the pace of store openings. As a case in point, Tesco in the Czech Republic is to reduce its total selling area by almost 2% in fiscal 2013 as it looks to sub-let space at some out-of-town hypermarkets that have been negatively impacted by reduced non-food sales. The UK-based retail giant has also identified its four CEE markets (Czech Republic, Slovakia, Slovenia and Hungary) as markets where it intends to maintain position, rather than commit investment to significant expansion.

Apart from readying market entries for Serbia and Lithuania, Schwarz Group’s Lidl will mainly focus on improving its sales per store through a CEE-wide roll-out of its instore bakeries, adding new product ranges adapted at country level (like pre-packed fish), offering exclusive products and intensifying its shopper liaisons via social media like Facebook. Biedronka in Poland will be testing and will possibly roll out self-checkout tills, followed by an introduction of mobile payments next year. Meanwhile Delhaize Group in Greece will be implementing My AB Touch Point self-service kiosks, where shoppers can check loyalty programme accounts and access digital coupons and personalised offers.